Saturday, December 08, 2018

A Turtle talks about trend following on stocks

Almost a month ago I posted this article about how that, given the recent price action, I was currently shorting individual stocks. I also mentioned that I had recently taken a couple of long trades, again purely based on meeting my entry criteria and triggering an entry.

Well, since then the long positions taken ended up generating small losses, but some of the short trades taken are still going strong. No reason to exit if the trend is still intact and the trailing stops haven't been hit...

As for the small losing trades, the majority of the trades I take always end up failing, regardless of what is going on in the general market, so they are simply viewed as a cost of doing business.

When entering a trade, I have no way of knowing which one will work, and which ones will quickly fail. Similar to what Larry Hite said in his Market Wizards interview, all trades are viewed the same way - they are a 1R risk, and the same percentage of equity is risked on each trade. 

Each trade taken has the same potential to work or fail. So on a single trade basis, each position is a coin flip. But over a larger sample, I know that the bulk of trades taken will end up as small losers, some breakeven or small winners, and the occasional big winning trend will come along.

That's the way it's always been. And I know that every losing trade will bring me closer to a winning trade - may be a big winning trade.

All I try and do is look to enter when a potential new trend may be starting, by entering on a price breakout.

To me, that is logical and rational, and suits my personality and beliefs.

And I have no bias to the long side or the short side.

Now, there are people out there who say trend following on stocks doesn't work, including some fund managers and authors. There are a few however who take the opposite point of view. Principal amongst these is former Turtle, and head of Chesapeake Capital, Jerry Parker.

Readers may be familiar with the "Top Traders Unplugged" series of podcasts hosted by Niels Karstruup-Larsen, who has recently also produced a series of free e-books.

One of these books is entitled "What the Best Traders in the World Wish They Knew When They Started Their Career", in which one of those contributors was no less than Jerry Parker.

As someone who took the original Turtle system and adapted it to trade stocks, I was fascinated with Parker's thoughts, some of which I reproduce here with Niels' kind permission:

"Every CTA today should have a stock trend following fund, where they only trade stocks - simple stocks, maybe some indices, and try to beat the S&P by a little bit with your trend following systems, long and short, and then also have a diversified program. 

The industry has gotten into major trouble by defining CTA trend following as managed futures, which is sort of defined as currencies, commodities, stocks and bonds - the perfect portfolio. Yes I agree, it's a perfect portfolio, but the CTA's and a few others are about the only people who agree with that. 

So today, if we have a 20 year track record with a diversified portfolio and a 20 year track record with stocks, the ideogram of the CTA industry would be a lot higher. So I think that is the most important, when you trade stocks, trend following does not equal managed futures. 

Trend following is going with the trend, paying attention to price, taking small losses letting your profits run, on any market, on every market: stocks, stocks and bonds, commodities only, diversified, and that's been lost. 

The billions of dollars under management with momentum trading, and the positive press, let's say that the momentum trading gets, there's huge missed opportunity from the trend followers. My opinion, the trend following is far superior than momentum investing. Some similarities, but not the same."

As you can imagine, this was music to my ears. 

And this is not the first time Parker has talked about this - earlier this year I stumbled across this article from a few years back where he talked about trading single stocks while utilising a trend following approach.

My own approach is actually taking me in the opposite direction. I solely traded stocks to begin with, before adding the occasional commodity or foreign exchange trade for a bit of diversification in recent years. But trading stocks is by far my primary focus, and will remain so.

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