Trend following, unrealistic expectations and a look into a fund's performance

Some people have unrealistic expectations when it comes to trend following - and trading in general, for that matter. 

I remember a trader contacted me once about some mentoring and essentially was looking for some assurance that, if he adopted a trend following approach, he would be able to make a +100% return over the next year.

Much ado about nothing

Well that's the first quarter wrapped up for 2016. And, as the metrics show, nothing much has happened in terms of performance. Looking at the monthly returns over the last year or so in particular, these losing months have been kept as small as possible. And, even after a period of non-performance, the returns on all closed trades is about 5R off of all time equity highs. Which, in the longer-term scheme of things, is nothing. One relatively decent trend will cover that.

As a comparison, below is a screenshot of the published monthly returns for Mark J Walsh & Co. While he was not one of the participants in the Turtles experiment from the 1980's, Walsh was an associate of Richard Dennis. You can view the monthly performance of other trend followers (including some of the former Turtles) here. 

Is this price action different?

My guess is that there are plenty of people trading now who didn't participate in the markets in 2008. Since the market bottomed out in March 2009, there has been a long uptrend, although the major averages have certainly struggled to make new highs in recent times.

The reality of trend following

Look at the performance records of some of the successful trend followers over the last 20+ years. You will see that there are plenty of losing months - as well as losing years.

These are people who have been successful over the long-term. Yet, how many individual traders do you know who are able to go through losing months or years? Some can't even stomach a losing week before they want to ditch a proven method and jump on the holy grail seeking wagon.

Let those profits run!

We have seen a volatile start to the new year in the major market averages. These gyrations in the market have been increasing in intensity and frequency over the last few months - pullbacks and sharp reversals have been seen in early August, the first part of October, mid-December and now from the beginning of 2015.

Given my own goal for this year of concentrating more on the price action in the stocks I am looking to trade rather than the indices, these market movements have been noted but have been of less importance and relevance to me than before.

As it is, one or two trades have failed (which can happen with any position), but my most profitable trade has continued to inch up regardless of the general market volatility or movement, and is now over +6R in profit on its own.

One good trend pays for them all

While still getting stopped out of a couple of trades this week which were at one time in profit, a couple of long positions have started to try and gain traction, combining for a current open profit in excess of 4R. While those gains can easily be lost in a day, it is nice to see some profits on my screen!

As Ed Seykota was fond of saying, "One good trend pays for them all!". Should a decent trend start to materialise, then it is quite possible that the run of losses suffered could easily be eliminated. Such is trend following.

Looking at the bigger picture

It's always worth zooming out on a chart every once in a while to look at the historical price movements and trends on an instrument, and to place any current trend into context.

I've shown some charts below of interest (using monthly candles). What is interesting here is how certain markets have been in a non-trending phase the last couple of years compared to the nice trends in the preceding decade. This explains the difficulty that trend following systems have had generating profits over the last year or two. In those instruments that HAVE trended, the movements have been far more volatile, which again makes it more difficult to generate profits.

All routes heading south

As mentioned in my recent posts the major US indices have been the weakest, with the Nasdaq leading the way. Today both the Dow and S&P have triggered short signals. The DAX also briefly gave a short signal before trying to rally (Dow and DAX charts below). The FTSE has not given a short signal as yet, but is now a lot closer to doing so.

Crude carries on down

There will be plenty of traders around the globe loving this downtrend on Crude Oil - a staple instrument in a typical trading basket of a trend follower.The $80 level is now broken - I'm sure hoping I'll see a similar kind of drop at the petrol pumps, but somehow I doubt it...

Remember, one big trend like this can easily the cover the accumulated small losses created by earlier failed signals. Just need to keep the faith...

Crude still leaking...