Own your trading strategy

As I often do, I equate traders to golfers.  The best traders do things in their own way, and are willing to stick with that plan through thick and thin, with some occasional tinkering.  Professional golfers, with the exception of Tiger Woods, are willing to stick with what they do best, and seek only fine tuning now and then.  Tiger has changed his swing four times, and it is clear that he has not exactly improved with each change.  But, I digress.

Most unsuccessful traders will move from one strategy to the next because they never rely on their OWN homework.  They are always relying on tips from other traders, or strategies and systems developed by someone else.  Poor golfers are always moving from one golf tip to another, one training device to another, and one swing coach to another, because they are unwilling to accept the fact that it takes hard work, and learning about their own strengths and weaknesses, to develop a golf game that works for them.

I can’t think of a single successful trader who simply copied what someone else was doing.  Sure, they learn a thing or two from other traders, but then they ultimately develop a trading approach that suits themselves.

This is why it makes no sense to simply learn the Turtle rules and start trading today.  If you don’t conduct your own research, and understand that losing streaks and drawdowns are inevitable with any system, then why would you think you would have the confidence to stick with a system through a losing streak?  Second guessing is human nature.

This is the reason I created The Futures Trading Academy.  I believe that most people could use a little guidance in developing their own trading approach.  I present a number of strategies from day trading to trend following, and develop a rapport with each individual I work with.  Our goal is to develop a program that works for them, not just regurgitate material that is already out in the public domain.

If you want to learn more about that program, I encourage you to visit The Futures Trading Academy.  Otherwise, at the very least, go through the process like Ben Hogan did and “dig it out of the dirt.”  Do the necessary research and testing to develop your OWN trading approach.  It takes a lot of hard work, but you will be better off for it in the long run.

The Fascination With The Turtle Trading System

The single most popular post on this website, by far, is the one titled “Is The Turtle Trading System Dead?”  There is a clear fascination with the Turtles and the trading system they were taught by Richard Dennis and William Eckhardt.

There is also a clear fascination with the trading approach known as Trend Following.  Since the Turtle Trading System is a trend following approach, these two ideas are inexplicably linked.

So, the question that should be asked is…should traders still be fascinated with this system and trend following in general?  My answer is a resounding NO!

It’s been over 25 years since the Turtle program ended, and just over twenty years since Russell Sands and others began to capitalize on the legend.  The futures markets have evolved dramatically since then.

Consider that back in the late 1980′s, total assets under management in the managed futures universe was well under $50 billion.  In fact, it was probably closer to $10 billion.  Now, the figure is upwards of $300 billion.

Also, the vast majority of the money managed by commodity trading advisors is done so with a trend following approach.

Let’s look back on the 1980′s.  At the start of the decade, interest rates were as high as 20%, as the Fed began aggressively tightening in order to reign in inflation.  There were huge moves in futures markets in every sector, and the currencies in particular made huge swings.

Remember, this was also prior to the substantial globalization in the markets.  Back then, if there was a supply disruption in a crop such as soybeans, prices would move dramatically, because we didn’t have nearly the amount of global trade that we do now.  Nowadays, a supply issue in one part of the world can be offset from another part of the world…in many markets.

Nowadays, we also have far more active central banks.  Back prior to globalization, if a country’s economy began to struggle, they would simply print money, which would lead to hyperinflation and huge movements in currencies and interest rates.  Now, central banks and governments are far more wary of such policies, and these financial markets are linked more closely.

The end result of all this is that while trends do still occur, they tend to be more difficult to exploit.  We also have the issue of trading firms that are far more focused on shorter term movements and market inefficiencies.  As a result, there is more daily volatility, but not more annual volatility.  In other words, the price action is choppier, which has absolutely killed the breakout style traders such as the Turtles.

Therefore, it has become necessary for traders to adapt.  I’ve noted that Jerry Parker at Chesapeake Capital seems to have done this.  After seeing a substantial decline in assets under management, likely due to mediocre performance, Chesapeake made a nice comeback in 2013 with a 25% return in its Diversified program.  Also, Chesapeake’s single stock futures trading program returned 65% in 2013.

Meanwhile, other former Turtle traders and their mentor (Eckhardt), continued to struggle, and assets under management have declined sharply, according to a review of reports at Autumngold.com.  In fact, JPD Enterprises, run by former Turtle James DiMaria, closed its doors in October.  The other former Turtles were flat to down double digits in 2013.

With all this in mind, the fascination with the Turtle Trading System really needs to come to an end.  Should a new or potential futures trader learn the system?  Absolutely.  It should be part of any trader’s required education.  But, the bottom line is that times have changed, and the competition has increased dramatically since the days when the system was originally taught.

Trading Competition Is Fierce

Recently, I’ve conducted a bit of research into how many of the commodity trading advisor and hedge fund firms are trying to improve their performance.  What I’ve discovered is that they are all basically trying to do the same thing.

Virtually every sizable firm out there is hiring, or has hired, quantitative analysts or software engineers to develop trading models to be implemented automatically.  Every firm is looking for people who know how to program using such programming languages as C++, Matlab, Javascript, R, and/or Python.

These firms are looking for every edge possible, and their focus now seems to be more on a scientific approach to trading, especially in the execution of short term models.

I believe this is one reason why the Turtle Trading system doesn’t work nearly as well as it did when it was originally taught in the 1980′s.  That system was intended to exploit medium term trends such as the one we just witnessed in the Coffee market.  There were enough of these trends back then across all markets that it was almost like shooting fish in a barrel.

Now, it appears that you either have to be a very short term trader, or have a much longer term focus.  Big trends still occur, but they have a different character now, and the medium term breakout strategies are getting killed.

So what does all this mean for the average Joe?  As I’ve indicated in previous posts, I believe the individual trader has an edge over these big funds by being able to cherry pick trades.  However, to be able to do this requires a lot of research and experience studying market behavior.  Of course, there will still be losing trades, so if you can’t handle that, you will still lose.

Just to demonstrate how difficult it has become for Turtle style traders, I’ve put together this new video.  Have a watch!

[jwplayer file ="http://www.youtube.com/watch?v=fsW44uUZTAo"]

Coffee – The End of the Trend

Well, with today’s price action, it’s clear that most trend following traders are bailing out of this nice coffee move.  The market has now made multi-week lows, and today’s action was the widest range day to the downside since the market peaked on March 12.  See the chart below.

coffeeMarch202014 Coffee   The End of the Trend

This was a heck of a nice run for Coffee, since the breakout in late January.  The end result is a profit of 50 to 60 cents or thereabouts, which translates into around $19,000 to $22,000 per contract, excluding any commissions and slippage.  For trend followers who include coffee in their portfolios, this move added significantly to the bottom line, and it has helped to offset some of the trend reversals in the financials and currencies since the beginning of the year.

The frustrating part of this trade is that off the high close to today’s close, a trend follower gives back over $11,000 in unrealized gains.  That is the nature of trend following, and one big reason why most people are unable to employ this approach.

 

Trend Following – How Much Equity To Risk Per Trade

In virtually every trading forum you will see the advice offered that you shouldn’t risk much more than 2% of your equity per trade.  Unfortunately, most people don’t realize exactly where that figure comes from, or if it is even valid.

The fact is, the amount you risk per trade is dependent upon a few factors…

  1. The long term per trade expectancy of the strategy or system you are trading
  2. The compound annual rate of return you are trying to achieve
  3. The amount of equity in your account
  4. And how much of a peak to valley drawdown you are able to stomach

For the new trader, it is virtually impossible to get this figured out before you start trading.  Until you put your feet to the fire, you won’t know how much volatility you can stomach in order to achieve the rate of return you desire.  Money talks…paper trading simply won’t effectively simulate actual trading.

Also, you need to determine what to expect from your  system or strategy.  This requires significant research and testing.  Just as an example, most successful trend following CTAs tend to experience a worst drawdown that is at least double their compound annual growth rate, over a period of at least ten years.  Track records under five years are fairly irrelevant for trend followers.  This is why when you conduct your research and testing, you really need to go back at least 15 years or more.

The amount of equity in your account will determine the number of markets you can reasonably trade.  The smaller your account is, the fewer the markets you can trade, and the greater your risk per trade will be.  It is very difficult to limit risk per trade at under 2% with a trend following system if you have an account much under $50,000, except when trading the micro sized contracts.

On the other hand, if you are trading a strategy with a higher percentage of winners where your winners still significantly outweigh your losers, you might want to consider risking more per trade to achieve your desired results.

With that in mind, before you start trading any type of system or strategy, be sure you do your homework and do the appropriate testing on it before you apply some random figure that you read about on the internet or in a magazine.

 

The Value of a Mentor

Very few people become successful traders without developing a relationship with a mentor.  The Market Wizards books written by Jack Schwager really spell this out.  The majority of those interviews mention the influence of a mentor of some kind.

Consider this list of traders…

Monroe Trout and Toby Crabel both worked for Victor Niederhoffer

Victor Niederhoffer worked for George Soros

The Turtles all worked for Richard Dennis and William Eckhardt

Michael Marcus and Bruce Kovner were both influenced by Ed Seykota

Stanley Druckenmiller worked for George Soros

Paul Tudor Jones was mentored by cotton trader Eli Tullis

This is just a small list of some of the biggest names in the hedge fund and futures trading world, and everyone of them at one time had a mentor.

Obviously, not everyone is going to have the opportunity to work with such successful traders.  Unless you make the decision early on in your life that this is the career path you would like to pursue, then you won’t get the chance to work at one of these firms.

The next best opportunity may be an indirect influence.  There are plenty of people out there who can provide you with the information you need to get on the right path to successful trading, and some actually specialize in doing just that.  I’m not talking about the vendors out there peddling the latest and greatest trading systems.  I’m talking about people who’ve actually had the opportunity to work in the business, or at least develop solid relationships with people in the business over the years.

I will even give a shout to my competitors out there… Michael Covel and Andrew Abraham.  While you may spend a good bit of money on their services, I would venture to bet that if you develop the discipline to stick with the plan laid out by any of them, you will have a good chance at success.  Both will likely tell you how it really is in this business, without the sugarcoating.

I’d like to think that you could get similar results from me as well.  With that in mind, feel free to drop me a line at Scott@trendfollowinguniversity.com to learn more.

 

 

Coffee Continues To Roll

May Coffee futures surged nearly 17 cents today, or over $6,000 per contract, as the market reversed yesterday’s losses and made new highs.  See the daily chart below…

maycoffee2014betterr Coffee Continues To Roll

May Coffee Futures 2014

 

This is one of those dream trends for a trend follower that can make the whole year.  In my previous post, I indicated that this market should not be traded unless you have an account size of at least $100,000…that’s based upon the volatility of this market at the time of the breakout in late January.

Since that breakout, unrealized profits for one contract are over $30,000 as of today’s close…a 30% gain for a $100,000 portfolio.

At this point, we have no idea how far this market can go.  This is the type of trend where much of the unrealized gains will be lost once it reverses and the typical trend following models exit the trade.  However, this is where the individual trader can exercise some discretion and potentially save some money.

Typically, a market that goes parabolic like this will peak in one of two or three ways.  The first will be the key reversal.  The market will make a new high, trade in a wide range, and then close at its lows.  The second way will be a blowoff top, where the market trades at its widest range for the move by far and closes at or near its high, and is then followed by a huge day to the downside.  Finally, a third way may be one where the market gaps to the upside, trades in a narrow range, and then is followed by a big downside day the following day.

The bottom line is that you won’t likely get out right at the high, but you can certainly exit sooner than a typical trend following system would allow if you are trading systematically.

Still a Great Market For Trend Followers

Because of my own personal history with this market, Coffee is still one of my favorites.  For trend followers, it is a must market to trade in your portfolio, but keep in mind, it is still a frustrating market, prone to many false breakouts.

About every ten years or so, coffee will make a huge move in a short period of time.  These moves are usually weather related.  Back when I made some money in this market, it was a couple of freezes in the growing fields that caused a spike.  A few years after that, it was drought conditions.  Here in 2014, it is hot and dry weather that is fueling concerns for the coffee crop.

As a result, since its most recent breakout, Coffee prices have run up nearly 70 cents.  Have a look at the chart below…

coffeeMarch32014 Still a Great Market For Trend Followers

Coffee March 3 2014

So far, if you’ve taken the breakout at the end of January, you will have unrealized profits of over $25,000 per contract.  However, this is not a market for the faint of heart, and for those of you who trade systematically, it is a market in which you really need to have an account size of at least $100,000 in order to have maintained your risk at a somewhat appropriate level.

Today, the market spiked up another 13 cents.  The 20 day average true range (ATR) has now more than doubled since the breakout, and it is quite extended, so keep a look out for signs of a reversal if you are long.

 

Trend Followers Rebound in February

After a difficult start to the year, when most equity markets took a nosedive in January, trend followers enjoyed a strong rebound in February.  U.S. equity indexes rallied to new highs, and some trend followers with a longer term outlook were able to take advantage of the move.

New trends in a number of markets heated up in February as well.  These included a new breakout in Gold and Silver, Soybeans and a very strong move in Coffee that Turtle style traders have been able to exploit.

It was also notable that the three portfolios that I track, more than offset their January losses.

Given the geopolitical turmoil that is brewing, this may be the start of some big moves in such markets as currencies, interest rates, energy and gold.  One interesting move I noted on Friday was the strength in the Swiss Franc, which acts as a safe haven currency at times.

Over the next week or so, I will report on the actual results of some of the major trend following CTA firms as they become available for the month of February.

The ART of Trend Following

Most of what you read about trend following in the futures markets involves mechanical trading systems.  The big successful commodity trading advisors (CTAs) all employ a systematic approach.  On the other hand, in case you weren’t aware, the systems taught to the Turtles by Richard Dennis and William Eckhardt were never meant to be traded mechanically.  They weren’t interested in creating trading robots, just successful TRADERS.

It’s no surprise that the last few years have been difficult for CTAs who employ a trend following approach.  In fact, some have actually had losing years in four of the last five years, and one notable Turtle, James DiMaria, closed his business last Fall as a result of losses.

The main reason for these trading difficulties is that the markets have been besieged by numerous false breakouts.  Also, once reliably trending markets such as the currencies, have not trended much at all for three years.

However, in reviewing the charts of the most liquid futures markets, there have been plenty of decent trends, but few huge trends.  The question traders face then is it possible to filter out enough of the false breakouts so that the decent trends can produce a profit?  I think the only way to do this is by studying charts and past price behavior to get a feel for when a market is most likely setting up for a decent move.  This is the ART of trend following.

To be a successful trend follower, most CTAs will suggest that you need to participate in every single trend.  Unfortunately, that means you need to trade all of the false breakouts, and that can be destabilizing.  Who wants to deal with 10 or even 20 losses in a row?

Consider the charts below of the Australian Dollar.

Aussie2011 2013 The ART of Trend Following

Australian Dollar Weekly

This is a weekly chart of the Australian Dollar.  As you can see, the price action was quite choppy and the trading range was wide and loose from mid-2011 through mid-2012.  Systematic traders would experience a number of losing trades during this period.

 

Aussie2009 2011 The ART of Trend Following

Australian Dollar 2009-2011

Now, here is the period that occurred just before the previous chart.  The Australian Dollar was clearly in a long term up trend, and a discretionary trader could simply trade the upside breakouts until the market changed its character.

If you are a trader with a smaller account under $100,000, your first priority is to preserve capital.  Therefore, you can’t afford to chase after every single breakout.  You have to learn to recognize the best opportunities when they come along.  Otherwise, if you want to trade systematically, you need to be more selective in the markets you choose for your portfolio, and stick with that portfolio until your account grows enough to add more markets.

The bottom line is that even with trend following, there are numerous ways to skin a cat.  However, you need to figure out for yourself whether you want to be a systematic trend follower or a discretionary trend follower.

 

 

 

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