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.
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…
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.
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…
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.
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.
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.
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.
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.
I would venture to guess that most people who are searching the internet, looking for some information about the trend following approach to trading futures have unrealistic expectations. When you read a book such as Market Wizards by Jack Schwager, which I would add was written in 1988, you get a sense that 100% annual returns are commonplace in the futures markets. Or, you may come across some other websites where trading systems are sold, and get the idea that you can make a million dollars in a few years after starting out with a small account.
This is why I often refer visitors to Trend Following University to Autumngold.com. Autumngold.com offers a rare opportunity in the hedge fund world to view actual performance returns for free for a few of the most successful commodity trading advisors on the planet. Among the advisors listed there include several former Turtles (Chesapeake Capital, Hawksbill Capital, Saxon Investment, and EMC Capital), William Eckhardt (one of the teachers of the Turtles), Dunn Capital Management, Abraham Trading, Millburn Ridgefield, Transtrend, etc.
The first thing you will notice is that none of them boasts a compound annual growth rate of 20% over the last twenty years. Sure, there were some very strong years, particularly in the 1990′s, but the last ten years have certainly been more difficult, and especially the last three.
I’ve put together a spreadsheet that lists the performance for some of these traders… tradercomparisons2013
Combined, these trading businesses manage over $10 billion in the managed futures business. They are among the cream of the crop in that business. If anyone has developed a trading system that can generate 100% annual returns, they would be among the likely candidates.
Earlier, I made reference to those vendors and websites that are out there selling systems for $5,000, promising 100% annual returns or more. Now, have a look at the two charts of the Canadian $ below, and ask yourself if one system could generate strong performance in both time periods indicated on those charts.
Clearly, you will not achieve the same returns with the same system in this market during these two different periods.
I can think of one particular vendor who actually seems to be quite knowledgeable who has successfully built a trading system selling business, and then ventured in the world of managed futures. One of his systems was touted as one of FuturesTruth’s “all time top ten systems.” The simulated performance returns on his website are quite impressive. Unfortunately, when the rubber met the road, the performance did not stand up quite as strong. Like most medium term trend followers, his performance struggled in 2011 and 2012, and that is the end of the performance data for his CTA firm.
What many of these trading systems sold to the public do not consider is the cost of execution. Many of these systems require precise execution at specific prices, and don’t consider the effects of slippage. Since most people who buy these systems don’t have experience in trade execution, performance can be adversely effected. Also, these systems tend to be over optimized as well, with too many parameters, curve fitted to more recent market data.
Now, I do believe that it is possible for individuals to outperform some of these big name CTAs, but only if they have the discipline to execute the trading plan and to withstand the inevitable drawdowns that may be more painful in reality than they are on paper.
I created Trend Following University to explain the realities of futures trading and trend following. Few people are willing to accept those realities, but we can certainly help out those that can. We offer a variety of solutions to those people who are ready to get serious about employing trend following in the futures markets to build wealth. Feel free to contact Scott Cole at Scott@trendfollowinguniversity.com, or get on the path to successful trend following by filling out the sign up form below…
January proved to be a difficult month for many trend followers whose portfolios are heavily weighted toward financial markets such as stock index futures. Stock markets around the world, including here in the U.S., experienced sharp pullbacks. This caused many systems to exit these markets.
However, in February, these markets have rallied, and are now approaching the end of 2013 highs. So now, many of these trend followers will be forced to re-enter at a high level if the market breaks out again.
This is the difficulty of trend following, and why it is important to trade a multi-system strategy. In the case of the S&P 500, it was clearly in an up trend for all of 2013 that proved to be profitable to long term trend followers. But, as you can see, this market was not profitable for breakout type strategies, due to the choppy nature of the trend.
Keep this in mind as you build your own trading program. A single system will likely be more difficult to follow. To be successful at trend following, your program needs to capture the bulk of trends similar to the one seen above.
Many people start trading futures, forex or stocks because they want to get away from their 50 and 60 hour per week jobs and do something they enjoy. I’ve been one of those people. Here’s the reality…most people who trade for a living are managing money for other people, not living off of the profits of their own account.
I’ve paid my bills as a commercial real estate appraiser for 25 years, and I’ve been self-employed for twenty of those years. But, I’ve never enjoyed the business, so I’ve always had the goal of getting out of it through trading for a living.
My first attempt at this came in 1994 when I traded my first futures contract. Through luck and stupidity, I turned a $10,000 account into over $200,000 in about four months (unfortunately, I through these records out many years ago, so I can no longer PROVE this). I had learned the Turtle system from Russell Sands, got into a big move in Coffee, over traded it, and luckily ended up with a small fortune.
Or, you could say I was unlucky…I thought trading futures was easy because of this success, and never treated it like a business. I traded from the seat of my pants all the time. I did not have the knowledge of how to program, test and research trading systems. I simply relied on what all the vendors were selling. Ultimately, I gave back most of these initial gains, and at the same time I stopped doing appraisal work. Quite frankly, this probably lead to my divorce a few years later.
I then had the good fortune to have the opportunity to work for a then successful hedge fund and CTA business, Brandywine Asset Management, run by Mike Dever. Mike was on the cutting edge of employing a purely systematic approach to futures trading, and used numerous strategies. I worked on the trading desk with three other guys, one of whom had worked a couple years at Campbell & Company, one of the most successful CTAs in the business.
During that time I had also discovered that a good friend of mine from college was working for Monroe Trout, who was featured in Jack Schwager’s book, New Market Wizards. Another friend of mine put me in touch with a friend of his from his home town, Jaffray Woodriff, who was featured in Schwager’s most recent book, Hedge Fund Market Wizards. I have other friends and acquaintances who’ve worked for such firms as Citadel, Tudor Investment, Crabel Capital Management and Bridgewater, the largest hedge fund manager on the planet.
The common theme here is that NONE of these big name traders makes a living by trading their OWN account. They’ve all made their fortunes by managing money, and INVESTING their own money in their own funds.
Many people would argue that making $100,000, or $250,000 or more per year is a pretty good living. If you are trading your own account, and start with $100,000, how do you make $100,000? You have to make 100% on your money.
Yes, Paul Tudor Jones made triple digit returns on his funds for five consecutive years in the 1980s, but what has Tudor’s performance been like in the last 20 years? A 15% return has proven to be a good year for Tudor since.
Jaffray Woodriff runs Quantitative Investment Management in Charlottesville, Virginia. He started that fund about ten years ago, after working on the trading desk at Societe Generale. Prior to working at SocGen, he had tried running his own firm with a fairly small amount of money, had some up and down years, got screwed by a partner, then realized he had to work for someone else for a while. Once he built up a track record working at SocGen, he was able to leave with a new partner, attract trading capital, and start his own business again. His trading was very successful for the next five years, and his assets under management grew to over $5 billion, which is why he was featured in Schwager’s book. Since then, he hasn’t been able to make a 10% return.
My good friend that worked for Trout left there over ten years ago, and tried his hand at working at a proprietary trading shop. He had over ten years experience working for Trout Trading, which has since become Tewksbury Capital. After three months working in this prop shop, he gave it up and went to work for Crabel. He couldn’t handle the stress of even trying to make money for himself with someone else’s money, even with the strategies he had learned at Trout!
We put traders like Jones, Trout, Richard Dennis and Toby Crabel on a pedestal because they have made substantial fortunes for themselves. Yet, with the Dennis being the only possible exception, none have made a fortune by just trading their own money. Dennis made his money during a wild period in the 1970′s and early 1980′s when commodities were making historic moves. The only comparable year we’ve seen since is 2008. Dennis had trouble managing money for other people, as his funds blew up with 50% losses twice, and he retired from the world of money management.
The point I am making here is this…don’t quit your day job. You need to understand that a VERY successful trend following approach in the futures markets will net you 20% compounded annual returns, but you may not be profitable every year, and occasionally you will see a drawdown of 30% or more. Can you stomach watching your $100,000 turn into $70,000 or less?
All of the traders I’ve mentioned developed BUSINESSES around futures trading. They were successful at trading their own money, or working at another firm, and then they were very successful at marketing their businesses. They then hired staffs of traders to execute their trades, market their business, deal with compliance issues, and handle their back office.
It is certainly possible to make a lot of money trading futures, but that money is made over time through the power of compounding. It basically took me over twenty years to learn that lesson. I always suggest that wannabe traders for a living visit Autumngold.com to review the real track records of many successful and unsuccessful CTA businesses.
My goal for Trend Following University is to provide the foundation and blueprint for individuals who want to achieve some financial goals through trading futures. There is so much more to this business than simply creating a trading system for trading in these markets. The information I provide here is based upon my own life experiences, what I’ve learned from many others who work in this business, and my own research. I look forward to the opportunity of helping some people avoid the pitfalls of this business, and in getting on the right path to long term success.
I’ve read this type of quote about trend following and trading systems in general many times over the years, and it still makes no sense to me… “all of our systems trade every market with identical rules and parameters to avoid any type of optimizing or curve fitting.”
Ask yourself this question…why would you do that? Why would you trade a market like treasury bonds the same way you would trade soybeans? Don’t they have different types of fundamentals that drive price? And don’t those fundamentals change over different time frames?
The interesting thing about one of the traders who made a quote similar to the one at the beginning of this post is that his trend following systems performed miraculously well in testing, but ultimately did not quite live up to the hype in real time trading under the microscope of the world of managed funds.
While prices in all markets are ultimately driven by supply and demand, it is the underlying fundamentals that drive supply and demand that are different among market sectors. For instance, interest rate markets are generally tied to economic cycles and inflation and these cycles and inflation perceptions can last for years.
On the other hand, the supply and demand of a market such as soybeans is affected primarily by weather concerns. Demand in this case is relatively inelastic, unless prices get very high. Otherwise, as prices rise due to some weather concern, such as drought or flooding, somewhere in the world, more soybeans will be planted to take advantage of the higher prices. A price cycle for soybeans then may last only a matter of months.
So, is it really curve fitting to trade one market a bit differently than another? I would argue that traders who rely more upon fundamental information will trade these markets differently in terms of how long they hold a position, so why would a technically driven trader not do the same?
From my point of view, an individual who is looking to make a living by trading should learn all they can about the markets they trade.
In reality, systems should be kept simple, with few parameters. However, traders should understand that no system will work great all of the time, and it is probably a good idea to employ multiple trading systems, and to consider that some markets act differently than others because they are simply, well, different.
Just food for thought. I am admittedly no computer whiz nor math genius, but I try to apply a sensible approach to my analysis of the markets.
Hey if you might be interested in more of what I have to say about the markets, fill in the box below and I will send you an actual trading system that, at least in my testing, pretty much trounces those ole Turtle systems. Keep in mind though, past performance results do not necessarily guarantee future results, and these are just simulated results, which have their inherent limitations. Not here to produce BS, just good trading ideas.
Should you bother trading from the short side? Common sense should tell us that we should at least trade the short side differently than the long side in most markets, because bear markets act differently than bull markets. The one exception is the currency markets, because a short position in one currency, is in fact a long position in another. Currency future contracts reflect long and short positions of the U.S. Dollar versus other currencies, or pit one currency such as the Euro versus another such as then Yen or British Pound.
With that aside, in general bear markets act differently than bull markets. There is an automatic limit to profit potential in a bear market because a market can’t trade at less than zero. As a market declines, there is always someone willing to enter a long position as a market begins to look cheap in their eyes. As a result, bear market trends tend to be choppier, with intermittent price spikes that result in bear traps that stop shorts out of their positions. In other cases, a bear market trend may be smoother, but with less volatility, and a smaller move overall.
This chart of Coffee in 2013 is a good example of a slowly declining bear market with intermittent price spikes. While some portions of the trend are smooth, they do not move far enough, and once stopped out, provide little, if any profits to the trend trader.
In the case of bull markets, the upside really has no limit. Bull markets do not end in the same way as bear markets. Bull markets end when there are no more buyers to push the market higher, while bear markets end when enough buyers begin to push the market higher. As a result, you will occasionally see a bull market end with a parabolic move. My old coffee trade in 1994 was one such move.
This is the move in Coffee in 1994 that I was referring to. After it broke out in May, it never made a 10 day low until late July, and this was a moon shot sort of move. This one trade provided the bulk of profits to the smaller trend followers in 1994, while it was actually a difficult year overall.
The bottom line is that traders should consider whether it is a good idea to employ the same system to the short side as they do to the long side. Some traders may find it to be a waste to trade the short side altogether. Testing results suggest that employing the same trend following system to both the long and short side will often lose money on the short side.
Want to learn about a trading system that trounces the Turtles? Fill out the box below and we’ll send you a free report with a free trading system that Trounces the Turtles in our simulations.
As always, futures trading involves substantial risk and is not suitable for all investors. Past performance results do not necessarily guarantee future trading results.