Systematic Trend Following and the Small Trader
I just read an interesting and revealing interview with trend following legend David Harding of Winton Capital. Inadvertently, Harding lays out the case that systematic trend following may not be the best approach for small, or individual trader.
Why? Check out this quote…
“It didn’t have any lasting impacts but it’s disturbing because if you put slippage in the models they don’t make money any more.”
Harding was referring to a significant reversal in the interest rate markets in Spring and how it impacted many trend following funds.
So what does this mean to the individual trader? It means that since trend following programs are entering and exiting positions at the same time, there is a tendency for significant slippage. As such, these fund managers are focusing more and more attention on how they execute trades, rather than the trend following models themselves.
This is quite apparent in the trend in hiring by these firms. They don’t hire traders so much as they hire programmers and researchers who can identify new ways of executing trades within the same models in an effort to limit slippage as much as possible.
With that in mind, for the individual trader, perhaps a purely systematic approach is not the way to go. Harding also describes how difficult it is even for someone who has enjoyed as much success as he has to stick with the program during drawdowns. He suggests that this may only be possible once money is not an object to the trader.
In other words, don’t trade in an effort to pay your bills. You need to approach trading with a different mindset…many successful traders have suggested that it’s not about the money, but about winning the game.
Keep that in mind as you continue to seek profitability in the trading business.