I would say that at least a small percentage of people who visit this blog dream of trading for a living. I will say immediately that if you want to make a living by trading YOUR OWN money, trend following is not the way to go.
Many people may point to Richard Dennis as someone who built a fortune through trading as a trend follower, but they would be wrong. He built a sizable stake by trading in the pits before moving to an office. It was then that he realized he needed to have a longer term perspective if he wanted to trade more markets.
Here’s the deal…if you want to trade for a living, and you feel you are most suited to the trend following approach, then you need to manage other people’s money in addition to your own. In fact, you will need to manage a lot of money for clients in order to generate consistent income, which will only come through a management fee. You can then make a lot more money through incentive fees if your performance is good.
Why is this the case? Because trend following does not generate consistent profits from year to year. Some years you will actually lose money. If you are really good, you will keep those losses small. But, even the best trend followers in the business have been down 10% or more in a given year. They may also experience substantial drawdowns along the way.
If you intend to trade money as a systematic trend follower in the futures markets, except this reality…whatever your target compound annual return may be, expect your worst drawdown to be at least the same amount. For instance, if you are targeting a compound annual rate of return of 20%, you should expect a worst drawdown of at least 20%. In fact, most Commodity Trading Advisors who manage client money experience a drawdown MORE than double their compound annual rate of return.
Consider Dunn Capital Management, one of the pioneers. Its worst drawdown is over 60%, and its compound annual rate of return since 1974 is 18%. Chesapeake Capital, run by former Turtle Jerry Parker, has had a worst drawdown of over 30%, and a compound annual return of just over 13%.
These traders are among the best in the business. You can check out historical performance returns among CTAs at Autumngold.com.
Keep this in mind though…it will be very difficult for you to raise money outside a few friends and family without a track record of at least three years.
If you are just now embarking on this path of futures trading, and you are convinced that this is the way you want to build wealth, then consider setting up an exempt pool and pool your assets with friends and family. You can set this up with as much as $400,000 in capital from up to 15 investors if you want to charge fees. If you don’t care to charge fees, then you can raise a good bit more and stay exempt, but once you decide to trade professionally, you will need to register as a CTA and CPO (commodity pool operator).
Yes, trend following is a great way to build wealth. Far better than a buy and hold program in the stock market if you ask me. But, it is not without its own pitfalls.