Why Does Trend Following Work?

I don't think trading strategies are as vulnerable to not working if people know about them, as
most traders believe. If what you are doing is right, it will work even if people have a general
idea about it. I always say that you could publish trading rules in the newspaper and no one
would follow them. A key is consistency and discipline.
Richard Dennis

The majority always wants to predict when the next business cycle will be. Trend Following
profits result from the majority's mistaken belief that they can actually predict the future (said
another way: zero-sum).
TurtleTrader

Why has Trend Following been the greatest style of trading in the past 30 years and continues
to be? Trend Following systems have worked in the past, excel today and will perform into
the future for the simple reason: trends exist.

The world will always face constant change and no one can forecast a trend’s beginning or
end until it becomes a matter of record, just like the weather. But if you have a basic strategy
that's sound, you can take advantage of those changes to make money by capturing the bulk of
a trend. Your boat rides the crest of the wave. Trend Following is just another example of
good business principles. If your principles are designed to adapt, the changing world is not
going to materially hurt you. Like a ship with precise navigational equipment and good ballast,
a Trend Follower will not only make it through the storm, but arrive at the destination ahead
of time. It’s the ability to adapt that allows Trend Following to continually pull profits from
the marketplace.

Skeptics
Some people are skeptical. They come to this web site seeking the magic bullet, the Holy
Grail, the special sauce, some secret -- they miss the clear point.

What do we hear from some readers?

• The markets have changed right?

• Trend Following has changed right?
• There is a new trend following system now right?
• I know a trader that did not do well. It doesn't work now right?
• You are saying I can earn the returns of example traders right?
• But I want profit targets!
• Adding to positions scares me.
• I want to trade stocks.
• What about short-term technical analysis that predicts?

Our response?

• The markets have not changed.

• Trend Following has not changed. New? Don't believe the hype.
 • The fact some trader did poorly has to do with that one trader's greed/fear profile, not
Trend Following.
• Can we promise you will earn like returns of the example traders mentioned? No, we
don't make those types of guarantees.
• What is the relationship among example traders mentioned on this site? The
correlation evidence is clear. Take a good read of it in the right hand margin.
• You still say that Trend Followers are all unique birds doing drastically different
things in their trading? You ignore reality.
• Profit targets are prediction. Set a profit target and you miss trends.
• If you are afraid to have your positions grow (by adding or pyramiding) as your equity
grows, you miss the lessons of all great Trend Followers.
• Stocks? Read.
• Short-term technical analysis and prediction? You are one step from the mother of all
draw-downs.

In 1995-1996 one Turtle decided he would start trading the S&P from a discretionary
standpoint. He nearly lost it all. That's right he put aside rules, that he knew worked, and
started trading without a system. Why did he do this? Who knows. But does it say something
about the individual trader's greed/fear OR the rules? Systems don't make up for poor
personal discipline. They are only as good as the individual adhering to the principles.

The wisest man TurtleTrader knows has offered that every 5 years some famous trader blows
up and everyone declares trend following to be dead. Then 5 years later some famous trader
blows up and everyone declares trend following to be dead. Then 5 years later...well the point
should be clear now. The Turtle above was probably noted in the press as one of those traders
every 5 years, but the reality of why he had problems was himself, not Trend Following.

The All-Time Skeptic

We posed the question many months ago: Ed Seykota says, Everyone gets what they want.
Do you get what you want when it comes to trading? One of the oddest answers we have seen:

I don't care what some guy said in an interview over a decade ago. Once again, trading is a
business and there's no place for pretending that everyone gets what they want or there are
truths or that any other delusional ultimate view of the markets exists.

Granted this skeptic is not fond of the TurtleTrader site, but doesn't he miss Ed's point entirely?
How can a reasonable man argue with the logic?

Trend Following
Geometric progression. Sounds like a complicated math theorem. It's actually a good term
for what happens inside of a big trend. Epidemics are an example of geometric progression.
Starting with only a few people, an epidemic can spread through a population as it multiplies
again and again. When a virus spreads, it doubles and doubles and doubles.

Market trends are no different. Extreme market trends can appear from out of nowhere
moving either up or down. These trends often feed upon themselves and can quickly progress
geometrically allowing the opportunity for huge profits if you were in the trend early and are
set with a trading plan. However, people can have a hard time with this type of progression,
because, like an epidemic, the end result often seems out of proportion to the cause.

In order to appreciate why market progressions or trends can be so powerfully rewarding, you
must not expect proportionality. You need to prepare for the possibility that sometimes big
market changes follow small events, and that sometimes that change can happen very quickly.
Ultimately your appreciation of geometric progressions comes from understanding and being
prepared for them. Trend Following trading is designed to find and exploit those market
trends long before they arrive on the radar screen of the masses.