David Druz is a long-time trend follower who was the first mentee of Ed Seykota. He has run Tactical Investment Management since the early 1980's. Here are some of his nuggets of wisdom:
“There are whole families of trend trading ideas that seem to work forever on any market. The down side is they are very volatile because they are never curve-fit. They're never exactly fit to any particular market or market condition. But over the long run, they do extract money from the market.”
“Robust systems tend to be designed around successful trading tactics (origin of our 'Tactical' name) classical money management techniques, and universal principles of market behaviour. These systems are not designed for specific types of markets or market action. And here is the amazing thing about robust systems: The more robust a system, the more volatile it tends to be!
This is because robust systems are not optimized to particular markets or market conditions. The converse is also true. You can design systems with excellent returns and low volatility on historical testing, but which only work for given periods in given markets. These systems tend to be curve-fit or market-fit and are not robust.”
"Successful traders rely on a small number of very profitable trades to compensate for several smaller losses."
"You have to keep trading the way you were before the drawdown and also be patient. There’s always part of a trader’s psyche that wants to make losses back tomorrow. But traders need to remember you lose it really fast, but you make it up slowly. You may think you can make it up fast, but it doesn’t work that way."
"For a system trader, it's way more important to have your trading size down than it is to fine tune your entry and exit points."
To many, the points made here aren't very exciting or new - but form the essence of trend following.
It is also interesting seeing how Druz talks about robustness and volatility. Basically, the simpler the method, the better the long-term results, BUT you will have more losers than winners and be prone to suffering a higher level of volatility in your returns.
In this regard, the performance record of long-time trend followers Dunn Capital is worthy of mention. In a 40 year period going back to the mid 1970's they suffered twelve drawdowns of 25% or more. And yet each time they carried on doing the same thing and ended up making new equity highs.
They didn't change anything - they just continued acting on their signals and adopting the same risk profile. And then things just started to happen - seemingly out of nowhere. With trend following you will often see a strong burst of performance after a run of losing trades and a drawdown, and a powering up to new equity highs. And it may only take one or two trends to do that.
It's just they way it works.
Hi there,
ReplyDeletewhat do you mean by twelve drawdowns, does it mean 12 years?
Hi Catalina - this means there were 12 separate occasions where they suffered a drop from equity highs of 25% or more within that 40 year period. The drawdowns would have lasted from a few months to 1-2 years in duration. As an example, Dunn had losing years of 27.1% in 1976 and 32% in 1981, followed by multiyear gains of 500% and 300% respectively. (Source - Trend Following by Michael Covel).
Delete