The Realities Of Trend Following From A Trend Following Legend

I just spoke to a potential student and shared with him some of the thoughts of David Druz a legendary trend follower…

The Bible of Trend Following

I’ve been trading for investors for over 30 years. My first fund, Tactical Commodity Fund started in mid-1981. Tactical’s current program began in 1993 as an offshoot of that first fund but with lower leverage and some evolutionary changes. I’ve learned a lot over the years. I’ve seen a lot of markets, a lot of bull moves, a lot of bear moves. And I can tell you I wish I had read this book 30 years ago. I would have made more money, especially near the beginning. Do yourself a favor. Read it. Now!!!!

My trading-for-investors career began not long after gold peaked around 870 and a bit over a year before the S&P bottomed near 100. I subsequently watched gold drop more than 70% over 19 years and then rally over 700% in the next 12. I watched the stock market rally for over 17 years with just one big, brief pullback along the way only to witness two retracements greater than 50% in the next 10 years.

I’ve seen almost too numerous to remember booms and busts in the commodity, currency and interest rate markets. I’ve seen things happen that everyone said never would and watched as things didn’t happen that everyone said were inevitable. I’ve traded and held positions in these markets nearly every single day since mid-1981.

Tactical was one of the first systematic, computerized fund managers. We started out on a Radio Shack TRS 80, before the first Apple. Historical data that costs pennies now took months to type in by hand. We ran Fourier transforms and proved there were in fact no repeatable hidden cycles in the markets while everyone else was still talking about them. We tested all the market lore to see what was true and what wasn’t. We tested the early mechanical systems that were touted and found most of them didn’t hold up. Indicators that people still use today we learned years ago don’t really give you a statistical advantage.

I wrote my own back testing software and tested everything I could think of. When personal computers advanced we bought the latest. For a number of years we had two Sun workstations running 24/7 doing systems testing when those were state of the art. Of course now you can do the same things much faster on a laptop. But that was then and this is now. We kept testing. We kept learning.

I read every book I could get my hands on about trading. I listened to the old traders. When I worked during summer breaks in college at a brokerage firm at the Chicago Board of Trade I kept my ears open as the old timers related their adventures, their successes, their failures. I tried to understand the psychology of the winners and how it differed from the losers. I got the idea that the psychology of the trader was as important if not more important than anything in success or failure.

I spent a lot of time learning things the hard way, a lot of trial and error, a lot of hard knocks. Trading is still a lot of hard knocks. Draw downs can go on seemingly forever. You can have days, weeks, even months on end without much in the way of profits. It can feel like you are a punching bag or a movie double who takes all the hits. But that’s the nature of the game, of the business.

Even after you’ve learned how to do it, you still take your hits. To succeed you just need to stand up every time you get knocked down. You need to have the confidence that standing up is the right thing to do. You need to know when to stand back up and how. And just by standing up again and again and staying standing as long as you can before you get hit again, well, you can actually make more money than you lose over the long run in trend trading. It’s quite the amazing process.

Very few people succeed in this process. The learning curve is too steep and the correct psychology is too hard to implement. If you have any attachment to making money, and who doesn’t it is very tough to trade correctly.

Read more here