Posted by: jhamon | August 7, 2009

Wall Street Journal All Wet: “Trend Chasers” Don’t “Struggle”…

Got Worms?
Got Worms?

The Wall Street Journal is all wet in titling its article “Trend-Chasing Funds Struggle After Blowout Year.” 

The notion that trend followers “struggle” is bogus.  Trend followers lose money when markets don’t trend, and that’s certainly frustrating.  (So do most people by the way, because whatever you call your method, the way you make money in the markets is by catching a trend.)  But “struggling” implies stressing and straining.  Trend followers have a method and they stick to it: lather, rinse, repeat.

To better understand trend following, think of a fisherman on a Sunday afternoon: he takes along a can of worms, puts one on a hook and throws it in the water.  He waits and watches his bobber and tries to set that hook.  His worm might get stolen or stop wiggling, but if he needs to put on a fresh worm, he doesn’t struggle!  He just puts on another worm.  He’s got a whole can of worms and besides, that’s what they’re for – catching fish.  If it takes him 5 worms or 50 to catch fish, so be it.  The point is to come home with fish, not a full can of worms.  And if he comes home with a partial can of worms and few or no fish – hey, that’s just part of fishing.

By analogy, a trend follower’s can is his trading capital and his worms are properly sized trades.  Of course he or she’s going to have losers!  But he’s not struggling; he’s looking for a trend.  He risks a little at a time. 

In fact for most trend followers, typically about a third of their trades are winners. (FractalBox brag alert: we’re more like 45% accurate in our strategies.)  But if 1/3 of the trades each make four times as much as the 2/3 that lose, it’s easy to see how trend followers can make money.  And they do.  Among the most consistent, most successful managers in the world are “trend chasers,” as the article so disparagingly calls them.

Happiness is a full can of worms and knowing where and how to fish!

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Responses

  1. Can’t you see, Can’t you see????
    How can you not see?
    The trend following goes absolutely against their idea of making money in the markets. It goes against the very notion of buy and hold and forget(and get bankrupt)… How can you not see.

    And I am sure, they are not so naive. They just dont’ want the common media to know about it, which is better than great for me. Because if even 50% of participants become trend chasers, the ‘edge’ will fizzle away.
    Its an insiders thing 😉

    And I hope, you wont try to refute WSJ the next time.

    Soham

  2. LOL

  3. Nice post. Just noticed you are following me on Twitter. I haven’t posted a lot–just learning and unsue of its usefulness. Besides I really have more than I can handle at futuresmag–issue, Website blog etc.

    I am interested in learning a little more about your background and am wondering if you would be interested in contributing.

    BTW
    I agree with the one comment. So called experts always try and knock TF. The WSJ and most of business press are beholden to buy and hold world. Even Yale put out a terribly boased study in ’08 (talk about bad timing) stating that CTAs absolutely add no value.

  4. I’m so glad I found this site…Keep up the good work


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