TurtleTrader®
Trend Following Systems

Blog: Animated Unemployment

Now, that is a great way to make numbers come alive.

Shout out to Barry Ritholtz.

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Blog: It’s Funny Cause It’s True!

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Blog: Benchmark Question

This question comes in from a Linkedin contact of mine:

Hi Michael, my name is [name]. I am the Founder, Managing Partner, and PM for [name]. First, thank you for posting your videos on YouTube. They have been a great reference point for me. I have a question regarding benchmarking absolute return strategies. We have been debating this topic to no end. Our optimization models use a modified Mean Variance Analysis. Modified since we have proprietary concepts to account for higher moments and other factors which are ultimately priced into our final portfolio weightings. The problem I am having is when running the optimization models, what is REALLY the appropriate benchmark to be using?…I have actually resorted to using an equal weighted index of the identical portfolio as a benchmark to determine the investors incentive of allocating via our approach over …simply investing in the managers directly. I know this is assumption may have numerous flaws, however as a quick and dirty approach, it seems to make some sense. I will also benchmark against a portfolio using a basic mean variance approach (i.e. w/out accounting for non-normal returns, etc.). Ultimately, it doesn’t make sense to me that many absolute return managers will benchmark their performance vs. the S&P or the Barclay CTA index (which i believe measures systematic trend followers only). If you could provide me with any suggestions or thoughts. I would be very appreciative. Respectfully, [name]

There will be many different angles here and no one size fits all. Shoot, debating the concept of a benchmark alone can be lengthy. I open the topic up.

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Trend Following Performance: Monster Returns for Decades!

This page is PROOF that huge returns can be made by ANYONE trading as a trend follower. If you want to learn how the traders below made their fortunes we can teach you. While no one can promise you their returns, we can teach you the philosophies and methods used to generate the big trend following money. Also as you review performance examples keep in mind that one month of performance tells you nothing. It's the big money made on average over many decades that should be compelling evidence for those investors who no longer trust brokerage firms and mutual funds.

Trend Following Backtest Reports

The following performance reports from trend following simulations give an idea of how to think about trend following portfolios and performance:

• Example 1
• Example 2
• Example 3
• Example 4

Trend Following Performance Reports

The following performance reports from trend following traders show the types of returns that can be earned by sticking with systematic trend following trading systems:

• Salem Abraham (PDF)
• Dunn Capital I (PDF)
• Dunn Capital II (PDF)
• Dunn Capital III (PDF)
• Man AHL I; London (PDF)
• Man AHL II; London (PDF)
• Bob Pardo (PDF)
• Eclipse Capital (PDF)
• Liz Cheval; Turtle (PDF)
• Hyman Beck (PDF)
• Millburn (PDF)
• Superfund I (PDF)
• Superfund II (PDF)
• Bernard Drury (PDF)

Trend Following Compared to Buy and Hold

Below are top trend following traders' performance charts compared to major stock indexes:

• Abraham Trading compared to U.S. indexes.
• Abraham Trading compared to world indexes.
• Aspect Capital compared to U.S. indexes.
• Aspect Capital compared to world indexes.
• Chesapeake Capital compared to U.S. indexes.
• Chesapeake Capital compared to world indexes.
• Clarke Capital compared to U.S. indexes.
• Clarke Capital compared to world indexes.
• Drury Capital compared to U.S. indexes.
• Drury Capital compared to world indexes.
• Dunn Capital compared to U.S. indexes.
• Dunn Capital compared to world indexes.
• Eckhardt Trading compared to U.S. indexes.
• Eckhardt Trading compared to world indexes.
• Eclipse Capital compared to U.S. indexes.
• Eclipse Capital compared to world indexes.
• EMC Capital compared to U.S. indexes.
• EMC Capital compared to world indexes.
• Hawksbill Capital compared to U.S. indexes.
• Hawksbill Capital compared to world indexes.
• Hyman Beck compared to U.S. indexes.
• Hyman Beck compared to world indexes.
• Man compared to U.S. indexes.
• Man compared to world indexes.
• Millburn compared to U.S. indexes.
• Millburn compared to world indexes.
• Rabar compared to U.S. indexes.
• Rabar compared to world indexes.
• Saxon compared to U.S. indexes.
• Saxon compared to world indexes.
• Transtrend compared to U.S. indexes.
• Transtrend compared to world indexes.
• Winton Capital compared to U.S. indexes.
• Winton Capital compared to world indexes.

Trend Following Winning Charts: Examples

• Chart 1
• Chart 2
• Chart 3
• Chart 4
• Chart 5
• Chart 6

Trend following methods can be used on stocks, ETFs, LEAPs, futures, currencies and all commodities.

Universal Chart Example

The universal chart example must be read by all.

Performance in Trend Following Book

More examples of trend following performance over the last 30 years are in the book Trend Following.

Additional Benefits Beyond Performance

• Trend following emphasizes diversification (example chart).
• Trend following has little to no correlation with long only stocks.
• Trend following's higher returns compound exponentially.
• Trend following is patient. It waits for opportunities.
• Trend following reacts to real events. No prediction.
• Trend following profits in up and down markets.
• Trend following profits across stocks, commodities, currencies, etc.
• Trend following trades exchange traded instruments. Transparency!

Disclaimers

We can not promise you will earn like returns of the traders, charts or examples (real or hypothetical) mentioned within this site. All past performance is not necessarily an indication of future results. Data presented is for educational purposes. This information is not designed to be used as an invitation for investment with any adviser profiled. All data on this site is direct from the CFTC, SEC, Yahoo Finance, Google and disclosure documents by managers mentioned herein. We assume all data to be accurate, but assume no responsibility for errors, omissions or clerical errors made by sources.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

Blackstar Funds: Trend Following on Stocks

Cole Wilcox and Eric Crittenden of Blackstar Funds, LLC authored a white paper titled Does Trend Following Work on Stocks? This paper is being released exclusively first on the TurtleTrader collection of sites.

Money Management

Money management is like sex: Everyone does it, one way or another, but not many like to talk about it and some do it better than others. But there's a big difference: Sex sites on the Web proliferate, while sites devoted to the art and science of money management are somewhat difficult to find.

Gibbons Burke

Resources for Money Management or Bet Sizing

1. Bet Sizing Article by Ed Seykota and David Druz
2. Gibbons Burke Article on Money Management (PDF)
3. Seykota Risk Management Resource
4. Kelly Formula and Data Transmission
5. White Paper by Johan Ginyard (PDF)
6. Johan Ginyard Position Sizing Interview
7. Frequency v. Magnitude White Paper
8. Web Resource for Math, Black Jack, Kelly, etc.
9. Edward O. Thorp: Beat the Dealer (PDF)
10. Kelly's Original paper, March 21, 1956 (PDF)
11. The Sharpe Ratio
12. Tutorial Risk-adjusted Return

Another resource to add? Send us an email!

Money Management FAQ

In the twenty-first century it has become fashionable to manage one's own investments, yet few traders implement disciplined, professional money management strategies. During the stock market bubble, limiting risk was an afterthought, but given the recent price action, it’s time to get serious about management of money and risk. Professional risk and money management strategies are the foundation for success. Essentially, money management tells you how many shares or contracts to trade at a given point.

Money management is a defensive concept. It keeps you in the game to play another day. For example, money management tells you whether you have enough new money to trade additional positions. Don’t confuse money management with stop placement. Stop placement does not address the how much question.

Money management is risk management. Risk management is the difference between success or failure in trading. Trading correctly is 90% money and portfolio management, a fact that most people want to avoid or don't understand. Once you have the money management down though, your discipline and psychology is 100% of your success.

Money management optimizes capital usage. Few have the ability to view their portfolios as a whole. Even fewer traders and investors make the move from a defensive or reactive view of risk, in which they measure risk to avoid losses, to an offensive or proactive posture in which risks are actively managed for a more efficient use of capital. Trend Following risk management formulas and philosophies are key to increasing profits while controlling risk.

Q. What are some issues addressed by money management or bet sizing?

A. For example:

• How much capital do you place on each trade.
• What is the heat of your trading.
• Capital preservation v. capital appreciation.
• When do you experience expectation of success.
• When must you take a loss to avoid larger losses.
• If you are on a losing streak do you trade the same.
• How must you prepare if trading both long and short positions.
• Does a portfolio of long and short allow one to trade more positions.
• How is your trading adjusted with accumulated new profits.
• How is volatility handled.
• How do you prepare yourself psychologically.
• Have you tested your bet sizing.
• More Money Management FAQ

Q. Does money management impact a decision to trade the same number of contracts or shares in all markets?

A. Yes. Money and portfolio management rules dictate the number of contracts or shares. Precise formulas set forth size. A trader who uses a constant trading size gives up an important edge in much the same way a blackjack player does when always betting the same regardless of what cards are on the table. Common single contract/share measures of trading system performance such as win/loss ratio, percent winning trades, etc. are of little value to decision-making when using Trend Following systems (and the Turtle system). Often the best trading approach, when tested on a single contract/share basis, will turn out not to be the best approach when money management strategies are incorporated.

Q. What about short term trading? Isn't short term less risky, and therefore you don’t need money management strategies?

A. Short term trading is not, by definition, less risky. Some people may mistakenly apply a cause and effect relationship between using a long term strategy and the potential of incurring large loss. They forget profit and loss are proportional. A short term system will never allow you to be in the trend long enough to achieve large profits. You end up with small losses but also small profits. Added together, numerous small losses equal a big loss. When you trade for the long term, you have a more positive expectation in terms of the size of the move. In the big picture, the larger the move, the larger the validation of the move. If you were trading some short term pattern predictive system you would never be able to participate fully in the big trends. Big trends make the big profits.

Q. How does money management impact drawdowns?

A. All systems have drawdowns. You can't have a profitable methodology, without taking some calculated risks as well as some losses. Trend Following drawdowns are a function of the risk level desired. Risk level among Trend Followers varies depending upon the size of the profit they seek. For example, if you sought 100%+ a year gains you must be prepared for the possibility of a 30% drawdown. Anyone who promises you can make 100%+ with only the possibility of a 5% drawdown is lying. More on Volatility.

Q. Can you manage margin issues?

A. Required margin has little to do with money management considerations. For example, if the margin was dropped from $5000 to $2500 on a particular stock or commodity, must you trade twice as many shares or contracts? Of course not. Margin issues are not money management.

Q. Is slippage a concern with money management?

A. No one wants bad fills. But Trend Following for the long term places far less emphasis on perfect fills for success. In contrast, short term traders' transaction costs and skids on their fills affect their bottom line to a much greater degree.

Q. What is the win/loss ratio of Trend Following management? Can it experience many losses in a row?

A. Trend Following systems (and the Turtle system) trade for the outsized large move. Several big trends a year are your key to success. The strategy cuts your losing positions quickly. Consequently, a few big trades will make up the bulk of your profits and many small trades will make up your losses. Winning trades can range from 35-50%, but that percentage reveals little information since we expect more losses (of smaller value) than winners (of much larger value). Win/loss ratio, while a favorite of the novice trader, has limited use in terms of Trend Following analysis.

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