Trend following is a brutal understanding of reality. It shoots for the big returns. If you want the chance for big money, in bull and bear markets, trend following is where you want to be. But this isn’t clipping coupons. No risk, no return. This page is proof that huge returns can be made trading as a trend follower.

Fundamental analysis, buy and hold, value investing, CNBC, stock pickers, day trading--stop. Enough. Those typical investing approaches, popularized by media for decades, are not the way to build true wealth. Explore trend following and learn something different.

Some people focus on the past results of a trading system to gauge its success. Others only think about what happened last month. Both are wrong.

A great trend following system, adapts to change. Trend following successfully trades the charts below. Moreover, these 3 charts have no dates or times on them. Why? That information couldn't matter less. Neither is there any mention of what market is being examined.

Universal Chart Example #1

Universal Chart Example #2

Universal Chart Example #3

Why no specific information on the charts? Why doesn't it matter? Markets trend. They have trended for hundreds of years. If you know markets trend, and the price is the key, why does it matter what market the chart even represents?

Take a close look at 1 and 2 and see if you can guess the market. What's the relationship? It's the Japanese Yen and Cisco from the 1990s and the dot com bubble. There is no relationship, that's the point.

Fundamental analysis, buy and hold, value investing, CNBC, stock pickers, day trading--stop. Enough. Those typical investing approaches, popularized by media for decades, are not the way to build true wealth. Explore trend following and learn something different.

Trend following performance data can be found here.

The trend of the dollar is straight down: A fundamental view of the dollar drop from the Economist: As the dollar hit another new low against the euro, briefly breaching $1.30 on November 10th, an increasing ...

The trend of the dollar is straight down:

A fundamental view of the dollar drop from the article, "How low might the dollar sink?", by The Economist:

As the dollar hit another new low against the euro, briefly breaching $1.30 on November 10th, an increasing number of economists are asking how far the greenback might fall and how its slide will affect the world economy. One of the most alarming answers comes from Paul Volcker, Alan Greenspan's immediate predecessor as chairman of the Federal Reserve. He recently said that he thought there was a 75% chance of a currency crisis in the United States within five years. It is easy to see how this might happen. America's current-account deficit is running at a record 6% of GDP this year, and on existing policies it will continue to widen. America's net foreign liabilities are already 23% of GDP, and economists at Goldman Sachs calculate that this figure will reach more than 60% by 2020, even if the current-account deficit stabilizes at 5% of GDP (see chart).

Other countries, such as Australia and New Zealand, have sustained large external deficits for long periods, but America's borrowing is much bigger in absolute terms. It is eating up around 75% of the excess saving of Japan, China, Germany and other countries with current-account surpluses. If the dollar did not have the advantage of being the world's main reserve currency, America would already be in serious trouble. Instead, the willingness of Asian central banks to lend to the United States has allowed its deficit to keep growing for longer.

Nevertheless, the deficit is unsustainable: sooner or later it will need to shrink, and that will involve a cheaper dollar. A new paper by Maurice Obstfeld, an economist at the University of California, Berkeley, and Kenneth Rogoff, of Harvard, a former head of research at the International Monetary Fund, predicts that the dollar will fall by another 20% in real trade-weighted terms even if America's external deficit unwinds gradually.

If the adjustment is more abrupt, the dollar will dive by more than 40%. The real question is not whether the dollar needs to fall, but how drastic the economic effects of its fall will be. In the mid-1980s, the greenback's trade-weighted value declined by 40% with few ill-effects in America. The world economy absorbed the shock reasonably well. Unfortunately, the authors see more parallels today with the dollar's collapse in the 1970s, when the Bretton Woods system broke down. Like today, that was a time of large budget deficits, loose monetary policy and rising oil prices, and America faced open-ended costs to pay for a war.

Today, the combined costs of fighting in Iraq and maintaining security at home could easily match the cumulative 12% of GDP that the Vietnam war cost.

There is therefore a risk that the global economic consequences might be as severe as those which followed the demise of Bretton Woods, with higher interest rates and a drop in global output. If Mr Obstfeld's and Mr Rogoff's gloomier prediction turns out to be correct and the dollar falls by 40% or more, then this would, in effect, amount to the biggest "default" in history. This would not, of course, be a conventional failure to service debt, but could be viewed as default by stealth.

America borrows from others largely in its own currency, so by letting the dollar drop it would wipe trillions off the value of foreigners' dollar assets. In such circumstances, the risk of a financial crisis is not negligible. As Mr Rogoff puts it: "The world is set to jump off the top of a waterfall without knowing how deep the water is below."

Trend followers don't profess to be economists. Six months from now we all may find out these fundamental projections were either right or wrong. Either way, though, you need a plan to deal with the actual price movement. Projections and forecasts don't make for good trading decisions. If the dollar stays down, trend followers will be short. At some point if the dollar reverses, trend followers will be long. If the dollar goes into a flat sideways period of starts and stops (false breakouts), trend followers will have many small losses. Bottom line the economic projections may happen or may not, but they don't really help you to take action.

Do you think a systematic trading approach could have brought one of Germany's largest company to its knees? Unfortunately for Metallgesellschaft (MG), a German metals and oils conglomerate, it happened. MG was long crude oil futures on New York Mercantile Exchange (NYMEX) most of 1993. They lost, depending on the estimate or source, $1.3 to $2.1 billion dollars. Those traders in short crude oil futures made the money MG lost. It's a zero-sum game. If you trade like the mindless majority, you lose. MG traded like the majority.

Chart A

During the course of 1993 crude oil futures had a steady slow decline from May through December (see chart A). A move such as the crude decline is not necessarily unusual, but this time was different. Why? There is always someone on either side of a futures trade. The difficulty lies in determining who is on the opposite side of a trade if one side is known. We know MG lost as crude prices dropped, but who won the other side of the trade and how? More important, can the individual investor or trader benefit from an understanding of who won and how? In the aftermath of MG losses a variety of explanations developed. People were treated to academic mumbo jumbo from MBA programs as to why MG lost money and numerous articles condemning futures and their speculative nature. The actual explanation is simply that MG were not good traders. However, this case is a primer not because MG lost but because someone else won.

Trend following played the hand in MG's defeat. Trend followers left a performance trail of their activities over the course of 1993. The job of explaining this is made easy by the near 100% correlated performances (see chart B).

There is slight variation in performance data due to differing levels of leverage employed by trend followers, but the key to the explanation lies in the months of July 93, December 93 and January 94. Those months don't require much more than a glance at the correlation to confirm the similarity in the strategies employed. They all made money in July and December, and all lost in January. How did trend followers position themselves to benefit from a completely unforeseen event (MG's bad trading plan)? Here are some insights as to why:

- Trend followers don't predict market movement, they react to it. May and June showed downward crude pressure and trend followers followed the trend. They have limits on market sectors and risk limits on the total portfolio as well. Position sizes are based on the amount of money under management.

- Every day trend followers know how many contracts must be on based on total capital. The key to their strategy is to place good profits at risk to participate fully in a trend. For example, after trend followers initiated positions and were rewarded with strong profits in July, they were willing to risk those profits again, which is what they did with their crude oil positions.

- Trend followers will risk 100% of the profit in a trade. For example, in August with nice profits in hand, they would have been willing to risk all of their profits and still lose a fixed % based on the original stop.

- Trend followers are willing to let profits on the table turn into losses. Trend followers let the market tell them when the trend is over (i.e. Jan-94).

- Trend followers don't favor liquidation. They want to capture 60-70% of a trend, not just 15%. Big money is made in the big moves. For example, trend followers want to hold silver as it moves from $6 to $30, not just hold it from $6 to $9.

The July Entry

Examine the crude oil chart and the performance chart. Trend followers all entered in the May and June 93 period and then, in July, the market nose dived. Trend followers were now in for the long haul with a fantastic and very profitable short position firmly established. What's the lesson? If trend followers had not been profitable, but had lost their maximum percent allowable instead, they would have taken their losses and exited.

After July: The Waiting Game

In August trend followers are firmly established short in crude oil futures. Obviously, MG is long at this point. MG is desperately trying to hang in there (hoping for crude to stop falling) while trend followers wait patiently (and aggressively short). Trend followers are no doubt opportunistic predators. Their waiting game continues through the summer with no real movement up or down (see chart A). MG has met margin calls and stayed in the game in hopes of an upward crude push. They do not anticipate or understand the discipline of their opponent on the opposite side of their long trades. Trend followers are not exiting anytime soon since the trend is down. An exit would violate their most fundamental rule: Follow the trend.

Trend followers were not just short, they were aggressively short with profits reinvested back into additional short crude oil positions. On the other hand, MG has no apparent strategy. They refuse to take a loss early on. The whole MG debacle would have been a footnote in trading history if they had simply exited after the July losses.

The Late November and December Route

Moving through October and November, the situation culminates in MG's near corporate destruction. Crude oil begins its final descent in late November and into December. At this time MG management closes out of all of their trades that fueled the November and December crash. Trend followers are still short from the May, June and July period and raking in profits at the expense of one ill-fated firm.

Ultimately all good trend following must come to an end. Trend followers would eventually need to begin their crude oil futures exit. The exit came sooner than later as January 1994 proved to be the month of trend followers' liquidation. Look at the performance of January 94. All trend followers lost for the month as they extricated themselves from their history making winning crude oil trades of 1993.

Conclusions

Trend followers reacted to crude oil movements with a steady plan of systematic trading. They played short to MG's long.

The MG example, with trend followers winning, is not 20/20 hindsight. Trend followers make money in the same months in the same stocks, commodities and currencies by employing consistently their trend following systems. Scandals and rogue traders in the trading game come and go, but trend following continues to produce great profits by taking advantage of other traders' poor strategies.

More.

Who is John W. Henry and Why Does
Barings Loss Matter to My Portfolio?

If you want to make more money than the average mutual fund holder, John W. Henry and Barings Bank must mean much more to you than any day trading hype. Included below are a few quotes from John W. Henry. These quotes offer perspective from a brilliantly successful trend following trader. Remember, John W. Henry's past returns are highly correlated with many other trend followers. They all make money at the same time in the same markets.

John W. Henry Correlations

John W. Henry, Futures Industry Association:

I know that when the Fed first raises interest rates after months of lowering them, you do not see them the next day lowering interest rates. And they don't raise rates and then a few days later or a few weeks later lower them. They raise, raise, raise, raise,... (PAUSE)...raise, raise, raise. And then once they lower, they don't raise, lower, raise, lower. Rather they lower, lower, lower, lower. There are trends that tend to exist, whether they are capital flows or interest rates. So you can call trend following a blackbox, I guess, because some people refer to disciplined, mechanical-type trading as blackbox. But if you have enough discipline, or you only trade a few markets, you don't need a computer to trade this way. It just makes it much, much more convenient for us.

Our philosophy is that there is an inherent return in trend following. I know CTAs that have been around a lot longer than I have, who have been trading trends: Bill Dunn, Millburn, and others, who have done rather well over the last 20 to 30 years. I don't think it is luck year after year after year.

Henry and Dunn

Dunn Capital and John W. Henry are two of the most successful money managers in the business. Both have been around for 20 plus years. Between the two of them they manage over $2 billion USD in customer funds trading as trend followers.

Dunn Capital and John W. Henry don't trade much during the course of a year, but when they do, they achieve spectacular returns. Shouldn't individual investors trade like this? Why pay money churning brokerage machines for short term trading noise when the best in the business don't trade often?

The only way to crack the code of the trading network is to learn how to trade for yourself. John Henry started trading an account of US$16,000. That account is now over US$1 billion dollars. Armed with discipline and commitment to a system, the individual investor or trader has tremendous opportunity to also crack the code and trade successfully.

Correlation 101

Why mention John W. Henry and Dunn Capital in the same breath? There is a distinct similarity in their trading. For trend followers, Henry and other trend followers alike, money is made at the same times in the same markets. The correlation is strikingly obvious if you compare individual months in disclosure documents. Trend followers all make money in the same years in the same months in the same markets. The correlation is beyond a shadow of doubt. We are not stating that long term trend following is the only way to trade, but trend following does make the most money. If your goal is not to make the most money you can, then adopt another system of trading.

An Opportunistic Trio

The first three months of 1995 must go down as one of the most successful periods in the history of speculative trading. This brief period should be a graduate program studied at institutes of higher learning. The market events of those months could, by themselves, be the subject of a graduate course in finance at Harvard Business School. Even more relevant to individual investors, is that those events revealed the success of long term trend following in stark relief. Yet only a few years later, despite the significance of what happened, those three months have been forgotten.

The basic plot outline goes like this: Rogue trader, Nick Leeson overextended Barings Bank on the Nikkei 225, the Japanese equivalent to the American Dow. He bankrupted the world?s oldest bank in a few months by speculating the Nikkei 225 would move higher. It tanked, and Barings, the Queen?s bank, one of the oldest, most established banks in England collapsed, losing $2.2 billion.

Who won the Barings Bank and Yen sweepstakes? That question was never asked by anyone, not the Wall Street Journal or Investor's Business Daily. Why? Did the world only care that Nick Leeson had lost money resulting in Barings' demise?

Was the world only interested in a story about failure, and not in the slightest bit curious about where that $2.2 billion went? If they had been curious, they would have learned a valuable lesson about trading.

They would have learned about zero-sum. Trend followers were sitting at the table devouring Leeson's mistakes. Because their philosophy is fundamentally opportunistic, they saw, in Barings, an opportunity to win.

This is not a common thought process among novice or short term traders and investors which explains why so few people understood the market significance of that 1995 time period. Most traders do not have the discipline to plan ahead three, six and twelve months for unforeseen changes in markets. But planning ahead is exactly what trend following is all about. Big moves are always on the horizon. The idea is to capture the majority of any trend revealed on radar.

Because reacting is what makes trend followers winners, Barings provided the perfect opportunity to make profits. Moreover, since timing is not significant, trend followers could relax after making their winnings off of the Barings fiasco knowing that exaggerated moves are often followed by trendless periods, the perfect opportunity to prepare for the next big ride.

Barings Bank: A Very Big Ride

"...[C]umulative losses continued to mount through 1994. By 31 December 1994, they stood at 25.5 billion (S$373.9 million) and after the collapse of the Baring Group, amounted to 135.5 billion (S$2.2 billion). In retrospect, it seems probable that until February 1995, the Baring Group could have averted collapse by timely action."
Report of the Inspectors of Barings Futures (Singapore) PTE LTD

The single most important lesson in the Barings blowout was who won. We all know the Queen's bank lost. After all, do you think Nick Leeson and Barings were interested in long term strategies or quick profits? Observe the Nikkei 225 chart from September 1994 until June of 1995. Long term trend followers rode the Queen's bank all the way home. It's a zero-sum game. Barings assets padded the pockets of trend followers. Period.

Prepared for Large Moves?

"Our company, JWH, boasts returns that are as compelling as anyone's in the financial industry. Our profits have been remarkable; about a billion dollars net to the investor over the last decade [a 1/2 billion in 1995 alone]."
John W. Henry, April 20, 1995, New York City.

We know Barings got slaughtered in February.

John W. Henry programs:

[John Henry's largest program has shown a 49% annualized return over ten years, but if you removed the 5 most successful months the annualized return was only 28%. Miss 5 months in 10 years and your returns drop by over 20% a year! This is the world of a trend follower. The discipline to wait for and ride the big move is richly rewarded.]

Dean Witter: John W. Henry's Broker

"I have over $250 million with John Henry....I have been pleased to see how well the Original [John W. Henry] Program has done so far in 1995: up over 50 percent through April 18th [1995]."
Mark Hawley, Dean Witter Managed Futures, April 20, 1995, New York City.

50% in 4 months? Does one recall outsized trends during the first quarter of 1995? Dean Witter has remarkable correlation with other trend followers - click here for correlation chart.

Dean Witter Futures and Currency Management

On average these two firms lost in January 1995 and made double digit returns in February 1995 and March 1995.

What About Trend Followers?

Trend followers brought home huge gains in February and March of 1995 as well. However, their winnings were more the result of the fantastic Yen surge.

The correlation among trend followers is solid. Sure there may be slight differences in leverage usage and execution, but even from a cursory analysis the relationship is crystal clear.

Summary

Trends persist over time and expectations of society continually manifest themselves in trends. Why then do so many people ignore trends in search of the short term Holy Grail or quick buck?

Disclaimer

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. Disclaimers

2001 Update to Story

Stinging commentary regarding all players in the Enron affair:

• Enron Employee Feedback.
• ABC News Video.
• How to Fool Wall Street.
• Hall of Shame.
• Enron = Barings?
• Enron Employees.
• Losers Average Losers: Enron.

Enron is Nothing New

The article below paints a bleak picture of what is left of Enron, once a global trading giant. To make it even more instructive, we’ve included some editorial comments:

By Robert J. Samuelson
Wednesday, December 19, 2001; Page A39

The collapse of the energy company Enron has inevitably become a metaphor for many of the sins of modern capitalism. It may be, but the story is more complicated than a simple tale of victims and villains. Capitalism derives its strength from the power of self-interest and the ingenuity of the human spirit. But its weaknesses also stem from human nature, which can convert the quest for riches into self-deception and dishonesty. The dangers mount in periods of economic and financial exhilaration when -- as we've just experienced -- the stock market seems the fastest path to instant wealth. People yearn for their pot of gold and, to get it, stretch rules and lapse into wishful thinking.

TurtleTrader® comment: This description of how wishful thinking contributed to Enrons’ collapse is accurate and insightful.

The cult of share prices seduced managerial elites, ordinary investors and workers alike, with often disastrous consequences. Among top corporate managers, it led to widespread embellishing and doctoring of financial reports. Accounting rules were twisted or evaded to enhance reported profits, because higher profits would (presumably) mean higher share prices. Creative obscurity became commonplace. The same spirit gripped many investors and workers. People suspended skepticism and counted their paper profits. The dot-com and telecom debacles are well-documented results. Now Enron joins the list.

TurtleTrader® comment: We agree. No one must be let off the hook for willingly suspending their disbelief, not to mention their moral code, to go after illegal profits.

To work well, capitalism needs accurate information. Even with ideal information, markets make mistakes. Miscalculation is inevitable, because risk implies failure as well as success. But false or misleading information compounds the dangers, and the booming stock market inspired a boom in misleading information. For example, there's EBITA -- earnings (profits) before interest, taxes and amortization (debt repayments). Companies emphasized earnings on this limited basis in their news releases and played down the more complete reports. The justification was that investors wanted to see a company's raw operating profits without the clutter of debts or taxes. The trouble, of course, is that companies have to pay debts and taxes.

TurtleTrader® comment: These comments are accurate, but needlessly complex. There was only one key piece of data needed to judge Enron as an investment: the share price. See the chart.

The Securities and Exchange Commission and the Financial Accounting Standards Board, an accountants' self-policing organization, did little to check these abuses. By and large, people wanted to believe the best, and the temptation to present the glossiest face was Enron's undoing. At its peak, the company's stock traded at $90 a share; now it's selling for about 50 cents.

TurtleTrader® comment: Why would anyone hold onto a stock that goes from $90 to 50¢? Even if Enron was the biggest scam ever must we not also take to task the mindless investors who held on down to 50¢ a share? Are they not guilty of something more than simply being lazy?

Lawsuits may uncover wrongdoing, but outwardly, Enron's 401(k) program seems fairly typical, says Jack VanDerhei, a pension expert at Temple University. According to company spokesman Mark Palmer, Enron matched employee investments with a 50 percent stock contribution: If I invested $5,000, Enron would put up $2,500 in stock. The stock contributed by the company could not be sold until a worker reached 50; but there were 20 investment choices -- including buying Enron stock -- for personal contributions. True, there was a total trading ban from Oct. 29 through Nov. 12, because the plan's outside administrator was being changed. But, says Palmer, investors were informed of a ban in late September and early October. They could have sold then or anytime earlier. Enron's stock had dropped all year, from $68.50 in February to $49.10 in June to $27.23 in September. Obviously, many didn't.

TurtleTrader® comment: Of course not because Enron’s collapse is a classic case of fear and greed at work. From upper management manipulators of the facts to those employees who ignored the facts, everyone is accountable. For trend followers, the lesson of Enron is that trend following will always continue to excel.

Enron's downfall stemmed mainly from its own mistakes. Whether some corporate officials crossed the line between creative obscurity and illegal concealment is an open question. But in a larger sense, the collapse reflected the financial fever of the past decade. The profit motive -- the promise of reward for risk and effort -- is a great incubator of invention and wealth. But those who glorify capitalism's triumphs often forget that it's also vulnerable to the frailties of human nature. There was a mass merchandising of dreams and delusions that was indiscriminate in its effects. Candor was corroded, judgment clouded. Pursuing self-enrichment, people often follow the path of least resistance. It sometimes leads to a cliff.

TurtleTrader® comment: The cliff is the end of a journey many investors take. They start out with no map, no compass, and no plan, so it’s no wonder they end up at a point of no return. There is nothing new in the revelation that many traders have no system for handling the Enrons of the marketplace, but if you are prepared from the beginning for these dramatic trends, up or down, you can profit.

The full Washington Post article.

Correlation data best portrays the continued close relationship among trend followers. Click here for more on the relationship.

More Correlation Charts

These are all sample snap shots. They are meant to illustrate the concept of correlation:

Correlation Chart #1

The above chart shows the correlation among Eckhardt, Chesapeake, Rabar and Abraham. One can readily see that their techniques are similar if not the same.

Correlation Chart #2

Dunn Capital, Millburn Ridgefield, Campbell and Company are trend followers that have been around each for over 20 years. The facts don't lie.