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.

The distinction between opinions and rules is the entire difference between discretionary and systematic trading. An opinion is what a trader thinks the market will do. A rule is what the trader does when the market moves in a defined way. Opinions vary by mood, by confidence, by recent experience, by what analysts are saying, and by what the news is reporting. Rules do not vary. They define the response to any market condition before the condition arrives. When the condition arrives, the rule fires. The trader executes.

Richard Dennis put this plainly: “The majority of the other things that didn’t work were judgments. It seemed that the better part of the whole thing was rules. You can’t wake up in the morning and say, ‘I want to have an intuition about a market.'” This observation came from someone who had traded extensively both with intuition and with rules and knew from direct experience which produced consistent results. The intuition-based approach produced outcomes that were unpredictable from one day to the next. The rules-based approach produced an outcome distribution that, while containing many small losses, reliably captured the large trends that drove long-run performance.

Dennis also said that he could publish his trading rules in a newspaper and no one would follow them. This is the paradox at the heart of systematic trading. The rules are not the edge. Everyone can know the rules. The edge is the discipline to follow the rules consistently through the periods when following them is most uncomfortable: extended losing streaks, large drawdowns, periods when the system seems broken because it is producing losses. The opinion-based trader has an excuse to deviate from any approach at any point because the market is always presenting new information that seems to justify a fresh judgment. The rules-based trader has no such exit. The rules define the action regardless of how the market feels today.

The financial media exist entirely on opinions. CNBC’s business model is continuous commentary about what markets will do. Every analyst, strategist, and commentator is paid to have a view. Those views change daily, sometimes hourly, as new information arrives. The cumulative weight of those opinions, absorbed by millions of investors and translated into buying and selling decisions, is a significant source of the irrational price behavior that systematic trend following exploits. The opinion-driven investor is reacting to the stream of commentary. The rules-driven trader is responding to what price is actually doing. The two are frequently different, and price is always right.

For the rules that define a complete systematic approach, see the TurtleTrader rules. For more on why avoiding judgment and following rules produces better outcomes, see the avoid judgment page.

Frequently Asked Questions

What is the difference between an opinion and a rule in trading?

An opinion is what a trader thinks the market will do, formed from information, analysis, and judgment at a point in time. A rule defines what the trader does when price moves in a specific way, regardless of what the trader thinks about it. Opinions vary with mood, confidence, and information. Rules do not. A rules-based approach produces consistent behavior. An opinion-based approach produces behavior that varies with the trader’s psychological state.

Why did Richard Dennis say rules were better than judgments?

Because he traded extensively with both and found that rules produced more consistent and profitable outcomes than intuition-based judgments. Judgment requires a fresh assessment of each situation, which introduces variability from mood, recent experience, and cognitive biases. Rules eliminate that variability. Once the rules are defined and validated, every trade in every market in every condition produces the same objective response.

Why is it hard to follow rules even when you know they work?

Because following rules means accepting losses when the rules produce losing trades, holding positions through adverse movement when the rules say to hold, and taking entries after losing streaks when confidence is low. All of these actions go against the emotional instincts that the market’s moment-to-moment behavior produces. The rules were designed to override those instincts. Consistently doing so requires the discipline Dennis described as the real barrier: not knowing the rules, but following them without deviation.

Trend Following Systems
Want to learn more and start trading trend following systems? Start here.