The word speculation carries baggage it does not deserve. In ordinary conversation it suggests recklessness, guesswork, or worse. In the actual history of markets, speculation has a precise and honorable meaning: a venture based on calculation, as opposed to gambling, which is a venture without it. The distinction was drawn clearly more than a century ago, and it holds just as firmly today. Anyone serious about trend following will recognize themselves in it.
Dickson G. Watts served as President of the New York Cotton Exchange between 1878 and 1880. His essay Speculation as A Fine Art was written before the age of electronic markets, before algorithmic trading, before CNBC, before any of the modern infrastructure that surrounds trading today. That is precisely what makes it worth reading. The principles he identified are not products of any particular market era. They describe the qualities that separate disciplined traders from everyone else, regardless of the instruments they trade or the century they live in. Those who argue that markets have fundamentally changed should note how little his words require updating.
What Speculation Is, and What It Is Not
Watts opened with a question that still stops most people cold: is speculation right? His answer was measured. He acknowledged the moral discomfort some feel toward any trade where an exact equivalent is not given, then set it aside in favor of something more practical. As society is organized, he concluded, speculation is a necessity. Markets require participants willing to take on price risk. Without them, hedgers have no counterparty, price discovery breaks down, and commerce itself is impaired.
“Is there any difference between speculation and gambling? The terms are often used interchangeably, but speculation presupposes intellectual effort; gambling, blind chance. Accurately to define the two is difficult; all definitions are difficult. Wit and humor, for instance, can be defined; but notwithstanding the most subtle distinction, wit and humor blend, run into each other. This is true of speculation and gambling. The former has some of the elements of chance; the latter some of the elements of reason. We define as best we can. Speculation is a venture based upon calculation. Gambling is a venture without calculation. The law makes this distinction; it sustains speculation and condemns gambling.”
The rules-based systems at the heart of trend following are calculation in its most rigorous form. Entry signals, position sizing, stop placement, exit criteria: every element is defined before a trade is placed. Nothing is left to impulse or instinct in the moment. That is not gambling. It is the opposite of gambling. Watts understood this before the methodology even had a name.
“All business is more or less speculation. The term speculation, however, is commonly restricted to business of exceptional uncertainty. The uninitiated believe that chance is so large a part of speculation that it is subject to no rules, is governed by no laws. This is a serious error. We propose in this article to point out some of the laws in this realm. There is no royal road to success in speculation. We do not undertake, and it would be worse than folly to undertake, to show how money can be made. Those who make for themselves or others an infallible plan delude themselves and others. Our effort will be to set forth the great underlying principles of the ‘art’ the application of which must depend on circumstances, the time and the man.”
The Five Qualities of a Speculator
Watts identified five qualities essential to the makeup of a successful speculator. He was careful to note that these qualities must exist in combination and in proper balance. A surplus of one and a deficiency of another is as damaging as having none at all. Read them as a checklist for self-assessment, not as a list of attributes to perform.
“1. Self-reliance. A man must think for himself, must follow his own convictions. George MacDonald says: ‘A man cannot have another man’s ideas any more than he can have another man’s soul or another man’s body.’ Self-trust is the foundation of successful effort.”
This is not stubbornness. Self-reliance in trading means following your system when others are skeptical, holding a position when the crowd has moved on, and trusting the process you have built rather than the noise around you. The Turtle experiment was designed in part to test whether ordinary people could develop exactly this quality under instruction.
“2. Judgement. That equipoise, that nice adjustment of the facilities one to the other, which is called good judgement, is an essential to the speculator.”
Judgement here is not prediction. It is the capacity to weigh evidence without bias, to resist the temptation to see what you want to see, and to remain calibrated in your assessment of what a market is actually doing versus what you hope it will do.
“3. Courage. That is, confidence to act on the decisions of the mind. In speculation there is value in Mirabeau’s dictum: ‘Be bold, still be bold; always be bold.'”
Taking a breakout entry after a long consolidation requires courage. Holding a large winning position through volatility requires courage. Adding to a position as it moves in your favor, which is what trend following systems are built to do, requires courage of a very specific and disciplined kind.
“4. Prudence. The power of measuring the danger, together with a certain alertness and watchfulness, is very important. There should be a balance of these two, Prudence and Courage; Prudence in contemplation, Courage in execution. Lord Bacon says: ‘In meditation all dangers should be seen; in execution one, unless very formidable.’ Connected with these qualities, properly an outgrowth of them, is a third, viz: promptness. The mind convinced, the act should follow. In the words of Macbeth: ‘Henceforth the very firstlings of my heart shall be the firstlings of my hand.’ Think, act, promptly.”
Prudence does not mean hesitation. It means thinking through all the risks before entering a trade, sizing the position correctly relative to the portfolio, and understanding the full range of outcomes. Once that work is done, the act must follow without delay. Hesitation after the analysis is complete is not prudence. It is its own form of failure. This is why systematic risk management matters: the thinking is done in advance, so execution becomes mechanical.
“5. Pliability. The ability to change an opinion, the power of revision. ‘He who observes,’ says Emerson, ‘and observes again, is always formidable.'”
Pliability is the hardest quality for most traders to develop because it runs against the ego investment that comes with every open position. A trend follower who is long a market and sees it reverse must be willing to exit, not because the original thesis was stupid, but because the price has spoken and the evidence has changed. This is not inconsistency. It is the capacity to update based on reality rather than attachment.
“The qualifications named are necessary to the makeup of a speculator, but they must be in well-balanced combination. A deficiency or an overplus of one quality will destroy the effectiveness of all. The possession of such faculties, in a proper adjustment is, of course, uncommon. In speculation, as in life, few succeed, many fail.”
The Cost of Chasing Immediate Gratification
John Dewey offered the philosophical complement to Watts’s practical framework. His observation cuts to the root of why most traders fail: not because they lack intelligence or access to information, but because they are oriented toward the short term at the expense of everything else.
“It is not truly realistic or scientific to take short views, to sacrifice the future to immediate pressure, to ignore facts and forces that are disagreeable and to magnify the enduring quality of whatever falls in with immediate desire. It is false that the evils of the situation arise from absence of ideals; they spring from wrong ideals.”
John Dewey
Wrong ideals. Not absent ideals. The trader who exits a winning trend too early is not undisciplined in a general sense. He has a very clear ideal: avoid the pain of watching a gain diminish. That ideal is wrong because it subordinates the logic of the system to the comfort of the moment. Trend following is, at its core, a sustained argument against this kind of short-termism. The drawdowns are real. The discomfort is real. The edge only materializes over time and across many trades. Watts and Dewey, writing in entirely different registers, arrived at the same conclusion: the speculator who cannot tolerate the present moment in service of the longer process will not survive.
Frequently Asked Questions
What is the difference between speculation and gambling?
As Dickson G. Watts defined it: speculation is a venture based on calculation; gambling is a venture without it. Speculation involves intellectual effort, defined rules, and a systematic approach to managing outcomes. Gambling relies on chance. Trend following is speculation in the strictest and most rigorous sense of the word.
Why do so many speculators fail?
Watts identified the core reason: the required qualities must exist in balanced combination. Too much courage without prudence produces recklessness. Too much prudence without courage produces paralysis. Most traders fail not from a total absence of these qualities but from an imbalance among them, compounded by the tendency Dewey described to sacrifice long-term process for short-term comfort.
Is speculation ethical?
Watts addressed this directly and concluded that speculation, properly practiced, is a social necessity. Markets require participants willing to absorb price risk from those who need to hedge it. The speculator provides liquidity and price discovery. Whether any individual practice within speculation is ethical depends on whether it is based on calculation and discipline or on manipulation and deception. Systematic trend following falls clearly in the former category.
How do Watts’s five qualities apply to trend following specifically?
Each maps directly onto the demands of systematic trading. Self-reliance: following your system when others doubt it. Judgement: reading price without bias. Courage: entering and holding positions through volatility. Prudence: sizing positions correctly and thinking through risk before execution. Pliability: exiting when the trend reverses without ego. Together they describe not just a trader’s character but the operational requirements of running a trend following system over time.
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