Ken Tropin: Top Trend Following Trader

Ken Tropin was formerly President of John W. Henry. Before that he was President of Dean Witter Futures. Now on his own, he is another successful trader with a trend following trading style. An excerpt from Ken Tropin, of Graham Capital Management:

The ability of trend following strategies to succeed depends on two obvious but important assumptions about markets. First, it assumes that price trends occur regularly in markets. While trends do not exist in all markets most of the time, they do exist in most markets some of the time. Secondly, it assumes that trading systems can be created to profit from these trends. The basic trading strategy that all trend followers try to systematize is to “cut losses” and “let profits run”. Trend following has had positive returns over a 20 year period because trends occur in virtually all markets some of the time. Trend followers create quantitative models to capture these long term trends while limiting the cost of doing so. These models create an expected return profile similar to being long options. A strategy has a long option profile when the strategy limits downside losses while potentially achieving very large upside returns. For example, trend followers use stop losses to achieve limited downside exposures on their positions.

Insight from the Institutional Investor:

Making money has been easy for Ken Tropin, although wealth doesn’t exactly run in his blood. He grew up comfortably, first in the Bayside section of Queens, New York, and then in Harrison, a suburb about an hour north of New York. His parents both worked for nonprofit organizations. His father was in public relations at the United Nations, and his mother was employed by the International Committee for European Migration, which helped refugees settle in the U.S. “Their priorities were not about making money,” he says. “They were more about helping people out.” Nor did Tropin have much use for conventional measures of achievement. In the early 1970s he traipsed off to Plainfield, Vermont, to attend Goddard College, an institution that eschews majors and grade-point averages. When Tropin wasn’t sculpting, he was skiing. After graduating From Goddard in 1974, he moved back to Harrison and started a small contracting business, which did painting and light construction. “I hired all of my friends from high school,” he recalls. “We didn’t make a lot of money.” He soon grew bored. After a family friend suggested he get a job on Wall Street, Tropin hooked up with a small firm called Rosenthal Group, which later merged with Collins Commodities to form the Rosenthal Collins Group. He then moved to Shearson Loeb Rhoades as a broker specializing in futures and equities…

A few months after leaving the firm [John W. Henry], Tropin started getting edgy. He bought a number of computers and taught himself programming, working in the guest cottage at his New Canaan, Connecticut, home. Within nine months he was able to write programs based on his own trading ideas and back-test them. It was then that he came to understand that neither Dean Witter nor John W. Henry & Co. had fully satisfied his entrepreneurial spirit. “I realized that what I wanted to do was start my own business,” he says….Tropin won’t go into detail about his proprietary systems except to say that they are designed to take advantage of sustained price changes that take place over several days, weeks or months. “The computer model tells us when to get in and when to get out,” he says. “The computer understands what the price is telling us about the trend of the market.” What does the software look at, exactly? “Volatility, price behavior. How much does it change every day? We’re trying to use as much data as we can get to interpret potential future price.” Successful positions remain in place for about six months; Tropin’s programs bail out of unsuccessful trades after a month. “All of the systems are designed to risk modest amounts of capital and to stay with winners as long as possible,” he says.

Graham Capital Management White Paper on Trend Following: Download PDF.

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