Sometimes if you look close at the great trend followers, there are subtle lessons. A reader forwarded some wisdom from Ralph Marston:
Great accomplishments most often result not from exceptional ability, but from ordinary ability followed through with exceptional commitment. Commitment can elevate even the most ordinary, tedious efforts into truly incredible levels of achievement. What you’re able to do doesn’t really matter much unless you actually do it. It is in the doing, the commitment, the effort undertaken with persistence, that greatness results. You can dream about success, hope for it, make the best of plans, talking about them with zeal and enthusiasm. Follow through with real, sustained action, and that success will come. The life you experience today is the result of what you’ve been truly committed to in the past. Your commitments, whatever they may have been, have manifest themselves into your current reality. You’re always committed to something, whether it is watching four hours of television each night or running eight miles each morning. Your true commitments are evidenced by your actions. What in the world would you truly like to do, to be, to experience, to accomplish? Commit to it, and make it happen.
Taking into account the consistency and commitment needed to win, keep in mind that there are no free lunches as Gene Callahan of the Ludwig von Mises Institute reminds us:
[G]overnment regulators are not, generally speaking, in a better position than private investors to evaluate…risks. When regulations prevent or hinder transactions for which there is a genuine demand, they encourage the creation of securities designed simply for the purpose of dodging those regulations, in order to fulfill that demand. In addition, when the government attempts to encourage the belief that financial markets are “safe” places to invest, it ends up attracting investors who are not prepared to properly evaluate the risks. This creates an interest group that will demand government redress when the investments don’t work out. If fulfilled, those demands will encourage a new wave of risky speculation based on the seeming existence of government insurance on the downside. It is as though the government were granting investors free put options! As in any innovative venture, there are significant risks involved with the fantastic voyage finance has undertaken in the last 20 years. But increased government intervention is likely only to heighten that risk.
Lastly, check out the latest Seykota.com update.
Are the 2 quotes above and Seykota’s link related to the big picture? You bet.
How the Three Connect
Marston’s commitment passage, Callahan’s no-free-lunch observation, and Seykota’s ongoing FAQ documentation are three different angles on the same foundational truth about trading and markets.
Marston’s point is about the internal work. “Your true commitments are evidenced by your actions.” The Turtle experiment’s most important finding was not that the rules could be taught. It was that the discipline to follow the rules under adverse conditions was not equally distributed among participants who had learned the same rules. Commitment to the system, demonstrated through consistent action rather than through stated intention, was the differentiating variable. The Turtles who said they would follow the rules and then did not follow them during drawdowns were committed to something, just not to the rules. Their commitment was evidenced by their actions.
Callahan’s no-free-lunch observation is about the external environment. When government intervention creates the perception of financial safety, it attracts participants who are not equipped to evaluate actual risks, and their eventual losses create political demand for further intervention. This cycle is the regulatory version of the buy-and-hold investor’s false sense of security: the comfort produced by an apparent guarantee leads to under-preparation for the inevitable adverse period. Trend following’s honest relationship with risk, the CFTC disclosure requirements, the documented worst drawdowns, the transparent acknowledgment that the approach involves extended losing periods, produces the informed participant that Callahan’s analysis implies is necessary for functional markets.
Seykota’s work bridges the two. His FAQ addresses both the internal commitment required for systematic trading and the external market dynamics that systematic trading captures. The combination of personal responsibility, the commitment Marston describes, and clear-eyed acceptance that markets involve genuine risk without government safety nets, the no-free-lunch reality Callahan describes, is the psychological foundation from which Seykota’s systematic approach operates.
Frequently Asked Questions
What does Ralph Marston’s commitment passage mean for systematic traders?
That the ability to design a good trading system is far less important than the commitment to follow it consistently through favorable and adverse conditions. “What you’re able to do doesn’t really matter much unless you actually do it.” The Turtle experiment demonstrated this empirically: all participants learned the same rules, but only those who committed to following them through extended drawdowns and losing streaks produced the results the system was designed to generate. The commitment is evidenced by the actions taken during the hardest periods, not during the easy ones.
What is Callahan’s no-free-lunch argument about financial regulation?
That government attempts to make financial markets appear safe attract unprepared investors and create political demand for bailouts when those investors lose money. The bailouts in turn encourage further risky speculation based on the expectation of future protection. Each intervention makes the underlying risk larger rather than smaller, because it attracts participants who would not participate if they correctly understood the risk. The no-free-lunch principle applies: the apparent safety guarantee has a cost, which is the moral hazard it creates in subsequent market cycles.
How do commitment and the no-free-lunch principle connect to trend following?
Through the honest relationship with risk that trend following requires. The approach’s CFTC disclosure requirements document worst drawdowns and losing periods explicitly. The approach does not promise smooth returns or government-backed safety. It promises that if the rules are followed consistently over a sufficient number of market cycles, the expected value is positive. Participants who commit to this with full understanding of what the adverse periods feel like are the prepared investors Callahan’s analysis implies are necessary. Those who expect government-backed safety or smooth returns will not maintain the commitment Marston describes when the drawdown arrives.
Trend Following Systems
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