Does this make sense....?

A friend of mine knows a retired trader in the area (Toronto) and had a lengthy conversation about his method. The guy, has a 40 car garage, 5 million dollar house. Pretty much any car you could think of. He used to trade back in the 80's and 90's. Primarily stocks, but got into commodity futures. This is all second hand info, but according to my friend, the guy would pyramid into winners, and average down if the market went against him, using a martingale approach. Basically, the market was different back then, in that stocks or whatever moved up consistently, and rarely crashed at all. So the system was to layer limit buy orders every ten ticks above the market. And double limit buy orders below the market every ten ticks. So if the market traded up, it was a winner. If the market traded down, it was still a winner. For example, the first ten ticks below the market, would be a resting limit buy order for ten contracts. Then another 10 ticks below that would be a limit buy order for 20 contracts. Then 10 ticks below that, another limit buy order...40 contracts etc. That's how the system was explained to me. Problem is, obviously, it's martingale, and the risk of ruin in a bear market is extremely high. Thing is, it never happened to this guy. Guy said he doesn't trade now because there are no clean trends and its' very choppy compared to the 80's and 90's. Said its much harder to trade now. I thought that was pretty interesting....

 

Could be just luck that he never traded during a meaningful correction.

Take 2013 for instance, imagine using leverage and averaging, the year never gave a hard correction, for a bull averaging down, he got out of alive by sheer luck.

 

Ya, that was my feeling on the matter, as well. However, he did trade for more then 15 years.

 

Maybe he took 1987 and 1990 off

 

ya, '87

My buddy visited his house though. He's the real deal.

 

As far as his comment regarding trends, I bet 2013 surprised him.

 

bank trader or independent? sounds like he'd have to be well capitalized during his run.

 

Positive autocorrelation was very high in the 70s - 80s and high in the 90s. Then it just went away. Many people made a lot of money with simple methods like the one you described. There was a very strong uptrend in the 90s. It was a matter of discipline more than anything else. Now even discipline is not enough. Take a look at the chart in this blog and the explanation is clear.

 

I wonder: isn't chop the best environment for such an (obviously fading the market) approach?

 

and 1997