Quote from AFJ Garner: ââ¦As everyone and his uncle, mother, brother and granny now know, trend followers have increasingly hit bumps in the road over the past decade and in particular over the past two years. The patterns have changed â perhaps temporarily, perhaps not. Something has changed at any rate or these long standing CTAs would have ridden smoothly over the bumps without suffering historically high levels of drawdown. Many explanations for the different market conditions have been put forward: the rise of HFT, Government stop/go policies, globalisation increasing correlation between hitherto independent markets, too may trend followers doing the same thing in the same time frames. The list goes onâ¦â ââ¦Such analysis is confirmed in the real world by the effective collapse of the methods of various long term trend followers in the mid 2000s: Dunn and JWH were lead to near ruin, Abraham and a slew of others were forced back to the drawing board and made changes to their portfolios and their systems. 2011 and 2012 wrought similar havoc among trend following CTAs. And a similar rush of head scratchingâ¦â Hi AFJ, Iâve been hearing about the woes of trendfollowers, especially John W. Henry & Co., for some time now. My understanding is that these guys tend to be breakout traders, buying breakout highs and lows and trying to catch a few long term trends and ride them as far as possible. Your post made me go look at a few longer term charts from last year. There seem to be trends occurring that last up to 6 or 8 months in many futures and forex markets. Do you think that trendfollowers rode those trends successfully, but then got chopped to death the rest of the year? Here's an index chart from last year:
How did I miss this thread?! I find it unbelievable that some people (strongly) oppose the idea that directional trading requires predicting. These same people are the ones who say "I don't predict, I react," or "I don't predict, I trade based on statistical analysis." If you have statistical analysis that tells you that in a certain situation price is more likely to go up than to go down, and price does that particular thing and you believe based on your data that price is now more likely to go up than to go down, you are predicting that price is going to go up. Any trading that is non-random is predicting. If you do not believe that price is more likely to go up, why would you take a long position? You are predicting that, based on the current situation, price is more likely to go up than to go down. If you are going to flip a coin 10 times, I predict that you will get heads 5 times. If I were allowed to bet on that so that the closer you got to 5 heads, the more money I made, I would definitely take that bet. Based on statistics I predict that you will get heads 5 times. Excellent thread, AFJ.
all trading that is not just gambling (and I have nothing against that) attempts to ascertain a positive expected value over a time horizon that is relevant to the trader. So, in that sense all trading methods attempt to be predictive. Not attempting to be predictive, in this sense, would indeed mean that one was content to be a gambler.
Even in that very case you are taking for example, there is no prediction involved, the trade is taken based on: - the observation of the past, - the assumption that the future will *statistically* reflect the past. One has to assume that the outcome of any particular trade is a random event. You are not taking a particular trade because you are predicting it is going to be win, you are taking it because it is one in a series of hundreds of trades with similar circumstances, which have a statistical edge (taking *all* the trades that have similar circumstances, you will make money - *THAT* is what the prediction is about, *NOT* the current trade) And there is the beauty of trading with an edge - you don't have to predict what the market is going to do, and you don't have to care whether it is actually doing it or not.