The Good News + the Bad News

“He who thinks he knows, doesn’t know. He who knows he doesn’t know, knows”

-Lao Tse

Embracing uncertainty is essential in trading. A trend-following trading process systematically makes trades that are centered around uncertainty--calculated uncertainty.

One never knows when a big move will happen, but a portfolio of diversified futures positions, betting on both the long and short side, combined with a well-defined strategy for cutting losing trades short, will undoubtedly capture any and every massively large trend.

Big trends are inevitable. The philosophy is to simply wait for the wave to come, then surf it as long as it permits you to. It can take 5 months, it could take 5 years, but when the statistical “once-in-a-lifetime” event occurs(which happens far more often than the market prices in), it will yield so much return that it will make up for every little losing trade along the way, and return huge profit on top of that.  

The nature of this system is that it relies on skewed returns: ~90% of the returns come from ~10% of the trades. There are a lot of little failures en route to a big win.

Here is an WTI Oil chart. Look how persistent and patient a trader has to be to capture a big win:    

A trend-following system got short oil toward the end 2014. (each +/- $1 move in oil=+/-$1000 in futures contracts. If a trader got short oil at $100, he/she would have a profit of ~$70,000 per contract).

But in early 2010, mid-2011, and mid-2012, trend followers had to endure sizeable losses betting on a drop in oil. A discouraged trader would have gotten sick of being “whipsawed” out of their positions and would have missed the trade of the year if they did not place that same exact bet toward the end of 2014.  

I’m not making any commentary on oil, or any commodity/asset. Markets move because people participate in them. People get drunk with euphoria and deflated with pessimism. Ultimately, trend-following takes advantage of that--it rides euphoria to the moon and makes sure to not miss the last bus to pessimism-ville.

The bad news: It takes well over 1 million dollars to properly deploy a diversified futures trend-following system. *you can improperly deploy a futures trend-following system with $50K, but the results will likely end in a loss of $50K .

The good news: There are plenty of CTAs that have a pooled futures account and will allow individual investors to buy a piece of their business. I have a portion of my portfolio allocated in a vetted and regulated CTA fund(until I start my own futures fund). I believe if one has a 401K, it would be prudent to allocate some funds to a vetted CTA as well.   

Not that this should affect your strategy, but my CTA has been short US stock market futures since August and still holds that same view.