The clustering illusion is good food for thought.

“Economic theory goes only so far in explaining why people buy, sell, save or trust. Scientists are looking inside the mind for answers.” Read LA Times article (PDF).

Aspect Capital: London based trend following trader (PDF). With roots to some of the great trend following trading firms, Aspect Capital has become a major player in the managed money arena.

Do all trend followers start as trend followers? No.

Recently I spoke with a top trend follower who spent the first 15 years of his career trading, following and providing analysis on one market alone. He did not focus on other markets. How did he change?

His wakeup call came from another trader who was trading trends over multiple markets and spending little time to do it. How could this trend trader be doing other things during the day and not be focused on the constantly changing news and fundamentals. His lesson took quickly — trend followers are not glued to screens during the day watching quotes. They trade systems and systems give flexibility.

A few years later, and after a bunch of hard work, the transition from trading one market was made. He now trades multiple markets relying on the “price” as his trading trigger for entry, exit and position sizing.

Consider:

“Thailand’s commodities futures exchange launched tapioca starch futures trading on Friday but turnover was very thin as most tapioca dealers do not understand futures markets, the exchange’s president said. “We did not expect very high volume on the first day as players need time to be informed about futures trading,” said Napaporn Kurupasutachai, president of the Agricultural Futures Exchange of Thailand (AFET). Tapioca starch, which is used in the food, paper and toothpaste industries, became the third futures product on the fledgling exchange, behind rubber futures started in May last year and rice futures in August.”
Daily Times, Pakistan

It sounds like there is not enough liquidity to yet trade Tapioca starch, but once the volume is established and traders trust the exchange, trend followers have another potential market to apply speculation.

You know nothing of Tapioca starch? Trend followers don’t either. They also know little about the fundamentals of stocks, cattle, oil, euros, etc. It’s not about having mastery of each market, the trick is to treat every market the same and you do that by trading the “price”.

Building on yesterday’s conversation with a top trend follower, today in New York City I spent over half the day with one of the great trend following pros of all time. His trading career has spanned 30 years with many twists and turns. He is one very wise man - he gets it. This was the first time I had met this trader, but I did use a few of his quotes in my first book.

Why is he special? He is able to break down the complicated processes of life into chunks to better avoid the typical reasons people fail to accomplish their goals. He uses extreme focus on whatever entrepreneurial task he sets his mind too.

He also compares so many other aspects of life to trend following. One great example involved searching for oil. You will drill many wells with many of them coming up dry, but some will produce that black gold. If you know from the beginning that there will be many aborted attempts at success and that those attempts are a necessary part of finally finding oil, then you can accept the game as it is and deal with it.

It all gets back to a mindset of portfolio management. Not everything in a portfolio always makes money. Maybe once in a while everything will turn positive, but more often than not you will have the winners paying for the losers. Why do it this way? Like this great trader pointed out — he can’t predict and nor can anyone else.

I had a face to face conversation today in New York City with one of the best trend followers out there (trading many hundreds of $ millions). Like I mentioned the other day with another interview, this too is a man who I had never met before nor was he mentioned in my first book Trend Following.

What did I learn in a big picture sense? This man was influenced by a host of factors, but ultimately he came to his understanding of producing above average returns through his own detailed research. He pointed out that when he first started 10 years back he had no idea who the best trend followers were. He came to his aha moment through a series of small steps ultimately leading to the big idea: How can I capture those big moves, that arrive at unpredictable times, over a broad array of markets? His answer, now demonstrated with a track record exceeding +20% a year, was trend following trading.