A recent article I wrote for TradingMarkets.com.

Suggestions for trading from the old pro and founder of Commodities Corporation Amos Hostetter:

1. Experience must teach. Follow it invariably.
2. Observation gives the best tips of all. Observe market behavior and experience shows how to profit.
3. Buying on a rising market is the comfortable way. The point is not so much to buy as cheap as possible or go short at the top prices, but to buy as & sell at the right time.
4. Remember a market is never too high for you to begin buying or too low to begin selling. Let your tape reading show you when to begin. After the initial transaction don’t make a second unless the first shows a profit.
5. There is a great deal in starting right in every enterprise.
6. When something happens on which you did not count when your plans were made, it behooves you to utilize the opportunity.
7. In a bear a market it is always wise to cover if complete demoralization develops suddenly.
8. Stick to facts only and govern your actions accordingly.
9. What is abnormal is seldom a desirable factor in a traders calculations. If a market doesn’t act right, don’t touch it.

Commodities Corporation was the original trading mentor long before Richard Dennis and the Turtles. Commodities Corporation, as noted in my book, taught or funded many of the great market wizard trading pros.

This presentation (MP3 audio) once given by Bill Dunn is interesting. It goes along with the charts in the book “Trend Following”.

Bernard Drury, a top trader, took a typical not so typical route to trading success. An excerpt from Futures magazine:

“So, how does this Russian language major do it? Not surprisingly, he attributes his success to lots of hard work and a little good fortune. Just out of Dartmouth College, Drury took a job as a trader in the grain markets at the Minneapolis Grain Exchange thinking the international aspect of trading would put his Russian skills to use. Though he never needed to speak the language, he grew more interested in the trading industry. His next job took him to Washington, D.C., where he worked as a writer analyzing the grain markets and how agricultural policies affected them. For more than eight years, he watched the grain markets and learned to anticipate certain responses to news and events, a skill that would come in handy later. “I was eager to get back to trading. So in 1990, I moved back to Chicago to trade for myself,” Drury says. It’s no surprise that he stuck to what he knew and traded grain spreads. “It was serendipitous that I chose to study for the MBA while I was in Chicago because, as part of a class project, I did research on the managed futures industry,” he says, describing how that in-depth look turned his attention to a new aspect of trading. “I am lucky I did that class project because it encouraged me to set up a CTA firm of my own.”

Today, Bernard has left the fundamentals behind and is a successful trend following trader.

A few years back a former pupil of Richard Dennis started touting his new money management firm. This man (who we will call “Bob”) had never traded for profit except while under Dennis’s guidance, so his nearly 20 year absence from the markets was greeted mostly with a yawn by the investment community. Nonetheless, “Bob” hooked up with a less than savory broker (who was fined shortly after the fund started) to raise money and started touting his trading prowess in chat rooms.

“Bob’s” firm started their track record in Spring 04 and got up to $800,000 under management from client additions. Yes, even with a resume that connected with Richard Dennis, less than a million dollars was all that could be raised. At the end of July 05 that number was down to around $300,000 from a combination of extremely poor performance and hasty client withdrawals. Uh oh.

Of course, the markets have been up and down, but compared to his peers “Bob” has seemingly blown up. How can this happen? If you have all the trading rules in the world, but you are sloppy, lazy and a poor businessman with many failures behind you, trading failure is not exactly a surprise. I am still amazed that some people think that trading rules will repair poor character.

Interestingly, I had met “Bob” before, so none of this was unexpected. As one hedge fund associate commented to me recently, “I saw [his] recent numbers….game is over.”

Sometimes it can be very educational to post comments from people that don’t quite get “it”. That said, more from yesterday’s “angry” reader:

“Even more disturbing are the extreme lies in your “approach”. Trend followers use “systems” and “money management” to make money based on momentum. They buy high and hope that there are enough suckers to buy higher. How can you describe that as sound investing? You make it sound like this is some form of intelligent investing. Like there is some rhyme or reason. There are no sound principles behind it. No intelligence. No reason. Just hold and hope and hope you get out before the crowd. Trend following depends on someone else being dumber than you. Buy high and hope someone else buys higher. It is nothing more than that…You sell a crummy irrational approach to investing that is no more successful than most mutual funds. You are no different than the people you bash every day.”

He also added in email to me:

“You don’t even understand the roots of Trend Following. Ask the pros if they believe in an efficient market? They will most likely say that the market is inefficient (how can they beat an efficient market?) and therefore predictable (for trend following to work the market MUST be inefficient). But if the market is inefficient (predictable), then why do your “pros” use a theory/system that relies on unpredictability?”

I understand what he is saying in his first quote above (and yes he has no clue about what he speaks), but can someone decipher the second quote?

Once again, if anyone else out there has this view of trend following trading after reading my book, I would like to hear from you.

I have a reader who really seems to hate and not understand trend following trading at the same time. One of his comments tonight:

“In the market, everything works and nothing works. If you use Trend Following then you rely on other people being dumb enough to buy after you. It is nothing more than that. And some times you will get lucky and some times you won’t.”

If anyone else out there has this view of trend following trading after reading my book, I would like to hear from you.

From Trader Daily a good quick and dirty bio on Larry Hite:

“As a visually impaired, scholastically challenged kid growing up in Brooklyn, Larry Hite was never voted most likely to succeed — he didn’t even learn to read until the fifth grade. Only toil and sweat could have propelled the scrawny kid to greatness, and toil and sweat were out of the question. “I didn’t want to work for my money,” Hite, 64, says unapologetically. “I wanted money to work for me.” His game plan worked. The ideas Hite concocted in the 1970s and ’80s spawned empires and industries: Man Group, PLC, might not be the beast it is today — it’s one of the largest hedge-fund managers on the planet — had it not collaborated with Hite two decades ago on a revolutionary joint venture. Likewise, Hite forever changed futures trading in 1972, when he published a paper titled “Game Theory Applications” in The Commodity Journal, helping to usher in a new kind of quantitative speculating that masters such as Jim Simons now practice.”

From Investopedia a good excerpt on prediction follies:

“One of the greatest popular myths about investing in stocks is that in order to be successful, you must be able to predict the stock market’s movements. Why do people assume this? For some, it is because they do not understand that stocks give a positive and substantial return over time – they falsely assume that stocks bounce around in the same range forever, and they therefore conclude they must predict movements in order to be able to sell at the top of the range and buy at the bottom of the range. For others, the desire to predict is borne out of human nature, which puts a premium on certainty. We love to know what will happen in advance. Hence, it is usually assumed by the beginning investor that to be successful, one must first become an expert at forecasting future market trends. Experienced investors know, in fact, that nothing could be further from the truth. Some icons of Wall Street love to advance the cause of market predicting, because they are paid to predict these movements. Others simply humor their clients who are looking for market projections because they know that it is easier to give them a projection than to try to correct the clients’ thinking. For instance, nearly every retail brokerage firm has a chief economist or market strategist whose main responsibility is to predict the climate for stocks. A large number of books, advisory services, and such that are sold focus themselves almost exclusively on prediction of how the stock market in general will perform in the future. But in truth, the best way to make money in the stock market is to avoid approaches that rely on market predictions. This will most likely seem an odd or even a absurd statement to some, perhaps most. Yet, any serious review of the results of market gurus over a long period of time reveals a track record that is no better (usually worse than) a simple buy-and-hold strategy. Don’t misunderstand me: There is no doubt that if a person could accurately predict the short-term fluctuations of the stock market, that person could far exceed the return of someone who simply bought a basket of stocks and sat on them. However, the one fatal problem with this is that there has never been a single person who has figured out how to do it. Nearly all market advisors claim to be able to call the market’s every turn, but in fact every credible study ever done on the subject has proven that these claims are invariably false. By far, most market prognosticators significantly underperform the market, despite their universal claims to the contrary. Given the large number of market gurus that now exist, the laws of statistics dictate that some of them must beat the market, out of pure luck if nothing else. However, they lack the ability to repeat this performance from one time period to another, and the group of market beaters will usually be a different group every time period that is sampled. If you could predict which guru would be right for the next year, you would be in good shape. But, of course, it’s just as hard to predict which guru (or which dart board) will be right for the coming year as it is to accurately predict market conditions. Finally, even if we are generous and assume that there is some market forecaster out there who has the holy grail of market prediction, our chances of being able to sort him out from those who simply got lucky are pretty slim.”
Investopedia

While perhaps too “salesy” for me, this radio ad from Hedgestreet continues to move their innovative exchange forward.

I was scanning Yahoo Finance today for some typical fundamental commentary and boom there it is from the Motley Fool:

“Some days, you have to love the market. Like today. Yes, I’m one of those people who, perversely enough, has a big appetite for red. That’s because I love getting shares on sale, and I think there might be a few good bargains appearing today. Despite good-looking sales results, a lot of fine retailers are taking their lumps. Case in point: American Eagle Outfitters. It has dropped like a rock over the past few days, including this morning, apparently owing to Street dissatisfaction with July sales and earnings guidance. What’s bunching the schizoids’ undies today? Horrors! It’s same-store sales growth of 17% and overall sales growth above 25%. Oh, and charge them with the further crime of lifting earnings guidance into the range analysts were expecting. You’ll excuse me if I laugh openly at the people running screaming for the exits, especially given the trajectory of American Eagle’s margins, free cash flow, and dividend. (Hint: The direction is up.)”

This all sounds like great fun. But doesn’t it also sound like the typical banter so common not but a few years ago during the dot com bubble? If the trend of the share price is up, you are long. If the trend of the share price is down, you are short. If you find this kind of fundamental commentary from Motley Fool insightful please be kind enough to tell me how you use it to your advantage.

“Back testing can help you experiment with various methods for trend identification and risk management until you find some combinations that suit your temperament. Any back testing you do, and any subsequent trading you do, all occur in the moment of now.”
Ed Seykota