Controlling Emotions is Not the Goal of Trading Psychology (.doc) by Brett Steenbarger.

This WSJ article by Jonathan Clements caught my eye:

My check register says my checking-account balance is perilously close to zero. Yet, in truth, there is $4,000 or $5,000 in the account. Sound weird? It is. But let’s face it: If we were all completely rational, we wouldn’t have any problems managing money — and we certainly wouldn’t have a negative savings rate in the U.S.

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I found a good excerpt on Mark Cuban’s blog. He attended Indiana University when Bob Knight was the basketball coach. Cuban was reflecting on what was the greatest thing learned from the famed basketball coach:

When I was at Indiana you were on 60 Minutes. In your interview you said one single thing that I took to heart. I reminded myself of it while it was in school at Indiana. I reminded myself of it when I failed. I reminded myself of it before any of the many businesses I have started I will continue to remind myself before any of my endeavors going forward. Its also the best advice I’ve been able to give people of any age who ask me for advice. Its also the characteristic I look for when choosing a partner or hiring…You said, and I’m paraphrasing: “Everyone has got the will to win, its only those with the will to prepare that do win.” Words for every athlete and those of us who partake in the Sport of Business to live by.

Trading rules, or a good entrepreneurial plan if pursuing some business idea, are important, but that will to prepare is even more critical.

Carla Mozee at MarketWatch writes on Feb 17, 2007:

SAN FRANCISCO (MarketWatch) — U.S. stocks are expected to drift lower next week, as a light lineup of economic data and a dwindling number of corporate earnings reports leaves investors searching for direction after a week of record highs for the Dow Jones Industrial Average, strategists said. Other factors that could weigh on stock trading include predictions that first-quarter earnings growth is set to ratchet down, concern about a possible rate increase in Japan and the closing of stock markets on Monday for Presidents Day, they said. “Earnings season is winding down, there’s very little data, it’s a short week. We’ll come down on the market’s own inertia, so to speak,” said Donald Selkin, director of equity research at Joseph Stevens. Selkin said he expects any move downward, however, to be “short and shallow” following the pattern of declines in the market since July. The only way the market could advance substantially next week would be if a significant development such as a “very big buyout” deal occurred, said Paul Mendelsohn, chief investment strategist at Windham Financial Services.

What struck me about this excerpt is the comment about the lack of “data”. It all depends doesn’t it? If your decision-making is driven by “price analysis” then “other” data is only so relevant. Will there ever be any consistent reporting showing anything other than a 100% fundamentally driven fixation?

I caught this criticism of trend following recently:

“Not only is trend following invalid statistically but, looking at the bigger picture, it has to be invalid logically without even running your unusual tests. If wealth distribution is to remain in the range of 20 to 80, trend following cannot exist. In other words, if the majority followed the trend (hence the concept of trends), and if trend following is in fact profitable, the majority will become rich and the 20-80 distribution will collapse…So in brief, no – trends do not exists and can not exist either statistically or logically, with the exception of the forever upward drift of population and general markets with some curves steeper than others, those of the countries with the extra weapon called land and immigration.”

I am assuming this guy would argue that every dollar ever made by a trend following trader was just dumb luck? Don’t the performance numbers mean something to a guy like this? Of course, trend following is really about answering these 5 questions:

* How do you determine what market to buy or sell at any time?
* How much of a market do you buy or sell at any time?
* How do you determine when you buy or sell a market?
* How do you determine when you get out of a losing position?
* How do you determine when you get out of a winning position?

At the end of the day everyone needs a trend to make money, but the five questions are where the rubber meets the road.

An email came in:

I think there is a problem here with naive trend following using the daily data. Even if crude goes to the moon, say $100, and you capture the $50 by trend following, one would need a million dollar account to ride one contract very comfortably on daily data. On the other hand, if one wasn’t so concerned about big picture direction and trend followed shorter duration moves long and short in the hourly data, one could comfortably trend follow crude oil with a much smaller account (or larger position with the big account).

Of course it is not impossible to be a short term trader. There are simply trade-offs. Transactions costs are a big issue. Trying to be Jim Simons is an issue. Mean reversion is worth considering too.

I like to post well put together performance reviews as they are educational. Cole Wilcox of Blackstar Funds provided a nice piece of research regarding trend following on stocks last year. Their February 2007 performance review (PDF) is well done too.

Ed Seykota offers insight for those trying to find trends.

Chuck Cain sent in A Graphical Inquiry into Trend Following (PDF).

Feedback in from the other day:

One advantage I sincerely admire in Trend Following is its simplicity and elegance. Rather than using chart patterns and the like and making many trades during one day or a week… it simply follows the trend, and I truly believe thats where the real money is made. But I have one question I am sure you have received from other traders: Don’t trends occur in all time frames? I believe a trader that is using technical analysis and chart patterns to identify an edge where a trend will begin to unfold or carry on, and captures this trend, whether it be over a one day period, or a one month period can be said to be trend following. I know you have spoken and wrote about “short-term” trading… but at the least in theory, it tries to achieve maximum efficiency. Only being in a trend that is currently moving, exiting near the short-term break of a trend, and buying near support of the trend… Is this not a common sense way of maximizing gains? Some trend followers stay in trends that do carry on for months and years but have major corrections where they would have been suited to take profits sooner and sit out the major correction or consolidation and/or look to buy near the support of a trend. I am currently using a swing-trading approach and a intermediate-term trend following approach.

Transaction costs are a big argument against very short term trading. In terms of some of your terms used, it would be wise to define exactly what you mean by ‘technical analysis’, ‘chart patterns’, ‘maximum efficiency’, ‘support of the trend’, ‘take profits sooner’, ‘major correction’, ‘consolidation’ and ‘swing-trading’. Those terms can mean anything.

This guy has been writing in for a while now. His latest:

Mr. Covel: In the interest of trying to figure out the efficacy of trending et al, I did a search for CTA returns. I came up with the Barclay Index; this may or may not be germane, but if it’s right, the average returns aren’t anything to write home about. If I have it wrong, then please point me in the direction for information as to what these great and not so great traders get in the way of returns.

The same answer applies. It is worth noting that this reader does have my book.

I found this excerpt from a criticism of this site:

One of the brilliant marketing tactics used on the site is the continuous repetition of the open question “Why are they (the TF managers) so rich?”. The question is offered as a sophist response to the real world question as to whether TF makes money. The marketing brilliance lies in the fact that there is never a need to provide factual support or performance records.

The performance data on pages 299-354 of my book Trend Following is clearly a mirage. I agree! Those pages don’t really exist.