Stephen Roach on the Commodity Bubble

[Mr. Now]

No. Trend following is not predicting. Predicting attempts to lead, trend traders follow. Any one trade is meaningless, the only item that matters are the aggregate stats (quantifyable odds) generated by the approach.

The tighter your approach in terms of discretion, the better your stats serve you. Most hedge funds approaches today are 100% mechanical in nature.

Trend following is following. Predicting is an attempt to lead, not follow. Predicting is in fact motivated by wanting to tell the market what to do.

Pure trend following is profitable and very boring. Pure attempts at prediction are long-term unprofitable, and usually full of emotional drama.

Real trend followers are successful and rare-- because the world is full of people who need reasons and need to be "right". Needing reasons to explain an adverse price move in the now will destroy trading accounts very quickly.

Trend followers are never wrong, because they are never right. Those that need reasons are often successful-- and more often, very very UNsuccessful in trading.

The need to be right naturally leads to attempts at prediction. This is folly and foolishness. For example, the need to be right leads one to sell winners (to make one "right") and hold on to losers (to avoid making one "wrong"). This is the Disposition Effect. It is a symptom of the need to be right. It is evil and indicates a notable lack of self-mastery.

Disposition Effect



A successful trend follower stays here and now. The successful predictor is often trapped in the illusory future.

That same predictor lives often lives in the past, reliving it over and over while missing what is happening, now.

If you have particpiated in trading seriously for any length of time, on the path to (self) mastery, the above will make immediate sense to you.

[eastbay]

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No. Trend following is not predicting.

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Wrong, in any reasonable sense of those words.

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Predicting attempts to lead, trend traders follow. Any one trade is meaningless, the only item that matters are the aggregate stats (quantifyable odds) generated by the approach.


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True but irrelevant. Prediction does not preclude probabilistic prediction. Which is what all strategies do, "trend following" included.

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Trend following is following. Predicting is an attempt to lead, not follow. Predicting is in fact motivated by wanting to tell the market what to do.


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Nonsense. Trend following is following on the basis of a prediction (in an ensemble average sense) that the trend will continue, to produce a profitable trade.

In the simplest of terms, trend following systems predict that markets that are moving up will continue to move up, and markets that are moving down will continue to move down. That's a prediction like any other. That the assumption (i.e. prediction) is valid (or not) in a probabilistic sense is irrelevant.

This "trend following is not predicting" is just marketing nonsense hype to try to distinguish it from other strategies. Also, to get around the commonly held belief that prediction is impossible. Oh, it's not predicting, so it can work! Silly word games. I'm surprised that you seem to have fallen for it.

It should be obvius when put this way: If a system is not predicting a profitable price in the future at which you can take profits, why on earth would you use it?

eastbay

[kagame]

trend following is merely a trading system that has empirically worked well based upon directional momentum

value investing is longer term and in truth seeks to be contrarian and anti-trend. the thing is with value investing you would ALWAYS want to wait until the absolute bottom to invest, but who can call that sort of thing its nearly impossible.

i would say that implemented properly neither of these master strategies depend upon reading tea leaves, but which is the better in terms of results likely depends on the market conditions

[AvivaSimplex]

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the thing is with value investing you would ALWAYS want to wait until the absolute bottom to invest,

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What value investor says that? Value investing has nothing to do with market timing. It's about finding companies whose stock price is less than their intrinsic value.

[Mr. Now]

Thank you for your detailed reply-post.


East, you seem to be missing my essential point which is that prediction strongly implies that the predictor needs reasons for price action.

Price action contains all the wisdom of all the players and that is the essential belief required of all successful trend followers. Strong price action has a beginning, middle and end. Noticing these states is the essence of trend following. Price action is the basis of a trend following system.

News provides reasons. The news that typically follows strong price action is incidental to the trend following process, and tends to support the trend following approach after the fact.

Even fundamentalists study and follow trends: trends in earning, sales ratios, book value, etc.

Trend following requires an integrated philosophy. If you need reasons, if you must predict, you will have scant success following trends.


Best to you,

Mr. Now

[Mr. Now]

kagame,

Thanks for your reply-post, those are excellent points, well articulated.

The ability to hold two opposing ideas in your mind and see the value of both-- especially when paired-- is rare.

Yet, this is exactly what mechanical quantitative systems traders do. By using 2 or more systems concurrently that display negative covariance, the player lowers risk per unit of reward resulting in better Sharpe and Sortino, lower overall capital requirements, and the ability to safely use more leverage.

The typical starting mix is to deploy capital across (1) lowe-frequency trend following system and (1)higer frequency fader-type system.

The high-frequency system typically has a higher win rate and lower avg win size, while the trend-system has a much lower win rate and a much higher avg win size. The systems paired are unrelated and smooth risk and volatility when paired as such.

One system predicts, one does not. Few traders can hold these opposing ideas at once and execute for profit.

[Mr. Now]

Value investing requires very small position size across a great many ideas. This is because a perfect value play may take years to realize the value, that is, for "Mr. Market" to understand the value, such that you get paid off.

It is a very good strategy when executed correctly. A player may choose to follow a specific value-oriented mutual fund manager and get overweight in some of his picks, as a starting point.

Often those new to value gravitate to microcaps. Those new to value-playing are wise to avoid microcaps, which are thinly traded, easily manipulated, and often feature very wide bid-ask spreads.

[eastbay]

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Thank you for your detailed reply-post.


East, you seem to be missing my essential point which is that prediction strongly implies that the predictor needs reasons for price action.


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Well now you've switched from the word "prediction" which has a well-defined mean to "predictor", as if this is some kind of archetype to which you've ascribed all sorts of meaning which has nothing to do with the word "prediction" in the usual sense. A trend follower also has reasons for his predictions of price action: he believes in market momentum, otherwise there would be no trends to follow.

You can set up a straw man trader called a "predictor" and ascribe to him all kinds of trading foibles that can be avoided by using a trend following system, and I guess that's what you're doing. But none of that has anything to do with whether or not trend following makes predictions in the usual sense of the word. It surely does.

eastbay