Trend Following, 5th Edition

6 Human Behavior

Human nature never changes. Therefore, the stock market never changes. Only the faces, the pockets, the suckers, and the manipulators, the wars, the disasters and the technologies change. The market itself never changes. How can it? Human nature never changes, and human nature runs the market—not reason, not economics, and certainly not logic. It is our human emotions that drive the market, as they do most other things on this planet.

—Jesse Livermore (1940)

We are not really interested in people who are experts at the French stock market or German bond markets due to the technical nature of the trading . . . it does not take a huge monster infrastructure: neither Harvard MBAs nor people from Goldman Sachs . . . I would hate it if the success of Chesapeake was based on my being some great genius. It’s the system that wins. Fundamental economics are nice but useless in trading. True fundamentals are always unknown. Our system allows for no intellectual capability.

—Jerry Parker¹

Simple, robust solutions are easier to find than robust people or firms willing to apply them.

Jason Russell²

Trend following is as much about observing and understanding human behavior as it is about moving averages, breakouts, and position sizing. Understanding human behavior and how it relates with markets is commonly referred to as behavioral economics or behavioral finance. It evolved from the contradiction between classical economic theory (EMT) and reality. The assumption people ...