Trend Following, 5th Edition

10 Trading Systems

If you don’t risk anything, you risk even more.

—Erica Jong

No matter what kind of math you use, you wind up measuring volatility with your gut.

—Ed Seykota¹

To manage human fallibilities, trend following has a process to counteract behavioral risk. Psychologist Daniel Crosby lays bare in his Laws of Wealth where that success foundation starts:

Sometimes a cigar is just a cigar.

Attributed to Sigmund Freud

• Consistency
• Clarity
• Courageousness
• Conviction

Building on those four C’s, trend following reduces to rules that guide daily decision making.

These rules comprise what are commonly called trading systems. There is no limit to the number of different types of trading systems. But most trend following systems are similar as they seek to capture trends in big liquid markets.

Unlike so many Holy Grails, the never-ending fundamental predictions of this or that, trading systems are quantified. Dunn Capital, for example, has said their trading system has a “programmed risk of a 1 percent probability of suffering a monthly loss of 20 percent or more.”² That’s what I mean by quantifying. That’s what serious people do.

At the end of the day, your job is to buy what goes up and to sell what goes down.

Paul Tudor Jones

It’s much too early to tell. I think all we’ve learned is what we already knew, is that stocks have become like commodities, regrettably, and they go up to limit and they go down to limit. And we’ve also known over the years that when they go ...