ETMA_The Evolution

New Week, New Day, Carpe Diem and Trade well.

The Best of Hans Zimmer.

13 Awesome Wall Street Movies To Entertain You On Your Day Off.

Rogue Trader (1999)
In a sentence: Faster paced British version of "Wall Street."

Trading Places (1983)
In a sentence: No movie about Wall Street is funnier than the 1983 comedy "Trading Places."

Wall Street (1987)
In a sentence: The classic Wall Street film.

Boiler Room (2000)
In a sentence: If you've ever worked in a job in sales or telemarketing, this should seem all too familiar to you.

Glengarry Glen Ross (1992)
In a sentence: "The leads are weak? You're weak!" -Alec Baldwin

Enron: The Smartest Guys In The Room (2005)
In a sentence: One of the best documentaries ever made. Ever

Trader (1987)
In a sentence: Brilliant... If you can find it.

American Psycho (2000)
In a sentence: You'll never look at business cards the same way again.

Quants: The Alchemists Of Wall Street (2010)
In a sentence: A rare look inside the minds of mathematical geniuses who have invented financial models that have both destroyed and made Wall Street.

Margin Call (2011)
Consider this one a new classic — it seems like everyone else is.
In a sentence: Director and writer JC Chandor said he "came up with this concept of locking these investment bankers in on the night when one of them thinks that he has found out that the world is coming to an end."

Cosmopolis (2012)
Cosmopolis
In a sentence: You may come out of this one scratching your head.

Arbitrage (2012)
YouTube
In a sentence: A solid job on everyone's part, maybe not a stunner though

I have another list that i will publish it later, meanwhile, enjoy.

Best,
B.R.

The Trading Edge Visualiser Users Manual

November 10, 2015/2 Comments/in Research, Trading Systems /by lbernut

It is impossible to survive in the markets without an edge. Let alone being able to quantify it. How do You know if You even have an edge ? If You want to articulate a better strategy, You need to 1) understand where your trading edge comes from, 2) quantify it and then 3) gradually improve it. Sharpe, Sortino or Treynor ratios may provide some comfort, but these are just sterile numbers. The smoothie approach of blending indicators and factors into an optimiser has never led to robust breakthroughs. Our brain remembers stories, associates images and concepts. If You can visualise your trading edge, quantify then You will be able to will be able to a better strategy.

The tool I am about to share simply changed my life. It permanently changed the way I approach markets and strategy development. It enabled me to reclassify strategies in two buckets. It then enabled me to understand the pros and cons of each. From there, it showed me the way to improve my trading edge by gradually nudging the distribution. This file is still very much part of my daily development kit. For example, in the summer of 2015 we realised there were many false positives very close to the break even line. We modified just 2 lines in the program, win rate improved by 5% points. This has enabled us to trade higher periodicity while keeping a high win rate.

Download Trading Edge Visualiser Now

The Trading Edge Visualiser tool is free. (You may be asked to reconfirm your mail-address, but it is 100% free). It is designed to be simple and intuitive. It will help You

1. visualise your dominant trading style: mean reversion or trend following
2. visualise and quantify your trading edge both in aggregate and at individual security level
3. materially improve your trading edge: we posted some techniques and tips. Try them and see the results for yourself

The trading edge formula

Whatever You believe your trading edge comes from, it can be expressed in this simple formula
Trading Edge = Win% * Avg Win Loss% * Avg Loss

The Trading Edge Visualiser is a visual representation of the trading edge. It shows two distributions: absolute P&L and contribution. Contribution is simply P&L divided by Equity.
Green and Orange bars show Buy and Sell (Long & Short) trades. Blue and mauve bars show AVG win, AVG Loss for BUY & SELL. The middle bar is BUY & SELL Trading Edge.
Visual representations of the trading edge of the styles
Irrespective of instruments traded, there are only two major types of strategies: mean reversion or trend following.

Mean reversion
http://alphasecurecapital.com/wp-con...on-300x212.png
Mean reversion strategies have a Moby Dick shape like distribution:

1. the hump of the win rate is above the 50% hit ratio line
2. The long left tail looks like a fin.

Trend Following
http://alphasecurecapital.com/wp-con...ng-300x216.png

Trend following strategies have those characteristics

1. Low win rates: between 30 to 40%. The peak of the loss rate is below the 50% line
2. Short left tail
3. Long right tail

Step 1: Diagnostic
If You dont know who You are, the markets are a very expensive place to find out, Adam Smith

Both Abebe Bikila, the barefoot Ethiopian marathonian, and Hussain Bolt run fast. Yet, marathonians are not good sprinters and vice versa. Similarly, we all have our own trading personality.
The story we tell ourselves about our style and what our trading history shows are two separate things. It is not uncommon to find value guys chasing momentum. Neither is it rare to find momentum guys doubling down on cheap stocks. The first step is to take an honest look at your dominant style. This tool is as honest as the scale in your bathroom.
Process your trading history on the Trading Edge Visualiser. Compare your distribution with the above major dominant styles: mean reversion or trend following.

Step 2: Understand and measure the risks associated with your dominant style

Risk is not a dissertation in an investment thesis. Risk is a number. The difficulty is to pick the formula will adequately match the risk associated with your style.
Sharpe, Treynor et al do not measure risk. They measure volatility of returns and naively assimilate volatility with risk. They may have some marginal utility for asset allocation purposes, but certainly not when it comes to quantifying risk.
Relevant risk measures:

1. Mean reversion: The key risk measure for mean reversion strategies is the Tail Ratio. Tail ratios of 0.3 and below present severe risk of blow-ups. For example, some strategies may clock +0.5% every month, but have a sudden -4% drawdown. This would take 8 months to recover, which is probably beyond the patience threshold of many investors.
2. Trend following: The key risk measure for trend following strategies is the Gain to Pain Ratio: trend following strategies have low win rates. For example, if You allow each loser to dent your capital by -1%, assuming a 40% win rate, winners will have to average +1.5% just to break even.

Common Sense Ratio

Common sense is not so common these days, Voltaire, French freedom fighter
One fine Monday morning at 9 am, I had the honour to meet Jack Schwager. I had just finished his book on risk so I was eager to show him my concocted risk measure. He murmured: hmm, common sense. A few days later, I showed it to my boss who cared to elaborate: hmm, it makes good common sense. Voila: Common Sense Ratio.

CSR = Tail Ratio * Gain to Pain Ratio
Lose money 1 < CSR < 1 Make money
CSR is a notable improvement on the tail ratio as it will also capture aggregate profit ratio, or the ability to recover from big losses. It will recapture the inherent cyclicality of trend following strategies via mediocre GPR but high tail ratio.
Step 3: Improve your trading edge
Techniques explained below are designed to nudge the shape of your distribution. Your trading edge is the shape of your distribution. Ideally, You want something that looks like this:

1. High win rate: not only does it feel better, but it compounds faster http://alphasecurecapital.com/wp-con...re-300x197.png
2. Long right tail: ride your winners and allow your capital to appreciate
3. No left tail: cut your losers
4. Symmetrical distribution on the Long & Short side: identical rules on both sides of the book

Mean reversion
The key to success for mean reversion strategies is to increase the tail ratio. This can be accomplished in two ways:

1. Stop loss: a strategy without a stop loss is like a car without brakes. As a rule of thumb, a stop loss should not be further away then twice the 90th percentile of your profits. Beyond that limit, the period of recovery may be too long to be commercially acceptable
2. Elongate your right tail: mean reversion strategies do not allow winners to fully mature. This simple technique can allow winners to develop while preserving profits. Instead of closing the entire position, close no more than 2/3 and place a trailing technical stop loss on the remainder. Do not place a valuation stop loss as it will exceed your comfort zone.

Moral of the story:

1. Shops do not restock on products they cannot sell; they mark down the inventory and clear it at a discount. Similarly, do not double down on losers, accept your loss and move on.
2. Value investors usually sell their positions to their momentum colleagues, only to sigh in despair when prices subsequently double or triple. Next time, sell them a portion of your holdings and enjoy the ride with them. Worse case scenario, if it does not work, your stop loss will take you out and protect your profit.

Trend Following
Profits look big only to the extent that losses are kept small. So, all You have to do is to manage losses and profits will take care of themselves.

1. Stop Loss is the second most important variable in your trading system, after the most volatile place on the market, that is the grey box between your left and right earlobes. Stop loss has a direct impact on three out of four components of the trading edge: Win rate, Avg Win, Loss rate. Make a habit of placing your stop loss as your enter your orders
2. Would You allow tenants to stay rent free in a building You own ? Every time You say yes to a free loader, You say no to a good customer, so make a habit of evicting poor performers
3. Improve your win rate: assuming average loss stays the same, any improvement in the win rate will have a material impact on the trading edge.

Real life example: i am a short seller. The short side is plagued by periodic tidal waves called short squeezes. The Trading Edge Visualiser taught me that rather fighting them, it made more sense to use them. I wait for the short squeeze to pass and only after that do I enter at a higher level. Then, as the next short squeeze approaches, I reduce size. This clocks a small win, reduces risk and allows to weather squeezes. Once the squeeze is over, there is a fresh high probability entry point.

This habit of scaling-out and scaling-in tilts the P&L distribution to something like the distribution at the beginner of the paragraph. It combines the high win rate of mean reversion strategies but still has long right tail, short left tail.

File users manual
Download Trading Edge Visualiser Now

The Trading Edge Visualiser was built using Metatrader 4 OrderLog. It can be applied to any trading history, provided You load data in the fields coloured in blue and reset the pivot table
Data load

1. Time and Date: the information is organised in chronological order on the Table sheet
2. Ticket No: this assumes that all trades have a unique identifier
3. Symbol: The table sheet calculates the trading edge of each security in a timely manner
4. Type: Buy/Sell, this allows rapid sort
5. Buy/Sell Lots: this field is useful for multiple entries/exits
6. Profit: this is an absolute USD P&L
7. Contribution: this is a simple P&L / Contribution field. There is no currency conversion, benchmarking or modified-Dietz time-series. Relative performance calculation should take place in this field

Pivot Table settings

1. ROW fields in Tabular Form: In the PivotTableFields: click on Field Settings: in Layout & Print table: Click on Show items in tabular form
2. ROW Fields SubTotals deactivated: In the PivotTableFields: click on Field Settings: SubTotal & Filters table, Subtotals: click None
3. PivotTable Options Totals Columns deactivated: Right-click anywhere in the PivotTable, go to Totals & Filters, uncheck Show grand totals for columns
4. Column Label: Click on Select All to allow automatic refreshing

Useful tips:

1. Run this analysis periodically and keep track of your evolution to receive the full benefits
2. Truncate data: the current file looks at the entire population. Segment your trading history into blocks when your strategy performs, when it does not.
3. Comment and annotate entries/exits. You will realise that a bit of finesse on exit will go a long way. It is useful to keep track of exits

Conclusion
People who keep track of their weight are 30% more susceptible to reach their weight loss target. The Trading Edge Visualiser tool will help You understand who You really are. It has the potential to transform your trading game, as it continues to do so for me.
It is 100% free, so download and play with it!
Download Trading Edge Visualiser Now

Posted by Danny Merkel at Sunday, March 02, 2014

My Trend Following Trend Commandments

When it comes to trading, not only is it important to focus on "what to do", but it is also important to think about "what not to do". So, here are ten pieces of negative advice pertaining to trend following trading.

1) Do not risk more than 1% of your capital on each trade

This means that if you are stopped out of your stock, the total value of your account drops by 1%. It does not mean sell your stock once it falls by 1%.
For example, if you start off with $10,000 of equity in your account, get stopped out of a losing trade, then your account should be worth no less than $9,900.
I am currently using a 0.50% risk on each trade, which allows me to enter more positions. And having more positions exposes my portfolio to what is known as positive optionality.
If your win rate is 50% and you bet much more than this amount, it is a mathematical certainty that you will go bankrupt eventually, which is why this is rule #1

2) Do not average down on a losing trade

Doubling down on a stock will lead you down the path to bankruptcy pretty quick.
One of my favourite trading movies is "Rogue Trader". In it, the actor who plays rogue trader Nick Leeson comments, "If you keep doubling up, you're bound to come out ahead". He ended up losing over $1 billion.
Every blow up that has occurred in the investment world has involved averaging down, and this is one of the lessons taught in the excellent book, What I Learned Losing $1 Million Dollars

3) Do not buy stocks trading beneath their 50 day moving average

This is a very flexible rule that can be combined with other forms of trading, even fundamental analysis. For example, if you love Apple's products or balance sheet (or whatever), wait until the stock clears its 50 day. Following this simple rule would have resulted in you sidestepping that stock's recent 50% correction.
Buying into markets that are trading above key moving averages is not myth - it has been an objectively profitable strategy going back more than 50 years.

4) Do not buy a stock because it is "too low" or sell a stock because it is "too high"
It's hard for new traders to accept, but often what seems too high just keeps going higher, and what appears too low keeps going lower. It's also equally difficult to let winners run.

5) Do not make a trade based solely on news or fundamentals

It's okay to have opinions based on fundamentals, but I think it is a mistake to trade off that alone. If you do incorporate fundamentals in your trading, wait until they line up with the technicals before getting in. React rather than predict.

6) Do not trade against the long term trend

If silver goes from $50 to $30, it may be tempting to jump in, just because it is on sale, but this is a losing strategy in the long run. Once a long term trend is in motion, it tends to stay in motion, so do not attempt to pick tops or pick bottoms.

7) Do not experience large losses

While you cannot control whether a stock goes up or down, you can control how much you are willing to lose on a trade. Unless a stock gaps down massively, it is completely in your control to cut small losses before they become large losses.

8) Do not fight the trend of the general stock market

The stock market has been in a massive bull market since 2009, and yet I've seen so many instances of traders resisting this, and trying to short individual stocks. A rising tide lifts all boats, so do not short individual stocks in a bull market.

9) Do not buy stocks that are illiquid or rising on light volume

A stock should do more than 200,000 shares a day of volume for me to consider it. It is important to be able to get in or out of a stock quickly without slippage. Also, a stock rising should be doing so on above average volume; trading with an increase in volume generally puts you on the same side as the smart money .

10) Do not invest all of your money in one asset class or sector

A trend following stock trader should not be loyal to just one sector. I personally trade whatever is making new highs - it does not matter what it is. If gold is making new all time highs, then I'll buy gold. If junk bonds are making new all time highs, then I'll buy junk bonds. With over 10,000 stocks to choose from and over 1,000 different ETFs, it is easier now than ever before to become truly diversified.

Great posts Bass. Very informative :-)

Thanks C., this is a glimpse of my daily read and a personal blog where i can store info to read them later, i often return to my early posts on this thread to reread them again and again, only the good stuff, i'm more active on twitter than Here, of course here you can elaborate more.

Best,
B.R.

Trend Following Wizards – October 2015

Red October again this year for the Wizards and their trend following strategy. All but one of the funds/CTAs tracked here posted negative returns for last month, with a few YTD numbers well in double-digit negative territory. Both the collective monthly and YTD performance are around the -3% mark.
Below are the full results as of end October 2015:

When Market Wizard Ed Seykota Speaks, I Listen!

 

1. One good trend pays for them all.
2. Accept just enough risk so you can sleep well at night.
3. When prices break through your stops, pull the trigger and sell.
4. News: we stash that flash in the trash. Ignore the “newsamentals”.
5. Betting the right size matters bigtime.
6. Most investors get stressed and need to stop the pain, so they use medicinal strategies instead of doing the right thing.
7. You have to notice trends early. If you wait and only participate in them when they’ve gone exponentially vertical, it’s too late. Look for a fresh trend.
8. Plow money back into your trading portfolio. Don’t make a big profit and then run out to buy a new Porsche.
9. When trend traders begin to lose interest, momentum starts to turn negative.
10. There are no Holy Grails. You just have to do the work, follow your disciplines and trends, and then cut your losses. It’s that basic.
11. Know where you’ll get out before you get in.
12. I have no demons. I’m a blessed man.
13. Luck is just a fat tail or outlier on a normal distribution. Luck happens. If it happens to you, manage it with humility and use stops.
14. The folks I mentor who wash out are those who just cannot control their feelings like I ask them to do. They can’t accept their own emotional landscape.
15. The trading adrenaline does diminish over time and with experience. The objective is to rid yourself of it – totally.

Trade well; trade with discipline!

Quotes by Ed Seykota

Technical analysis

1. In order of importance to me are: (1) the long-term trend, (2) the current chart pattern, and (3) picking a good spot to buy or sell. Those are the three primary components of my trading. Way down in very distant fourth place are my fundamental ideas and, quite likely, on balance, they have cost me money.
2. If I were buying, my point would be above the market. I try to identify a point at which I expect the market momentum to be strong in the direction of the trade, so as to reduce my probable risk.
3. If I am bullish, I neither buy on a reaction, nor wait for strength; I am already in. I turn bullish at the instant my buy stop is hit, and stay bullish until my sell stop is hit. Being bullish and not being long is illogical.
4. I set protective stops at the same time I enter a trade. I normally move these stops in to lock in a profit as the trend continues. Sometimes, I take profits when a market gets wild. This usually doesn’t get me out any better than waiting for my stops to close in, but it does cut down on the volatility of the portfolio, which helps calm my nerves. Losing a position is aggravating, whereas losing your nerve is devastating.
5. Before I enter a trade, I set stops at a point at which the chart sours.
6. Getting back in is an essential part of trend following.
7. I don’t implement momentum, I notice it and align my trading with it.
8. The markets are the same now as they were five to ten years ago because they keep changing – just like they did then.

Risk management

9. Trading requires skill at reading the markets and at managing your own anxieties.
10. Risk is the uncertain possibility of loss. If you could quantify risk exactly, it would no longer be risk.
11. Risk control has to do with your willingness to allow your stop to do its job.
12. Speculate with less than 10% of your liquid net worth. Risk less than 1% of your speculative account on a trade. This tends to keep the fluctuations in the trading account small, relative to net worth.
13. Reliance on Fundamentals indicates lack of faith in trend following.
14. Risk no more that you can afford to lose, and also risk enough so that a win is meaningful.
15. I usually ignore advice from other traders, especially the ones who believe they are on to a “sure thing”. The old timers, who talk about “maybe there is a chance of so and so,” are often right and early.
16. Pyramiding instructions appear on dollar bills. Add smaller and smaller amounts on the way up. Keep your eye open at the top

Longer term trading

17. Having a quote machine is like having a slot machine on your desk— you end up feeding it all day long. I get my price data after the close each day.
18. Intraday trading is tough since the moves are not as big as for long-term trading and there is no comparable reduction in transaction cost.
19. In general, short-term trading systems succumb to transaction costs and execution friction.
20. Trend systems do not intend to pick tops or bottoms. They ride sides.
21. The shorter the term, the smaller the move. So profit potential decreases with trading frequency. Meanwhile, transaction costs stay the same. To compensate for profit roll-off, short-term traders have to be very good guessers. To improve guessing skills, you can practice dealing cards from a standard deck, one at a time. When you become very good at it you might be able to make money with short term trading.

Money management

http://www.tradingwithrayner.com/wp-...out-money2.jpg
22. The key to long-term survival and prosperity has a lot to do with the money management techniques incorporated into the technical system. There are old traders and there are bold traders, but there are very few old, bold traders.
23. The manager has to decide how much risk to accept, which markets to play, and how aggressively to increase and decrease the trading base as a function of equity change. These decisions are quite important—often more important than trade timing.
24. The profitability of trading systems seems to move in cycles. Periods during which trend-following systems are highly successful will lead to their increased popularity. As the number of system users increases, and the markets shift from trending to directionless price action, these systems become unprofitable, and under capitalized and inexperienced traders will get shaken out. Longevity is the key to success.

Trading a system that suits you

25. Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible.
26. I don’t think traders can follow rules for very long unless they reflect their own trading style. Eventually, a breaking point is reached and the trader has to quit or change, or find a new set of rules he can follow. This seems to be part of the process of evolution and growth of a trader.
27. A trading system is an agreement you make between yourself and the markets.
28. Trading Systems don’t eliminate whipsaws. They just include them as part of the process.
29. A computer can follow a system and place orders without making predictions or feeling anticipation. Predictions and anticipations are objects you create. These objects may interfere with sticking to your system.

Rules to follow

30. The trading rules I live by are: (1) Cut losses. (2) Ride winners. (3) Keep bets small. (4) Follow the rules without question. (5) Know when to break the rules.
31. The elements of good trading are: (1) cutting losses, (2) cutting losses, and (3) cutting losses. If you can follow these three rules, you may have a chance.

Embrace losses

32. If you can’t take a small loss, sooner or later you will take the mother of all losses.
33. I handle losing streaks by trimming down my activity. I just wait it out. Trying to trade during a losing streak is emotionally devastating. Trying to play “catch up” is lethal.
34. (On losing streaks and over-trading) Acting out this drama could be exciting. However, it also seems terribly expensive. One alternative is to keep bets small and then to systematically keep reducing risk during equity draw downs. That way you have a gentle financial and emotional touchdown.

Mindset of a winner

35. A losing trader can do little to transform himself into a winning trader. A losing trader is not going to want to transform himself. That’s the kind of thing winning traders do.
36. The winning traders have usually been winning at whatever field they are in for years.
37. It is a happy circumstance that when nature gives us true burning desires, she also gives us the means to satisfy them. Those who want to win and lack skill can get someone with skill to help them.
38 The “doing” part of trading is simple. You just pick up the phone and place orders. The “being” part is a bit more subtle. It’s like being an athlete. It’s commitment arid mission. To the committed, a world of support appears. All manner of unforeseen assistance materializes to support and propel the committed to meet grand destiny.
39. In your recipe for success, don’t forget commitment – and a deep belief in the inevitability of your success.

Had to share this : http://www.trendfollowing.com/whitep..._Following.pdf

EURUSD shoots through 1.0600 on FT rumour of unchanged

ECB Cuts Its Deposit Rate to Minus 0.3% as Boost to QE Awaited

Financial Times publishes stunning, incorrect report on major...

Already Flying after the fakey test of Major support @ the 05 but still 20 Minutes to the Press conference, be very careful for this probable and typical Buy the Rumor sell the Fact or pump and dump, wait until after the press conference to buy or sell, again be very careful the big boys are manipulating the market.

Best,
B.R.

TREND FOLLOWING UP IN NOVEMBER AND YTD

State of Trend Following Report

NOVEMBER 2015 TREND FOLLOWING: UP +6.06% / YTD: +9.86%

The Wisdom trend following index gradually made its way up last month to post a strong result for November, and recover a large part of the losses occurred in October. This helped cement the YTD number further in the black. Now nearly in double-digit territory, there is a strong chance that trend following will end 2015 positive. Stay tuned next month.

http://www.wisdomtrading.com/wp-cont...1511-Index.png

http://www.wisdomtrading.com/wp-cont...x-12months.png

State of Trend Following in November

Last month’s results for trend following were positive, with a strong performance that took the index back into positive territory for the year. The strategy goes into the last month of the year holding modest gains but 2015 will obviously not be a repeat of the runaway performance from last year.
Please check below for more details.

DETAILED RESULTS
The figures for the month are:
November return: 7.31%
YTD return: 2.93%

Supercharge Your Trend Following System

Nathan O.

How I came to trade trend following, an overview and techniques
to take your system to the next level

Part I – History
Background

Trend following’s popularity seems to come and go based on the returns of the big CTA firms. When they have a bad year (or years) the whole idea of trend following is typically taken to the stage for a beheading for all to see. The years that are homeruns are usually never covered as thoroughly or talked about as much, other than by trend following sites and proponents of the system. As a fellow trend trader, I actually prefer the anonymity. The less people that buy into the concept or value of this approach the better.
I admit there is a small part of me that likes being in the “not so” secret society of trend followers. I make no amends for telling anyone I don’t have any idea what the market may do tomorrow or next week for that matter. Although my background in finance/accounting and engineering gave me the tools to analyze balance sheets and income statements, they have honestly had no part in my success with trading. I think a big reason for my success is doing a lot of things wrong, a lot of different ways, yet still being smart enough to learn from those mistakes. Smart is being used loosely here, as this didn’t happen overnight and I had many failures trading early on.
I don’t have enough reams of paper to go into all of them, but I will list a few mistakes for your entertainment:

1. I was told by my broker that I had to get into an internet mutual fund they had received great information on.

This was during the tech bubble and I rolled 80% of my IRA into this fund. I believe he had me purchase it roughly 3-4 days before the fund’s absolute lifetime high. Along with the collapse of the internet stocks this fund of course followed suit. I did the most mature thing I could think of and simply didn’t open up the quarterly brokerage statements. Despite that tactic, I continued to lose capital. To add insult to injury, a few years later I received an invitation to join a lawsuit against said broker. It turns out that this specific internet mutual fund paid the highest commission back to the broker of any funds they offered.
Two great things came out of this………..1) I quit using brokers/advisors; and 2) I started using stop losses on every single trade.

1. I purchased a penny stock (I still remember the trading symbol) in my “trading” account and eventually lost my entire amount invested in this stock.

These two events happened during the same general time period which led to rule number three – 3) never trade penny stocks.
I am fortunate that, during the time period leading up to these events, I had made a significant amount of money in the markets (along with everyone else). During this time period I analyzed company financial statements and proved to myself that I was an expert trader. Pretty much everything I bought went up in price. This is a perfect example of learning nothing from success but everything from failures. Similar to business owners that failed several times before they eventually ran a profitable business, I had learned some incredible lessons from these disasters. Probably the hardest to swallow out of all of them was the following:
http://www.mercenarytrader.com/wp-co...my-success.png
This was a hard pill to swallow, as I believe it is human nature to take credit for good things that happen and attribute that success to our abilities. Likewise, I think it is human nature to blame everyone and everything else for your failures. This simple acceptance of blame jump started my brain towards the path to profitable trading. The sentence above was initially hard to admit, but I honestly consider it the turning point in my trading life.
When looking back over the collapse of the market, I realized I now knew the cause of my losses. I simply had to go to the nearest mirror to see who was at fault. It was not my broker’s fault, the government’s fault, my parent’s fault or Wall Street’s fault. Let’s face it – the freedom of trading is a double-edge sword. While on one hand you have the incredible opportunity to take part in a multitude of investments and earn unlimited returns, you also equally have the absolute freedom to destroy as many accounts as you can fund in your lifetime. Outside of margin calls or leverage limits, no one will stop you from blowing up your trading account. “Trading suicide” is actually easier than you might expect.
This time period also made clear the following:
http://www.mercenarytrader.com/wp-co...-scenarios.png
This concept is SO simple, yet how many traders today still get to the point where they say internally “it is down so much now there is no point in selling (or buying if short)”.
The last but certainly not least of important statements I had to accept was as follows:
http://www.mercenarytrader.com/wp-co...ing-advice.png
Let’s face it, it is easy to say “well, I was just off in my analysis”, “the broker screwed me over” or “my friend gave me a horrible stock tip”. At the end of the day it is a cop out.
This simple fact is so easy to overlook and I believe you will NEVER succeed until you can accept full responsibility for all your losses and gains.
Since I finally admitted my fundamental analysis and that of others did not give me any edge, I fell over to the mechanical trading side. The problem with even phenomenal advice on the markets is it still doesn’t answer when to buy, how much to buy based on your account size, and most importantly when to sell. Even if you are a fundamental trader the actual mechanics of how you buy, sell and how much you risk should exist. I will delve into these individual components in more detail later on, but suffice it to say you don’t have a trading strategy if you can’t answer these questions.
I eventually read a few books that really steered me towards trend following. Market Wizards and the Jesse Livermore books set the wheels in motion. Digging into the “turtle traders” in great detail, especially their thoughts/methods for risk, correlation, normalizing each instrument traded, and the worthlessness of winning percentage sealed the deal. Despite the simplicity of their entry and exit methods, I was sold on their humility. They freely admitted they did not know and could not predict the markets, yet they earned unreal returns despite not knowing. I was sold on the idea of being removed from the markets, being removed from the NASA type trading screens and simply“REACTING” to price. The whole idea of N, position sizing and volatility doesn’t get the credit it truly deserves. This was a goldmine as far as I was concerned.
The first time I took part in a huge trend and actually sold when the trend ended was all it took for me to be hooked. When you join a monster move all the little losses up to that point lose their significance in an instant. It is not all champagne and caviar dreams come true as I will later explain, but let’s say I became a believer.
So what exactly is trend following?
Trend following and the goal
The DNA of trend following really comes down to “never arguing with price – ever”. I am pretty sure it won’t come up this way in the dictionary, but this really is the core belief if you will. If prices are going up you are a buyer and if prices are going down you are a seller. Granted, there is more to it and we have not answered the important questions of when, what, how much and so forth. Regardless, trend followers never buy bottoms, sell tops or predict the market’s next move. We react and by default don’t get into positions until the trend has started and don’t exit until after the trend is over. We are simply happy taking chunks out of the middle of moves. You will never find us impressing guests at the cocktail party over the call we made to sell at the top.
With respect to returns, plenty of strike-outs are evident on the quest for out-of-the-park homeruns. As a result, your equity curve graph is not a nice 45 degree angle from left to right. It is more like a roller coaster track and keeps the faint of heart on the kiddie rides. Saying you can handle large drawdowns and ACTUALLY handling large drawdowns are two different things. This is what led to supercharging the system for me.
Components of Standard Trend Following Systems
Any mechanical system (trend following included) has the following components:

1. Entries

Every system has a condition or trigger for entry. The turtle system used standard break-out (channel) entries. For example, the highest high (or lowest low if going short) of the last 55 days was used in one of the turtle systems. Not sexy, nor does it do much for winning percentage, but it enables that you are there for the ride if a trend starts. To be brutally honest, entries are just not that important to trend following. I almost look at them as taking out insurance……they ensure you don’t miss a major move. In fact, Linda Raschke coined the term “turtle soup” for a strategy she had that specifically faded these breakouts.

1. Exits

Once we are in a trade, we need to know when to get out if it goes against us (initial stop loss) or when to exit a profitable trade. Standard trend following systems don’t use profit targets, but they will be discussed further when discussing improvements. The turtles used the same strategy on exits as they did with entries – lowest low of the last N number days. As expected, it is impossible to catch the top with such a strategy. It does, however, keep you in the trade through normal fluctuations for the full ride.

1. Risk %

Almost all trend followers limit their risk to a certain percentage of capital on each trade. Typical ranges are 1-2%, using fixed fractional position sizing. You have some options here, as you can use open equity (more aggressive) or closed equity (more conservative) for determining position size. Using a simple example, if you are trading a $1,000,000 account and your open equity (capital + open profits – open losses) is $1,100,000, risking 2% would yield $22,000 per trade. Using closed equity, you would risk $20,000 per trade (2% of $1,000,000).
http://www.mercenarytrader.com/wp-co...TR-201x300.pngWhere trend followers and the turtles really struck gold was in their ability to normalize markets through volatility of the underlying. For example, a stock that has an average true range of $4.00 would have an initial stop loss of $8.00 (2*ATR), whereas a stock that had an average true range of $.50 would have an initial stop loss of $1.00.
Using stocks is probably the not the best example in showing the genius of this strategy. In the futures markets, which is what the turtles traded, a move when having one contract of Corn vs. a move in one contract of Gold were worlds apart.
As a result, this concept normalized the risk for the trader by buying more contracts of Corn relative to Gold. It essentially put each commodity on the same playing field with respect to risk. A 2*ATR move in Corn would equal a 2*ATR move in Gold. As mentioned before, I believe this is one of the most powerful and underrated concepts to come out of the Turtles.
This is not meant to be an exhaustive thesis on trend following rules or the turtle system. There were additional rules relating to pyramiding positions, limiting risk per commodity, limiting risk per correlated group, and limiting the number of positions with respect to long/short direction. You should have a good understanding of the basics after going through the information.
Advantages/Disadvantages of Standard Trend Following

1. Advantages

1) Mechanical/simplistic in nature
Let’s face it, it doesn’t take a rocket scientist to understand where to enter and exit positions with trend following.
2) Diversifies across a broad number of instruments
The more capital you have and the less % risked on each trade, the more instruments you can trade. With ETF’s you can cover the indexes, many commodities and to a lesser degree currencies. This is beneficial to the Nth degree when comparing to the misguided thought that you have diversification with small cap, large cap and international funds.
3) Normalizes each instrument traded
Whether trading Silver, Usd/Chf or an ETF, the same N move in or against your position has the same affect on capital.
4) Potential for outsized returns
This is the bread & butter of trend following, hitting the ball out of the park on occasion.
5) Risk % is small – you can stay in the game
Relative to returns and account size in general, risk per trade is minimal. Using 1% risk per trade, it would take roughly 100 trades to blow up your account (actually much more if using fixed fractional bet sizing as you would be decreasing your percentage risked as your balance fell). Taking a $100,000 account as an example, once you were down to $50,000, you would be risking 1% ($500 per trade), which would be another 100 trades (actually more) and so on.
I am assuming I don’t have to point out what will invariably happen if you risk 10% of your account on each trade.

1. Disadvantages

1) Low Winning %
This “disadvantage” doesn’t really hold much water, but for those that require a high winning percentage it will be torture on your trading psychology. If you only care about increasing your capital this becomes irrelevant.
2) Erratic Equity Curve
There is no question that standard trend following models can give you some indigestion. These are not Madoff guaranteed returns (which of course were bogus) each month. You will need your seatbelt at times (4 point harness recommended) because markets simply don’t trend that often. Most of the time they are doing “a whole lot” of nothing! Being range bound and meandering with little conviction is not unusual.
3) Outsized returns typically require sizeable drawdowns
This goes lockstep with 2), but if you truly desire 200%+ returns that means you have to accept 30-40% drawdowns at times. Be honest with yourself, most people overestimate what they can handle on the drawdown side.
4) Commission vs. Paycheck type returns
Long term trend trading can have huge positive months and also have months with losses or break-even results. If you made 12% in the month of June, it is irrelevant when estimating what may happen in July, or the rest of the year for that matter. You can’t annualize your interim results, as it is much like having a commission sales job for high end products. There will be months where you dip into your account and other months where you earn a big bonus. This is not an annuity, and you cannot budget for consistent monthly income.
5) Patience is required
If you crave constant action, you will be severely disappointed. Comparing trend following to shorter-term systems is like watching grass grow compared to watching the bulls run in Pamplona. This has none of the excitement of a casino, horse racing, or gladiator duel to the death. Unlike most businesses, the majority of your profits are made when you are doing nothing. Think about it, big trends require you to do nothing more than adjust your trailing stop (or stops) as needed. It is a great contradiction……….making money while not taking action, producing more product or selling more widgets.
Why Trend Following will continue to work
I am often asked if I think Trend Trading / Trend Following will continue to work and why. I am confident it will continue, primarily for one reason and one reason alone:
http://www.mercenarytrader.com/wp-co...kets-are-a.png
To put it as bluntly as possible, as long as there is a human element to the markets there will be trends. Unless people change, fear and greed will simply continue to be reflected in the markets. There will continue to be bubbles, irrational buying/selling and sheep like behavior that will be reflected in the price of stocks, exchange traded funds, commodities and currencies. To me this is like people asking if it will ever rain again………….a confluence of events will always happen that will force conditions for trends, the same as there will be conditions for precipitation.
The chances of no more shortages or excess supply in commodities, or irrational buying or selling of whatever instrument you decide, seems impossible to fathom. Do you really think interest rates will stay low forever? When they rise, what do you think will start to happen to the bond /treasury markets?
Conclusion to Part I
I hope this has given you a much better understanding of trend following. You may be shocked to read that I don’t trade the “standard” trend following model. There are changes (what I consider improvements) I have made to tackle the drawdown issues and amount of open profits that are typically left on the table. If you are interested in reading the steps I took to improve the standard Trend Following model and use those same techniques to improve your own system, read on……
Part II – System Improvement

1. Breaking down each component and thoughts on improving

Most trading systems have room for improvement and Long Term Trend Trading is no exception. Let’s tackle the individual components of any system (including Trend Following) and discuss the possibilities of improvement.
Initial Stop Loss
While the standard risk distance for Trend Following is 2*ATR (see glossary for ATR definition), this is by no means set in stone. 2*ATR is a good stop loss, in my opinion, because it allows sufficient room in most cases for whatever you are trading to still go your way after a retracement. I have analyzed using 3*ATR in addition to 1.5*ATR with mixed results. While 3*ATR does on occasion keep you in a trade that would have stopped you out using only 2*ATR, it reduces your position size as well. I have found in my own research it also can keep you in trades that go nowhere, where I would have preferred to be stopped out and allocate that capital elsewhere.
Using 1.5ATR allows a bigger position to be put on vs. 2*ATR; however, no surprise, it does stop you out more than using the traditional stop. This is one of the instances where I actually prefer using Trading Blox or Trade Station back testing over manual back testing. You can quickly see the affects of how changes in your initial stop loss affect drawdowns, percentage return, and the structure of your equity curve. (I will get into back testing in much greater detail later.) Chances are that you can find a better Stop Loss for your system if you have enough data history.
Remember two important concepts when back testing:
1 Just because a change improved results historically, does not mean it will mirror the results in real time.
Honestly there is no way around this fact. While the changes in real time should mirror the historical results, there are no guarantees.
2 If a specific number is needed to improve your results dramatically, it screams disaster in real time trading.
http://www.mercenarytrader.com/wp-co...ge-216x300.pngLet me elaborate on this further. If you are adding a moving average as a filter for entries and a 40 day moving average gets you a 5% increase in return, a 60 day moving average gets you a 7% increase in return, but a 50 day moving average gets you a 24% increase in return, I can guarantee you 99.9% that the 50 day moving average is over-optimized (fit too closely to the data) and will tank in real time trading.
Entries
For both entries and exits I believe you will do yourself a huge disservice by not manually back testing. I enjoy and applaud the fact that computers can spit out data at lightning speed. In many cases they save valuable time when testing new trading theories; however, computers do not match the human brain in certain instances. By this I mean patterns or visual clues that simply cannot be picked up by a computer.
One of my first attempts to improve standard trend following was a focus on entries. Just a few of the ideas were as follows:
1) Using volume increases as a filter
2) Using ADX strength as a filter
3) Using RSI as a filter
4) Using weekly bars vs. daily bars for breakouts
5) Using various moving averages as a filter for long/short entries
I will freely admit that manual back testing takes a lot of hours. I will also freely admit that manual back testing is 95% responsible for the improvements I have made to standard trend following.
After all those hours spent on researching the above, I unfortunately only found one of those 5 ideas that improved the original entry enough to keep. Again, these are only 5 – many other ideas were tested not included on the list.
The small improvement made had the effect of taking fewer trades overall, and a high enough majority of those missed trades turned out to be losers. I have no doubt I could have programmed these and did a normal Trade Station back test, but I wanted to actually see (bar by bar) the effect it had. What was nice is that several of the above ideas were quickly discarded after not much research. You could VISUALLY see they had no value in predicting better entries.
The one I did keep as a filter also quickly proved it had some merit and it was VISUALLY easy to see in manual back testing. One valuable hint I would like to offer is the following:

1. When back testing manually (by hand) on real trade examples, make sure you have a large enough sample of each type of trade.

What I mean by each type of trade is that you want to include your winners, losers, break-even and everything in between. If you do not follow these simple instructions you can quickly deceive yourself into thinking you have added value where there is none. For example, let’s say you are testing a spike in volume (whatever % you are testing) as a filter for entry. If you look at ONLYlosing trades and find out that the filter would have kept you out of those trades, don’t put your Lamborghini on order yet!! You may also find out that there are several winning trades that you would have missed as well that accounted for the majority of your return.
You may find something I have totally missed or have your own ideas that you want to test that will make a difference. In all honesty, the simple break-out entry probably cannot be improved that much. I struck out on almost every angle I tried and ended up with only a slight improvement when it was all said and done.
Exits
Now this is where things started to get really interesting. I had always believed to a high degree that trade management (decisions made once you were in the trade) had the greatest possibility for improvements to any system.
Whether day trading, swing trading or trend following, I still believe most systems can be improved by meaningful amounts with improved trade management – specifically your exit strategies. To me, this is where you can turn a good system into a better system or a great system into an even better system. I will run through the specific thought process I used and the same thought process you can use with your own system.
First, you need to understand your system or style of trading well enough to know what the weaknesses are. If you don’t know your system well enough to know its weaknesses then I can’t (and you surely can’t) improve it. I should be crystal clear that weaknesses can mean different things to different people. For me, I view large drawdowns as a weakness despite the high returns of trend following. We could probably debate whether large drawdowns are truly a “weakness” per se, but I would put it like this:
http://www.mercenarytrader.com/wp-co...f-there-is.png
In other words, if you can’t handle large drawdowns, which causes you to either not take all your signals or panic and make poor decisions, it is a “weakness”. Again, there could be debates about the system not having a weakness, as it is the “trader” that has issues. Even if we both agree it is truly a weakness of the trader, that doesn’t change the fact it needs to be dealt with.
Also regarding exits, one of the general rules of trend following is not knowing your exit point (no profit targets) ahead of time. While you most certainly know WHAT CONDITIONS will cause you to exit your position, there is no pre-determined profit target – only a pre-determined initial stop loss.
Let’s briefly go over the advantages/disadvantages of profit targets.
1) Returns are somewhat easier to estimate
If, for example, you risk 1% and your profit target is 2%, you know on average if your winning % is 40% after 10 trades you make on average 2% (6 * 1% = (-6%) + 4*2% (+8%)).
2) You are typically in trades a shorter amount of time (capital is exposed for less time)
3) By default you will have no homerun individual trades as your profit per trade is capped
Other than a gap opening in your favor, the most you will make on an individual trade is 2% in this scenario.
With respect to trend following, we need those large homeruns to counter the many small losses. Limiting profits would spell disaster on the whole portfolio, or at a minimum greatly reduce our return.
To better fit the system to my needs as a trader, I added a profit target component for a portion of the position. This had two effects – one negative and one positive:
The negative effect should be obvious – it reduces your returns. On large trending moves you don’t have your full position on. Instead of having 10,000 shares (5 contracts, or 100,000 lots, etc…), you only have 3,000 shares (2 contracts or 30,000 lots) for the big move as 30% or whatever percentage used would have taken a profit at a predetermined point.
The positive effect should also be obvious – you make a return on a medium trending move vs. taking a loss or break-even. If price moves enough to hit your profit target you sell a portion for profit (and in my case move the remaining to break-even) ensuring a profitable trade. If price continues to go up then we still take advantage of a nice return for the remaining position. This will smooth out the equity curve and reduce drawdowns, BUT also reduce returns.

Scenario #1

This is much easier to follow with a trade example. Keeping it simple, let’s assume we are trading $1,000,000 and risking 2% per trade. Let’s also assume the ATR for the stock purchased is $2.00 per share and our entry price is $100. Since our stop loss is 2*ATR ($96.00) and we are risking 2%, we purchase 5,000 shares. Let’s also assume price makes a run to $135 before we are stopped out at $127. We make a nice profit of $135,000, or 13.5% on a homerun trade.
Using the same example, let’s assume we sell 30% at $110 and the remaining 70% at $127. This nets us a total of $109,500 (1,500 shares @ ($110 – $100) = $15,000 + (3,500 shares @ ($127-$100) = $94,500)), or 10.9%.
In hindsight trading it is easy to say the profit target was a terrible idea as you made less. Unfortunately, we can’t trade in the past and we had no idea it was going to $127.

Scenario #2

Using the same stock, ATR and entry let’s take that same $1,000,000 account where price goes to $112.00 before crashing back down to below our initial stop loss.
With the “no profit target” standard approach we are stopped out for a 2% loss of $20,000. Our ending account balance is $980,000 and we are down 2% – not the end of the world.
With the “profit target” method we make $15,000 (1.5%), since our profit target was hit and when hit we moved the remaining position to break-even. Our ending account balance is $1,015,000.
For a single trade, I don’t expect you to get overexcited over the difference here. If this happens on 10 to 20 trades over 2 or 3 years, though, you should be able to see the value with respect to limiting drawdowns and smoothing the equity curve. This was a key component in crafting my own personal trend trading system that fit me.
The second, and what I consider the “major” piece of the puzzle I solved (to a degree), was tackling the open profits issue with trend following. Using the standard channel exit there is no way around leaving (at times) huge open profits on the table. What helped me solve this problem was admitting one simple fact:

1. “A channel exit only takes the time variable into account.”

http://www.mercenarytrader.com/wp-co...ow-300x264.pngThat phrase won’t exactly light the trading world on fire, but that simple fact has led me to keep a sizable amount of open profits. More importantly is what a channel exit doesn’t take into account – the magnitude of the price movement.
For example, if after five days of price movement on a Forex pair price has moved +600 pips in your favor your channel stop will still likely be below your initial stop loss.
Think about this concept for a minute…..do you think we should treat a 600 pip move the same as a 60 pip move after five days? It was pretty clear to me these should be treated differently. I am may be willing to leave 200 or 400 pips of that move at risk but I am not walking away empty handed. This allowed me to come up with what I call a Momentum Trailing Stop, or MTS.
I am not going to give my system away, but through manual back testing I found a repeating pattern that worked extremely well at locking in a higher percentage of profits vs. standard trend following. In many cases that same pattern would get me to break-even or at a small profit after a false break-out. I do want to point out that the pattern does not happen every time and in some cases it is never activated. As with my previous logic though, if you take advantage of this pattern on 10-20 trades over a year or two, it turbocharges your equity curve.
Adding the MTS captured back the return lost by adding a profit target and further smoothed out my equity curve. Regardless of your trading style, I believe these same concepts can be applied to improve your exit strategy. Define the weaknesses of your system, break them down into their components and search for ways to improve them.
Testing Your Theories
As I mentioned before, you need to take care not to over-optimize when you back test. With computers it is far too easy to show incredible results historically that will quickly destroy your trading account in real time. The shorter the time frame tested, the fewer the instruments tested, and the smaller the sample size, the less reliable the data. I hinted earlier about changing parameters and what to do if only a “special” number makes a dramatic improvement in your system – RUN!! That is a sure recipe for disaster.
One of the best ways (outside of manual back testing) to test your theories is using demo accounts to mirror your actual trades. For example, if you are testing two exit strategies, trade your live account normally and use each demo for one of the exit strategies. On a quarterly basis, compare the performance to help you make a decision.
I have a very “advanced” analysis I used when testing my exit strategy…….when I started kicking myself for not using the MTS (which I manually back tested and then used in demo) with my live account I incorporated the strategy.
Fine Tuning your approach based on your goals/psychological makeup
http://www.mercenarytrader.com/wp-co...-true-Holy.png
Although trading psychology probably gets 10% of the attention it deserves, I would say it contributes about 90% or more to your eventual success as a trader. A big part of that is trading a system that “fits” you. For instance, I will never (and could never be) a successful day trader. I even have a short track record to prove it! My emotional make-up simply works poorly with day trading. I don’t perform well at that speed and under those trading conditions.
One of the few trading books I recommend is Trading in the Zone by Mark Douglas. I strongly urge you to read that book along with Market Wizards. If you don’t nail down the trading psychology aspect of your trading, the best system in the world won’t work for you.
Every trader should determine their approach to their system. What I mean by this statement is, from what angle are you approaching your trading? Are you looking for maximum return? Are you looking for minimum risk? Lowest drawdown and smoothest equity curve? Highest win percentage?
You should at least know what you are trying to accomplish with your trading. If historically you have 10% drawdowns it shouldn’t rattle you. If it does, you need to approach the markets from a different perspective – give up some return to get a drawdown level you can handle.
If you are drawn to winning percentage (which in my opinion is irrelevant to trading success), you don’t want to trade with a trend following approach. In fact, I will give you a free high winning percentage system (96%) for free right now – trading any forex pair, when price breaks the highest high of the last 55 days put in a profit target order for 5 pips with a stop loss of 500 pips. You can amaze your friends as you win on 24 out of your first 25 trades, though unfortunately you will be down 380 pips after that last trade. Hopefully my sarcasm is loud and clear regarding actually using such a system.

What % Of Equity Risked Is Right For You

This is a question only you as a trader can answer, and it very well may change over time or due to circumstances. For instance, if your goal is to manage money, you may be surprised to find out that 80% returns are not viewed as necessarily a great thing if you have to incur 30% drawdowns to get there. You are much better off limiting your drawdowns and shooting for less aggressive returns.
The easiest way to make adjustments to your drawdown / equity curve is changing the % risked. Comparing 2% to 1% to ½% risked will roughly have the same affect on the magnitude of your returns and drawdowns over time. Using a simple example, if you risk 1(R) on losing trades and average (2R) on winning trades, and your win percentage is 40% after 5 trades, a one million dollar account would show profits as follows:
– Initial Balance Trade 1 Trade 2 Trade 3 Trade 4 Trade 5
2% $1,000,000 $1,040,000 $1,080,000 $1,060,000 $1,040,000 $1,020,000
1% $1,000,000 $1,020,000 $1,040,000 $1,030,000 $1,020,000 $1,010,000
½% $1,000,000 $1,010,000 $1,020,000 $1,015,000 $1,010,000 $1,005,000
This assumes two winning trades and three losing trades (ignoring fixed fractional betting for this example). Using 2%, our drawdown (peak to trough) is 5.6%. Risking 1% our drawdown is 2.8% and risking ½% our drawdown is 1.4%. Maximum returns after three trades between the three options are doubled vs. halved when going from ½% to 2% as expected (2%, 4% & 8%).
Risking 10% of your account balance might seem enticing, as you would hit a high water mark of $1,400,000 after two trades. But what if your first five trades are losers? You then need to earn a 100% return on your account to get back to break-even – AFTER ONLY FIVE TRADES. This should reinforce the need to limit losses to a small percentage of your capital. That is a lot of ground to make up and you are well behind the eight ball.
Point to Consider

Correlated Markets

If you trade highly correlated markets, from a risk perspective you are doubling your bet (i.e. if you risk 1% per trade you are effectively risking 2%). This works great if it is a winning trade, but if approaching your trading from a risk perspective, you probably want to have limits on correlated markets. Otherwise if you are trading, say, five correlated markets together, you are stepping out side the boundaries of normal risk parameters (5% vs. 1%, etc…)
If you trade correlated markets, another option to consider is using alternate exit strategies for each position. If you are trading the gold and silver ETFs GLD and SLV, for example, you could use a profit target for GLD and a standard trend following exit for SLV, which could reduce your overall risk. You could also simply dial down your risk from 1% each to ½%, thereby keeping your correlated risk to 1% of your account.

Portfolio Allocation

If you are trading 70% of your capital in Equities and 30% of your capital in Forex, you could risk 1% on the Equities portion and 2% on the Forex portion. This allows the Forex portion to have a greater or lesser impact on your results. Alternatively, you could risk 1% on your Equities portion and ½% on the Forex side to limit the effect of Forex on your return. The options are limitless, but you can fine tune your equity curve swings by adjusting your allocation and percentage risked to get to the “sweet spot” you are after.

Diversifying Systems

Using trend following for 30% or less of your capital and the remaining for swing trading is a way to diversify through trading systems. You will enjoy the home runs trend following brings to amp up your total returns from swing trading alone. If you also day trade, you then cover all the bases and overall your equity curve should be much smoother.

Adjusting Risk % Based On Age

As you get closer to retirement or get to the point that you want less of your liquidity at risk in the markets, it is easy to dial down your returns and risk. I have one client that has steadily dialed down their risk % every couple years. Their thought process was that until interest rates (and interest paid by CD’s / Money Market Accounts) were higher, they could simply achieve better returns than .40% and still reduce the magnitude of their drawdowns by simply adjusting down risk percentage.
There are numerous betting strategies that can be employed based on your account balance. A dangerous one that I don’t recommend is increasing your bets after losers or reducing after winning trades. This is too much like the martingale approach gamblers use that can have awful consequences. If you continue to increase your risk % as your capital reduces, you are effectively removing the benefit of fixed fractional betting. As an example, if your $100,000 account suffers drawdowns bringing your account down to $80,000 (and you normally risk 1% of capital), by default fixed fractional will slow the rate at which your lose money ($800 per trade risked vs. $1,000 originally). If you now risk 2% per trade “to catch up” and suffer another five losses, you are accelerating your capital loss.
The only time I believe it is acceptable to increase your risk % is when you have built up profits and you wish to leverage those profits.
If you are losing capital the only sensible choice is to reduce your risk percentage and rate at which you are losing, not potentially speeding up the process.

The Next Big Trend

For any fellow trend traders out there, here is an idea to possibly help with catching the next big move. Pull up a weekly chart for whatever instruments you are covering and look for the tightest consolidation (narrowest range) over the longest period of time. I am not making predictions of guaranteeing the next big trend – as trend followers we don’t do that. I do want to point out that narrow price ranges and long periods of tight consolidation many times lead to monster moves once price breaks from these areas.
If I have two possible entries, but I am limited by capital to only choosing one, 100% of the time I will choose the stock, ETF or forex pair that has had the longest consolidation period and narrowest range of the two. These long bases that form (especially on the weekly charts) seem to have pent up energy when they finally break free.
Executive Summary
Let’s sink our teeth into some actual trade ideas and examples that are sure to help your trend following system (or any system).

1. Initial Stop Loss

I prefer between 1.5 – 3.0 times the ATR for initial stop losses. As mentioned, experiment with back testing on this one to determine how it affects return, drawdown and your equity curve. I have tried lower and higher ranges, but I think if you stick within this area you will save a lot of wasted time.
AVOID trying to select different stop loss ranges for different instruments. If one currency pair, stock, ETF or commodity jumps out “too well” on your back testing I would caution getting excited. It is much more beneficial in real time trading when the parameter you change is applied across a broad range of investments. Don’t back yourself into a corner by fine tuning your parameters to the point you end up making things worse.
http://www.mercenarytrader.com/wp-co...on-217x300.pngOne other idea that has some merit is maximum adverse excursion (MAE) testing, whereby you measure how far the position goes against you before a loss (profit target would not get hit). For example, I knew a few day traders that traded the e-mini S&P and evaluated hundreds (in some cases thousands of trades) to see how far price typically would go against their position before going back and hitting their profit target.
Typically there was a point where once price went past (against their position) it almost never came back. Depending on their profit target it could range from 2 tics to 5 tics of room where they still had a high percentage shot at hitting their profit target. Naturally a few of them adjusted their stops specifically to that tic level as odds were once it fired past that same level price did not come to ever hit their profit level.
You can probably see one potential weakness of such a system – volatility! While this range or tic level may work great during slower markets, it could simply butcher you in more volatile time periods. For this reason I have stuck with ATR, as it takes volatility into account by default. There still may be some merit to using MAE levels as a stop, so I throw this out there for the engineers and other number crunchers to chew on.

1. Entries

I discussed about five ideas that have some merit for improving your entry percentage. I would like to cover one of them on the list as well as an optional entry method to consider.
Weekly Bars
Trading the weekly bars keeps you out of the market more, which is not necessarily a bad thing. It also is pretty good at avoiding whipsaw markets or at least limiting multiple entries (repeat with me “whipsaw”) into the same stock, ETF, or currency pair. Instead of taking a simple break-out entry try the following approach:

1. Use a simple moving average on the weekly chart (20 – 40 days)
2. Only take long signals when above the moving average
3. Only take short signals when below the moving average

Taking positions based on a moving average or crossing moving averages alone leaves much to be desired, BUT if you use it as a filter and then also require a break-out once above the moving average, you have something of value. There are a couple of options here:
1) You could use a standard channel break-out for a long position when above the moving average (say 5-10 weeks/bars) and vice-versa for short positions
2) You could require a swing high/swing low to form and then be broken before taking a position (long if above the moving average/short if below)
Last but not least you could use the weekly bars simply as a filter for your break-outs on the daily chart. For example, you could require there to have been no breakouts of the highs or lows on the weekly chart (say 12 weeks/bars for a parameter) in whatever you are trading. In other words, we are forcing any instrument we trade to have had at least 12 weeks of consolidation with no new highs or lows before taking entries on the DAILY chart.
Moving Average Filter
http://www.mercenarytrader.com/wp-co...ge-300x290.pngA bit less complicated, but also effective as a filter, is to simply put a longer term moving average on your daily chart and require price to be above for long positions and below for short positions. Using a 100 day simple or exponential moving average at least ensures you are going with the overall trend. As boring (and unimpressive) as this sounds, you will probably be surprised by the improvement this one simple step could make with your trading. As always, if you back test with machines, make sure you don’t tailor fit a specific moving average to each instrument. The same moving average should work on the basket of instruments you are trading.
“If you find that going long the SPY using RSI levels above 50 with a filter requirement for price to be above a 32 day exponential moving average ONLY when preceded by two red bars during May – August with average volume above 500,000 shares the one day before the actual day of entry, all you have done is guaranteed a complete failure in live trading.”

1. Profit Targets

Using profit targets is a personal choice. Remember, you will earn less on big moves but you can earn a return on smaller moves that would have been a loss if not using a profit target. If using profit targets you can only use a portion of your total position or you have essentially stopped becoming a trend trader. I would never allocate more than 55% of your total position (and preferably be in the 30 – 45% range) to be taken off with a profit target. You MUST leave a nice chunk of your position for the really big moves,
Only you can determine whether profit targets fit you better. If you can’t handle some erratic drawdowns then you are probably a good candidate for partial position profit targets.
If you ARE going to use profit targets, here are a couple solid ideas for consideration:
1) One simple idea (not invented by me) is to take 50% of your position off when price has moved double the range of your initial stop. If you buy Stock A at $10.00 with a stop of $8.00 (500 shares), you peel off 250 shares when price hits $14.00. If the ATR is $1.00 and you are risking 1%, by default you will be at break-even if you sell half at $14.00. You are risking $1,000, and 250 shares at $14.00 ($4.00 per share profit) is $1,000 profit (equal to your stop loss). Even if price goes back and stops you out you are at break-even.
2) Percentage Stop. You can pick a percentage (say 8 – 12%) of price movement to sell a portion of your position. For a $100 stock, you could sell at 12%, or $112.00 and trail the remaining.

1. Exits – Trailing Stops

I obviously feel exits are a very important component of trend following (and trading in general). To ensure you capture really big trends, you have to use a trailing stop that gives sufficient room for the instrument to breathe. Little moves and reversals cannot take you out of the position. The problem with traditional channel exits is how much in open profits they can give up. Since channel exits only take the time factor into account vs. the magnitude of the move, they have inherent weaknesses.
Here are a few ideas to improve your current exit strategy:
1) Use a stop that is implemented after large moves or volatility
2) Lock in a % of open profits after specific ATR move in your favor
One potential exit strategy is to move your initial stop loss to break-even if any daily bar after entry exceeds the ATR by a specific factor of the last 14 days. For example, say the Eur/Usd pair has average volatility of 200 pips. If the daily range of the bar exceeds the ATR by a factor of 150 to 200% (300-400 pip range bar) you could move your loss to break-even, or under the low of that bar. If your channel stop is below your initial stop or only locking in 20% of open profits, this simple volatility stop can save you a bigger percentage of those open profits.
Alternatively you could have a percentage of open profits stop that gets put in place once price has moved so many factors of ATR in your favor. On a $100 stock with an ATR of $10, you could move your stop to lock in 50% of open profits once it has moved 3 or 5 factors of ATR in your direction. Once the stock gets to $130 or $150 you lock in 50% of your open profits (if higher than your channel stop). You will ALWAYS want some trailing stop not related to volatility or a factor of ATR in place for the move. If price doesn’t get to your ATR level or completes a price range expansion, you still want an exit strategy to get you out of a position.

1. Pyramiding

http://www.mercenarytrader.com/wp-co...ts-281x300.pngThe turtles originally pyramided their positions early on in a trade for a maximum of 4 units on each individual commodity. They also had limits for correlated market groups and net long/short exposure.
To the turtles, one unit represented risking 2% (or whatever % of capital) they used. One unit might represent 4 contracts of Corn but only 1 contract of Gold because of the difference in volatility and the underlying value of the commodity. This normalized all the commodities, as one unit of each commodity (though a different number of actual contracts) would give the same return for each N move in their direction. Corn would equal Gold due to the larger number of contracts. Initial stop loss of course equaled a 2% loss for each commodity.
If you can handle pretty severe drawdowns and equity curve fluctuation then this strategy can really hit some home runs. By accumulating 4 units early on in the trade (the turtles added an additional unit each ½ ATR move in their direction) you have a heavy position if you catch a big trend. If you don’t catch a big move, then obviously you have more at risk than if you had only one unit on in the trade. You don’t actually risk 8% (4 units @ 2%), since each new unit added brings any/all prior stops to the new stop loss. If you had an entry price of $100 on a stock with an initial stop loss of $96 (ATR of $2.00), you would add positions at $101, $102 and $103 thereby getting to a full 4 units. Since we use the last entry for all stops, our current stop loss on ALL positions would be $99.00 ($103 – 2*ATR, or $103 – $4.00). It is easy to see we do not have 8% at risk, despite having four positions/units. Assuming a $100,000 account risking 2%, each unit represents 500 shares (($100,000 * 2% = $2,000; $2,000 / (2*ATR = $4.00) = 500 shares).
Our total cost is as follows:
- 500 @ $100 = $ 50,000
- 500 @ $101 = $ 50,500
- 500 @ $102 = $ 51,000
- 500 @ $103 = $ 51,500
= $ 203,000
You will have to bear with me on the math, as with futures it is possible to add positions due to leverage. With stocks (and assuming your account does not allow leverage), if we had a $100,000 account we could obviously not buy $203,000 worth of shares. Let’s just assume we had enough leverage to accomplish the trade for illustration purposes only. If we are stopped out at $99.00 on all 2,000 shares we get net proceeds (less any commissions of course) of $198,000. This equates to a loss of $5,000, or 5% vs. 8% that you may have expected.
With the leverage allowed in futures it effectively allows you to add positions (as long as you meet margin requirements) for big-time gains. This is much harder (and in many cases impossible) to do with unleveraged stock accounts. I personally do not pyramid, but if you trade commodities this is a very effective technique to earn some outlier type returns.
Final Thoughts
Although I follow a mechanical system, every system has discretion involved. You decide how much you risk per trade, which financial instruments you trade along with countless other decisions (do I pyramid positions, do I adjust bet size, what markets do I trade, etc…). I don’t use discretion once those decisions are made.
If I am risking 1% per trade, I don’t add to my position out of the blue and risk 2% or vice versa. I have reached a comfort level with my system that I don’t monkey with anything.
The only changes I would make are reducing or increasing risk % to serve a purpose. I can dial down or amplify my equity curve/drawdowns and returns to better fit money management guidelines or my own personal guidelines.

Can Anyone Become A Professional Trader?

This is a tough question to answer, because I myself made awful mistakes early on and did not resemble a successful trader by any stretch. Unfortunately some traders never seem to get it and almost have a self-defeating gene kick in the closer they get to success. I think anyone can become better at improving their entry, exit, risk and trade management techniques. I don’t think everyone can get to the mental state required to trade successfully over a long period of time.

Would I Change Anything?

NO! Despite all the errors, poor judgment and obstacles I have faced I can’t imagine I would have made much progress without failing several times. Don’t get me wrong, I didn’t enjoy the process of failing, but I believe I would probably still be taking unnecessary risks on trades if I had not suffered the brutality of those losses years ago.

General Do’s and Don’ts

1. DO always limit risk
2. DO always cut your losses short
3. DO always let your profits run (at least a portion)
4. DO limit correlated markets
5. DO look for ways to fine tune your existing system
6. DO use manual back testing for pattern recognition/visual clues on improvement
7. DO take accountability for all of your actions
8. DO take all of your entry signals

1. DO NOT take losses personally
2. DO NOT over-optimize your back testing
3. DO NOT ever move initial stop losses further from price
4. DO NOT put a heavy reliance on indicators
5. DO NOT let others’ opinions influence your trade management
6. DO NOT trade with risk percentages you cannot handle emotionally
7. DO NOT think you know it all; expect the unexpected

Trading can be one of the most rewarding, as well as challenging, businesses out there. Overall the tools to take part in it are minimal compared to most industries. While you do need initial trading capital, a computer, internet access and a discount broker, this is a far cry from managing employees, tracking inventory, collecting receivables, planning for equipment purchases, keeping the board of directors happy, and a whole host of other requirements for many traditional businesses.
It is kind of a lonely pursuit. By not having a board of directors or shareholders to hold you accountable, it means that no one will stop you from wiping out your account. The organization chart starts and ends with you – the individual trader. This is a blessing and a curse! It takes hard work, perseverance, dedication and a mental toughness far beyond green light / red light nonsense spouted on infomercials. I prefer being brutally honest over sugar coating. The market is a proponent of tough love, not coddling. Treat the markets with the respect they deserve and you will be rewarded!
To your success!!

GLOSSARY

ATR – Average true range. The average true range is a moving average of a stock or futures contract’s “true range” for the day. The true range is the high of the day minus the low of the day, if we pretend that yesterday’s close was part of today’s range. This is a very simple way to estimate the volatility of a stock without using intra-day data or complicated formulas.
Channel High/Low – Highest High or Low of the last N days. For example, a 25 day channel high is the highest high of the last 25 days. Typically used for entry and exit strategies in trend following systems.
Unit(s) – Concept used by infamous turtle traders to normalize moves in commodities of differing values. Each unit represented a position for that specific commodity that put all commodities on an equal playing field with respect to volatility.
Simple Moving Average – A simple, or arithmetic moving average is calculated by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods. Short-term averages respond quickly to changes in the price of the underlying, while long-term averages are slow to react.
Exponential Moving Average – Exponential Moving Average, or EMA, is a type of statistical moving average that is similar to a simple moving average, except that more weight is given to more recent prices or data.
Maximum Adverse Excursion – A historical measurement of the closed losing trades versus the closed profitable trades of a trading system. It is used to determine the stop-loss level that can be used that will allow winning trades to remain; the extreme unfavorable price level reached for both profitable and unprofitable trades.

Once again Bass you have delivered a pot of gold. Excellent recap mate. Much appreciated. :-)

U R Welcome buddy, be good - trade good, i just had a smashing November and December is already signaling a change in trend, dollar weakness, Hmmm... maybe but not for long, remember when Yellen starts raising rates which is already priced in, run for the hills because there is a tsunami coming in and u can not stay at the shore.

Cheers,
B.R.

Am i seeing Crude going to pre crisis level of 30$/Brl or i need to change my pair of glasses.

In my line of thoughts, Suggested to read by the Legend Peter Brandt on twitter :

THE MAN IN THE ARENA CITIZENSHIP IN A REPUBLIC
"The Man In The Arena"

Speech at the Sorbonne
Paris, France April 23, 1910

The Famous Quote It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.

The Full Speech : http://www.theodore-roosevelt.com/im...inthearena.pdf

When trend Following goes well and as planned.

Dennis, Rich


The name "Richard Dennis" evokes many images; few people know them all. There is Dennis the legendary floor trader, Dennis the father of the "turtles", Dennis the systems guru, Dennis of the ill-fated Drexel funds, Dennis the philanthropist, Dennis the political activist, and Dennis the high-flying, industry-leading CTA, among others.

Born to Trade?
Richard Dennis was born and raised in Chicago in close proximity to the futures exchanges he later stalked. He actually began trading before he was old enough to qualify for membership on the floors by wigwagging signals to his father, who stood in the pits doing the actual trading. He landed a job as a runner at 17 at the CME, ventured into the pits a year later, and made his first million at the age of 25. His dedication and work habits were strong even then. "I used to go to bed with a book of charts," he recalls, "and just flip through them before I went to sleep. I wasn't trying to analyze or interpret them, just retain them so that my mind could work on them while I slept." In 1984, having become one of the largest futures traders in the world, he made the now-famous bet with his partner Bill Eckhardt and began the "turtles" training program.

Unlike Eckhardt (and most other savants) Dennis believed that trading could be taught and learned. Eckhardt belonged to the "you're born with it or you're not" camp. Twenty-four students were accepted into the two separate training programs. The results were remarkable - eight "turtles" still actively trade, with several ranking among the top traders in the industry today.

The Drexel Disappointment
Then came 1988. Drexel Burnham Lambert, the junk bond giant, induced Dennis to manage two funds offered and managed by Drexel. At a certain point, these funds were down almost 50%. Dennis recalls: "They came to see me and said, 'What the hell are you doing?' Frankly, I didn't understand the problem. As a floor trader, I had been down more than 50% a few times, but this kind of volatility was obviously something new to the investors. I asked Drexel, 'Didn't anyone tell these people what they were getting into?"

The Drexel episode is often mentioned as a dark period in Dennis's career. The fact was, most investors in these funds had already exited, many with profits. Dismayed by this experience, Dennis announced his retirement, and dedicated himself to philanthropy and political activities. Even so, he maintained his research staff and kept devising new trading systems. "I've gone six months without trading, but I doubt I've gone six days without doing research," Dennis says. "If you don't put the research to work in the real world, it's not much fun," Dennis admits.

By 1994, however, Dennis had become very enthusiastic about the new systems and related concepts his research had produced. Dennis quietly investigated ways of offering his services to outside investors, organized Dennis Trading Group [refer to table] and reentered the asset management arena.

Dennis, with his aggressive strategies and larger-than-life returns, is clearly not for the faint of heart. But for those investors who put their faith (and money) with him once again, the payoff has been remarkable. DTG's compounded annual ROR since inception is approximately 63% through September 1998. For two years in a row, 1995 (+108.9%) and 1996 (+112.7%) DTG has had triple digit returns. For 1998 year to date through September, returns are +57.3% Surprisingly, this performance has been accompanied by a considerably lower level of volatility than most investors had expected. The largest drawdown for the program since its inception in May 1994 was -27.6%, and it took seven consecutive losing months (February through August 1997) for the drawdown to reach this level.

While he describes his drawdown potential at approximately 30%, Dennis estimated the probability of so many consecutive losing months as "almost impossibly low", and promptly dispatched investor concerns with a September 1997 return of 45.9%. Dennis also points out that the drawdown came after a very strong performance, and notes that fewer than 1% of his investors liquidated during this period. The drawdown made 1997 something of an off year, with an annual result of approximately +15%.

So - what distinguishes Dennis's new methodology from what he has done in the past, and why was DTG able to prosper during the first half of 1998 (+40.2%) while so many other well-known CTAs struggled in what was a difficult market environment?

Radically New Trading Methodology
Dennis has evolved a series of trading systems that he describes as markedly different from any of the concepts and methodologies he has employed previously, including the precepts and principles used in the "turtle" training program. One of the most significant changes, however, has less to do with system evolution than a change in basic approach: since January 1995, Dennis has eliminated all discretion from his trading, and relies exclusively on his systems for all trading activities.

"Given what the computer can do today - compared with what it could do only a few years ago - I just can't see how any human could possibly compete on a level field with a well-designed computerized set of systems," Dennis explains. In order to ease any possible client concerns about the new discipline, DTG formed an alliance with Kenmar Advisory Corp. to oversee trading. DTG forwards all trading system signals to Kenmar on a daily basis, and Kenmar then reconciles all trades versus the signals to confirm that all signals were acted upon in correct proportion to the system's indications. Discretion is not permitted, except with respect to the timing of order entry and, in extraordinary circumstances, to reduce risk.

DTG is one of the few CTAs to have combined a series of trend-following and counter-trend trading systems successfully. On average, DTG has between ten and twenty different systems operating at any given time.

Making Things Tick
Dennis sees DTG's real advantage in its constant research. "We are continuously looking for ways to improve our systems. We think system changes and tweaks are essential if you're going to preserve program vigor, otherwise, returns will fall off increasingly over time." Dennis explains.

Dennis employs six full-time programmers/researchers who continuously work on projects ranging from the development of new systems and refinement of current systems to analysis and testing designed to detect signs of performance deterioration. For example, last year the longer-term systems were just not performing well. DTG's research indicated that the market trends had become much shorter in duration, and as a result, some of the longer-term systems were replaced with those of a shorter time frame. This flexibility, DTG believes, is one of the reasons that it has achieved extraordinary results when compared with the performance of other programs.

Another highly significant aspect of the DTG trading program is its success in S&P trading. While most traders have either eliminated the S&P contract completely from their program, or downsized it to extremely small percentages of their overall portfolio, S&P trading makes up approximately 15% of DTG's portfolio. There are currently (although this is subject to change) two systems completely devoted to S&P trading, and these systems both follow a counter-trend approach. This year alone, S&P trading has accounted for a significant portion of total return, perhaps helping to explain DTG's success during a generally poor first half for most CTAs.

DTG continuously monitors individual market performance and allocates capital to individual trades and sectors using a proprietary model that emphasizes uncorrelated positions. The overall program is not only diversified by its use of multiple systems, but also by market and timeframe. DTG currently trades over 90 markets, and new markets are constantly researched and added to the program. Markets are also removed when dictated by research, and just recently, in anticipation of the forthcoming EMU conversion, all EMU-related interest rate contracts were deleted from the program. "It seems likely that these contracts will now trade significantly differently from the past, and since we use historical data to design our trading systems, we don't have much faith in the ability of such systems to trade these markets effectively." Dennis explains.

Examining the quality of data is another Dennis hallmark; for example, he primarily employs market data from 1988 onward, as "the increasing actions and influence of trend-following money changed the way markets behave tremendously," according to Dennis. Finally, in addition to market and system diversification, the system is also designed to take advantage of short-, medium-, and long-term trends, thus diversifying risk over time frames as well.

Why Bother?

One of the questions Dennis is asked most frequently is, "Why are you doing this?" Certainly he has sufficient wealth. His reputation as one of the great traders is secure. His legacy, the "turtles", confirms his unique ability to analyze and demystify market behavior.

Dennis gives several answers to this question. Sometimes he points to his philanthropic activities: "I learned a lot from my earlier involvement, mostly from my mistakes. I'd like to give away a lot more money, hopefully using what I've learned." Sometimes he points to the turtles, and says, "I kept picking up the trade journals and seeing how much money they were managing. I thought, 'I know I'm at least as good as some of these people,' so I decided to give it another try." Finally, he points to his lifelong commitment to research and his desire to apply the results.

Dennis observers offer one more theory about his return to the markets. "This is the greatest trader of all time," says one Dennis insider. "He trades because he loves to, because it's the thing in life he does best."