Trend Following Plus Nothing

Ben Lichtenstein: You have to be able to sit with the winners and let them jostle around a bit ⁓ in order to have a successful trend program. So there's never a claim of the trend beginning or ending. We're not in that business. That's prediction. We're taking small losses, we're doing longs and shorts, so we have some risk control there, and we're not over trading. Everyone knows the trend ended right here, but you stayed in it. I've never been a fan of adding too many things to the trend following to smooth it out. ⁓ Carry trades, short-term, mean reversion, things like that. Hello everyone and welcome to Trend and Turtle Season 1 Episode 3 Trend Following plus Nothing. Last time we were together we talked about how we got here, how Trend and Turtle, the idea to produce the podcast and the desire to educate, inspire and entertain came to fruition. I introduced you to Jerry Parker. We talked about his path from being one of the original turtle traders in 1983 to his success as a trend follower over the last four decades. Today, I to continue to lay the groundwork, the foundation for all the concepts and the topics that we're going to be covering in the coming months. Today, the plan is to define the philosophy before we get into the mechanics. Today is about diving further into the realm of trends and turtles. Ladies and gentlemen, to help us with that, let's bring in Jerry Parker. Jerry, welcome to the podcast. It's good to have you here. Thanks, Ben. I'm glad to be here. Thanks for having me. Absolutely. everyone, I want to remind our listeners the following content. This conversation is about trading history, principles and education. Nothing you hear is investment advice. I mentioned before I brought you in, Jerry, how the focus today is on the philosophy behind trend following and how today's is going to be a jumping point into this realm of trends and turtles. Jerry, you spent decades working in this space. let's cut right to the chase. How do you define trend follow? That's very proper first question, I would have to say. That's what we have to get on the same page. What are we actually talking about? think trend following, nothing's better than the cliché, let profits run and cut losses short. That certainly is the heart of it. It's something I take very seriously. As we build our systems and models, that's a foundational principle that we're going to be very concerned with money management and risk management and keeping those losses small. and not letting them get out of control. And then letting the profits, when we have profits, we're following the trend. trying to, paying attention only to price. And when we get some profits, we're going to let them run, not be nearly as ⁓ conservative and worried about the givebacks and the profits as we would with a losing trade. Small losses, yes, but we're going to give those ⁓ winning trades. a lot more room, a lot more rope to hopefully turn into a large winner. That really is another component too. Trend following is hunting for these outlier trades. Very few of the trades will make all the money and pay for all the small losses. We don't need a lot of them. Maybe 5 or 10 % of the trades will be responsible for their profits. So this is a theory and the philosophy of original, classic, traditional trend following, which I still adhere to. Another big component of trend would be trade lots of different markets and be willing to go long and short with your approach. Certainly systematic ⁓ is a big word where we want to have rules. not just discretionarily buying markets that are in trends, up trends and selling markets that are in downtrends. We're going to have a certain specific set of rules that hopefully we've been able to back test. and figure out if it's ever worked in the past before. No guarantee of the future, but we really want to start on day one is having some confidence that we've at least looked at, analyzed history to the best we could and that the rules we come up with have actually looked like they've performed well historically. That's a lot. That's maybe more than you wanted and there's so much more to go though. No, it is a lot. We're going to talk about some of those specific components quite a bit today and in the coming weeks and months. But before we get into some of the specific components, I'm learning, Jerry, how it's kind of like in this somewhat counterintuitive fashion, the trend following, it's not about forecasting, not about calling tops or bottoms, doesn't really require a strong opinion about the market one way or the other, or how it's really more about responding to what the market's doing, not what you think it will or should do. That's right. We're sort of believing that a lot of good information, ⁓ secret information, secret fundamentals are sort of included in the price. And we're only paying attention to the trends up and down ⁓ and trying not to be overwhelmed by all the confusion and the fundamentals and the news, especially the news. We want to have, it's fine to read about these things and to understand what's going on. ⁓ get an MBA if you want, but trend following should be part of your strategy that only looks at the prices and ⁓ tries to put aside everything else and not allow the ups and downs of the world and the markets to have any impact. We're going to be really disciplined and follow those rules. as you say that a little bit about the Aussie turtles, a couple guys that you do a fair amount of work with ⁓ Adam Havryliv is it and Richard Brennan, they describe trend following in their material, they phrase it a bit differently. But I think the message is really the same. say markets don't reward prediction, they reward alignment. Yes, and we want to get aligned as quickly as possible. And sometimes we might be aligned and then we have to take a small loss only to have to get right back in again. So anything can happen. Everything will happen. There is nothing that... And we want our strategy to be prepared for that. And we want what we call loose pants. We want to have our exit from profitable trades in a way that it ⁓ doesn't... get us in and out of the markets a great deal. So we're going to be more long. I think it's better to be more long-term and try your best to hang in there with these long-term trades that may last one or two or three years even. Don't put your stops too tight, too close necessarily. They also talk a little bit about ⁓ in their book, I remember they were talking about how markets don't reward brilliance, they said, and again, just kind of a different way of wording it, but they don't reward brilliance, they reward persistence. for sure. The discipline and the persistence that it takes to put that trade, the best traders I've seen over the years are ones that no matter what's going on, no matter how much they've had, they're down for the year, how much they've been losing recently, they just do the next trade. And that's the really one of the most important things for all traders and investors is to be, have a set of rules and be consistent and don't give up on those rules too quickly. Just because you're losing money doesn't mean that the rules are bad. They may be bad, but more than likely you've done a good job of backtesting, researching, analyzing the history, the price history of the markets that you're trading and you've come up with a very good trend following system. And now that's just up to us to follow them and not be impacted by... The negativity of losing money. It's a very personal thing sometimes and we have a tendency to give up at the wrong time, actually. I think that's a major problem. Yeah. Persistence is key, especially when you were talking about, again, taking that trade after multiple losses or after getting stopped out and just having to get right back in because the system says to. And on another note- You were talking about those outliers a minute ago. think it's important to also talk real quickly about how they stress the Aussie turtles talk about how it's about being there. They say it's about listening and reacting. Basically, they say the edge isn't in being right. It's in showing up again and again. So you're positioned when the improbable arrives, when these outliers come into play. That's right. You can't predict these markets. You can't predict what's going to occur. If you follow your strategy, that's your best shot usually for being successful and try to minimize or eliminate discretion altogether. But sticking with the rules and applying them and never giving in to the doubt. you know, loving your systems and loving what you've come up with and being dedicated to them. Even when everyone around you is making more money or everyone around you is wondering what are you doing? Why don't you do something different? I think trading can be kind of a lonely business. I don't think it's something that you ever want to desire to have lots of positive feedback on what you're doing. You don't want to walk around and asking people if they like your trades or like your positions. You want kind of ⁓ follow those rules without needing a pat on the back or the benefits that we all get from taking small profits. don't, maybe the system will dictate we exit a trade and it happens to be a small profit, but we don't want that dopamine fix that we'll get if we concentrate on taking small profits. Or the dopamine fix maybe with being in the masses and the numbers sometimes going against the grain is the way to go in trading. found ⁓ I remember an email that I received once from Michael Colvell. ⁓ I'm pretty sure that's who sent this one out, but he was talking about, again, just kind of sticking with this thought process, this, this idea about trying to, was talking about how trend following or classic trend following. was saying it's cutting a loss exactly when your system says to holding a 40 % winner. When every bone in your body screams, sell taking the next trade signal after five straight losses, kind of like what we were just talking about and sticking to your risk management, no matter what he says. Yes, I agree with all of that. I think there could be times where you say, look, I really do need to step aside for a while, make sure I'm not making some mistakes. Maybe I'm trading too large, I'm trading too short term. Things are just not looking ⁓ like I thought they should and to start over or that's fine too. think it's, but most of the time when I've made mistakes, I gotten very upset over current performance, recent performance. ⁓ and tried to make changes that I wish I hadn't have made. Well, hindsight's 20-20, that's for sure. ⁓ And it takes that experience to know it, and learn it, and go through the process to avoid it again the next time, or at least live and learn. Jerry, this is priceless. We're not talking about shortcuts here, secrets. This is an approach that's been studied, practiced for decades. not talking about quick results, we're talking about long-term discipline. And Jerry, this is exactly where I want to be. So I appreciate this. Again, really insightful. Yeah, for sure. We have a lot to go over. A lot to learn about how trend-fobbing works. So sticking with the basics, but zooming out a bit Jerry. You became a turtle in the early 1980s almost 45 years ago. Markets were very different when you started trading for Richard. The technology was different. Information moved a lot slower. Back then, many of the original turtle systems were designed to capture short to more intermediate term trends. That's right. ⁓ The short, maybe even shorter than intermediate, but when we first started, were, I had a maybe one month at the most, on average, one month holding period. then 40 years later, think we feel like, I think most of the industry as well thinks about trading ⁓ longer term holding periods for a year or two because of these changes in the market. So many computers and trend followers and the markets are probably just... ⁓ a little bit more choppy. They'll have a tendency to have trends just like they always have, but maybe it's harder to stay in them if your exits are too close and you don't, I'm not willing to give back more of the profit and suffer more of the volatility. And imagine some of the computerized trading is probably added to some of those big swings, those big volatile swings that can take you out of a position that's still valid actually from a longer term perspective. But let's talk a little bit about how, if we were to fast forward to today, Clearly, you're still a trend follower, suggesting that this approach is endured over time. Talk to us about how your approach personally has changed over the years. ⁓ longer term for sure. mean, in every way. I used to say take small losses. I still say that, but it's really become more of an optimal loss. Not too small, not too many whipsaws getting chopped up into markets with a low win percentage. The win percentage for the best trend following that I've seen is maybe 40%, low 40%. So we want to stay around that area. And the smaller the stop loss, the lower that is going to be the lower that win percentage will be. So we want to sort of on optimal stop loss. then ⁓ like I said, some of these trends, the major trends can last for a year or two or three. So you want to be in there. And part of our job is to come up with parameters and systems that ⁓ tipped to get in the trend, stay in the trend as long as possible, as long as it's still looking good, but not give back too much profit at the very end. We don't want to hold things for one or two years and give back a year's worth of profit before we get out. It can happen, but hopefully not too often. Certainly another big thing that's changed over the years, which I know we'll get into later, is the number of markets, the number of futures markets has increased quite a bit. We'll talk about that in just a second, but just thinking about the process a little bit more. It's interesting because while so much has changed, again, it sounds to me like you're saying that actually a lot has remained the same. And I remember hearing you talk about how it's not so much that the longer stuff suddenly started working, right? I've heard you say before that that longer term stuff actually worked all along. And in some ways, when you looked at it, it worked even better than some of the short term strategies that you guys were implementing in your earlier days of trading. That's at least been my experience. I'm not sure if it's a good case for everyone, but Yes, definitely looking back, longer term stuff, when we replaced the longer term with the shorter term, was not just looking at the past few years or even feeling bad. We thought it was ⁓ that approach, that more patient approach, and that approach that allows you to do less work and enjoy the trends longer. I remember just looking at charts. I don't recommend just looking at charts, but I like to look at charts sometimes to get ideas on how to backtest and use the computers to analyze information and possibly change our systems. But I remember just scrolling through weekly charts for the first time and seeing something I'd never seen before, which is all of these trends pop up. So was sort of getting the short-term stuff for me, but I was getting lost in the weeds. I wasn't seeing the big trends as much as you can in the... weekly charts. So I was very excited about that and excited to see if we could make that work. Yeah, I remember in one of our first sit down sessions, we talked about my personal trading over the last year or so and trying to take advantage in terms of trying to take advantage of some of the trends that I've been following and watching. I was honest with you and I said, look, Jerry, I sometimes fall victim to these more intraday, more short term intraday moves that I try and take advantage of. And you just point blank said, look, you've got to take a step back. You think that I'd be better looking at these longer term trends, pull weekly charts up and look at three years, I think you were saying, or again, these longer term trends. So the philosophy hasn't necessarily changed. The timeframe that you're operating in seems to be more that what's changed. But as you mentioned, it's the number of products as well that you trade. A big part of the evolution has been the diversification. That's right. ⁓ Diversification is so key to build up a good portfolio that will help you with the ups and downs and the choppiness and the volatility of all the different markets we're following. And since we're going to hold those profits and try to play for the bigger gains and allow more volatility and draw down on individual profitable trades, having lots of small positions really could help with being able to enjoy life while we're getting beat up by the markets all the time. So I like trading hundreds and hundreds of markets. Some people don't. It's different opinions on that. that's been one of my goals, is to trade as many commodities and all the currencies and interest rates and stocks that we could find in order to make trend following as good as it could possibly be. And it could be really great if we trade hundreds of markets, if possible. You know, it seems to me like trend following. I've always kind of looked at it as sort of this less is more, back to basics approach, which has endured again over time. These are the rules that you were taught back in the early 1980s, talking again, more than 40 years ago. I'm sure that makes you feel old. I apologize for saying that, but you're talking about decades old approaches and strategies. Obviously they remain a sturdy foundation. And Jerry, you have a phrase, kind of again, getting back to this back to basics sort of. mentality I feel like. I feel like it really captures the simplicity of your approach to participating in trends. You call it trend following plus nothing. Right. I think that that's sort of a funny slogan that I started saying a few years ago. It means different things to me. means ... We're going to, ⁓ trend following only and not try to add other strategies because I think this, I like this strategy the best. It allows me to manage my risk and at the same time give myself an opportunity to make profits. So I really like the approach and I don't want to add things to the trend following. I also don't want to deviate away from traditional trend following. I want to cut those losses short. and treat every trade individually and let the profits run and not take profits on the way up, which is a very tempting thing to do. so I'm a really big fan of keeping trend following traditional and not violating those general principles that I learned 40 years ago. The philosophy is the same, but of course over time you have to adjust and evolve and change parameters and understand how the markets are changing. But hopefully trend following will continue to hunt those outliers and find the outliers that pay for all the losing trades and ⁓ those small losses. Yeah, it reminds me of something we talked about in episode one, how when you use things other than trend, you said to identify entry and exit positions, how Well, oftentimes you can leave a lot on the table when you do so. You leave a lot on the table sometimes just for the way you feel. we want to, it's better for me to isolate my feelings and keep those out of the markets. And I would like to, what I would like to do is have a strategy that makes, you know, 2 % a month, no, no, losing months, but you want to, when you realize that you can't do that, at least I can't do that, then you need to put your faith in finding the best way to trade, sticking to it. and just living with the ups and downs and understanding that it's a long-term game. And preserving capital is the most important thing so you can keep playing this fun long-term game. Okay, so Jerry, let's talk a little bit about when evolution goes too far because we just talked about evolution can be healthy. Research is good. Testing is good. Refinement is good. But at some point, like anything else, I feel like you reach a point of diminishing returns. There's a point where evolution turns into erosion, possibly. Jerry, in episode one, we touched on how classic trend following, the basics of trend following are slowly being eroded. As CTAs add more bells and whistles, we ended last segment talking about trend following plus nothing. And I want to tie those two conversations together because you've also used another phrase over the years. That's trend following plus PhD. Now, by that, you were talking about how some systems, how some trend followers have added additional variables and niceties to try and prevent losses and drawdowns. And if I remember correctly, it was more in the context of how this is kind of over engineering and it has a tendency to shrink the sample size and ultimately weaken the system itself? That can definitely happen. think I've never been a fan of adding too many things to the trend following to smooth it out. ⁓ Carry trades, short term, mean reversion, things like that. ⁓ AI probably is on the agenda now to where trend becomes maybe the most, biggest driver of profits, but ⁓ it's being helped, the drawdowns. It can be focused on the drawdown so much ⁓ that, you want to eliminate that and make it easier for clients to hold on. And I would just be afraid that I would get away from doing ⁓ enough trend following so as to make sure everything stays profitable. So I'm not a fan of adding too much to that. I think it's pretty much impossible for some of the larger firms with staffs, the PhDs, like you said, to stay away from doing that because they just feel like the trend following needs a lot of help to make it palatable for other people. But I think it's better for me to concentrate on delivering a trend following ⁓ product to clients and know exactly what they're getting. You can ⁓ add your trend following, your traditional trend following that does have some volatility and ups and downs. You can add that to ⁓ your stocks, your bonds, all the other things in your portfolio and let trend following be trend following. ⁓ Just like stocks are stocks, bonds are bonds, let trend following be trend following and put it all together with your other assets and ⁓ then you have a more stable portfolio maybe. But going in there and adjusting the trend following and delivering things that is not pure trend following, I really don't have any interest in doing that and I think clients can appreciate the consistency. and the knowledge of they know what's coming and just say, Hey, yeah, I've lived through the ups and downs with all my investments. And there's ups and downs and bad periods with trend following and ⁓ they've come through them. I think they may in the future, no guarantees, but I'm not a big fan of watering down the trend following with ways to essentially not let those profits run because when you let those profits run, They're going to create ups and downs, volatility. ⁓ people like to make money. They just don't like to give any of it back. And you have to be able to sit with the winners and let them jostle around a bit ⁓ in order to have a successful trend program. Yeah, it kind of makes you think, if it's not broke, don't try and fix it, right? Why unnecessarily tinker with something, an approach that has multiple self-regulated components. For example, talk to us about the cutback rule. Well, just to comment on that, I think that they do think it's broke. They do think it's broken. That's why they're trying to fix it. holding onto a winning trade and suffering the volatility we've seen in some of the markets recently, silver, gold, whatever, this is an indication of brokenness. And so I think that trend followers might say, well, That is very uncomfortable. I don't like giving back that profit. If that profit's gone from where it was at the peak, I'm not happy with that. If it goes back to the highs and keeps going, I'm not happy with that either because it's been too volatile and the sharp ratio is not high enough. And I don't think trend really fits with the sharp ratio approach. It's a non-normal distribution of five to 10 % of the markets theoretically producing. the profit for the entire fund over a year period. So this is ⁓ not things we should try to make this better. there's ways we can make it better than the next thing you know, ⁓ we're not doing trend follow it anymore. We're not doing enough of it, in my opinion. ⁓ You mentioned the cutback rule. I think this whole principle is basically, you know, if you're getting into situations that you've defined as critical drawdowns or losing periods, then just feel free to trade smaller. think that's kind of the yin and the yang of it is I've been trading, haven't been making money, I've been losing money. What do I do? I'm trying to follow these rules. Then let's have a rule that allows you to keep following the rules, which is trade smaller. So think that's the genius of, we already have great money management. That's what money management is, tremendously diversified. currencies, commodities, stocks, bonds, hopefully. You can do stocks only or whatever, anything only if you want. Let's just say that that's more of an optimal risk adjusted portfolio. We're taking small losses. We're doing longs and shorts. So we have some risk control there. And we're not over trading. ⁓ That's difficult. Most people are going to start out or even end up over trading, trading too large for their to stay alive or for their personality. So we need to have a rule in there that says, let's just trade smaller. We've gone through this bad period. All of the risk management that we have is still not keeping us from these uncomfortable drawdowns. just not an uncomfortable market action. It's actually uncomfortable. It may be fatal market losses. So let's just use the ultimate rule of trade small. trade a lot smaller and keep doing our, keep following the rules. That's how we're going to dig ourselves out. You yeah, actually for me that there's multiple, and you listed some of them there, appealing aspects of the approach and the psychology behind trend following. You know, I remember listening to, I think it was Alex Greisserman, Greisserman is his name, I think, chief scientist at Managed Futures, a firm, ISAM, as far as I remember. Anyways, he was talking about how one of the nice things about trend following is that the strategy largely risks manages itself, he said. So when there are fewer signals, fewer trends, there's naturally less risk. He talks about how classic trend followers don't add to losing trades, and that's a big part of what gives the approach its staying power or, as he put it, their survival capability. great. I would like to see that video of him because I haven't seen too much of him talking. But yeah, he's great. He's wrote a great book with my friend, Kaminski. And ⁓ all of those are really good points. ⁓ We can do a lot of podcasts together. And at the very last podcast we do, after hundreds and hundreds of podcasts, I'm going to walk away saying, darn it, I forgot to mention that one thing. And so some of those things I should have have mentioned. ⁓ Yeah, that's all really great stuff. Okay, so I want to get back to some of the core principles that we touched on earlier. Jerry, let's start with one of the primary principles of trend following the importance of, as you said, letting winners run and cutting losses short. That's a big part of Yes, definitely. And I think that little touchstones like that, that's what I like to use to build my systems around and do the research. Are we still letting profits run? Are we taking all the trades? We can never miss a trend. We have to have a strategy that gets us in eventually. Not after six months of trading, but maybe after a few weeks of ⁓ trending, we want to be in that market. Yeah, that's very important. Yeah, that kind of gets us back to that evolution phase as well. It reminds me how the turtles had a couple different strategies as far as the entry, right? There was the more short term and then a little bit of a longer term, where if the short term was missed, then as far as I remember, it was mandatory that you got into the bit more longer term. But conceptually, Jerry, now you look at trading in terms of one entry, one stop, one exit. Explain that. Well, I think that's another term I came up with, which just really emphasizes the looking at each one of the markets individually. As if it wasn't even part of a portfolio. We want to have an entry for our British pound, and then we have a stop loss as soon as we know exactly where we're going to get out of that trade. So we have one entry for that. And it could be maybe more than one rule, but we don't want to. ⁓ have too many parameters and rules because it will reduce the number of trades we get to look at, the number of sample size in our back test. So an entry rule is good. Maybe it has a couple components to it and an exit. ⁓ I like to have one exit for sure, not combined exits. We're having an exit that says get out here or get out there. combine two exits, this and this happens, then you can enter. This and this happens, then you can exit. Those are my favorites. It keeps things simple, keeps things robust, and puts an emphasis on counting the historical trades that you've back-tested and being able to say, I've looked at thousands of trades. This is the performance, the average win, the average loss, the win percentage. This is what the theoretical equity curve looked like. I think it keeps... ⁓ keeps that very clean and ⁓ straightforward so you can feel good about the future. And once again, want to leave out traditional trend, sort of leave out rules that would say, hey, how about this really volatile silver market? Can you do something about that? know, hey, look, when the exit gets hit, we'll get out. Before then, we'll just sort of hold on and allow. know, are we going to allow the... ⁓ big outlier trends to pay for the losses. Are we going to allow that or are we going to say, no, we're not really going to sit with some of these long-term trends. We're going to reduce our positions. They're just too volatile. They're just too much of the portfolio now. I used to have a balanced portfolio. Now it's mostly precious metals that are just ruining my day if they're down or I'm really happy at the end of the day if they've been up. I can't handle this any longer. I understand people's desire to do something about that. you should attempt to resist that and see what happens if you just let profits run. Eventually you get used to it and you'll really get used to the increased profits versus the alternatives, in my opinion. imagine that comes a little bit with the experience for one, but just the ability kind of like a fine wine, let it breathe a little bit. Don't be so confined and constraining always and feeling like you have to kind of always do something or change things up. But all this combined, Combined with money management strategies that we're to be discussing in coming weeks creates an environment where as you've put it every trade is treated the same. So no favorites, no exceptions. That's right. ⁓ Well, I have my favorites, but then the next time they'll be really disappoint me. ⁓ This is a strategy that's lasted a long time. It's hard to do. Psychologically, it's difficult. Small profits will turn into losses. Nice profits will turn into small profits or even losses. So you've got to be willing to deal with that because you're sort of handing the reins over to the system. You've tested it, it worked good in the back test. You want to go forward with it. And so you have to let it do its thing. And then living with it on a day-to-day basis is very difficult. But that's what you have to put your faith in is that I looked at lots of decades of data, decades of trades. And I'm in it for the next few decades at least. And I'll be happy at the end of that, that I did all of this. before we get there, I'm going to be really uptight and really unhappy on lots of days. And that's just something that this discipline and persistence and ability to live with probabilities and to have faith in ⁓ your analysis, it's just something that takes time. You have to practice being a disciplined, persistent person. Yeah, these are reoccurring themes I'm hearing. We're talking about simplicity. We're talking about trusting the system. We talk a lot about how these principles are simple, but it sounds like consistently executing them well is the hard part, right? One could argue it's still not as hard as being a successful discretionary trader though, because I remember you talking about how, and I've personally found a lot of difficulty in just discretionary trading. And you talked about how kind of, again, getting back to trusting the system. ⁓ You don't want to have to be that good every day in terms of what's required of a discretionary trader. You'd rather just trust the trend or trust the system and that's what you have with trend filing. You don't have to be exceptional. You just do what the system tells you to do. That's right. I think you want the system to be as good as possible. You want to keep improving it as you learn more. But I think the key is the discipline to do all the trades that you're supposed to do them all and do them the way you're supposed to. I've heard famous traders say, we're going to have an average system. ⁓ that's ⁓ doggedly pursued and the person does all the trades, well, I perform a better system. That's not the person that's not committed to doing all the trades. That's kind of a good thing and a bad thing. It's a great thing if you say, not that great at trading. I don't know how good I'm going to be. I'm not sure how much of a quat I am. You're saying to me, all I have to do is just follow the rules. I think I can do that. ⁓ I said that as well, that I wasn't able to follow the rules for a long time. I was really slow at picking up on how important that was. I told people, I told myself I would do that. But when you put yourself on the firing line, that's when you'll find out, you going to do this perfectly from the very beginning or is it going to take a while? For me, it took a while. Yeah, kind of again, sticking with that systematic or... trusting the system versus trying to take this discretionary approach. I remember, I think his name is Ewan Kirk. He's the head of, is it Cantab Capital? He was talking about discretionary traders and how difficult it is to be one. He says that he's not sure that those who found success in discretionary trading and in a discretionary environment aren't just as he calls them lucky pennies. So ⁓ definitely difficult to do. But yeah, the systematic approach is a different one for sure. a nice thing to feel too that when you've done well with a systematic approach, you can give the credit to the system. If you've done well with discretionary, you just got to wonder, was I lucky? What do I know? What are my principles? I even think that discretionary traders probably have a long set of rules or principles that they follow. But with trend following, it is a systematic approach. It's not just that we have these rules and these philosophies. We're doing every single trade that the system tells us to do, the way the system tells us to do it every single day. It's not just a philosophy or a way of thinking about the markets that will apply somewhat randomly when we hear about a market or we get other reasons we want to participate because we've read something or heard something. No, no, no. We have a fixed universe of markets, ⁓ like a fixed deck of cards, and we're going to apply these rules. And the markets that are not in our portfolio, we're going to ignore, but we're going to play a game with these markets that ⁓ do the trades like we learned from the back test. And we're going to ⁓ expect trends from all of these markets over time. And each market we're expecting to be somewhat of equal, ⁓ equally as good. Equal contributors, what I trying to say. Yeah, an equal contributor to our profits. ⁓ It's a beautiful strategy. Yeah, for me, it was comforting the idea of a fixed basket relative to or compared to constantly cycling some markets in, cycling some markets out and sort of just. a head spinning sort of a dizzying kind of ⁓ aspect or contributing factor to trading. Yeah, I'm not a fan of, ⁓ I ran this screen on the stocks and today I have these stocks because they're doing something earnings wise or fundamentally wise or even technically wise. Now I'm going to take this group and I'm going to see which ones have the strongest trends and I'm going to put that trend on, put that trade on. Yeah, I like the more ⁓ confining, know, we're very confined on what we're going to do. There's not a lot of room for imagination, zero room for imagination. Once we've chosen the system and the portfolio, we're going to take all of those trades. ⁓ If you miss a trade, it's probably going to be the one where that market finally takes off and goes. And so you're going to be really disappointed. If you kick a market out, Don't be surprised that as soon as you kick it out of the portfolio, just because it was losing, that it becomes, it has a good trend as well. So I don't like eliminating ⁓ instruments from the portfolio just due to their lack of profits, you know, from my approach. ⁓ Lots of losing trades in a row, for instance. That's usually another sign that the market's going to get, that that particular market will be, is probably due for a big trend. that reminds me of Coco over a years ago. It's exactly what happened. kind of lulls you to sleep or lulls you into a state of frustration before it rewards the persistence as we talked about earlier. you Okay, so Jerry, I'm starting to understand how as trend followers, we live by the belief that all markets will eventually exhibit trend. And our job is to develop and follow models that efficiently capture those trends. But these models also have to not lose too much money during the periods when markets aren't trending. That's right. It's not that we can guarantee we're attempting. We're trying. We're attempting. We don't think that even with a good back test and even with experience that the future is going to look just like the past. These are just roadmaps. And hopefully ⁓ the markets don't change too much over time because a good back test is going to take a lot of data, decades worth of data. And things can change. But sure, we're just doing the best we can and trying to. Stay out of trouble, try and follow, try to keep us out of trouble with the diversification, long and short, it's the small losses. I remember you also told me at one point, not necessarily in so many words, but you said, one thing that will help me stay out of trouble is just do what the computer tells you to do. Don't listen to the words you were saying, some of the opinions and the commentary that's out there, just follow the system. Yes, definitely. Don't ever listen to the news or the fundamentals. other people's opinions, you know, just follow your own rules. ⁓ Sometimes the other people's opinions will be perfect and you would have wished you would have followed them. But overall, you don't want to have to do that and follow those rules. Even if it looks like the trend is reversing and you're still long and you're not going to exit for a while because your trending stop is far away. ⁓ Don't even pay attention to the chart or your feeling of, I think the trend is over. ⁓ These markets will fool you and turn on a dime when you're doing well and you go home on Friday and markets are at all time highs and you've made all this money. ⁓ Monday could be a really bad day. I've seen it happen many times. And the same way you go home on Friday and things just had a horrible week and all your positions are getting hurt really bad and looks like the trends are ending. only to come the following week and they all ⁓ go right back to trending in your favor and we're off and running again. So you just really have to believe, you're going to tell your clients you've got to follow price, follow trends. You can't predict these markets. You need to believe that as well because we'll be the first ones to stop believing that because we're on the firing line every day, taking the bullet every day of the ups and downs and the complaints. And sometimes it does look really silly. I've had people point out to me and say, look at this chart. Everyone knows the trend ended right here, but you stayed in it. And I stayed in it because my well analyzed back test told me to stay in it. And if I did all those trades the same way over my entire career, I'm to be a lot better off than looking at charts and looking at verbiage. That's to tell me that the trend has probably ended. is the day we're not 100 % trend followers. We're 90 % trend followers. We're 100 % systematic trading. Yeah, I would think there's ⁓ multiple charts that you could pull out as well that show why that strategy and why that approach ⁓ over time has proven, again, to be the correct one. And that ⁓ swaying from that or ⁓ trying to change that up, as we talked about, is premature in many ways. You know, again, these reoccurring themes, Jerry, commitment, trusting the system. You were just talking about never claiming the trend's begun or claiming that a trend's ended. I mean, that's the real goal, right? Right, because we'll trade multiple strategies, know, different timeframes, a shorter term trend system and a little bit longer term trend system. That's another good idea, a way to diversify things, lots of markets, two or three different trend. systems with maybe just different parameters. shorter term gets in quicker, gets out quicker than the longer term. ⁓ So when we get out of the system one, we're not saying the trend is over because we still have system two. The trend, it may be over and system one will have gotten out at a more advantageous position. But just as likely the trend could restart again, system two stayed in, it's longer term, system one has to get back in again. So system. So there's never a claim ⁓ of the trend beginning or ending. We're not in that business. That's prediction. We're in the business of hanging on to these long-term trends and taking small losses has a tendency to work. Like we talked about before in the business of participation. ⁓ You know, as you talk about all this, I'm really looking forward to moving away from the short-term noise, focusing on these longer-term trends. trading fewer opinions, more rules, shifting from discretionary stresses, I like to think of it, to a more systematic structure. I'm really starting to grasp the idea and embrace the idea of how we're not talking about sitting around trading the ES or the NASDAQ on a five-minute candle chart, stressing over every blip or meaningless tick that comes across the screen, or even worse, waiting for a green arrow, red arrow type email to hit your inbox and telling you what position to put on one way or the other. Casting this wide net that we talked about trading a diverse basket of products buying strength selling weakness cutting losses short Everything we talked about you just mentioned again letting winners run doing the hard thing Jerry like we discussed in episode one if you remember Right. It's all about doing the hard thing and been willing to put yourself out there to do the hard thing and understanding that more than likely if we're doing something, it's difficult, not people counterintuitive, the opposite of what the human brain is probably comfortable in doing. And maybe that's the reason it works. And that's the reason it's going to keep working. You know, one of the things that's kind of funny is that I really, there's elements of finance or trading that I've on purpose never understood because I want to keep it out of my brain. It's not trend. It's not what I want to do. So I don't want to understand it. And I might be one of the few people who don't know what candles are. I've seen them on charts and I know it, I think it came from Japan initially, but I never wanted to get into, never wanted to understand what a candlestick really was. I'm totally not interested. I think that's a defense mechanism. I'm not interested in some of these things because what happens if I get interested? This could take me off of my straight and narrow. Yeah, Jerry, in the intro, I was talking about ⁓ Richard Dennis and how that famous saying, right, how he could post his rules in the newspaper and nobody would follow them. And I guess sort of looking back on it, he was probably right. Most people probably wouldn't have followed them because trend following isn't just a strategy. It's not just an approach towards trading markets. It's a commitment. It's a long-term commitment. And in my opinion, many traders only focus on short-term gains. So Jerry, thanks for taking the time to talk to us today. Really appreciate it. ⁓ Join us for Trend and Turtle next time as we explore how systematic traders think about trade entries, the framework behind going long or short. For Jerry and me, we hope you enjoyed the podcast. Look forward to seeing you here next time. Hey, everyone. for joining. Before we sign off, just a quick reminder, today's podcast was intended for educational purposes only and should not be considered investment advice.