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Trend Following & Trading of Commodities

I want to share a fascinating conversation I had with a colleague who has been in the field since 2002. He started working in trading of commodities in Asia with a trend following firm who at that time was managing approximately $100 million dollars. Due to a combination of some good years trading in commodities and excellent marketing the firm got to the level in excess of $2 Billion dollars.

As per our discussion what I gleaned was not just the results for trading in commodities but the importance of marketing.

This colleague decided to go out on his own and is in the process of opening a niche short term currency trend following and pattern identification CTA. He told me from a business level, it was a niche to grow a business but has believes and has invested most of his investments in trend following strategies.

Interesting, He has most of his investments in mid to long term trend following strategies and building a niche business with short currency trading. My belief is also mid to long term trend following. I have been trend following since 1994 and investing in CTAs since that period. Regarding trend following strategies you will always go through ugly draw downs that don’t seem to end ( almost like we have experienced up till last month) and then when you least expect it, trades start working & trends appear.

With all the uncertainty & fear in the global markets trends are present ( no one knows how long they will last) in the interest rates, short Euro, short various currencies, long US Dollar, cotton as well as others. I my personal experience the bastions of safety have been trend following strategies during times of volatility and uncertainty. All one has to look at is the results of trend followers in 2007 and 2008. The world was in very bad situation yet trend followers hit double digit returns.

To balance the reality of 2007 and 2008 trend followers had a very rough 2005 & 2006. More so 2009 was negative for most trend followers. This is the reality of trend following. It is not retirement in a box.

I look at trend following results over a 10 or even 15 year period of time. Any month and any year do not mean anything. My goal is to make over 10 years a CAGR of approx 15% on average. This means over 10 years I 4 times my money. Over a 15 year I 8 X my money…This is the goal of trend following. Along the way you go through ugly draw downs and worse; long periods of no profits. You never know when you hit the next equity peak high though.

Most investors do it all wrong. They buy trend following CTAs when they are doing well and sell during the draw downs. I do the opposite. I buy trend following CTAs that under risk when they are in their draw downs. This has worked for me, however the only certainty in trend following is uncertainty.

Look for my upcoming book published by Wiley Books

The Bible of Trend Following

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts, commodity options or forex can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results. You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources.

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