Best of TTU – How ”Slow” Trading Can Be Profitable

Would you believe somebody if they told you they had been very successful in the investment world, by looking at the just markets once a week? Everything, and everyone, seems to be getting increasingly more short-term in their nature, so it seems counter-intuitive that you can run an actively managed trading strategy by only checking for new signals once a week. Nevertheless, this is exactly what Scot Billington and his partners have done.

When I spoke to Scot a while back, he shared some great stories and real-life experiences, that had led him and his partners to this realization, and ultimately, their unique way of implementing a Trend Following approach. I’m excited to share some of these key takeaways with you today. I hope you enjoy this short post, and if you would like to listen to the full conversation, just go to Top Traders Unplugged Episode 25, and also Episode 26.
Will Trend Following work forever?  Is there a risk that the Markets can fundamentally change?
Niels:  It's a slightly different topic than where we started, but I think it's an important one, so I'd like to explore it a little bit. Although you probably know that my bias is also that I think trend following is a highly robust and sustainable strategy. If I was going to take the opposite side of the discussion here, and that is because we obviously hear the argument every time that people say, oh trend following is dead and out comes the veterans of the industry saying, yeah, we've heard this before, and it never comes true, but we also know that decompression or compression of volatility is not great for trend followers and we have to admit, maybe with you as one of the exceptions, but we have to admit that some of the people who have been around for 20 or 30 years have significantly larger drawdowns in the past few years than they have seen in their 30 year career. Some of them have even folded and stopped because they thought it was getting too difficult. The question is, of course, can one always argue and say yeah, sure it's going to come back, it's going to be fine, or is there as you alluded to before, is there always the risk that the markets, or that something has actually fundamentally changed? I'm not saying I'm a strong believer here, I'm just saying..



Scot:  In the midst of any drawdown, that will always be a great and valid question, and I always start by saying look, I don't know the future. I can make my best guess. I can argue vehemently that my guess is very rational, but just because something has worked doesn't mean that it will work forever across any board. We would be out of business long before there was enough physical evidence to suggest that trend following didn't work. If you took the position today that trend following doesn't work, that would be an extraordinarily irrational statement because the empirical evidence before you strongly suggests that it does.

Niels:  Yet a lot of investors take that stand.

Scot:  Of course, they do, but they bought tons of collateralized debt obligations, right?

Niels:  So they did, yeah.

Scot:  I mean hundreds of trillions of dollars of them. They ran models that didn't even have an assumption possibility of a real estate price going down. Again it's easy to pick on things in retrospect, but we also bought lots of Enron stock, didn't we?

'Your largest drawdown is always in front of you... but there will also always be a winning period better than we've ever seen.'

Niels:  But if we talk about evidence and I think we both agree that certain market environments are not good for trend following and certainly compression of volatility is one of them.

Scot:  In our stuff volatility is bad. You want volatility post-trade entry, not pre. So volatility pre-trade entry is bad. Ultimately, volatility tends to increase as a trend increase...