Trend Following: Learn to Make Millions in Up or Down Markets Book

Foreword xiii

Preface xvii

Acknowledgments xxi

Part I 1

1 Trend Following 3

The Market 3

Winning Versus Losing 4

Investor Versus Trader 6

Fundamental Versus Technical 7

Discretionary Versus Mechanical 11

In Plain Sight 12

Change 15

Modus Operandi: Price 17

Follow the Trend 18

Loss 22

Conclusion 23

2 Great Trend Followers 27

David Harding 29

Bill Dunn 32

John W. Henry 45

Ed Seykota 58

Keith Campbell 67

Jerry Parker 71

Salem Abraham 74

Richard Dennis 78

Richard Donchian 85

Jesse Livermore and Dickson Watts 90

Part II 95

3 Performance Data 97

Absolute Returns 98

Fear of Volatility and Confusion with Risk 99

Drawdowns 106

Correlation 111

Zero Sum Nature of the Markets 114

George Soros and Zero Sum 116

4 Big Events, Crashes, and Panics 123

Event #1 2008 Stock Market Bubble and Crash 126

Day-by-Day Analysis 136

Event #2 2000-2002 Stock Market Bubble 138

Event #3 Long-Term Capital Management Collapse 151

Event #4 Asian Contagion 164

Event #5 Barings Bank 168

Event #6 Metallgesellschaft 172

Final Thoughts 175

The Always "New" Coming Storm 178

5 Baseball: Thinking Outside the Batter's Box 181

The Home Run 182

Moneyball and Billy Beane 185

John W. Henry Enters the Game 186

Red Sox 2003-2007 188

Part III 191

6 Human Behavior 193

Prospect Theory 194

Emotional Intelligence: Daniel Goleman 200

Charles Faulkner 201

Ed Seykota's Trading Tribe 202

Curiosity Is the Answer, Not Degrees 204

Commitment to Habitual Success 206

7 Decision Making 211

Occam's Razor 212

Fast and Frugal Decision Making 213

The Innovator's Dilemma 216

Process Versus Outcome 218

8 Science ofTrading 221

Critical Thinking 222

Chaos Theory: Linear Versus Nonlinear 224

Compounding 229

9 Holy Grails 231

Buy and Hold 232

Warren Buffett 234

Losers Average Losers 235

Crash and Panic 238

Analysis Paralysis 241

Final Thoughts 243

Part IV 245

10 Trading Systems 247

Risk, Reward, and Uncertainty 248

Five Questions for a Trading System 253

Your Trading System 265

Frequently Asked Questions 266

11 The Game 277

Slow Acceptance 278

Blame Game 279

Understand the Game 280

Decrease Leverage; Decrease Return 281

Fortune Favors the Bold 282

Afterword 285

Acceptance 285

Inefficient Markets 288

Trend Following Critics 290

Critic Geetesh Bhardwaj 294

Final Thoughts 296

Foreword to the First Edition by Charles Faulkner 299

Appendices 303

Introduction to Appendices 305

A Trend Following for Stocks 307

Does Trend Following Work on Stocks? 307

Short Selling 318

Tax Efficiency 318

The Capitalism Distribution: Observations of Individual Common Stock Returns, 1983-2006 331

Charts 338

B Performance Guide 347

Trend Following Historical Performance Data 347

Abraham Trading Company 347

Campbell & Company, Inc.-Financial Metals & Energy- Large Program 349

Chesapeake Capital Corporation-Diversified Program 352

Clarke Capital Management, Inc.-Millennium Program 354

Drury Capital, Inc.-Diversified Trend Following Program 355

DUNN Capital Management, Inc.-World Monetary Assets 356

Eckhardt Trading Company-Standard Program 359

John W. Henry & Company, Inc.-Financials and Metals Program 361

Millburn Ridgefield Corporation-Diversified Program 363

Rabar Market Research, Inc.-Diversified 366

Sunrise Capital Partners LLC-Expanded Diversified 368

Superfund 370

Transtrend B.V.-Diversified Trend Program-Enhanced Risk (USD) 371

Winton Capital Management Ltd-Diversified Winton Futures Fund 372

Risk Disclaimer 374

C Short-Term Trading 375

D Personality Traits of Successful Traders 377

E Trend Following Models 381

F Trading System Example from Mechanica 385

System Background Information 385

System Details 386

A Canadian Dollar Trade 388

System Performance 389

Summary 392

G Critical Questions for Trading Systems 395

Resources 397

Endnotes 399

Bibliography 423

Index 431