S1 P5: Why Traders Don't Want 30% Per Year

[This is post #5 of Season 1. You can read last week's post here.]

When we first get into trading, we want the freedom and we want the money.

And then we set out on an adventure to make that happen.

Along the way, something funny happens:

We find a solution--and then toss it aside.

We say we're looking for the truth, and when it knocks on our door we say, "Go away. I'm looking for the truth."

To change our lives, we need our money to make money. Trading can give us that.

To be among the best traders in the world, we need to beat the market. Trend following can give us that.

Trend following has been researched for hundreds of years, and it's been making money and beating the market all that time. As we've mentioned, over decades, trend following returns about 3 times as much as the market does.

In specific, I built trend following robots that I've been tracking for a couple of years now, and the research shows that a basic trend following portfolio of just two currency pairs has averaged about 25% per year for the past ten years.

If we added a third currency pair to that portfolio, research shows it would have averaged about 37% per year.

The market has only averaged about 10% per year.

It begs the question: why doesn't everyone just stop what they're doing and start trend following?

It begs another question: why don't traders want 30% per year?

Here's why: Trend following is hard.

Trend following isn't an automatic ATM. In fact, it does something that traders just won't tolerate: it has losing years.

Even though the market loses and perfect managers like Ray Dalio lose and the magic formula loses, we still demand relentless winning.

And so we have a problem. Trend following has 12-month periods where it doesn't make profit. And everyone hates that.

In the decade that trend following hypothetically would have returned 25-37%, it had two losing years.

But here's the thing. Ray Dalio's famous all-weather asset allocation model is the best in the world. Oops: it has losing years.

The Magic Formula portfolio has beaten the market for decades (according to research and my personal tracking of the system). Guess what? It has down years.

Index Funds are the best investment ever according to the experts. It has BIG losing years.

What's interesting is that someone without "trading knowledge" would happily invest with Dalio or a trend following fund or the market. That person would see his/her portfolio rise beautifully over the years. They would be big winners over the long term doing any of those options.

Yet traders throw out systems that answer all of their problems and do everything they need their money to do.

All because those systems don't win every year.

A wise man once said, "A good plan violently executed now is better than a perfect plan next week."

Trend following is hard and it's definitely not perfect.

But it might be the best answer of all.

 

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