4.6% of trades make all the money. Here is what the industry scoreboard pays a manager for catching one.
The Evidence Base:
Over 640,000 daily observations across 68 global futures markets, spanning more than four decades, from September 1984 to July 2026.
One consistent method throughout.
Episode One showed that squaring magnifies the rare, that one day in a hundred carries a fifth of the entire risk number, and that all 68 markets in the global futures complex sit outside the narrow zone where the square is the right tool.
This episode is about what that costs a particular kind of person. Not a theorist. A working manager whose livelihood depends on rare, large, favourable events, graded by an instrument that cannot see them properly.
The measure cannot tell profit from loss
Go back to the square and look at what it throws away.
A day where you made 5%. The distance from the average is positive. Square it, you get a positive number.
A day where you lost 5%. The distance is negative. Square it, you get exactly the same positive number.
The squaring destroys the sign. Once a return enters the risk calculation, the formula cannot know whether the day was the best of your career or the worst.
This is not a bug in one model. It is built into the mathematics itself, and every model that uses standard deviation inherits it.
For most investors that is a curiosity. For a trend follower it is the central fact of professional life.
The bread and butter of an outlier hunter
Trend following does not make money by being right often. It makes money by being wrong cheaply and right enormously.
Before anyone objects to the system, a word about it. We ran a 50-day moving average crossing a 200-day moving average. Buy when the short-term trend crosses above the long-term trend, sell when it crosses below. Positions scaled to recent volatility. No filters, no tuning.
This is 1970s technology and anybody could have run it in 1990. We chose a strawman deliberately. If the argument only worked on a finely tuned proprietary system it would be an argument about that system, and it isn’t. The instrument behaves the same way no matter what you point it at.
The system produced 3,696 trades over 34 years across 68 markets.
It won 38.5% of the time, so it was wrong roughly six times in ten. Winners averaged +11.5%, losers -4.4%, which makes the average win about two and a half times the average loss.
Then we ranked every trade from best to worst and asked where the money actually came from.
The best 170 trades produced 100% of the net profit. That is 4.6% of all trades.
The other 3,526 netted out to zero. More than ninety-five percent of everything the system did across four decades, and it contributed nothing.
The biggest single trade was a long position in the Canadian Dollar held for 1,453 days, close to six calendar years, returning 92.4%. Second, palladium, nearly three years, up 76.7%. Third, London cocoa.
These are the trades that pay for the staff, the losing years, the drawdowns, the retirement.
And every one of them is an outlier, sitting far out at the extreme edge of the distribution. They are precisely the observations that squaring magnifies hardest.
The strawman cuts the wrong way
A careful reader will push back on the system here, and correctly. A moving average crossover is always in the market. It is synthetically long or short every single day, whereas a real trend follower sits flat until a material move breaks out, takes the position, rides it, and returns to flat. That is a genuinely different exposure, and it is fair to ask whether the finding is an artifact of a system that never stands aside.
So we rebuilt the whole analysis on a breakout system: a Donchian channel with a trailing stop, the archetypal “participate only on material moves” design. It sits flat until price breaks a 50-day high or low, rides the trend, and exits on the opposite channel or the stop. This one is genuinely flat 55% of the time, long 25%, short 19%.
The outlier dependence did not soften. It got worse. On the breakout system the best 2.1% of trades produced 100% of the profit, against 4.6% here.
That is the opposite of what the objection assumes, and the reason is worth sitting with. A system that refuses to participate until a move is already underway is more hostage to the rare large trend, not less. It forgoes the small mean-reverting wins that a permanently-invested system collects along the way, so when the accounting is done, an even thinner slice of trades carries everything. Standing aside most of the time concentrates the outcome into the tail rather than spreading it out.
The verdict does not depend on which system you prefer. If anything, the more realistic the trend follower, the sharper the point.
So what happens to a manager who catches one of these?
First, a claim we have to withdraw
There is a story that circulates among trend followers, and we have told a version of it ourselves.
Big winners inflate your volatility. Volatility sits on the bottom of the Sharpe ratio. So the scoreboard punishes you for your best trades, and if you deleted your winners your score would improve.
We tested it on 3,696 real trades. It is false.
Remove the single best trade from each market and the score falls in 68 out of 68 cases. Remove the hundred best days from the portfolio and the Sharpe ratio drops from 0.98 to 0.44.
The reason is simple once you see it. A large gain lifts the top of the ratio, which is a plain average, at the same time as it lifts the bottom, which passes through a square root. The top wins that fight.
Anyone telling you that great trades lower your Sharpe ratio has not run the numbers. We hadn’t either.
The two-cent dollar
The truth is quieter than the myth, and considerably more damaging.
Look at how much the winners help.
October 2008 was the single best month in the entire 34-year history of this system. Trend following at its finest, short almost everything, as the financial world came apart.
That one month delivered 3.4% of all the money the system ever made. One month out of more than four hundred, producing a thirtieth of the lifetime profit.
Its effect on the headline score was to move the Sharpe ratio from 0.914 to 0.931.
An improvement of 1.8%.
Here is why. The same enormous return that made the money also inflated the volatility figure it is being divided by. The bottom of the ratio absorbs almost everything the top is trying to say.
The measure does not reject the outlier. It pays you about two cents on the dollar for it.
The breakout system tells the same story. Its best month, 5.8% of all lifetime profit, moved the score by 2.2%. Different system, same discount.
Spend a career hunting rare, enormous, favourable events, get graded by an instrument that under-credits them by that margin, and you will look ordinary no matter how good you are.
And the ruler moves while you are being measured
Given forty years of data, the volatility estimate settles down well enough. We checked. The trouble is that nobody has forty years.
An allocator considering a fund looks at three. A board reviewing a manager looks at three. An investor deciding whether to pull their money looks at three, often at one. Three years is the window in which nearly every capital decision in this industry gets made.
So we took the system, whose true long-run Sharpe ratio is 0.98, and asked what it would have looked like to somebody judging it over any given three-year stretch.
The measured score ranged from -0.86 to +2.87.
Same system. Same rules. Same code. The only thing that changed was which three years you happened to look at.
17.1% of all three-year windows showed a negative score for a strategy that demonstrably makes money. Roughly one window in six would have told you the manager was destroying value.
27.8% came in below 0.5, which is a common threshold for putting a manager on watch, redeeming, or firing them.
So a sound system spends more than a quarter of its life looking like a failure to the instrument the industry uses to judge it. Three years is nowhere near enough data to pin down a volatility figure in a market where one day in a hundred generates a fifth of the variance.
What this adds up to
The trap has two jaws.
The trades that pay for everything are credited at two cents on the dollar. And the window over which the scoring happens is far too short for the score to mean much, so in any given three-year stretch there is a one-in-six chance it will report that a sound strategy is worthless.
Nobody designed the Sharpe ratio to persecute trend followers. This is just what happens when you measure a process driven by rare extremes with an instrument built for a world that doesn’t have any.
Next, in Episode Three: we leave the manager’s problem and follow the assumption into the machinery. A safety limit meant to break once in a hundred days that breaks nearly twice as often. A bond market so quiet the model authorised sixteen times leverage, days before it took nine percent of the capital.
Richard Brennan writes on systematic trading, complex adaptive markets, and the philosophical foundations of trend following at atstradingsolutions.com. His books include The Fractals of Finance, Complex Adaptive Markets, Carved by Impossibility and The Aussie Turtles Trend Following Guide.
Want to explore why structure exists at all?
Carved by Impossibility: What Remains When Everything Else Is Eliminated
The book explores the architecture of constraint, emergence, and reality itself, and what it means for how we understand markets, life, and the universe.
Available now on Amazon in paperback, hardcover, and Kindle.
Want the theoretical foundation for why trend following works?
The Fractals of Finance: Determinism, Adaptation and the Geometry of Markets bridges complexity science with practical trading implementation. With a foreword by Jerry Parker, original Turtle Trader.
Available now on Amazon in paperback, hardcover, and Kindle.
Want a practical field manual for trading trends and capturing outliers?
The Aussie Turtles Trend Following Guide: A Field Manual for Hunting Outliers adapts the timeless principles of the original Turtle traders into a systematic, rules-based approach for modern markets. Co-authored with Adam Havryliv.
Available now on Amazon in paperback, hardcover, and Kindle.