One of the central reasons for why systematic trend following systems work over the long haul is that ‘survivability’ allows them to take full advantage of the power of compounding.
You have heard it all before….but it is worthwhile raising it again as the secret sauce lies in these simple words.
It is the market that determines your fate. If markets don’t trend, then successful trend following systems avoid these conditions or simply stagnate. If markets trend then successful trend following approaches squeeze as much juice as they can out of the trending condition.
Diversification of trend following systems is essential as no one knows the future trajectory of trending conditions. A diversified suite of methods allows for a broad array of different trending conditions. Single systems only capture a single aspect of a trending condition. To succeed in the long term you need system diversification as trends come in many different flavours.
Diversification across non-correlated liquid markets is essential as this increases the timing of the trending condition so somewhere some place one of your markets is delivering superior risk adjusted returns….whereas the other non-trending markets are simply stagnating.
You systems must place their emphasis on risk management and survivability first….to protect your capital at all times. Long term survival combined with a slight edge of positive expectancy is all you need to then let compounding deliver it’s magical effect. If you do not have slight positive expectancy….you may as well choose another profession or hobby as you will not survive and blossom over the long term. You will not see the power of compounding take effect if your systems can only survive say 3-4 years. It is when you can survive over say a 20-50 year horizon that the vast portion of your wealth is created from compounding.
Long term positive expectancy can only be achieved if your system can stand up to all possible market conditions. Simply flourishing during a single market condition is insufficient to achieve wealth building returns. You must be able to endure and prosper across a vast array of different market conditions. Only then can you treat your trading endeavours as an investment approach.
If you are in the trend following game for instantaneous riches….then think again. This is a game that can only be won if you have a long term perspective to your approach. You must be patient and be systematic in your application to achieve this. This approach is ideal if you think in terms of a 30-50 year generational exercise.
……and provided you meet all these conditions……then you might be able to consider yourself a diversified systematic trend follower…..but let’s not get too cocky. 🙂
Below is a video that demonstrates the power of compounding using simple but diversified trend following systems over a 50 year timeframe.
Trade well and prosper
The ATS mob