The Legend And The Lore
Perhaps no one in the world of commodity trading has more lore attached to him than the legendary Richard Dennis, the founder, along with William Eckhardt, of the original Turtles and the system they established. Dennis's stunningly successful involvement with mechanical systems came about when he realized that whatever worked for him in his trading could be reduced to and defined as a trading rule. Today, he pretty much eschews the public investment arena, confining himself to an exploration of mechanical trading ideas for personal use. A self-described "computer-illiterate," he nonetheless has worked steadily with a handful of programmers for the last quarter century.
To separate the myth from the man, STOCKS & COMMODITIES contributor Art Collins spoke with Richard Dennis in October 2004 at Yoshi's, a restaurant in Chicago.
How's the current trading environment compared with your high-profile days?
It's 10 times harder than it used to be. It should be. The market's job is to derail the systems traders. Some of them are going to make money, but that can't go on forever.
Because the market is changing more dramatically than it would have 15 or 20 years ago. I think that's because there are a lot more trend-followers involved in the market than before. It's a game where you're forever chasing your tail.
Anticipation doesn't have a lot of place in the mechanical trading world, does it? The adage is that systems react rather than predict, and traders should have no input at all once they're beyond a certain stage.
There's something to be said for the dumb bunny approach of "I'm just looking at numbers." I've done my share of talking myself out of systems that would have worked for years. You pays your money and you takes your chances. But ideas help if you're thinking about what the market is likely to be like two years from now.
Let me give you an example. It seems to be increasingly true that volatility screens are a good idea; the trades with the lowest volatility for trend-following are best. You might decide to push that envelope even further by taking only a quarter of the trades that are the least volatile instead of half. That part wouldn't be based on data, but on your idea that low volatility is good and the rest will be worse.
There's got to be something different about the future. Otherwise, everyone will make money, and we know that can't happen.
Any other reasons behind the change?
People should marvel at the difference between the returns of hedge funds and Commodity Trading Advisors (CTAs). The hedge funds have been much better over the years, with more money, which is a reason they should be worse. It's harder to perform with huge amounts under management. I think it's because hedge funds exploit trend-following systems to a large extent. A lot of the hedge funds are just trading on inside information. They're not trading. They're shooting fish in a barrel.
Think about what we had 20 or 25 years ago. The paradigm was that unknown information seeped into the market and gradually moved price.
You go to a currency market, and there's the same fundamental forces but you also have this tremendous flow of inside information. It isn't unknown inside information, but it's bureaucratic. It's bureaucrats at the Bundesbank telling the hedge fund guys what they're going to do. Now as a trend starts, it explodes immediately so that the trend-followers can't get in until it's over. It isn't slow. It isn't indirect. It's all at once.
System followers see a signal in financials that they think is the same as a soybean signal, but it's not. The structure of the trend changes. Let's face it, if you're running any kind of a fund, 90% of your trades are in interest rates and currencies. It throws all the data of more than 10 to 15 years ago into question because it was generated a different way.
...Continued in the April issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the April 2005 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2005, Technical Analysis, Inc.
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