J. Cody Tafel, CMT - Market Technicians Association

J. Cody Tafel, CMT
J. Cody Tafel, CMT is an Equity Trader for Thompson, Siegel & Walmsley LLC in Richmond VA He is also an Adjunct Instructor of Technical Analysis in the Richmond, VA.
He is also an Adjunct Instructor of Technical Analysis in the
Robins School of Business at the University of Richmond, and serves on the Board of Directors for the MTA Educational Foundation. Cody was previously the Director of Trading for Rapidan Capital LLC and also the C
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Head Trader for Shockoe Capital Partners, a long/short equity hedge fund where he managed proprietary capital and developed systematic trading programs.
Cody studied the Turtle Trading Method with an Original Turtle in 2005, and contributes technical analysis commentary as an online author for the Emmy award‐winning Web site Minyanville. He earned his CMT designation in 2007 and holds a BA in economics from the University of Virginia
and holds a BA in economics from the University of Virginia. Sources
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Market Wizards by Jack Schwager
Market
Wizards by Jack Schwager
Trend Following by Michael Covel
www.trendfollowing.com
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www.turtletrader.com
www.cmegroup.com Webinar by:
Tom O’Donnell
Tom O
Donnell of The Bornhoft
of The Bornhoft Group
www.autumngold.com
The History of Trend Following
The History of Trend Following
In the words of Tom Basso, in the book Trade Your Way to Financial Freedom[1]
“ Let's break down the term Trend Following into its components. The first part is "trend". Every trader needs a trend to make money. If you think about it, no matter what the technique, if there is not a trend after you buy, then you will not be able to sell at higher prices..."Following" is the next part of the term We use this word because trend followers always wait for
part of the term. We use this word because trend followers always wait for the trend to shift first, then "follow" it. ”
The History of Trend Following
Trend following is an investment strategy that tries to take advantage of long‐
term moves that play out in various markets. The strategy aims to work on the market trend
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mechanism and take benefit from both sides of the h
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market, enjoying the profits from the ups and downs of the stock or futures markets. Traders who use this approach can use current market price calculation, moving averages
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cu at o , o g a e ages aand channel breakouts to determine the general d c a e b ea outs to dete
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direction of the market and to generate trade signals. Traders who employ a trend following strategy do not aim to forecast or predict specific price levels; they simply jump on the trend and ride it.
Trend following is most commonly associated with Commodity Trading Advisors as the predominant strategy of technical traders. Dr. Galen Burghardt, an adjunct professor at the University of Chicago's Booth School of Business, researched the relative impact of trend following funds in the CTA business. By tracking a subset of trend following CTAs and comparing that subset then with a broader CTA index (from the period 2000‐2009), Dr. Burghardt measured a correlation of .97 between the two groups, showing measured a correlation of 97 between the two groups showing
how large the impact of trend following is in the CTA business.
The “Father”
The Father of Trend Following
of Trend Following
Richard Davoud Donchian (b. September 1905, Hartford, Connecticut ‐ d. 1993) was an Armenian‐American commodities and futures trader, and pioneer in the field of managed futures.
The first publicly managed futures fund, Futures, Inc., was started in 1949 by Richard Donchian He also developed the trend timing method of futures investing Richard Donchian. He also developed the trend timing
method of futures investing
and introduced the mutual fund concept to the field of money management.
Richard Donchian is considered to be the creator of the managed futures industry and is credited with developing a systematic approach to futures money management. His professional trading career was dedicated to advancing a more conservative approach to futures trading.
Richard Dennis
Richard Dennis
Richard J. Dennis, a commodities speculator once known as the "Prince of the Pit,"[1] was born in Chicago, in January, 1949. In the early 1970s, he borrowed Pit,
was born in Chicago, in January, 1949. In the early 1970s, he borrowed
$1,600 and reportedly made $200 million in about ten years. Dennis profited, as he bought successively new weekly and monthly highs in the trending inflationary markets of the 1970s, an era of repeated crop failures and the "Great Russian Grain Robbery" of 1972, when agents of the Soviet Union
secretly purchased 30% of the U.S. wheat crop in the space of a few weeks. This set the stage for solid sustained price trends in both directions for the next
set the stage for solid, sustained price trends in both directions for the next several years, a period in which "anyone with a simple trend‐following method and a dart board could make a million dollars".
The “Turtles”
The Turtles
Dennis believed that successful trading could be taught. To settle a debate on that point with William Eckhardt, a friend and fellow trader, Dennis recruited and trained 21 men and 2 women in two groups, one from December 1983, and the other from December and 2 women,
in two groups one from December 1983 and the other from December
1984. Dennis trained them, known as Turtles, for only two weeks about a simple trend‐
following system, trading a range of commodities, currencies, and bond markets, buying when prices increased above their recent range, and selling when they fell below their recent range. They were taught to cut position size during losing periods and to pyramid aggressively—up to a third or a half of total exposure, although only 24% of total capital would be exposed at any one time. This type of trading system will generate losses in periods when the market is rangebound often for months at a time and profits during
periods when the market is rangebound, often for months at a time, and profits during large market moves. Then, he gave each of them a million dollars of his own money to manage. When his experiment ended five years later, his Turtles reportedly had earned an aggregate profit of $175 million. The exact system taught to the Turtles by Dennis has b
been published in at least two books and can be back‐tested to check its performance in bl h d
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recent years. The result of such back‐test shows a drastic drop in performance after 1986, and even a flat performance from 1996 to 2009. However, a number of turtles (eg. y
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Jerry Parker of Chesapeake Capital, Liz Cheval of EMC, Paul Rabar) began and continued careers as successful commodity trading managers, using techniques similar, but not identical, to the Turtle System.
Jerry Parker & Chesapeake
Jerry Parker & Chesapeake
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Deliver what you say you will, an Deliver
what you say you will an “Edge”
Edge
Bad Trading = Not Following Rules!
Entry Rule/Exit Rule (12 Systems)
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60% Losing Trades (Preserve Capital)
Making Money, not Predicting the Future
Unit Sizing a Function of Risk Capital
Unit Sizing a Function of Risk Capital
Demand more of the Trend. Uncomfortable.
Hall of Fame
Hall of Fame
Bruce Kovner: Kovner is a trend following trader featured in Jack Schwager's 'Market Wizards.' He was trained by trend follower Michael Marcus. Marcus was trained by Ed Wizards.
He was trained by trend follower Michael Marcus. Marcus was trained by Ed
Seykota. More on Seykota can be found in Trend Following. Kovner is worth over $3.5 billion (source). John W. Henry: Henry is a trend following trader featured in Trend Following and T dC
Trend Commandments. He is worth $840 million (source). He used his trend following d
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gains to buy the Boston Red Sox for $700 million. Bill Dunn: Dunn is a trend following trader featured in Trend Following and Trend Commandments. Dunn made $80 million in 2008 when the rest of the world was $
blowing up. Michael Marcus: Marcus is a trend following trader featured in Jack Schwager's
'Market Wizards.' He turned an initial $30,000 into $80 million (source). David Harding Harding is a trend following trader featured in Trend Following and The David Harding: Harding is a trend following trader featured in Trend Following
and The
Little Book of Trading. He is worth over $670 million (more). Ed Seykota: Seykota is a trend following trader featured in Trend Following and The Little Book of Trading. He turned $5,000 into $15 million over 12 years in his model account (an actual client account). Kenneth Tropin: Trend following trader Tropin made $120 million in 2008 as buy and hold collapsed. Considerations
Price: One of the first rules of trend following is that price is the main concern. Traders may use other indicators showing where price may go next or what it should be but as a general rule these should be disregarded. A trader need only be worried about what the market is doing, not what the market might do. The current price and only the price tells you what the market is doing.
you what the market is doing. Money management: Another decisive factor of trend following is not the timing of the trade or the indicator, but rather the decision of how much to trade over the course of the trend. Ri k
Risk control:
l Cut losses is the rule. This means that during periods of higher market C l
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volatility, the trading size is reduced. During losing periods, positions are reduced and trade size is cut back. The main objective is to preserve capital until more positive price trends reappear. pp
Rules: Trend following should be systematic. Price and time are pivotal at all times. This technique is not based on an analysis of fundamental supply and demand factors. Questions
The trend following strategy answers the questions:
How and when to enter the market.
How and when to enter the market. How many contracts or shares to trade at any time. H
How much money to risk on each trade. h
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How to exit the trade if it becomes unprofitable. How to exit the trade if it becomes profitable. Stats
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Calmar Ratio more applicable than Sharpe?
Calmar
Ratio more applicable than Sharpe?
Winning Percentage & Win/Loss Ratio
Average Profit & Loss
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Average Monthly Return
Percentage of Positive Months
Rate of Return / Max Drawdown > 1
Rate of Return / Max Drawdown > 1
85‐90% system success in different markets
The Benefits of Managed Futures
The Benefits of Managed Futures
Commodities will continue to become a more important piece of institutional
more important piece of institutional investor portfolios. The only question is – Will they implement it correctly? The di
diversification and inflation hedging ifi ti
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attributes associated with commodities are well documented. What the proponents and sponsors of long‐only commodity index products (Goldman Sachs Dow Jones Jim Rogers etc ) fail
Sachs, Dow Jones, Jim Rogers, etc.) fail to mention is the information contained in the following charts:
The Benefits of Managed Futures
The Benefits of Managed Futures
The Benefits of Managed Futures
The Benefits of Managed Futures
The S&P500 declined ‐41.8% from Sep‐08 to Feb‐09.
The
S&P500 declined ‐41 8% from Sep‐08 to Feb‐09 The The
“non‐correlated” long‐only commodities experienced its maximum drawdown, a declined of ‐67.6%, from Jul‐08 to Feb‐09.
to Feb
09. Active CTAs as measured by the CASAM Active CTAs as measured by the CASAM
CISDM CTA Asset Weighted Index were up +10.5% from Sep‐08 to Feb‐09.
The creation of wealth occurs when we convert unrealized gains into realized gains. Buying crude oil in 2008 was a successful trade until it wasn’t.
2008 was a successful trade until it wasn
t. Do you think Do you think
the man on the radio who keeps telling us to buy gold will ever tell us when to sell gold? I doubt it. If he knew the answer to that question he would be a CTA!
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The US Dollar Index
The US Dollar Index
Euro 1.43 & 1.40 Support
Euro 1.43 & 1.40 Support
GBP acting relatively better…
GBP acting relatively better…
But don’tt forget the Long Term!
But don
forget the Long Term!
Although the Euro could outperform again soon…check EURGBP…
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Commodity Currencies Weaker after Significant Outperformance ‐
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Aussie
Head and Shoulders Top in NZDUSD 0.76 Target
Canadian Double Top? 0.97
Canadian Double Top? 0.97
Maybe a different view…
Maybe a different view…
Safe Swissy
Safe Swissy
Yen Carry Unwind since 2007
Yen Carry Unwind since 2007
EURCHF Flight to Safety
EURCHF Flight to Safety
Gold – Secular Bull
Gold Secular Bull
GC High Correlation to US 30 Recently
GC High Correlation to US 30 Recently
US 10 Year Yields Lowest Since 1950’ss
US 10 Year Yields Lowest Since 1950
Got Junk? Credit did not Confirm
Got Junk? Credit did not Confirm
S&P 500
S&P 500
Back to the 50% Retracement
Back to the 50% Retracement
Huge Expansion in Volatility
Huge Expansion in Volatility
Dow 10k Key Last Summer
Dow 10k Key Last Summer
Dr. Copper
Dr. Copper
Silver Silver
Crude Oil
Crude Oil
Natural Gas Spikes
Natural Gas Spikes
NG Bearish 3.3 Target?
NG Bearish 3.3 Target?
RBOB Gas @ 200 Support
RBOB Gas @ 200 Support
Corn – Chop, Trend, Chop, Trend
Corn Chop, Trend, Chop, Trend
Soybeans – Bullish Consolidation
Soybeans Bullish Consolidation
Wheat – 750 Key
Wheat 750 Key
Rice Upside?
Rice Upside?
Cotton – Breakout Acceleration!
Cotton Breakout Acceleration!
Coffee
Sugar
Live Cattle
Live Cattle
It works for Stocks too! Apple
It works for Stocks too! Apple
AAPL since 2002…WOW!
AAPL since 2002…WOW!
Baidu
Netflix
Whole Foods
Whole Foods
Chipotle
Las Vegas Sands
Las Vegas Sands
Bank of America
Bank of America
Bank Index
Bank Index
Equity Curve (12/1/10 to 8/19/11)
Equity Curve (12/1/10 to 8/19/11)
$20,000,000 $18,000,000 $16,000,000 $14,000,000 Series1
$12,000,000 $10,000,000 $8,000,000 0
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