As we read this Inspiring quotes, know they are the source of inspiration and guide in our times of struggle. We all get stuck at some point of our life at which we require someone to inspire us to move ahead be it Entrepreneurs, Investors, Traders, CEO’s or global leaders. A successful man is one who can lay a firm foundation with the bricks others have thrown at him. The whole secret of a successful life is to find out what is one’s destiny to do, and then do it. Successful people do what unsuccessful people are not willing to do Don’t wish it were easier, wish you were better. Most of the important things in the world have been accomplished by people who have kept on trying when there seemed to be no help at all. Success does not consist in never making mistakes but in never making the same one a second time. Success is not final and failure is not forever: it is the inspiration we to choose that matters most. For me that was probably my peak with Richard Dennis, and had no idea that the CTA business would turn into billions of dollars under management, and big businesses, and so it was not even thought of, and at the time we didn't feel it was necessary. I believe it finished in the beginning of 1988, and everybody sort of went on their own, and traded their own money, or for clients. Dennis and CD commodities is accepting applications for the position of Commodity Future Trader to expand his established group of traders.
One of the things about Turtles were that we were taught that, in order to trade you had to really force yourself to follow the right procedures and the right philosophy in the systems, and not listen to other people, so it was almost like the Turtles, when they left the Richard Dennis program, that we had sort of a chip on our shoulder.
Traders will be paid a percentage of their trading profits and will be allowed a small draw. I had a managed account, $2,000,000, so right out of the box I kind of knew that I should trade smaller. So when I started Chesapeake, I kind of said, well, maybe I should shoot for 20%, and I remember doing those first trades with a lot less leverage and risk, but kind of feeling a little guilty. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world, so you can take your manager due diligence, or investment career to the next level.
The most important thing about my evolution has been, whether it was by instinct, or having computer research, it's always been to become a little bit more longer term. At what stage, would you say, that you started to change the profile of the program, because you were still producing quite extraordinary returns and all the way through to year 2000, which is 13 years of trading, you never had a losing year, and of course 2001 is really only one out of 3 losing years over a 26 year period, so that is in itself an amazing record.
We may not have traded the single stock futures, but I know we started out trading cash stocks, contracts for difference, maybe some options, synthetic futures in the options markets, so we did other things, but once the single stock futures, and once Chicago started, for a long time, we were pretty much the only CTA utilizing those markets.
And I would say that I classify myself as someone who is very flexible, and I would say that I am open minded, but I probably trade the original system philosophy as much as humanly possible.
Only thing next is to get rid of all those bad drawdowns, so I think by trying to minimize the drawdowns, and the bad parts, the parts people don't like about trend following, we ended up getting rid of some of the good parts also. So, essentially, the way I would describe it is, everyone is tempted, most people do it and that is putting things in your systems that essentially cause you to cut your profits short. When I got the job, they would ask us, a few time a year to respond to a question, but every response had to be one sentence. I want to have shorts and participate in many different trends and many different markets as possible.Number two would be the systematic characteristic that it has, I want to back test my rules, I want to make sure that they work, I want to sample size to be thousands of trades, and I want to follow those rules. I don't think it's appropriate to get rid of the systematic approach and trade without the rules or without following those rules.
Everybody desires to trade shorter term, the drawdowns would be less, the pain would be less, but you just need to find that sweet spot to where you can continue to make money. So I think all of the elements of trend following, taking small losses, letting your profits run, using a trailing stock, paying attention only to the market prices, these are all things that are ultimately necessary to have a good risk control approach to these markets.Now, I think that CTAs, and Chesapeake in particular let's say, has taken this amazingly great approach and philosophy and mishandled it in different ways, at different times, and one of those would probably be too much leverage, trading too large.
So I tried to study, how silly is that, to study to better impress them with all my knowledge of trading.
So, if you trade too large, and you have 30% or 40% drawdowns, then the poor client cannot see all of these benefits, and experience those benefits because the leverage was just too much for them to take. If the portfolio gets above a certain level we'll do non-system trades that are more portfolio management type trades. But in a period, like the last 4 or 5 years, where there are not that many big trends, and cutting your profits short, it tended to work, so I don't think it's something you should be doing, but bad ideas can work for a long period of time. But he said, you know what, I'm going to look at all this based upon how well you are following the rules, and so if you are making money, but not following the rules, you also may be fired. So I think that's sort of the problem with evaluating traders on a small sample size, is that bad ideas can seem to work. You know 2005, 2006, and 2007 were not great years for the industry, although you made money through this, and I guess this was one of the times where a lot of people declared trend following dead.
One is we had a really bad period in 2007 that caused us to have a big drawdown, and we reduced our leverage at the exact wrong time, and that sort of fed over into 2008. So in 2007 we were trading particularly aggressive, we got into a bad drawdown, and we reduced our leverage, and then we kept it at that level all throughout 2008 during a very good period of time. So, once again, the leverage that a CTA chooses is so important, and it's going to have impacts on the way you trade and your performance. It's best to have that moderate use of leverage and not get into these bad situations and to keep it sort of constant and choose a leverage that you can keep constant over time. Another thing too is we traded more on the longer term, and our systems under performed in 2008, but they kind of over performed in 2009.
Now the last 4 years you've mentioned a couple of times, and we all know that they have certainly been challenging.
I know we can talk about, which I don't think we need to, that there's been a lot of external manipulation, and-so-on-and-so-forth, but I also recently heard that Larry Hite at ISAM, that they are going back all the way, I think, 800 years or so, and looking at those numbers, that they concluded that this is kind of a normal phase within a bigger picture. Another thing that was kind of interesting, which comes to mind, and I don't know if anyone has ever mentioned this to you, but one of the most fun things that the group ever did was, like once a year, everybody would have an opportunity to go up and trade with Rich for a day, so if you get the impression that we didn't see Rich very much, other than that, it's kind of right.
And I'm sure I'm going to be happy with the way it handles the inevitable reversal, in some of these stocks and in stock markets in general, so as compared to other ways of liquidating those trades. The markets are going to change over time, so these specific set of parameters may have to be adjusted over time.
The same systems that had poor performance, or no performance apply to more normal type trending markets, get much different answers.I think trend following is broken if you trade too short term.
So we were well equipped with training and the mindset that you need to evolve over time and understand how the markets work. That sort of mentoring and foundation that we had far exceeds just me telling you, or someone telling me, here's how you should trade, here are the systems, and here are the parameters.
So it's kind of unspecific to say I take small losses, well what does that mean, because a loss that is too small, you'll continue to be whip sawed, and your percentage of winning trades will be too low. I think at that point in time, in that Turtle room, it was more like I really want to make sure Rich is happy, and I want to make sure that I don't blow this opportunity.
Just because you are willing to trade a system that is 40% when it trades, or less than 50%, doesn't mean you want to be in the 30s or the 20s.
I think the problem with looking at track records is that you can come to a conclusion that you know who the top five traders are, and so the best idea is to hire 20 traders that all look pretty decent and good and have been able to stay in business, and withstand many different environments, but don't for a minute think you can pinpoint who the top five are going to be in the future.
The fact of the matter is that most of these CTAs and trend following systems, they make the same amount of money. It was only when the program ended and I started Chesapeake, that I really had the freedom, and I had to, I had to be my own person, more so, and I had to think about it more, and it was up to me what I wanted to do there was no more having to please Rich, or to have him tell me what I could and couldn't do, and you're on your own, and now my creativity reached an all-time high.
That's our experience, and that's been our research is sort of sharing that every different set of parameters will have better and worse performance over time. In terms of investors in general, most people now-a-days, and certainly in 2014, they don't really appreciate or like the systematic trend following strategies. Constructive comments will be rewarded with 30 days of free access to our premium member area. Now you mentioned that, maybe the experiment didn't foster the result in terms of the Turtles going out and developing their own additions to a large extent, and in your case, that all came later.
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