“There is a clear difference between understanding how to construct a successful strategy and having the ability, drive, and willpower to make it happen in reality. That is the tough part that can never be properly taught.” – Clenow
Clenow begins his third chapter by discussing the returns of some trend following funds. He asks the reader to note the differences in annual returns and how those differences correlate with the differences in maximum drawdown. It is important for us to understand that most trend following systems will react the same way in certain situations, but the amount of risk will determine the magnitude of those reactions.
“Contrary to popular beliefs and widespread myths, trend following is not a terribly complex subject. It is all about waiting for a price to make a move up or down, taking a bet that it will continue in the same direction for a while and sitting on that bet until the price moves enough against you that you conclude that the trend is over.” – Clenow
From here, Clenow touches on some investment strategy topics including: diversification, position sizing, time horizon, risk level, and multiple strategies. It is interesting that he, like many of the Market Wizards, makes a point to state that an investor is far better served to focus on these areas than entry and exit signals.
He also suggests using a position sizing algorithm that accounts for a market’s average true range (ATR). This will allow each position in our portfolio to have a similar impact on the entire portfolio regardless of volatility.
Clenow also spends a significant portion of this chapter explaining the importance of diversification. We need to remember that we are building a robust system that can be traded across many different markets. This is one of the key flaws of my 10/100 Trend Following System.
It looks like the next chapter will get into some detail about specific trend following strategies.