Tom Basso, Michael Covel: Trend Following Mindset - PursuitOfEdge/books GitHub Wiki

Enjoy the Ride

  • his wife describes his entire life, his hobbies, and living with her as very calm, process
  • "What are my clients going to look like, and how can I provide them with something that I think they will hire me for and keep me o the books for a long period of time?"
  • mentions how CTAs would do 50% in a year, then lose 20%, then 60%, then another 27% down. says these kind of drawdowns are too much for most people to handle. they must be hiring people, firing people, and it must be a chaotic business
  • thanks to a silver trade he missed that ended up being a huge winner, he will never miss an other trade again
  • but there was a time where his portfolio went from $100k to $500k and he was watching silver every day, he felt he was too emotionally attached and cut back
  • #1 is psychology and position size + volatility risk management is a far away #2
  • thinks about how everything just keeps going up in a bad way, post-apocalyptic, and wonders how anyone but the top %1 (profitable traders) will have any idea what to do with their money
  • accepts responsibility for everything that happens so he can control it
  • mentions the best trend trades come with high vola
  • be around for the long term, have a 30 year career like him, then you end up at all the conferences and everyone knows you anyway just because you survived
  • makes fun of short volatility: would be something like selling naked options, you sell them far enough out and vast majority of the time it expires worthless and you make money, then you have Long-Term Capital scenario and it blows up and kills them with the leverage - so he doesn't like mean reversion in general it seems

Q&A with Mr. Serenity

  • Alan Watts
    • "If money was no object, what would you do? How would you manifest your desires? How would you unfold your life?"
    • "How can you structure your life differently, and think about it early on? How do you avoid getting stuck on the treadmill?
  • Tom Basso says the answer is just what he does right now. and if he was given even more money to do more than what he does right now, he'd still just do what he does right now
  • Mentions happiness is a choice, and even if you had all the money, you could still do stuff to stress yourself out and make your life miserable e.g. get divorced 4 times or something, so make the choice today
  • he starts each day with "i can't wait to attack it"
  • exits: trailing stop
  • Ed Seykota's objective when he gets into a trade is that it will go "to the moon", hopes he can be in that trade for life, obviously hasn't happened, but you get the idea
  • scans with some fundamentals too like high dividend yield, PE ratio, would rather buy something a little cheaper than pricey
  • hedges by short selling SPY for short periods of time
  • neutral state: if he has a good day, he thinks of the bad times, if he has a bad day, he thinks of the good times
  • he says the most useful thing in dealing with drawdown is observing the market frequently and asking "did the strategy perform how it was supposed to today?" e.g. if it's a sideways market, we can expect to do not great, but will just wait for the next trend
  • he peels off positions as he goes to keep volatility the same, so he manages risk with both position size % and vola on the overall portfolio
  • he looks at 3 main things: 1. dollars of risk, 2. volatility risk, 3. margin risk. and he does them the exact same e.g. volatility is just ATR(20) then calculate the percentage like you would calculate percent allocation
  • if any risk limits are exceeded, he sells off positions until he gets back to normal
  • you can fixed levels for all of these, and at the initially entry, cause when things are running your way a bit of volatility is fine and actually what you want
  • every position should not be too big, or too small, but meaningful
  • he doesn't believe in walk-forward, in-sample out-of-sample, etc. stuff because it's just a weird concept. he thinks it makes more sense to just look at simple stuff like ATR(20) because it changes every day and is closer to what you'd actually do when trading
  • says that markets have to move, and therefore trend followers will capture that, and in esp with all the fed QE and crazy memes in the future there will certainly be more volatility and prices will move more, so bigger and more trends to capture. trend following will always work
  • has limits for margin-to-equity, volatility-to-equity, risk-to-equity
  • TrendStat was ran at about 1-2% per position for a lot of things, mentions running for him and his wife at a little more than 1%
  • has this thing called "existing controls" when here loosens the risk on a position by about double as it starts moving in the right direction, so it has room to move

Brain Teasers

  • Tom Basso was imagining the worst and doing stoicism before it was cool
  • "If you're not afraid of losing small amounts of money, you're almost invincible"
  • TrendStat win rate ranged from 28%-40%, realistically 36%-37%, averaging around 33%, so he would expect to lose every 2 out of 3 trades and the 1 winner would be bigger than the losses
  • thinks of losing in trading as breathing out, as in people just want to breathe in cause they need air/winning money, but part of the process is breathing out too/losing
  • he's used some of the same strategies since 1984
  • TrendStat's flagship fund: Market Math - 6 diff portfolios that ranged from commodity options, 2 different approaches in currencies, 2 diff in futures, 1 in mutual fund timing, all diff kinds of trend following. some only had a 28% win rate. would rebalance monthly taking allocation from the strong strategies to the weak strategies to create a steady performance e.g. so they would take money out of the equity highs and put more into the ones with drawdown
  • his worst daily loss trading futures a -6% day on oil, in which he thought "huh that's interesting"
  • he analyzed a bunch of CTAs and saw they were pretty correlated, made/lost money at the same time, and more more during high volatility months, made less/lost during low volatility months
  • thought it was kinda nuts that John Henry managed billions of dollars with a -40% maxDD
  • says with the Fed printing money, people are gonna have to average +10%-20% returns just to keep up with at all, which is a daunting task