Traderman and Trend Following

Usually Traderman writes about his pathetic attempts to find a date or some such stuff. But yesterday was different. He wrote about Trend Following and therefore deserved a mention in my musings today. This is what he wrote. 

"Today was the bestest day ever. I so destroyed my friend... the b**t**d who always calls when he makes money and tries to show me down. You know Diary, how I always complain about the fact that I get the killer retort--the one that would make everybody laugh and that would leave the opponent insulted--- hours after the fight is over? Well not today, No Sir, today was my day. He started it all by discussing systems of trading and told me that he has now developed algos for HFT (High Frequency Trading...for those who are not with it in terms of the latest jargon in the market). That would have been okay you know. Everybody has a right to their opinion (even though I sometimes think that there is also something called too much kindness.... I mean how can even an idiot like him be allowed opinions... but any way ) He spoiled it by telling me that his advice to me, as a friend, was to give up on Trend Following(TF) as TF is dead. He went on to explain that logically there is no way TF can work since it is so easy to buy when the market goes up and sell when the market goes down. Anything simple and easy can be followed by any person (the way he said it made it sound like he meant that it could be followed by even an idiot like me) and as a consequence cannot work because the crowd cannot win all the time and he told me that TF is nothing else but being with the crowd. He then ended with the killer line 'Do you want to be part of the crowd and lose money or learn to swim against the tide and chart your own path?'. You know Diary that he has this annoying habit of mixing his metaphors"                                 

"You know me Diary. Normally I would let this pass. I would have been happy to let him preen since I do not think that it is my responsibility to enlighten every idiot in this world. But today was different. He had questioned whether TF works on the basis of a principle that anything easy cannot work and that TF is simple and I do not take kindly to anyone insulting TF".

"After listening to him speak for 10 minutes...notice that I did not interrupt him even once....I asked him why are you so fat? This stumped him totally. For the first time in 10 minutes he kept quiet. I told him that everybody knows the answer to lose weight. It is very simple. Burn more calories than you eat. So logically there should be no fat people in this world. Despite the simplicity it seems that people find it a very difficult thing to do since there are a lot of fat people in this world. He interrupted me and said that knowing how to lose weight is not the problem. Executing it is. In any case he could not get the connection between TF and weightloss. I explained that eating unhealthy gives one pleasure and to lose weight one has to give up on the pleasure of eating and take the pain of workouts that is take short term pain in order to get the pleasure of better health and looks over the longer term. I told him that the difficulty in this lies in basic human nature. Human Nature follows one simple principle of Pain Avoidance. It is hardwired to avoid pain and most people find it very very difficult to work through the short term pain in order to achieve a longer term pleasure".

"By this time, my friend was getting really angry. He walked directly into trap that I had laid for him. He said that he understood and agreed with all the Pain Avoidance theory but asked me where was the pain in TF? TF was easy and a pleasure to follow. That is when Dear Diary, I got him. I had him where I wanted and I really pressed my advantage. I told him that most TF systems will have more loss making trades than winning trades. In fact even the best TFs have only 40-45% winning trades. That means a TF trader has to accept more losers over the short term in order to make money over the long term! And this brings us to the very "Pain Avoidance" that we agreed was the problem in the weight loss discussion.  This very pain avoidance makes TF, which looks a very easy system but which has more losing trades than winning trades, one of the most difficult to use".

"Then when I had him totally down and out (where I wanted), I landed the sucker punch. I told him that since TF is difficult to use as I so succinctly proved, it follows that anybody who works through the short term pain and sticks to TF over a longer term will necessarily make money. TF is therefore as contrarian a system as the best Value Investing one. My victory was complete. He could not utter a word and hung up. What can I say Dear Diary, I seem to be developing new abilities as I go on in life. I did not know I had it in me to be so brilliant! Maybe I will keep surprising myself with new abilities as time moves on. I cannot wait for me to surprise myself tomorrow!"

He went on in usual Traderman style but the key in the note was the justification of TF. Anyway, I cannot keep writing so I will end this note by reminding you that I am now short and will cut my short position and go long only above 5592.