One of the most popular trend followers is actually quitting trend following. Even though he made billions using trend-following, why is he moving away from it? And if an expert is quitting trend following, should you too?

But who is this famous trend follower anyway, and why should you listen to him?

Trend Following means taking trades in the direction where the price is already heading. You know how many people now say that trend following is the easiest thing there is, and anyone can make money with it? Well, that wasn’t the case many years ago. One of the people who made trend following popular by making good returns more consistently was David Harding. If one of the pioneers of trend following is quitting trend following, it’s worth taking a look at his reasons for doing so.

I gathered his reasons from his recent interviews and 15 trading investing lessons that you will find extremely helpful.

Lesson 1.

When David was asked whether the current market conditions have made it more difficult for people to achieve their financial goals and whether they need to adjust their tactics in order to be successful.

His response was that, just like every other industry, many things in the financial markets are evolving again. Some people are struggling to adapt to these changes and may be at risk of consolidation, while others are in a more stable position due to their long-standing reputation and experience. However, he also says that it is important to remain innovative and not become too satisfied with what you are doing, as those who do may face challenges in the financial industry.

When he was asked why his firm moved away from trend-following strategies?

David said that his firm has reduced its trend-following strategy because it has become slower and less effective over time. They attribute this decline in performance to increased competition and crowding in the market, with more people using similar strategies and techniques. As a result, David believes that it has become more difficult to generate substantial returns using this trend-following approach and that it is no longer as lucrative as it once was.

When he was asked whether all trend-following strategies will eventually become less effective and less profitable due to increased competition and the presence of many computers and large amounts of capital in the market?

He said yes, but suggests comparing financial markets to a jungle ecosystem, in which different creatures emerge, thrive, and compete with each other, and the system as a whole evolves over time. To survive and be profitable in the long run, you have to evolve your strategies to adapt to the evolving market. He argues that this is a more realistic model than the idea that markets are not predictable. David expresses scepticism about the belief that perfection can be achieved in financial markets and suggests that a more “messy” model of the world may be more accurate.

When David was asked to talk more about evolution in the financial markets, and if the increased use of algorithm trading is changing the markets in a way that making money is more difficult than before?

He said everything changes. Some things change very slowly. You wouldn’t make money the same way you would have done in the 1980s. Back then, people used a 2 and 20-day moving average crossover system to make some easy money. But that crossover system wouldn’t work now as the market has changed. What doesn’t change is the fact that markets are hard to make money in. The current markets are difficult to make money in the same way they were in the past.

When David was asked what he thinks about using leverage and if his firm uses it any longer?

He said that firm does use leverage in some of its long-short portfolios, but not to the same extent as other firms such as Goldman Sachs, which was rumoured to have been leveraged ten times on some portfolios. The response also suggested that they often receive requests from clients to use more leverage. But David implied that they are more cautious about using leverage for less experienced investors, as they feel a responsibility to protect these clients from potential risks.

When he was asked if there are currently as many profitable, systematic opportunities available in financial markets as there were in the past? And whether he believes that it is still possible to find mispricings or inefficiencies that can be exploited for financial gain.

David responded that he believes that while there may not be as many profitable opportunities available in financial markets as there used to be, the future for people that use advanced mathematical techniques and computational modelling to manage money is still bright. David implies that financial markets will never become fully unpredictable and that there will always be opportunities for the quantitative strategy to make profits. However, he also says that this will be a competitive industry and hopes that there will not be only one winner in this competition. Otherwise, it will be a monopoly where one firm controls most of the market.

When David was asked how he is looking to find profitable opportunities in the current financial markets?

He said that they are currently working on a project focused on agriculture, which may be considered an unlikely area for investment by some. David says that his firm is looking at very long-term strategies and using mathematical methods and time series modelling to analyze data and identify potential investments. They mention that they are studying weather patterns and other factors that could influence the market, and they express hope that they might be able to find evidence of changes in the data that could form the basis of a trading system.

When he was asked about the kinds of strategies he is employing in the stock market?

David said that he is using a variety of strategies in the stock market, including event strategies, strategies focused on how companies are organized and governed, and traditional technical strategies. All of the strategies being employed in the stock market are systematic, meaning that they are based on predetermined rules rather than subjective judgment. David says that the firm’s investment strategies are designed to be run automatically but that the team is responsible for overseeing and managing the program to ensure that it is running correctly. They don’t run the algorithm blindly. They know when to start and stop the algorithm.

When David was asked about his willingness to trust a computer to make investment decisions?

He said that the people who are running the computers need to understand what they are doing, and implies that the computers themselves are not the source of problems or errors, but rather it is the people who programmed them that are responsible. He says that it is important for those who are responsible for managing investment programs to have a clear understanding of how they work and what they are designed to do. Otherwise, letting a computer make investment decisions for you is a recipe for disaster.

When David was asked, since the trend-following strategy that made him successful wasn’t working well, are all trading and investment strategies going to stop working as well?

He replied that they have observed a decline in the effectiveness of trend-following strategies over time and have warned their clients about relying too heavily on them. They have lowered their forecast for the success of these strategies in the future but still, believe that they will be able to make money. Most strategies will become less effective over time. That’s why it is important to innovate and continuously adapt in order to remain successful in this industry. David says that those who do not innovate and adapt will struggle to remain profitable.

When David was asked if the decision to move away from trend following was a risky one since the clients who invested in their firm thought they were getting trend following?

He said, yes, they made a risky decision to shift the focus of their company’s approach to managing capital, as they believed that the trend-following strategy that had been successful for them in the past was no longer as profitable as it had been. They anticipated that some clients may not accept this change and that they would need to earn their confidence again. However, they were relatively successful in retaining assets despite making this change. David is trying to communicate that they are adapting and innovating in order to continue being successful rather than relying on the same strategy that may no longer be as effective.

When he was asked If this shift out of trend following was delivering better returns already?

David said, no, not yet. That’s because the systems that we’re moving into have the same properties as trend following. In other words, they are unpredictable. They’re statistical systems. They can’t forecast when they are going to work. All David can say is that they have the same objective, mathematical, and scientific grounds for believing in the new strategies that they had while using trend following. In other words, they will make money over the long term, just like trend following. David also said that you don’t measure the success of any money manager by how well they are doing this month or last month, or next month. And anyone who’s under that illusion is riding for a fall. It’s a very long-term game. If you stop investing in Warren Buffett’s fund after he has been flat for five years, then you are going to fall in the financial markets.

When David was asked if he had tried to reverse engineer the strategies Jim Simons, another famous hedge fund manager, is using at his fund?

David said when people ask him this question, he says, “Yes, I know how he does it.” Then people ask him, “why don’t you do what he does then”? And he says, “Well, do you know how Roger Federer, a famous tennis player, plays tennis?” Just because you see someone do it is not the same as knowing exactly how it’s done. What people don’t understand is that Jim Simons’ firm is not using one magic formula or one secret data to make money. It doesn’t work like that. They have many years of experience and research data that brings them profits. These statements are so true in today’s internet age. Many beginner traders see a YouTube video of someone making a profit with a strategy and think that they suddenly know everything there is to know about making money in trading. As David said, that will never work as you don’t have the same experience level to make it work. Watching someone play tennis on TV and actually playing tennis are two very different things. To get the same profit results as an experienced trader, you will also have to gain trading experience similar to theirs.

When David was asked if there was a way to prevent negative returns in the market?

He said that it is not really possible to solve this problem, as stock markets naturally experience fluctuations, and trend-following strategies involve taking long positions, which can lead to losses during periods of market downturns. When the stock market has been moving in the upward direction for 3 months straight, you can bet that most trend-trading hedge funds are taking long positions. If the market reverses, they are obviously going to make a loss. There is no way to avoid negative returns in the short term.

When David was asked how confident he was about discovering something totally new in the markets?

He said that he is 100% confident that there will be new discoveries in the future that can generate a lot of profit, but it is difficult to predict what those discoveries will be. He also mentions that applying modern technology to investment markets is a current and profitable business that continues to attract competition and offer opportunities.

Since one of the pioneers of trend-following strategies is moving away from trend-following, should you too?

Are you struggling to make money from trend-following like David? If yes, then sure. If not, then there is no reason to blindly do the same thing. Use your own experience and data to make decisions. That’s how David makes his decisions. As for me, I’m still sticking to trend following as long as my data says it’s good! That’s all!

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