For a long time trend trading was the preferred method of trading the markets by some of the most successful traders that ever lived. These traders were active back in the 60s -70s-80s but nowadays you would be hard pressed to find one of these traders still trading the markets with or without a trend trading system.
Today I want to look at what happened to some of these trend traders and see if the reason they stopped trading was because trend trading itself stopped being profitable.
Who Made Trend Trading Popular ?
The concept of the trend has been around for over 100 years now and since its inception has almost become law that you must follow the trend and the trend is the only way to make money trading the markets.
Trend trading never used to be as popular a trading method as it now. For first 50 years since its creation most people still focused on using fundamentals to trade the markets, anything considered to be technical analysis was shafted by most traders as it didn’t’ make sense with how they believed the markets worked.
This all began to change in the 70s and 80s with the rise of traders who began to use make a lot of money using what they claimed to be technical analysis. One of the main concepts of technical analysis is the idea that once the market has moved in the same direction for a long enough time its more likely to move in the same direction in the future than it is to reverse and move in the other direction. i.e a trend.
Most of the traders who were really successful during the 80s used strategies which were based around the concept of the trend to make large sums of money.
Richard Dennis was one of the biggest trend traders of all time, if you read my article last week you’ll remember I said he turned $400 into $200 million in trading profits over a ten-year period. Dennis was stern believer in following the trend and in the mid 80s actually offered to teach a group of people how to make money trading the markets using an advert placed in a newspaper.
Some of the group who applied went on to make large amounts of money using Dennis trading systems and a few of them eventually split off and started their own trading firm.
Due to the huge return Dennis and his trading group ( known as the turtles ) made trading the markets you’d think he’s still be actively trading today but he isn’t, and nor is the majority of his trading group who were so successful trading back in the 80s.
Dennis first retirement from trading came after he suffered big losses during the 1987 crash. He then returned to trading in the mid 90s with a new firm which eventually had to be closed in 2000 because of more losses.
Now if Dennis who is undoubtedly one of the greatest traders of all time had to stop trading because he kept losing money then what does that tell us about the state of trend trading ?
Dennis isn’t the only trend trader who no longer trades the markets.
John W Henry is another well know trader who made the majority of his money from trend trading.
Henry started his own trading firm back in 1981 after developing a trend trading system which he found to produce positive results.
Like Dennis, John was very successful in trading the markets. Most of his current 2.2 billion fortune was made through trading the markets using his trend trading system. In 2010 he decided to close his firm due to his clients assets shrinking from 2.6 billion in 2006 to only 200 million in 2010. The reason why they decreased by such a large amount is unknown though its likely to be from negative returns or losses.
The point is both Richard Dennis and John Henry no longer trade the markets even though at one time they were some of the most successful traders on the planet. There are countless other examples of trend traders who were hugely successful back in the 60s – 70s and 80s no longer trading the markets, this begs an important question……..
……Did trend trading stop working ?
Why I Think Trend Trading Stopped Working
The reason why I think trend trading stopped working is because so many people started trading with the trend.
All of the success people had with trend trading in the 70s and 80s made people believe it was the most profitable method of trading the markets. The fact there were so many traders who had made substantial amounts of money from trading the trend only added to the people’s belief that they could also make the same kind of returns if they began trading in the direction of the trend.
The education on trading doesn’t help either.
In nearly all technical analysis books the concept of trend is a big focus with the books always stating you need to be trading in the direction of the predominate trend in the market.
All of the people who then go and read these books start trading with the understanding they should always be trading in the direction of the trend. The problem is because so many people started trading with the trend it made it unprofitable to also trade with the trend.
You’ve got to remember, in order for anyone to make money in the market other people must be losing money.
How do you make someone lose money ?
By pushing the price in the opposite direction to which they have placed their trade.
Now if the majority of the traders in the market are all trading in the same direction, it means the only way for someone to make money, is if they cause the market to move in the other direction.
This is why I don’t think trend trading works anymore.
Because so many traders believe in the concept of the trend and will trade in the direction of the trend once they have determined a trend actually exists in the market, it means the banks can’t come into the market and start placing trades in the direction of the trend because there wont be any traders who will lose money if the price moves continues to move in the direction of the trend.
The banks need traders to be losing money in order to make a profit, if most of the traders in the market have placed short trades the banks can’t come in and place their own short trades because they wont make any money. The banks need to change what the trend traders believe about the market direction. They do this by causing retracements and consolidations to occur as what this does is make a large number of trend traders close their trades, which puts more orders into the market the banks can use to place their own trades in the direction of the main trend whilst also making a certain percentage of traders believe a reversal is taking place which also puts more orders into the market in the opposite direction to the trend.
To be honest I don’t think trend trading stopped working so to speak, I think structure of trends changed because of how many people started trading in the direction of the trend. If you go back and look at some of the markets which were trending in the 70s and 80s you’ll see hardly any consolidations or retracements take place. The ones that do come after the market has moved in the same direction for a really substantial amount of time, not like today where we see a consolidation or retracement take place after each big movement occurs.
You know I believe the market always undergoes periods of change where some things stop working and other things start working. Trend trading is one of those things which for a long time was a really good method of making money from the markets but over the years has decreased in its profitability due to the big players devising ways to make the people who trade the trend lose money.
I’m sure trend trading in its most classical sense will return in the future but for now all we can do is adapt and learn how to take advantage of the changes in the market.