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Change Doesn’t Change

A recent article by Roger Cass in Fast Company holds important truths for all traders. Cass relates an intensely calming lesson: Change is a vastly overrated concept. Things don’t change, explains Malcolm Tulloch, 50, one of Cass’s colleagues who runs Tulloch Research, a London-based hedge-fund advisory firm. The way Cass sees it, the future only has two tricks up its sleeve: bigger and smaller. Good times alternate with bad times at predictable intervals.

It is a lesson that Cass learned from the writings of a French historian named Fernand Braudel, who conceived the notion of projective history, an oxymoronic way to discern the future by studying the past. According to Braudel, you can learn only so much from change–from the movements of great men, wars, and treaties, from CEO hirings and firings, or from the rise and fall of big companies. The future can’t be found on the front page of today’s newspapers. Rather, the future can be found by looking at what doesn’t change. By studying the eternal truths of history, you can see what has to come next.

Cass, like Braudel, works at a level where things don’t change. He studies in detail the small, permanent features of the economy: interest rates, housing, loans, money, taxes, energy consumption. These things are immortal in economies. They have been around ever since the time of Hammurabi, and they are still around today. Trade is as old as the sea itself. Consumer confidence is an eternal condition. Technology has always existed. Trace the deepest movements of economies, and they will tell the story of how change actually occurs in the economy. The message that economies carry is that change is very rarely new.

Trend Following Connection

Cass is not presenting a trading philosophy per se, but he is speaking about patterns of world events through time. He recognizes a world in flux, directing our attention to the cycles of history. Cass correctly points out that global volatility is nothing new.

If you know the world, indeed, moves in cycles and those cycles can’t be predicted, what course of action can you take to trade for profit? Must you buy and hold forever hoping for straight up growth? No, that is not wise strategy. That strategy does not accept change. There is only one way to gain from unknown cycles or trends. In Cass’ words, if you focus on what doesn’t change, you can see what is genuinely important.

Jim Little of Campbell and Co., from a recent publication, offers wisdom from a trend following perspective:

Our trend-following methods do not pretend to determine the value of what we are trading, nor do they determine what that value ought to be, but they do produce absolute returns fairly consistently.”

He is also quick to note that there are several other ways to extract returns trading futures. “But trend-following is one of the better ways.” Over its 31 years as a trading advisor, Campbell has achieved an aggregate annual return of 18.1%, which compares most favorably with returns in all other asset classes or trading methods. In general, a pretty typical statistic for trend-followers is 60% losing trades, 40% profitable trades. Over longer periods of time, winning and losing trades are usually interspersed, says Little. “Say, for example, on the 60%, you lose 1% of your capital, but on the 40% winning trades you make 2%.” Over longer periods of time, say a year or more, this would net 20% on a broadly diversified program.

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