Some mistakenly believe that trend following will cease to work if too many people trade as trend followers. We have addressed this question over the years, but decided to approach the issue from a different angle: human nature and the lottery.
Take this CBSNews.com excert for example:
The odds of winning the Powerball lottery are more than 80 million to one, a fact that seems lost on most lottery players. A survey taken last year by the consumer group Consumer Federation of America shows over a quarter of Americans believe the lottery is their best chance at gaining wealth in their lifetime. “Many don’t fully appreciate the odds against their winning the lottery,” said Stephen Brobeck, executive director of the Consumer Federation of America. “Some are not aware of the opportunities for even moderate-income families to save and build wealth.” Opponents of state-sanctioned lotteries believe the problem is much deeper. The deputy director of the Council on Compulsive Gambling of New Jersey calls the lottery a national addiction. “It’s culturally OK and socially acceptable to play the lottery,” said Kevin O’Neill, adding that near-wins are “instant reinforcement” to continue playing.
Look at how many people play a losing game like the lottery and still continue to play, day after day, year after year. The outcome of the purchase of a Lotto ticket is based on objective probabilities, but people still play. What are the odds?
- The odds of winning the California Super Lotto Jackpot are 1 in 18 million.
- If one person purchases 50 Lotto tickets each week, they will win the jackpot about once every 5,000 years.
- If a car gets 25 miles per gallon, and a gallon of gas is bought for every Lotto ticket bought, there will be enough gas for about 750 round trips to the moon before the jackpot is won.
- It is three times more likely for a person driving ten miles to buy a Lotto ticket to be killed in a car accident than to win the jackpot.
You have better chance for the following events to happen long before you ever win the lottery:
- Dealt a royal flush on the opening hand in a poker game (1 in 649,739).
- Killed by terrorists while traveling abroad (1 in 650,000).
- Die from flesh-eating bacteria (1 in 1 million).
- Heart disease caused by eating a steak a week (1 in 48,000).
- Killed by a lightning strike (1 in 30,000).
Trend following trading is different. It requires you to accept an understanding of odds. As long the majority consistently play losing games (like the lottery), the same lack of odds understanding will enable trend followers to keep winning.
One reader posted this:
For example, the Canadian 6/49 Lottery has 6 numbers drawn from a total of 49 balls with the numbers 1 through 49 on them. The probability here is 1 in 13,983,816. Before the first ball with a number on it is drawn, or randomly selected, there are 49 balls in the hopper. The first ball is drawn and put aside. After this first ball is drawn, there is 48 balls in the hopper. After the first two balls are drawn, there is 47 balls, or numbers, remaining. This continues until there are 44 balls remaining in the hopper when the sixth winning number is drawn. The Canadian 6/49 draws a bonus ball, which is drawn from the remaining balls after the sixth number is drawn. This last, or Bonus, number is used to select a second tier winner, and has amounted to more than $693,000.00. The Irish Lotto 6/42 has 6 numbers drawn from a total of 42 balls. This brings the odds down to 1 in 5,245,786. The US PowerBall draws 5 numbers from a total of 45 balls. Then, 1 number is drawn from a separate set of balls numbered from 1 to 42. This little detail makes the odds here 1 in 80,089,128.
Have you thought about your trading with this level of precision? Trend followers do every day.