Formal Name: Japan
Local Name: Nihon
Local Formal Name: Nihon Koku
Trend Following in Japan
Kingo Tanaka is one of the most successful traders in Japan. He is the developer of the long-term trend following program Dragon Horse, which earned a 102% return in 2000. Tanaka explains his returns by saying, “I stuck to trend following. It was a common view that trend following did not work in Japanese commodities markets, but that was a conjecture never proven scientifically.” While working at an Asian order desk Tanaka was able to analyze the tendencies of losing traders. He found two common characteristics. One was they tended to trade against market trends and two they used poor money management skills. Applying simple long-term trend following rules, Tanaka was able to develop a system that combated both problems. “I was tired of seeing my customers lose money and get wiped out,” said Tanaka, “I wanted to help.” Dragon Horse is named after the Chinese imaginary animal with a dragon head and horse body and is used to represent an outstanding person.
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Why Tanaka’s Story Matters Beyond Japan
Tanaka’s 2000 result was produced in the same year that NASDAQ fell 39% and most equity-focused strategies suffered catastrophic losses. His 102% return was generated by following trends in Japanese commodity markets at a time when the conventional wisdom in Japan was that trend following did not work in those markets. His response, that this was a conjecture never proven scientifically, is the correct answer to any claim that trend following cannot work in a specific market. The claim requires empirical refutation, not assumption.
The two common characteristics Tanaka observed in losing traders at the Asian order desk, trading against trends and poor money management, are the same two structural failures documented by every practitioner who has analyzed retail trader performance across every market globally. The pattern is not specific to Japan. It is the universal behavioral pattern that emerges when inexperienced traders enter leveraged markets without systematic rules. Trading against trends produces entries at the worst possible times. Poor money management ensures that the losses from those entries cannot be survived long enough for the account to recover.
Japan’s financial markets have produced some of the most significant price trends available to systematic traders over the past four decades. The Nikkei 225’s collapse from 38,957 in December 1989 to 7,054 in March 2009 was one of the longest and largest equity bear markets in financial history. A systematic short position following the Nikkei downtrend through any portion of that 20-year move would have captured extraordinary returns. The Japanese yen’s sustained trends against the US dollar, driven by BOJ policy divergence from the Federal Reserve, have been among the most reliable currency trends in global markets.
Japan is also the home of one of the world’s most significant futures exchanges, the Osaka Exchange (merged with the Tokyo Stock Exchange to form the Japan Exchange Group), which lists Nikkei 225 futures, JGB (Japanese Government Bond) futures, and commodity futures. These instruments are directly accessible to systematic traders worldwide and are core components of diversified global systematic portfolios. The yen’s role as a global safe-haven currency means that Japanese monetary policy decisions produce currency trends that affect markets far beyond Japan’s borders.
Frequently Asked Questions
Who is Kingo Tanaka and what did Dragon Horse prove about trend following in Japan?
Kingo Tanaka is a Japanese trader who developed the Dragon Horse systematic trend following program, which earned a 102% return in 2000. His program proved that trend following worked in Japanese commodity markets despite the conventional wisdom that it did not. His observation that this conventional wisdom was a conjecture never proven scientifically is the correct methodological response to any claim that trend following cannot work in a specific market.
Why are Japan’s financial markets important for global systematic trend following?
Because they produce some of the most significant price trends available to systematic traders. The Nikkei 225’s multi-decade bear market after 1989, the yen’s sustained safe-haven and carry trade dynamics, and Japanese government bond trends driven by BOJ policy all create the large, sustained directional moves that systematic approaches capture. Japan’s markets are directly accessible through Nikkei 225 futures, JGB futures, and USD/JPY currency futures that are core components of diversified systematic portfolios.
What were the two common characteristics Tanaka found in losing traders?
Trading against market trends, and poor money management. These are the same two structural failures documented in retail trader performance studies across all markets globally. Trading against trends produces entries at the worst timing relative to price momentum. Poor money management ensures losses from those entries cannot be survived. Tanaka’s Dragon Horse addressed both by applying simple long-term trend following rules with defined position sizing, the same two-component solution that systematic trend following provides universally.
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