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Trend Following - Trend Following Traders Returns for 2008

Sector rotation and trend following are interrelated parts of most successful trading strategies. As we all know, 2008 was a tough year in the market. But trend following allows you to follow trends down as well as up, so it could be successful in bear markets as well. Here’s a look at a study of trend following returns for 2008.

Trend Following Traders Enjoy Huge Returns in 2008
By Scott A. Cole

Traders whose strategies capitalize on major trends were among the big winners in 2008, as trend followers enjoyed their biggest returns in a number of years. Among these big winners were some big names who have experienced some difficult times in the past five years, including Dunn Capital Management and John W. Henry. Both traders enjoyed strong returns due to the huge moves in currencies, commodities and interest rates.

Also among the big winners were former Turtles Tom Shanks and Elizabeth Cheval, as well as one of their mentors, William Eckhardt.

In keeping a close eye on the commodity and currency markets in the last year, it was obvious to me that the trend followers were having a big year. I found it incredible that many so-called hedge funds were losing money just because the stock market was declining. Isn’t the purpose of a hedge fund to provide a hedge against a declining stock market? Well, an alternative investment utilizing a trend following strategy in the futures markets seems to do a much better job!

Over the holidays, I decided to do some research in regard to how well the trend followers actually performed in 2008 by testing the Turtle trading system. In the past, I have mentioned that it is difficult for smaller capitalized traders to consistently trade this system due to the volatility and the drawdowns. With that in mind, my focus of research was to come up with a smaller portfolio of markets that tend to trend well over time.

Overall, currency markets tend to trend better than stock markets and commodities in the long run. Energy markets also fall into this category, followed by interest rates. Agricultural commodities tend to require significant events such as drought or flooding to produce significant trends. As a result, these markets tend to produce fewer big trends over time.

With this in mind, I settled upon a portfolio of six markets, Crude Oil, Natural Gas, the Swiss Franc, the Japanese Yen, 30 Year Treasury Bonds and the Dollar Index. Keep in mind, there can be some strong correlation at times among these currencies. I would prefer to trade the Euro over the Swiss Franc, but since I wanted to test out the portfolio in years prior to 1999 (the initial year of trading for the Euro), I included the Swiss Franc instead. Furthermore, if the Euro would have been included, the Dollar Index would have been dropped due to the high, inverse correlation between these two currency markets.

For the energy markets, I applied the E-Miny size, due to the volatility of these markets, and since the idea was to see if this portfolio can produce decent returns for the smaller capitalized trader.

The end result is that 2008 was indeed a huge year. By just trading one contract in each of these markets, the gross return (no slippage or commissions included) was over $120,000. You could have traded this portfolio with under $30,000. Unfortunately, this portfolio declined $7,000 in 2007. However, in the last 15 years, the portfolio enjoyed positive returns 10 out of 15 years. With a portfolio size of $30,000, the average annual return was 67% on a gross basis. If you take out the two biggest years, 2008 (over 300% return) and 1995 (over 200% return), you still have an average annual return of 23%.

Keep in mind, however, that the Turtle system was NOT meant to be traded as a 100% mechanical system. It is possible to significantly outperform the system through the use of some other indicators, particularly if you have the ability to trade multiple contracts.

2009 will likely not repeat the same performance as 2008. However, it is notable that the big 1995 performance was followed by two very solid up years.

With this in mind, it will do you a whole lot of good to pay close attention to the original Turtle trading system in the future!

Scott Cole is a trader and analyst experienced in trading stocks, commodities and currency markets. A former hedge fund trader, he owns the website,

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Filed under Sector Rotation

Comments on Trend Following - Trend Following Traders Returns for 2008 »

September 12, 2009

bart eagleston @ 4:12 pm

Are you not following the fidelity equity portfolio any longer, just the sector portfolio? I don’t find it anywhere.

Best Mutual Funds @ 10:44 pm

The number of people following the equity portfolio was under 10% of those following the select portfolio, so we stopped publishing it for lack of interest.

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