Why We Don't Believe: Trend Following Skeptics

Stanford University psychologist Leon Festinger (PDF) once said:

"A man with a conviction is a hard man to change. Tell him you disagree and he turns away. Show him facts or figures and he questions your sources. Appeal to logic and he fails to see your point."

That explains succinctly why so many refuse to adopt trend following thinking. I have written four books on trend following. I directed a film on trend following. However, skepticism for some is deep-seated. Why? Consider one explanation:

"It would seem that expecting people to be convinced by the facts flies in the face of, you know, the facts. The theory of motivated reasoning builds on a key insight of modern neuroscience: Reasoning is actually suffused with emotion (or what researchers often call 'affect'). Not only are the two inseparable, but our positive or negative feelings about people, things, and ideas arise much more rapidly than our conscious thoughts, in a matter of milliseconds—fast enough to detect with an EEG device, but long before we're aware of it. That shouldn't be surprising: Evolution required us to react very quickly to stimuli in our environment. It's a 'basic human survival skill,' explains political scientist Arthur Lupia of the University of Michigan. We push threatening information away; we pull friendly information close. We apply fight-or-flight reflexes not only to predators, but to data itself. We apply fight-or-flight reflexes not only to predators, but to data itself. We're not driven only by emotions, of course—we also reason, deliberate. But reasoning comes later, works slower—and even then, it doesn't take place in an emotional vacuum. Rather, our quick-fire emotions can set us on a course of thinking that's highly biased, especially on topics we care a great deal about. Consider a person who has heard about a scientific discovery that deeply challenges her belief in divine creation—a new hominid, say, that confirms our evolutionary origins. What happens next, explains political scientist Charles Taber of Stony Brook University, is a subconscious negative response to the new information—and that response, in turn, guides the type of memories and associations formed in the conscious mind. 'They retrieve thoughts that are consistent with their previous beliefs,' says Taber, 'and that will lead them to build an argument and challenge what they're hearing.' In other words, when we think we're reasoning, we may instead be rationalizing. Or to use an analogy offered by University of Virginia psychologist Jonathan Haidt: We may think we're being scientists, but we're actually being lawyers. Our 'reasoning' is a means to a predetermined end—winning our 'case' and is shot through with biases. They include 'confirmation bias,' in which we give greater heed to evidence and arguments that bolster our beliefs, and 'disconfirmation bias,' in which we expend disproportionate energy trying to debunk or refute views and arguments that we find uncongenial."

Why will the majority never trade like a trend following trader? That is one major reason. Think about it. Here is one more example:

"Some people see the signs. Others do not. Some decide to get out while the getting is good. Others do not. Incident by incident, trigger point by trigger point, people see signs. Most people ignore them. 'It can't happen here.' Most times it doesn't. Sometimes it does."

Exactly.

Note: sources.

Bring on the Criticism

Mutual funds, brokers, financial news, big banks, and 23-year-old AP finance writers fresh out of journalism school, the ones who literally make up the fundamental news and predictions daily, have all been a massive sham, wittingly or unwittingly. To say that puts a .30-06 bullseye figuratively between my eyes. Provoke reactions is just part of my job. Here are some critiques:

• The [trend following] field is marked by unsubstantiated claims of success; a track record of failure and associated rationalizations; a lack of peer reviewed studies showing any positive results; and a collection of logical, mathematical and statistical fallacies. Although there are plenty of technical traders having success, there is no evidence that they are anything more than statistical artifact and the hidden use of standard, subjective, fundamental analysis. Technical traders fail to realize that the market would quickly overwhelm any truly successful system, rendering it useless.
• [Covel's] book does not say how to be a trend follower, or how the average person can buy commodities, FX, futures etc., the markets trend followers use. I hate books that promote stuff, but then don't actually tell you anything or how to do it.
• Trend following is one of the stock market's biggest cons, I would even go so far to compare the concept to a cult like Scientology. I get the same sort of value from Trend following as I do from supernatural operators such as Uri Geller and horoscope readers.
• There were no specifics. No rocks to cling on to. If you want to discover trend following techniques then look elsewhere.
• [Trend Following] has no substance. Lots of historic data to show trend following does exist, some people make money doing it, but no more! It has zero information on how to do it.
• You'll find in [Covel's] books a kind of anti-intellectualism shared by many blind-faith religious people.
• BEWARE: Covel had an agenda when he wrote [The Complete TurtleTrader].
• Rather than impartially presenting the evidence, like any good evangelical sectarian blind-faither, [Covel] pitches the story as one of competition between two mutually incompatible doctrines.
• Examining only price action is clearly a kind of primitive attempt. The analogy I think of is in trying to explain the movement of oceanic water. Examining nothing other than the surface phenomena of price action is analogous to looking at surface wave movements only[md]where the wind explains some part of the movement. Now what might really be moving bodies of water requires a fundamental model--for example, how gravity, the moon, ocean floor structure, temperature might explain the movement of oceanic water mass.
• [Covel's] documentary [Broke: The New American Dream] does not address the saps who haven't been drawn the cards on the table to put them in the game of risk and luck depicted here. It presumes that millions of other dwellers beyond the devastated areas have sufficient income to generate their American Dream. It begs you to have the mental aptitude of a Houdini. It wants us to believe that life has affordable risks if we have the instincts of a poker player; whereas, until the 70's, the American Dream was guaranteed by an education, solid marriage and sound character. Here, you only require the predatory instincts of a roving gambler. Welcome to West World, by gummy!
• [Covel] there is no contradiction between being a chartist, an Elliottician, and a trend follower. I consider myself all of the above, as well as a fundamentalist.

One of the most useful criticisms that you can use to further your understanding centers on prediction. Trend followers, as shown throughout Trend Commandments, do not predict a market's timing or direction. Trend followers react to market movements. It is critical distinction best seen in the words of trend follower Bill Dunn:

"We don't make market predictions. We just ride the bucking bronco."

One critic could not wrap his arms around that idea. He yelled and he beat his chest in argument for quite a long time. However, you need to judge whether Bill Dunn, a man with a 35-year performance track record, and who has made hundreds of millions in profit as a trend following trader, is wrong with his no prediction wisdom or whether my critic, who works as a massage therapist, is right with his trend followers do predict wisdom. However, even after the last decade of market tumult, the media still push the prediction party line:

"The markets may be rational after all. The threat of severe nuclear contamination from a breached Japanese nuclear reactor still looms. The outcome of the escalating war in Libya is uncertain. Yet The Standard & Poor's 500 index ended the week up 2.7 percent. The Dow Jones industrial average rose 3.1 percent. So what happened to all that headline-driven volatility from two weeks ago? If you look at historical patterns, this week's rebound isn't so surprising. The numbers suggest stocks will likely keep rising for the next few months."

It is guaranteed that if you think you can forecast the future, you will lose your shirt betting on those predictions. Some will never know any better and will most likely say the same things about this book, too. Now I could very easily avoid criticism, do nothing, say nothing, and be nothing, but quitting is not in my DNA.

However, criticism is important and often invigorating for many reasons:

• You are on the right track when a target appears on your back.
• Making a sizable dent in public thought brings detractors and saboteurs. It's part of doing business.
• Trying to get everyone to like you is mediocrity.
• You are going to be criticized if you play small or play big. Might as well play big. Criticism will come either way.
• History does not remember those who pretend to be neutral. Picking sides, choosing those you want to be associated with, and sticking with your true beliefs, is all that counts.
• Speaking out on issues, that others are too afraid to speak against, will draw criticism.
• Disgruntled people need to release anger. Standing there as an easy outlet for their anger is part of the gig. Criticism always parallels influence.
• It takes courage to see things for what they are, not what you want them to be.
• Poking an inferiority complex brings out vitriol--always.

Society's insatiable push to discredit those who rock the boat, coupled with digital printing presses cataloging it all, has allowed village idiots and Nobel Prize winners to effectively share the same stage. In this environment, for many, the truth has ceased to matter.

Note: sources.

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