Correlations in Sectors in Trend Following
There are days like yesterday that it seems none of the trades work ( You will have these days when you are trend following). Yesterday in particular the grains expressed extreme weakness. Prior to this the grains had been trending strongly. Wheat for instance started trending up since the summer starting at 450. Currently wheat is trading at 847. This has been a big move…however yesterday across the grains there was extreme weakness. This brings me to the point that one needs to be very aware of how much risk one takes per sector. If one does not take this into account one exposes oneself to additional risks when allocating too much to any sector. In my trading I allocate a maximum risk of 5% to any sector. This to some degrees mitigates some of the volatility in my account. I will not take any new trades in any sector if more than 5% of my account is at risk.
There are always risks and draw downs when trend following. Our job is to try our best to manage the risk. By limiting the maximum exposure to 5% to any sector this assists but in trend following we will surely have losses and draw downs.
That is the bad news..or the true news… the other true news…if you have the patience,discipline and the mental fortitude to get over days like yesterday you put yourself in a position to compound your way to wealth. On average many commodity trading advisors have compounded money in the range of 15%. This means that your $100,000 dollars or $1,000,000 dollars in 10 years is worth $400,000 or $4,000,000…In 15 years it could be worth $800,000 or $8,000,000. This is the power of compounding. You need to realize that you are doing this for the long term. Any day..Any month…Any year means nothing… Your goal is to compound money.
Trend following really is easy….however it is one of the hardest things to do. It is not retirement in a box. It is not that you allocate to a commodity trading advisor or trade a program and you go to the beach. You will go through ugly periods…and lo and behold when you least expect them and when most people give up you enter into periods of strong trends and profits.
This is the reality of trend following.
Futures trading involves risk. People can and do lose money