You know, it’s true what they say. “The more things change, the more they stay the same”! It has been just about three years now, since January of 2003, that I wrote my now classic “I Was Wrong” article, admitting that trend following was not dead after all. And in the past couple of years, we have seen some good trending markets and some nice returns, with the Turtle computer model being up between 50% and 100% for 2003 and 2004 respectively. And while the current final yearly results are not quite in yet, although 2005 got off to a pretty rough start, it looks like a late rally in many of the markets is going to wind up giving us another profitable year.

But the truth of the matter is, if you look very closely, as I have, at both the Turtle system in particular as well as other trend following systems in general, there are some things that have changed slightly. An examination of ‘rolling’ five or ten year periods will show some smaller deteriorating statistics since the ‘formal’ origination of the trading method back in the early 1980’s. The total returns are slightly lower, the drawdowns are a little deeper, and the recovery periods are a little longer.

There are several reasons for this, most of which can be summed up under the wide umbrella of natural progression. On the one hand, we have the good old fashioned Darwinistic “survival of the fittest model”. Hey, trading is basically still one big zero sum game, where somebody has to win, and somebody else has to lose. The winners are the smarter combatants, the losers will tap out and fall by the wayside (or even become ‘brokers’:). As with any competition, this means that eventually, you will have the winners competing against other winners, thus raising the bar for the entire level of competition, and making the whole damn game harder to begin with. At least that is the philosophical argument for what happens.

The technical argument is a lot more cut and dried, but it is basically the same story. In the ‘old’ days, whoever was the first and quickest to figure things out while they were still changing had a huge edge. But then along came that crutch to human thought, the computer. By the early 1990’s everybody had one sitting on his desk, and the playing field had been greatly leveled. Information still flowed, but now it flowed faster, and everyone became more quickly aware of it. Which meant that all the traders on the outside were now able to more quickly adjust their positions and come back into line with whatever sudden new information had become available.

I have spoken at great lengths before about how and why trend following works, and the fundamental reasons that trends come about in the first place. Simply put, when something happens to either the supply or demand of a commodity (or stock), the equilibrium fair market value shifts, and the price moves to a new level. In the old days, sometimes it took a while for the market mechanism to find this new level, but nowadays, thanks to more powerful computer speed and efficiency, everything is all happening a lot faster.

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