16 Oct Would You Believe In a Free System?
Would You Believe In a Free System??
Oct. 16, 2019
I can’t stop thinking about this quote.
I’m not even sure it’s true.
Allegedly, Richard Dennis, co-founder of the famous Turtle Traders experiment, was once asked about the rules to his trading system. These were the rules he taught his Turtle traders and used to the rules he used to make 100 million dollar fortune for himself.
Dennis famously replied:
I always say you could publish my rules in a newspaper and no one would follow them. The key is consistency and discipline.
There are so many things to unpack from that quote (which is why I can’t stop thinking about it).
One, the reason no one would follow them is that the rules are in the newspaper. Do traders still read newspapers?
Two, what about system decay? It’s understood that some systems deteriorate when too many people are trading them. For example, let’s take the “January Effect”.
The January Effect was a theory that stock prices rise in January of each year. In December, institutions take losses for tax purposes. And then these institutions buy back their positions in January, forcing the prices of stocks up.
Maybe that was true for a long time. And then someone talked about it too much.
Then big traders looked at the theory and decided to front run. Maybe they start buying at the end of December instead of selling. Then these traders sold in January when the stocks started to rise like before. The new selling pressure then suffocated the January Effect, making it no longer viable.
That’s an example of saying a system out loud and ruining that system. But did it happen to the January Effect?
According to a 2017 white paper, yes. The January Effect is gone for all intents and purposes. If it ever really existed, talking about it killed it.
And, yet, Richard Dennis says he could take his million dollar rules, publish them, and nothing would happen.
How can that be?
On one hand, maybe his trend following system can’t be hurt by more people doing it. If we all bought breakouts, wouldn’t that make the position better for everyone?
On the other hand, traders could still game his entries (buy before a breakout, sell after Dennis’ signal for profit).
So what did Dennis really mean?
He meant that human traders aren’t very good at being disciplined. Traders aren’t good at following-through.
A trader could see his rules, and take one or two entries. Then a trader would get distracted and move on to something else–leaving Dennis’ system intact.
Or a trader would follow his rules, take one loss and give up. That also would leave his system intact.
Or a trader would see his rules and simply not believe them. We all say we want something for free, but when we see something for free, what do we think?
A free system? It has to be a hoax. And it must be worthless at any rate because you get what you pay for!
And that’s why Dennis thought his system would be safe no matter how much he talked about it.
But guess what? He kept the rules confidential anyway! Just in case.
So what would you do if you saw a system given out for free in the newspaper or in a free Newsletter?
Would you try it and get bored?
Would you try it and abandon it after a loss or two?
Would you not believe it because it’s probably fake news?
It’s an interesting question.
This week, we’re going to try this experiment (as we’ve done previously) and give out some free rules.
And, at some point, I’m super tempted to put out a free portfolio and see what happens.
Would it help or would it be ignored?
I’m dying to find out the answer.
We’ll talk about a system in our next email.
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