Transcript
Eric Crittenden: We launched at the beginning of 2020, and we synced up with the model and we had a full risk on posture and we had a nice diversified portfolio, but it was long growth and long risk, and we all know what happened in February of 2020, the market started breaking down. None of us knew COVID was coming. We started getting signals to short every energy market on the planet, and they were coming every day, short this, gas oil, heating oil, crude oil, natural gas, gasoline, all this stuff, and these were big trades, because those are big, deep liquid markets.
Before you get all of the information that we're going into lockdowns and that we're going to have COVID, just the whole long story, you start getting trend signals because that supply-demand mismatch shows up in the markets, it shows up in the term structure, shows up in the price action, and the trend, you start getting these signals to go short. You do that, but no short trade lasts forever. Eventually, and it only took a couple of months for the crude oil to go negative, it went from $70 a barrel down to -$35, which everyone thought was impossible, but that's how bad the oversupply of the market was, given the recessionary type conditions.
We talked earlier about stop losses, like getting out of a trade. It's absolutely essential to put those trades on, but it's even more important, and this is the hard thing to do, is how do you know when to pull them off? That's the hard thing, because you have to in all these markets. These are macro markets, they are not stocks. You can't hold them forever. Having that trailing stop loss be far enough away to give them enough room, but close enough that you can actually retain 70%, 80% of whatever the peak profits were in a position is absolutely essential, and you have to have the discipline to both put the trade on and then later on, when it's time to pull it off, you have to pull it off.
You have to ignore the news and just stick with what you see with the models, essentially. What happened is, we shorted all these energy markets and then a few months later, they had collapsed and then they started to rally and we had to pull those positions off, but it's easy when you have a system that enforces that discipline. Likewise, if you fast forward to the end of 2021, we started getting signals to go short every bond market on the planet.
French bonds, German bonds, British bonds, Japanese bonds., Canadian, the whole US. Again, very difficult psychologically and socially to put the trade on, but the system doesn't care. It's looking at supply-demand, it's looking at trends, and it's saying these things you need to be short. We entered those positions, and here's a different example. We had to hold them for the entire time that they were trending down, and that ended up being a lot longer than everyone suspected.
A lot of people felt, "Okay, I see we're going to have rising interest rates. It's going to be like the energy trade, though. It's going to be short, a couple of months and then you have to get out." No. A trend-following system enforces discipline and says, "You hold until you have a valid reason, statistically, to get out of the position." You end up holding it for so much longer than you thought you ever would.
That's a reoccurring theme. If you go back 50 years and you look at the biggest winning trades that added the most value to a 60-40 portfolio when it needed it, it's the ones where you just couldn't envision this trade working out for three years, and you end up holding a short natural gas for ten years after the peak, and I can't remember when that was, 2008, 2009.
The stop losses, that sell discipline, it serves two purposes, to control your risk, but to also keep you in the trade, because you don't have to worry about anything else. You don't have to predict, you don't have to crunch the fundamentals. You don't have to get any predictions right. You just have to have the discipline to put it on when it needs to go on, but more importantly, pull it off when you need to, and hold it in between.
