In 2008, the S&P 500 plunged 37%, sending shockwaves throughout international markets.
Nevertheless, whereas everybody else was promoting their kidneys to cowl margin calls, a small group of merchants had been quietly making a fortune:
- Mulvaney Capital gained 108% (whereas most fund managers had been updating their resumes).
- Dunn Capital returned over +50%.
- Graham Capital completed the yr up about +36%.
How did they do it?
They weren’t attempting to name the underside, predict the bailout, or outsmart the Fed.
As an alternative, they had been merely following one timeless precept: trip the development till it ends.
This strategy known as Pattern Following—and it has labored for many years. From the legendary Turtle Merchants to billion-dollar hedge funds, Pattern Following has constantly thrived in bull and bear markets, particularly throughout a disaster.
That’s why in in the present day’s put up, you’ll uncover…
- What’s Pattern Following and why does it work?
- 4 rules of Pattern Following
- An entire Pattern Following system that works (backed by 25 years of knowledge)
- Professionals and cons of Pattern Following
- Easy methods to know if Pattern Following is appropriate for you?
By the tip, you’ll perceive why Pattern Following is likely one of the strongest methods, and how one can apply it to your individual buying and selling.
Sound good?
Then let’s go…
Pattern Following defined
Pattern Following is all about taking advantage of sustained strikes out there (in each uptrend and downtrend). The thought behind it’s easy: to trip the development until it ends.
It originated from the commodities market and was made widespread by Richard Dennis (and his Turtle Merchants).
Right now, Pattern Following continues to be a well-liked buying and selling strategy and is even utilized by billion-dollar hedge funds (like Winton Group, Transtrend, and many others.).
Why does Pattern Following work?
There are three primary causes…
Behavioural biases
If you happen to see the market goes up 5 days in a row, what’s your first response?
“It’s too excessive! I’m not shopping for that!”
However then it goes up one other 3 days, and all of the sudden you’re hitting that purchase button quicker than I run when my spouse says, “We have to discuss!”
And when there’s worry? You promote quicker than I run away from my children after they need assistance with homework.
These behavioural biases trigger the market to development, and that’s how a Pattern Follower can revenue from it.
Info takes time to get priced in
Hedge funds and establishments transfer with dimension. In contrast to a retail dealer, they will’t simply enter a place suddenly as a result of they may transfer the market (which suggests they get a poor entry value).
So, they may accumulate their positions over weeks and typically even months. This shopping for stress will push the market increased, and by the point the “large cash” completes their shopping for, the development is effectively established, and a Pattern Follower will revenue from the transfer.
Traits are structural
Financial cycles result in issues like inflation, bubbles, crises, productiveness, bull markets, bear markets, and many others. These elements trigger worry and greed out there, which leads to each uptrends and downtrends.
So long as these elements exist, you possibly can count on markets to development.
Now, earlier than I provide the guidelines of a Pattern Following system that works, you first want to know the rules behind it so you may make it give you the results you want.
4 rules of Pattern Following
1. Purchase excessive and promote increased (and vice versa)
The precept behind “purchase excessive and promote increased” is that power tends to beget extra power.
In contrast to traders who “purchase low and promote excessive”, Pattern Following doesn’t care if one thing appears costly or overbought. What issues is that the value is shifting within the course of the development.
By shopping for power, you align your self with the market’s course and keep away from betting in opposition to the market. Consider it as going with the movement, not in opposition to it. Like when my spouse says we’re going purchasing and I simply nod and put together my bank card for the beating.
2. Use a trailing cease loss
After you enter a commerce, when do you exit?
That’s the place a trailing cease loss is available in. It’s a dynamic cease loss that follows the value like my children observe me after I’m attempting to eat ice cream. It’s the key to slicing your losses and using your winners.
Right here’s an instance…
- You purchase a inventory at $50 and have a 20% trailing cease loss.
- If the value drops to $40, you’ll exit the commerce as a result of it has hit your trailing cease loss (calculation $50 x 0.8 = $40).
- But when the value goes as much as $60, your trailing cease loss will probably be at $48 (calculation $60 x 0.8 = $48).
- Now, if the value shoots as much as $200 and hits your trailing cease loss (at $160), you’d have captured an enormous winner.
Now, should you used a set goal revenue, it’s unlikely you’ll trip such a development due to feelings. Agree?
However with a trailing cease loss, you merely trip the development until it ends—with out guesswork.
3. Commerce many alternative markets
Right here’s the factor: tendencies don’t occur in all places directly. By buying and selling many markets, you at all times have “lottery tickets” unfold out throughout totally different asset lessons—like having a number of courting apps as a substitute of only one.
Additionally, totally different asset lessons development at totally different instances:
- Commodities transfer on provide/demand shocks.
- Bonds transfer with rate of interest insurance policies.
- Currencies transfer with capital flows.
- Indices transfer on progress and earnings.
By buying and selling these totally different asset lessons, you profit from these totally different sources of tendencies.
Right here’s a real-world case research:
Throughout 2014, the US inventory market was uneven. On the similar time…
- USD had appreciated strongly in opposition to EUR and JPY.
- Crude oil collapsed from $100 to $40.
- Bonds had a significant uptrend.
A Pattern Follower would have made a killing whereas inventory merchants had been struggling.
4. Preserve losses small
Though you commerce many markets, you’ll nonetheless face frequent losses as a result of most of those trades fail to develop right into a development. That’s why it’s necessary to chop your losses so you possibly can dwell to battle one other day—not like my hairline, which fought the great battle however has now given up.
Pattern Following shouldn’t be about being proper typically. Quite, it’s about slicing your losses and using your winners. This fashion, even with a 40% profitable price (which is frequent for a Pattern Following system), you’re nonetheless worthwhile in the long term.
These 4 rules kind the spine of Pattern Following. However rules alone aren’t sufficient— you want clear goal buying and selling guidelines.
So now, I’ll train you a Pattern Following system that works (backed by information)…
A Pattern Following system that works
Markets traded:
Currencies: GBP/USD, USD/JPY, AUD/USD, EUR/USD, USD/CNH
Metals: Gold, Copper, Silver, Palladium, Platinum
Commodities: Espresso, Euro-OAT, Corn, Soybean, Wheat
Bonds: Bund, US 5-year Observe, Lengthy Gilt, US T-Bond, Bobl
Timeframe:
Each day
Danger administration:
2%
Buying and selling guidelines (lengthy)
- Go lengthy when the value closes on the highest over the past 200 days.
- 6 ATR trailing cease loss.
Buying and selling guidelines (brief):
- Go brief when the value closes on the lowest over the past 200 days.
- 6 ATR trailing cease loss.
Right here’s an instance…
Espresso (Each day timeframe)
On July 9, 2024, Espresso made the very best shut over the past 200 days (as proven on the Donchian Channel) and gave you an entry set off to go lengthy.
On this case, the commerce labored in our favour, and also you held the place until the value hit your 6 ATR trailing cease loss on April 4, 2025. This could have netted you a achieve of 39% on the commerce.
In fact, this can be a cherry-picked instance. And since you are buying and selling with an goal algorithm, you possibly can backtest this Pattern Following system and see the way it has carried out.
Backtest outcomes: Pattern Following system
Right here’s the end result over the past 25 years…
- Whole return: 2866% (since 2000)
- Annual return: 14.51%
- Successful price: 45.77%
- Shedding price: 54.23%
- Payoff ratio: 1.74
- Most drawdown: 37.7%
Right here’s the fairness curve of the buying and selling system…
And the yearly returns…
Take note of the years 2000, 2008, 2019, and 2022.
What do you discover?
These had been all disaster intervals: the Dot Com Bubble, the Monetary Disaster, COVID-19, and the Russia-Ukraine Conflict.
Whereas the inventory market collapsed throughout this time, a Pattern Following strategy would have made a killing.
Right here’s what one in all my college students, I Ang (from The Final Methods Dealer), has to say about Pattern Following…
“As confirmed, it has labored effectively in bear markets and obtained me into commerce earlier than the large strikes, like Crude Oil.” — I Ang
Now you is perhaps questioning…
“Why does Pattern Following work effectively throughout a disaster interval?”
Herd mentality.
Let me clarify…
Think about you’re in a cinema watching a film (Maybe Avengers: Finish Sport). Then, in entrance of the display screen, you discover a flame getting bigger because the seconds go by. And earlier than you realize it, BOOM, there’s a large hearth!
Now let me ask you: will you proceed watching Avengers or sprint out of the cinema? I assure you’ll run out of the cinema. Why? As a result of there’s a worry in you, the worry that you simply would possibly get burned alive. And guess what? Everybody else has the identical worry as you, in any other case referred to as the herd mentality.
You’re in all probability questioning:
“What has this obtained to do with Pattern Following?”
Nicely, the identical applies to the monetary markets.
When there’s panic and worry within the markets, what occurs? Folks promote their shares and dangerous belongings, which causes the value to enter a downtrend.
For a lot of establishments (like pension funds), they will’t maintain a ton of money due to regulatory causes. So, they might use their money to purchase up safer belongings like bonds, gold, the US greenback, and many others, which causes these markets to enter an uptrend.
If you happen to recall, how does Pattern Following revenue? It seeks to revenue from tendencies out there! That’s why you typically see Pattern Following do exceptionally effectively throughout a disaster or a recession—it’s like proudly owning a bathroom paper firm throughout COVID.
Transferring on, let’s discuss in regards to the execs and cons of Pattern Following…
Professionals and cons of Pattern Following
First, some great benefits of Pattern Following…
- Easy and strong
- Has labored for hundreds of years
- Does effectively throughout a disaster
Pattern Following has easy and strong guidelines. If you happen to appeared on the buying and selling system I shared earlier, the entry & exit have solely two buying and selling guidelines. This makes it a sturdy buying and selling strategy, and it’s more likely to proceed working for many years to return (like the way it has labored for the previous few centuries). It’s the cockroach of buying and selling methods; it simply received’t die.
In contrast to most buying and selling methods correlated to the inventory market, Pattern Following shouldn’t be correlated. This offers you safety throughout a disaster and affords you higher risk-adjusted returns in your portfolio.
This implies you’ll sleep higher at night time realizing that even when shit hits the fan, you’ve gotten a buying and selling system that can carry out effectively.
Subsequent, the disadvantages of Pattern Following…
- Low profitable price
- Lengthy drawdowns
- Tough to commerce psychologically
Pattern Following has a low profitable price, anyplace between 30 to 40%. This implies you’ll lose incessantly and have lengthy drawdowns.
You is perhaps considering: “What’s a drawdown?”
Right here’s an instance: let’s say your buying and selling account reaches a excessive of $100,000 after which declines to $90,000. That’s a drawdown of 10%.
Now, the size of a drawdown refers to how lengthy it takes to your account to achieve a brand new fairness excessive. If it took 1 month to go from $90,000 again to $100,000, then it’s a drawdown period of 1 month.
Nevertheless, for Pattern Following, you possibly can expertise a drawdown period for years, which makes this a troublesome buying and selling system to execute psychologically. In any case, who likes to lose typically and never see outcomes for years?
And since this can be a troublesome system to commerce, most merchants will quit when the going will get robust.
(The great factor is that when extra folks quit, the technique is much less crowded, which suggests the sting will stay for disciplined merchants.)
Subsequent, let’s discover out…
Is Pattern Following appropriate for you?
Right here’s my tackle it…
Pattern Following is NOT for you if…
- You could be proper actually because Pattern Following has a low profitable price.
- That is your first buying and selling system as a result of it’s psychologically troublesome to commerce.
- You have got a small buying and selling account as a result of it requires at the very least a 5-figure account.
Pattern Following is FOR you if…
- You might be lengthy shares and need to hedge your self throughout a disaster.
- You desire a buying and selling technique uncorrelated to the inventory market.
- You have got different buying and selling methods and need to enhance your portfolio’s adjusted returns.
Now, you’ve gotten a good suggestion whether or not Pattern Following fits your character and targets.
Nonetheless, you may need a couple of questions. So let’s sort out among the frequent ones I get from merchants…
Continuously requested questions
How can I scale back the drawdown of a Pattern Following system?
There are two issues you are able to do:
- Improve the variety of markets to commerce.
- Undertake a number of buying and selling methods, not only one.
That’s the rationale why in The Final Methods Dealer (UST), we train a number of buying and selling methods so you possibly can scale back your drawdown and revenue nearly yearly no matter market situations.
Can Pattern Following work on Forex?
Pattern Following works greatest while you commerce many alternative markets as a result of it will increase the chances of capturing a development.
By decreasing the variety of markets, you scale back the chances of capturing a development, drawdowns will probably be longer, and this makes it much more troublesome to be a Pattern Follower.
Can it work on shares?
The idea of Pattern Following will be utilized to shares, however with a couple of tweaks.
- Keep away from shorting as a result of the inventory market has a bias to development increased.
- Have a development filter to remain in money throughout a bear market.
Can this be traded on decrease timeframes?
I’ve not examined this but. However hypothetically, tendencies are shorter on the decrease timeframe and transaction prices are increased (since you’re buying and selling extra typically).
I’d assume it wouldn’t work as effectively (or by no means) on the decrease timeframe.
What number of markets can I apply Pattern Following to?
As many as you possibly can afford.
There are hedge funds that apply Pattern Following to tons of of markets for diversification functions.
Conclusion
Pattern Following shouldn’t be about predicting the long run. It’s about slicing losses small and letting winners run. It’s easy, strong, and it really works. Historical past has confirmed it, information has backed it, and billion-dollar hedge funds nonetheless depend on it in the present day.
Nevertheless, it’s psychologically robust to commerce by itself. The frequent losses and lengthy drawdowns can put on down even disciplined merchants.
That’s why inside The Final Methods Dealer (UST), you’ll discover ways to mix Pattern Following, Imply Reversion, and Momentum—so you possibly can revenue in a bull market, a bear market, and even throughout a recession. One of the best half?
You solely want quarter-hour a day. Particulars right here.
