16 October 2018
Richard Dennis: 17 Trading Advice from a Market Wizard
Credit: Rayner Teo
Richard Dennis was a Systematic Trend Follower who trades the Futures market (during the 70s and 80s)
His rise to fame came when he was featured in Market Wizards as he took a $400 trading account and turned it into $200 million.
He is also the founder of the Turtle Traders (which came from a bet he made with his partner to determine if trading can be taught, or not).
And yes, he won the bet that trading can be taught.
However, not all stories have a happy ending.
According to sources, Richard Dennis’s hedge fund suffered huge drawdown (in excess of 50%) due to aggressive risk management, and he eventually shut it down.
However, there are valuable lessons you can learn from Richard Dennis — which are still applicable today.
And I want to share them with you right now…
1. Whatever method you use to enter trades, the most critical thing is that if there is a major trend, your approach should assure that you get in that trend.
If you think about it…
Breakouts are the only entries that will ensure you’ll catch every single trend — every single time.
And that’s why most Systematic Trend Followers trade breakouts as their entry method.
You might be wondering:
“But what about pullbacks?”
I know pullbacks are psychologically easier to execute because you’re buying low and selling higher.
But it comes with a price — and that’s missing the entire trend because the market didn’t offer a pullback.
So if you want to be involved in every trend that comes along, then you must trade breakouts.
2. A good trend following system will keep you in the market until there is evidence that the trend has changed.
Here’s a fact:
There’s no way to predict how high the market will go.
So, the next best thing you can do is trail your stop loss as the market moves in your favor.
However, you don’t want to have a tight trailing stop loss as you’ll get stopped out on the retracement.
Instead…
Widen your trailing stop loss to accommodate the deep retracement that might occur — and you have the best chance of riding a trend.
And chances are if you get stopped out, it’s because the trend has reversed.
Pro Tip:
You can use indicators like Moving Average or the Average True Range to trail your stop loss.
3. When you have a position, you put it on for a reason, and you’ve got to keep it until the reason no longer exists.
This is the opposite of what most traders do — and it HURTS them big time.
Here’s why…
Most of you tell me you want to ride big trends.
And it’s no secret that the KEY to riding massive trends is to trail your stop loss (I covered that earlier).
However…
You have difficulty holding on to your gains because…
You see profits.
You see green.
You see money.
BUT…
You have the FEAR of losing those gains.
So, you exit your trade even though the market hasn’t hit your exit signal.
The end result?
Big losses and small winners.
So here’s the lesson:
If you want to be a consistently profitable trader, you must follow your rules and exit your trades ONLY when the reason no longer exists.
4. You should expect the unexpected in this business; expect the extreme. Don’t think in terms of boundaries that limit what the market might do.
Look at the chart below:
You’re probably thinking:
“Insane! The price is so high. I’m sure the market is about to reverse lower.”
And here’s what happens next…
BOOM!
The market exploded even higher.
I know it’s hard to believe the market can just continue to make new highs especially when it looks “overbought”.
So the lesson is this:
You can never tell if the market is too high to buy or too low to short.
Because what’s high can go higher and what’s lower can go lower.
5. If there is any lesson I have learned in the nearly twenty years that I’ve been in this business, it is that the unexpected and the impossible happen every now and then.
If you saw the earlier Bitcoin example, you might think that such “extreme” moves rarely occurs.
Wrong!
Here are more examples…
Now don’t get me wrong.
You shouldn’t expect these moves every week or month.
But chances are, you can find these trends once every few years (and they can last for YEARS).
The bottom line is this…
If you have the discipline to ride your winners, it’ll be a matter of time before you catch one of these “monsters”.
6. Trading decisions should be made as unemotionally as possible.
If you trade based on emotions:
You’ll buy at the highs when things are moving “fast”, hold onto your losses hoping they will rebound, trade larger hoping to make back what you’ve lost, and etc.
Clearly, you know that trading based on emotions is a recipe for disaster,
Instead, you’ve got to think, act, and trade like a machine!
Now the question is, how?
Here are a few tips to get you started…
Develop a trading plan with clearly defined buy & sell rules
Risk not more than 1% of your capital on each trade
Focus on executing your trading plan consistently (this is so important)
Don’t get swayed but the short-term results, think long-term
If you want to learn more, then go check out this trading guide: How to be a Consistently Profitable Trader within the Next 180 days.
7. Trade small because that’s when you are as bad as you are ever going to be. Learn from your mistakes.
Let me ask you…
If you want to be a brain surgeon, will you immediately operate on a live human brain?
Of course not!
You’ll probably start off practicing on a “dummy” brain.
As you get better, you’ll work on a live human but only on a minor segment of it (so it doesn’t cause danger to the person).
Then as you level up, you’ll work on the major parts and finally, you have the confidence to do it on your own.
And it’s the same for trading!
You want to trade small because you’ll make mistakes — plenty of it.
So, why pay more in “tuition fees” to Mr. Market when you can do so at a fraction of the cost?
8. I could trade without knowing the name of the market.
You’re probably wondering:
“How is that possible?”
Well, that’s because you’re trading the price in front of you without concerning where the price is derived from.
It could be Soybean, Crude Oil, Copper, Rubber, or Cotton, who cares.
The only thing that matter is price, and nothing else.
Because the price is moved by an imbalance of buying & selling pressure which is based on emotions like fear, greed, hope, and regret.
These emotions or biases can last for a long time which in turn becomes a trend — something Trend Followers can capitalize on.
And that’s why you don’t need to know the name of the market.
All you need to know is…
Buy what’s going up
Sell what’s going down
Repeat
9. In the real world, it is not too wise to have your stop where everyone else has their stop.
Let me ask you…
Do you always get stopped out only to watch the market reverse back in your intended direction?
Because you put your stop loss where everyone else puts it (like below Support) — which creates an incentive for the “smart money” to hunt your stop loss.
So, how can you avoid it?
By setting your stop loss AWAY from the obvious market structure.
This means don’t place your stop loss smack under Support, or just above Resistance.
I cover in more details here: How to Avoid Stop Hunting While Other Traders Get Stopped Out
10. You could publish trading rules in the newspaper and no one would follow them. The key is consistency and discipline.
This is true for 99% of traders out there.
Most would not have the conviction to take someone’s trading rules and trade it consistently even though its profitable in the long-run.
Why?
Because when the drawdown comes (which all systems will have), they will abandon it and look for the next trading system — and rinse repeat this cycle again.
So, the question is…
How can you gain the confidence in your trading strategy or even someone’s trading system?
There are 2 ways you can go about it…
1. Backtest the trading strategy
This allows you to understand how a trading strategy performs historically.
If it’s proven to work in the past, there’s a possibility it could continue to work in the future (although no guarantee since it could be curve fitted).
2. Understand the logic behind WHY a trading strategy works
Most trading strategy that works have an underlying logic behind it.
For example:
Trend Following works because human biases and emotions cause the market to trend.
So, if a trader can cut his losses and ride his winners, he can capitalize on the long-term trend that comes about.
Or how about Value Investing?
It works because investors dump stock during “bad news” and that pushes the price of the underlying security below its intrinsic value.
This allows savvy investors to buy low (below the intrinsic value), and sell high (when the price increase back towards the intrinsic value).
11. There are lots more false breakouts, perhaps because there are more computer-based trend followers.
Here’s the deal:
Not all breakouts will work out.
In fact, half or more of your breakout trades are likely to fail.
However, it doesn’t mean trading breakouts is a losing strategy, far from it.
Remember, it’s not how often you win that’s important.
It’s how much you win when you’re right and how much you lose when you’re wrong — that’s what matters.
Also…
If you want to increase your odds of capturing a trend, you must trade across different markets.
This includes Forex, Indices, Energy, Metals, Agriculture, and etc.
If you want to learn more, then go read The Ultimate Guide to Trend Following.
12. It is misleading to focus on short-term results.
I’ll tell you this:
Your short-term results are random.
Because when you’re dealing with probabilities, anything is possible in the short run.
It’s only in the long run (after a large sample size of trades) that your results will align towards its expectancy.
Don’t believe me?
Then let me prove this to you…
Look at the performance of this trading system over the last 5 months…
Now, most of you would say this performance is crap and you’ll likely abandon this system after few losing months.
Now, look at this trading system below…
This looks like a much better system, right?
But guess what?
This is the same EXACT system as the one above.
The only difference is I’ve shared with you the results over the last 18 years instead of the 5 last months.
Do you see my point now?
In the short run your trading results are random but eventually, it’ll align towards it’s expected value.
13. You have to minimize your losses and try to preserve capital for those very few instances where you can make a lot in a very short period of time. What you can’t afford to do is throw away your capital on suboptimal trades.
Here’s the deal:
No matter which trading strategy you’re using, there will come a time where trading is so easy and it feels like you’re “printing” money.
But don’t be too happy just yet because…
There are also times where it sucks so bad you feel there’s no light at the end of the tunnel — and you just want to quit trading altogether.
So…
The “trick” is to minimize the damage during the bad times so you can survive and THRIVE during the good times.
This means:
Have proper risk management in every trade
No revenge trading even if you’re angry with the markets
No over trading hoping you can make your losses back quickly
Follow your trading system no matter how hard it is to pull the trigger
If you can do it, then you’ll likely overcome your drawdown and reach new equity high again.
14. I learned that a certain amount of loss will affect your judgment, so you have to put some time between that loss and the next trade.
There are 2 ways to look at this…
If you’re a discretionary trader, then yes, it makes sense to put some time between your loss and the next trade (especially if you have sustained a series of losses).
Because as a discretionary trader, your trading decisions are based on your analysis of the markets.
If you are carrying emotional baggage, you won’t objectively analyze the markets which lead to sub-optimal trading decisions.
However, if you’re a systems trader, then things are different.
Because the more losses you face, the closer you’ll be towards your next winning trade.
So, if you have a proven system that works, the last thing you’d want to do is to skip your trades because you have the fear of losing.
Instead, you must trade your system consistently so you don’t “mess up” the results of it.
15. Trading has taught me not to take the conventional wisdom for granted. What money I made in trading is a testimony to the fact that the majority is wrong a lot of the time.
The reason why most traders fail is because they want to be spoon fed.
They don’t want to put in the hard work to find out what works and what don’t.
They trust what “gurus” say instead of spending time and effort to figure things out themselves.
Now, is it no wonder that most traders never make it?
So here’s the deal:
If you want to succeed in this business, you must TEST everything.
Trust nothing but question EVERYTHING.
If you’re unsure, backtest it, forward test it, and use your brain to think about it!
16. Almost anybody can make up a list of rules that are 80 percent as good as what we taught people.
You’re probably thinking:
“What? I could never come up with a profitable trading strategy.”
Here’s the deal…
Trend Following isn’t a difficult concept.
It’s basically…
Trade a broad basket of markets
Ride your winners
Cut your losses
And that’s it!
How difficult can it be to come up with a set of trading rules based on the above criteria?
Still, I’m going to spoon feed you further.
Go read the book Following the Trend by Andreas Clenow.
This book provides you with the exact strategy and markets to trade — so there’s no excuse anymore.
But please do your own backtesting first before trading it live.
Now…
The difficult part isn’t formulating the strategy but the execution of it — especially when the drawdown comes.
Will you be able to execute your trades consistently when you’re down 10%, 20%, or even 40% of your trading capital?
17. I’ve learned that markets, which are often just mad crowds, are often irrational; when emotionally overwrought, they’re almost always wrong.
After many years of trading, the one thing I’ve learned is to NOT trade with the crowd.
For example:
Back in 2017, Bitcoin was making new highs with a lot of attention from the media and the public.
To an astute trader, it’s a warning sign that the “party” is about to end.
Now, I don’t expect you to short Bitcoin because the market could continue to trend higher.
However, if you’re long, then you should tighten your stop loss and be prepared to BAIL OUT the moment the market show signs of reversal.
Because when the whole world has already bought, who’s left to buy?
Nobody.
And if there’s no one left to buy, the path of least resistance is DOWN.
Here’s a quote by Warren Buffet that says it best…
“Be greedy when others are fearful and fearful when others are greedy.”
Conclusion
The wisdom shared by Richard Dennis is still as applicable as they were decades ago.
Now, some of you might argue that Richard Dennis strategy doesn’t work anymore.
Well, the exact parameters he used to trade might not work anymore.
But the principles of Trend Following still works and is currently used by some of the biggest hedge funds in the world (like Winton Capital).
So, don’t get caught up by the specific tactics but look at the big picture and understand the concepts behind it.
Richard Dennis was a Systematic Trend Follower who trades the Futures market (during the 70s and 80s)
His rise to fame came when he was featured in Market Wizards as he took a $400 trading account and turned it into $200 million.
He is also the founder of the Turtle Traders (which came from a bet he made with his partner to determine if trading can be taught, or not).
And yes, he won the bet that trading can be taught.
However, not all stories have a happy ending.
According to sources, Richard Dennis’s hedge fund suffered huge drawdown (in excess of 50%) due to aggressive risk management, and he eventually shut it down.
However, there are valuable lessons you can learn from Richard Dennis — which are still applicable today.
And I want to share them with you right now…
1. Whatever method you use to enter trades, the most critical thing is that if there is a major trend, your approach should assure that you get in that trend.
If you think about it…
Breakouts are the only entries that will ensure you’ll catch every single trend — every single time.
And that’s why most Systematic Trend Followers trade breakouts as their entry method.
You might be wondering:
“But what about pullbacks?”
I know pullbacks are psychologically easier to execute because you’re buying low and selling higher.
But it comes with a price — and that’s missing the entire trend because the market didn’t offer a pullback.
So if you want to be involved in every trend that comes along, then you must trade breakouts.
2. A good trend following system will keep you in the market until there is evidence that the trend has changed.
Here’s a fact:
There’s no way to predict how high the market will go.
So, the next best thing you can do is trail your stop loss as the market moves in your favor.
However, you don’t want to have a tight trailing stop loss as you’ll get stopped out on the retracement.
Instead…
Widen your trailing stop loss to accommodate the deep retracement that might occur — and you have the best chance of riding a trend.
And chances are if you get stopped out, it’s because the trend has reversed.
Pro Tip:
You can use indicators like Moving Average or the Average True Range to trail your stop loss.
3. When you have a position, you put it on for a reason, and you’ve got to keep it until the reason no longer exists.
This is the opposite of what most traders do — and it HURTS them big time.
Here’s why…
Most of you tell me you want to ride big trends.
And it’s no secret that the KEY to riding massive trends is to trail your stop loss (I covered that earlier).
However…
You have difficulty holding on to your gains because…
You see profits.
You see green.
You see money.
BUT…
You have the FEAR of losing those gains.
So, you exit your trade even though the market hasn’t hit your exit signal.
The end result?
Big losses and small winners.
So here’s the lesson:
If you want to be a consistently profitable trader, you must follow your rules and exit your trades ONLY when the reason no longer exists.
4. You should expect the unexpected in this business; expect the extreme. Don’t think in terms of boundaries that limit what the market might do.
Look at the chart below:
You’re probably thinking:
“Insane! The price is so high. I’m sure the market is about to reverse lower.”
And here’s what happens next…
BOOM!
The market exploded even higher.
I know it’s hard to believe the market can just continue to make new highs especially when it looks “overbought”.
So the lesson is this:
You can never tell if the market is too high to buy or too low to short.
Because what’s high can go higher and what’s lower can go lower.
5. If there is any lesson I have learned in the nearly twenty years that I’ve been in this business, it is that the unexpected and the impossible happen every now and then.
If you saw the earlier Bitcoin example, you might think that such “extreme” moves rarely occurs.
Wrong!
Here are more examples…
Now don’t get me wrong.
You shouldn’t expect these moves every week or month.
But chances are, you can find these trends once every few years (and they can last for YEARS).
The bottom line is this…
If you have the discipline to ride your winners, it’ll be a matter of time before you catch one of these “monsters”.
6. Trading decisions should be made as unemotionally as possible.
If you trade based on emotions:
You’ll buy at the highs when things are moving “fast”, hold onto your losses hoping they will rebound, trade larger hoping to make back what you’ve lost, and etc.
Clearly, you know that trading based on emotions is a recipe for disaster,
Instead, you’ve got to think, act, and trade like a machine!
Now the question is, how?
Here are a few tips to get you started…
Develop a trading plan with clearly defined buy & sell rules
Risk not more than 1% of your capital on each trade
Focus on executing your trading plan consistently (this is so important)
Don’t get swayed but the short-term results, think long-term
If you want to learn more, then go check out this trading guide: How to be a Consistently Profitable Trader within the Next 180 days.
7. Trade small because that’s when you are as bad as you are ever going to be. Learn from your mistakes.
Let me ask you…
If you want to be a brain surgeon, will you immediately operate on a live human brain?
Of course not!
You’ll probably start off practicing on a “dummy” brain.
As you get better, you’ll work on a live human but only on a minor segment of it (so it doesn’t cause danger to the person).
Then as you level up, you’ll work on the major parts and finally, you have the confidence to do it on your own.
And it’s the same for trading!
You want to trade small because you’ll make mistakes — plenty of it.
So, why pay more in “tuition fees” to Mr. Market when you can do so at a fraction of the cost?
8. I could trade without knowing the name of the market.
You’re probably wondering:
“How is that possible?”
Well, that’s because you’re trading the price in front of you without concerning where the price is derived from.
It could be Soybean, Crude Oil, Copper, Rubber, or Cotton, who cares.
The only thing that matter is price, and nothing else.
Because the price is moved by an imbalance of buying & selling pressure which is based on emotions like fear, greed, hope, and regret.
These emotions or biases can last for a long time which in turn becomes a trend — something Trend Followers can capitalize on.
And that’s why you don’t need to know the name of the market.
All you need to know is…
Buy what’s going up
Sell what’s going down
Repeat
9. In the real world, it is not too wise to have your stop where everyone else has their stop.
Let me ask you…
Do you always get stopped out only to watch the market reverse back in your intended direction?
Because you put your stop loss where everyone else puts it (like below Support) — which creates an incentive for the “smart money” to hunt your stop loss.
So, how can you avoid it?
By setting your stop loss AWAY from the obvious market structure.
This means don’t place your stop loss smack under Support, or just above Resistance.
I cover in more details here: How to Avoid Stop Hunting While Other Traders Get Stopped Out
10. You could publish trading rules in the newspaper and no one would follow them. The key is consistency and discipline.
This is true for 99% of traders out there.
Most would not have the conviction to take someone’s trading rules and trade it consistently even though its profitable in the long-run.
Why?
Because when the drawdown comes (which all systems will have), they will abandon it and look for the next trading system — and rinse repeat this cycle again.
So, the question is…
How can you gain the confidence in your trading strategy or even someone’s trading system?
There are 2 ways you can go about it…
1. Backtest the trading strategy
This allows you to understand how a trading strategy performs historically.
If it’s proven to work in the past, there’s a possibility it could continue to work in the future (although no guarantee since it could be curve fitted).
2. Understand the logic behind WHY a trading strategy works
Most trading strategy that works have an underlying logic behind it.
For example:
Trend Following works because human biases and emotions cause the market to trend.
So, if a trader can cut his losses and ride his winners, he can capitalize on the long-term trend that comes about.
Or how about Value Investing?
It works because investors dump stock during “bad news” and that pushes the price of the underlying security below its intrinsic value.
This allows savvy investors to buy low (below the intrinsic value), and sell high (when the price increase back towards the intrinsic value).
11. There are lots more false breakouts, perhaps because there are more computer-based trend followers.
Here’s the deal:
Not all breakouts will work out.
In fact, half or more of your breakout trades are likely to fail.
However, it doesn’t mean trading breakouts is a losing strategy, far from it.
Remember, it’s not how often you win that’s important.
It’s how much you win when you’re right and how much you lose when you’re wrong — that’s what matters.
Also…
If you want to increase your odds of capturing a trend, you must trade across different markets.
This includes Forex, Indices, Energy, Metals, Agriculture, and etc.
If you want to learn more, then go read The Ultimate Guide to Trend Following.
12. It is misleading to focus on short-term results.
I’ll tell you this:
Your short-term results are random.
Because when you’re dealing with probabilities, anything is possible in the short run.
It’s only in the long run (after a large sample size of trades) that your results will align towards its expectancy.
Don’t believe me?
Then let me prove this to you…
Look at the performance of this trading system over the last 5 months…
Now, most of you would say this performance is crap and you’ll likely abandon this system after few losing months.
Now, look at this trading system below…
This looks like a much better system, right?
But guess what?
This is the same EXACT system as the one above.
The only difference is I’ve shared with you the results over the last 18 years instead of the 5 last months.
Do you see my point now?
In the short run your trading results are random but eventually, it’ll align towards it’s expected value.
13. You have to minimize your losses and try to preserve capital for those very few instances where you can make a lot in a very short period of time. What you can’t afford to do is throw away your capital on suboptimal trades.
Here’s the deal:
No matter which trading strategy you’re using, there will come a time where trading is so easy and it feels like you’re “printing” money.
But don’t be too happy just yet because…
There are also times where it sucks so bad you feel there’s no light at the end of the tunnel — and you just want to quit trading altogether.
So…
The “trick” is to minimize the damage during the bad times so you can survive and THRIVE during the good times.
This means:
Have proper risk management in every trade
No revenge trading even if you’re angry with the markets
No over trading hoping you can make your losses back quickly
Follow your trading system no matter how hard it is to pull the trigger
If you can do it, then you’ll likely overcome your drawdown and reach new equity high again.
14. I learned that a certain amount of loss will affect your judgment, so you have to put some time between that loss and the next trade.
There are 2 ways to look at this…
If you’re a discretionary trader, then yes, it makes sense to put some time between your loss and the next trade (especially if you have sustained a series of losses).
Because as a discretionary trader, your trading decisions are based on your analysis of the markets.
If you are carrying emotional baggage, you won’t objectively analyze the markets which lead to sub-optimal trading decisions.
However, if you’re a systems trader, then things are different.
Because the more losses you face, the closer you’ll be towards your next winning trade.
So, if you have a proven system that works, the last thing you’d want to do is to skip your trades because you have the fear of losing.
Instead, you must trade your system consistently so you don’t “mess up” the results of it.
15. Trading has taught me not to take the conventional wisdom for granted. What money I made in trading is a testimony to the fact that the majority is wrong a lot of the time.
The reason why most traders fail is because they want to be spoon fed.
They don’t want to put in the hard work to find out what works and what don’t.
They trust what “gurus” say instead of spending time and effort to figure things out themselves.
Now, is it no wonder that most traders never make it?
So here’s the deal:
If you want to succeed in this business, you must TEST everything.
Trust nothing but question EVERYTHING.
If you’re unsure, backtest it, forward test it, and use your brain to think about it!
16. Almost anybody can make up a list of rules that are 80 percent as good as what we taught people.
You’re probably thinking:
“What? I could never come up with a profitable trading strategy.”
Here’s the deal…
Trend Following isn’t a difficult concept.
It’s basically…
Trade a broad basket of markets
Ride your winners
Cut your losses
And that’s it!
How difficult can it be to come up with a set of trading rules based on the above criteria?
Still, I’m going to spoon feed you further.
Go read the book Following the Trend by Andreas Clenow.
This book provides you with the exact strategy and markets to trade — so there’s no excuse anymore.
But please do your own backtesting first before trading it live.
Now…
The difficult part isn’t formulating the strategy but the execution of it — especially when the drawdown comes.
Will you be able to execute your trades consistently when you’re down 10%, 20%, or even 40% of your trading capital?
17. I’ve learned that markets, which are often just mad crowds, are often irrational; when emotionally overwrought, they’re almost always wrong.
After many years of trading, the one thing I’ve learned is to NOT trade with the crowd.
For example:
Back in 2017, Bitcoin was making new highs with a lot of attention from the media and the public.
To an astute trader, it’s a warning sign that the “party” is about to end.
Now, I don’t expect you to short Bitcoin because the market could continue to trend higher.
However, if you’re long, then you should tighten your stop loss and be prepared to BAIL OUT the moment the market show signs of reversal.
Because when the whole world has already bought, who’s left to buy?
Nobody.
And if there’s no one left to buy, the path of least resistance is DOWN.
Here’s a quote by Warren Buffet that says it best…
“Be greedy when others are fearful and fearful when others are greedy.”
Conclusion
The wisdom shared by Richard Dennis is still as applicable as they were decades ago.
Now, some of you might argue that Richard Dennis strategy doesn’t work anymore.
Well, the exact parameters he used to trade might not work anymore.
But the principles of Trend Following still works and is currently used by some of the biggest hedge funds in the world (like Winton Capital).
So, don’t get caught up by the specific tactics but look at the big picture and understand the concepts behind it.
Labels: Investment Quote
