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Trend Following Interview with Thomas Arnold of Plimsoll Capital
Michael Covel (February 15, 2005)
The following interview is with second generation Trend Follower Thomas Arnold. He offers insight to new and established traders considering Trend Following.
Q. How did you become involved in the markets?
A. I have been interested in trading for as long as I can remember. My first job was working for a very successful stock trader in Los Angeles who was a friend of my father's. Every Saturday I would obtain a copy of the Daily Graphs. I would then look at each and every chart, that is, every stock on both the American and New York Stock Exchanges. I was looking for specific chart patterns accompanied by higher than usual volume. By midday on Saturday, I would bring my analysis to my father's friend, and for my efforts I would receive a crisp $100 bill. I'm not sure if it was the hundred bucks or the market analysis. But somehow, I was irrevocably involved in the markets.
Q. Before you learned Turtle Trend Following why did you feel it would help you?
A. I knew enough about Trend Following to know that it was not just another indicator or analytical approach. I knew there was some real mathematics involved, and by that I mean there was substance which I could prove or disprove objectively. It wasn't a holy grail, it was an edge. And for that reason I was interested. Also, I could not ignore the fact that Richard Dennis was spectacularly successful.
Q. When you say some real math was involved you seem to imply you were ready for a more concrete, dispassionate style of trading?
A. Absolutely. I was not interested in an approach that simply re-tooled what I was already doing. At the time, I was an interbank currency trader. I took positions up to a size I felt comfortable, based upon technical analysis and deal flow. There was very little objectivity in that mix. I was interested in building an investment business, one that was scalable and not based upon subjective analysis. If my position size was based upon my comfort level, there was a very real and nearby limit to the business I could build. Secondly, I desired to remove emotions as completely as possible from my trading. Position size must be calculated based upon market volatility and assigned per position risk.
Q. Talk about the use of money management in your trading?
A. Money management is 90% of what we do. At the risk of frightening investors, I'm not sure my performance would suffer tremendously if I flipped a coin to determine our direction. To be fair, we have come a long way in selecting our trades and managing the risk profile of our portfolio. But the real driver of our success is how we size our positions at the beginning of a trade, how we add to our positions when we are right, and where we place our stops when we are wrong. Our goal is that our profits are exponential, and losses are linear.
Q. Why do you think directional accuracy seems to excite many beginners and pros alike? Is it the false sense of comfort they enjoy with a high accuracy?
A. I think most novice traders feel that directional accuracy is the key to trading success. It really doesn't bother me if they continue to think so. Having been a trader on several major currency desks, I have heard endless recounts of traders calling the market correctly. It seems traders desire to be right, more so than they desire to be profitable. If this were not the case, they would spend a lot more time focusing on the money management aspect of their trading. Of course this is a personal account as well, in that being right was my focus for over ten years.
Q. How do you explain profits as exponential and losses as linear?
A. We never add to a losing position. We add mechanically to winning positions. And we only add to winning positions when we can do so without substantially adding risk to original capital. Therefore we can be wrong several times and right once, and still perform well. The alternative would be to keep your position size the same on a winning position, which means you have to be right substantially more often, and you would have to allow your position to go much further. We desire that our winning positions be far more dynamic than our losing ones.
Q. You bring up an interesting point traders desire to be right more than they desire to be profitable. You seem to make the case clearly that no matter the level of sophistication, most traders are not even focused on profits in all reality?
A. I think that is an accurate statement. The vast majority of traders fail to view trading as a business. To be successful over the long term you have to build your trading strategy the same as you would build your business. Trading is not about intellectual triumphs. It is about creating a reasonable, objective expectation for success over time.
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