Sunday, March 26, 2006

John Henry's Trading Philosophy

John Henry discusses his trading system design philosophy here. Henry discusses the time period in which he developed his original trend-following system. And offers some great insights such as...
Every time we go through a bad period in our firm, whether it's for two months or for eight months, people ask me have the markets changed. And I always say the same thing. I say, "Yes, the markets are always changing; but people's reaction to change, more or less, remain the same."

I knew I could not predict anything, and that is why we decided to follow trends, and that is why we've been so successful. We simply follow trends. No matter how ridiculous those trends appear to be at the beginning, and no matter how extended or how irrational they seem at the end, we follow trends.

At JWH, we realize that not only is it impossible to foretell the future, it's not necessary. We rely on the fact that other investors are convinced that they can predict the future, and I believe that's where our profits come from.

We may take a small risk in placing a trade initially, but after we have a large profit we risk it, and that's a risk very much worth taking and one we gladly accept.

Suffice it to say that we embrace both volatility and risk and, for us, risk is that we're going to lose if we risk two-tenths of one percent on a particular trade. That is, to us, real risk. Giving back a profit to you probably seems like risk, to us it seems like volatility.

Enjoy the article.

Later Trades,



jontait said...

Hey Michael, good excerpt. It seems like JWH is drawing a distinction between a trader's risk capital and his paper gains at risk. I love this subject because I don't think it gets enough attention. In my own trading, if I tried to micromanage each trade over its entire lifespan how I micromanage it at the very beginning, I wouldn't be in any position for very long and could not follow trends lasting months or longer. I try to minimize risk to my "risk capital", but when it is cushioned, my mind is at ease through volatility. Where other traders try to avoid risk and long holding periods, I try to put myself in a position to be able to carry it for them, for a premium of course :D

Mike Taylor said...

Thanks! I agree with you...this subject receives very little attention and yet is so important.

Funny, I guess we're both fighting over that premium to carry. :)

Take care,