Brent Penfold has a simple but uncomfortable message for traders who rely on traditional technical indicators: the more subjective variables you introduce into a strategy, the larger the universe of alternative equity curves you create – and the higher the probability that you will eventually slip into one that blows up your account.
Brent is a systematic trader, author of two books on trading principles and tactics, and a firm advocate for objective tools over the indicator-heavy approaches that dominate retail trading education. Over 30 years of live trading across indices, currencies, commodities, and softs, he has refined a philosophy built on a single foundation: risk of ruin must be zero, full stop.
In this episode Brent discusses why indicators with adjustable variables are dangerous, why the science behind trend following guarantees it works even though most trend traders fail, the importance of portfolio diversification across strategies and markets, and the practical framework from his second book on objective trend trading tactics.
Watch the full episode below, then read on for the complete breakdown.
Why Most Indicators Become Echo Chambers
Brent’s core critique of standard technical indicators is that they have too many variables. When a strategy stops working, traders adjust variables to recapture lost performance. The adjustment always improves the backtest – because you are fitting to historical data. But you have now moved from your real equity curve into one of the parallel alternative equity curves that exist around any strategy with adjustable parameters.
“As soon as you change a variable in the indicator, that will change the shape of your equity curve. As soon as your equity curve changes, it changes the expectancy. And that changes your risk of ruin calculation,” he explains.
For a strategy with four variables, allowing four adjustments to each variable in either direction produces 256 alternative equity curves. Any of those 256 could have a risk of ruin above 0 percent. History and human nature says traders will eventually land in one of them.
His solution: use tools that are objective – tools where, if you and I and everyone watching applied them to the same market, we would all arrive at the same interpretation. No echo chamber, no subjective massage.
Why Trend Following Works but Most Trend Traders Fail
Brent is emphatic on this point: the science behind trend trading says it works and it is guaranteed to work. The empirical studies confirm it. Some of the world’s best managers are trend traders with extraordinary long-term records. And yet over 90 percent of trend traders fail.
The reasons:
- Risk of ruin above zero: A strategy with fragile equity curves – where small variable changes produce dramatically different outcomes – will eventually blow up. Most retail traders are mathematically guaranteed to go broke before their edge can play out.
- Six to seven losing trades out of ten: Markets rarely trend. The majority of trend-following trades are small losses. “I’ve had a losing streak of over 30 losing trades in a row. It’s terrible, but you have to keep up with it – because a market you least expect will suddenly take off and make up for all the pain.”
- Fat tails in the distribution: Trend trading works because market returns are not normally distributed. Moves of three standard deviations and higher occur far more frequently than a random distribution would predict. Trend following captures those fat tails. But to capture them you must also take all the small losses that fill in the rest of the distribution – and most traders cannot tolerate that process emotionally.
The Importance of Sensitivity Analysis
Brent’s practical framework: any strategy you develop should be subjected to sensitivity analysis before you trade it. Take every variable, adjust it up and down by two steps, calculate the expectancy and risk of ruin for each resulting equity curve. If any of those alternative curves has a risk of ruin above 1 percent, you should not trade the base strategy.
The reason is simple: even if you believe completely in your chosen parameter values, you will change them eventually. Market conditions shift, drawdowns happen, clients push back. If changing those values produces a dangerous equity curve, that risk is real regardless of your current intentions.
Diversification Across Strategies, Markets and Timeframes
Brent trades across 34 markets including indices, currencies, commodities, softs, grains, meats, and metals. He uses multiple strategy styles – trend following, counter-trend – and multiple timeframes from short-term through to long-term.
The practical payoff was demonstrated during the COVID volatility period. His equity indices suffered significant drawdowns as markets swung violently. But his trend trading in other markets kept producing. “Diversification works. My boring trend trading was replacing what the indices were taking out because other markets just keep chugging along.”
His preferred tools are the 200-day moving average (for dominant trend context) and ATR (for volatility measurement). Both are simple, objective, and have been working for over 30 years without any need for adjustment.
Practical Trend Tactics From the Book
In his second book on universal tactics of successful trend trading, Brent provided concrete examples of objective tools in action. His retracement trend trainer strategy uses three indicators – two moving averages and an RSI – with four total variables. The sensitivity analysis across those variables, with four adjustments each, produces 256 alternative equity curves. His requirement: every one of those 256 must have a risk of ruin below 1 percent for the strategy to qualify as tradeable.
He prefers dealing with price directly: “I’d rather deal with price and just try to listen to what the market is saying. Whatever tools I use, I want them to be independent of me so I have very little influence on what they’re telling me.”
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