Diversified Trend Trading Approach

Blending the Waves to Create the Tsunami



Do you remember in that boring physics class at school where you may have played around with wave tanks to observe wave diffraction patterns at work? They say that you really don't learn anything at school that has to do with entering the real world.... Well think again as we really have to be careful in our assumptions. The principles of dampening and amplification of wave functions which you learn in the physics class really has everything to do with trading a portfolio.

We hear about the benefits of the 'free lunch' offered by diversification, but the majority of us don't ask the question why? That's a shame for if you can grasp the concepts of wave interference, you will find that this very general principle can be found in a complex system almost everywhere you look as this is the way at a very deep level that energy transference in a complex system manifests itself. For example the picture above represents interaction events between what we regard with our classical glasses on as fundamental particles. You actually don't need to go to school to learn this principle. Anyone with a bathtub can experience this principle at work by splashing around a bit.

......anyway without getting to sciencey, the general principle is this. If two 'coherent' waves (perfectly in phase) and of the same amplitude interact together you get a new 'emergent' wave that is twice the amplitude. If two incoherent (180 degree out of phase) waves of the same amplitude waves interact together, the wave disturbance is cancelled. This general principle can be applied to any wave function no matter what their amplitude resulting in an emergent wave form that is representative of the individual waves contributions in terms of phase (frequency) and amplitude.

This general principle gives the free lunch in a diversified portfolio as in terms of diversification the individual waves become individual return distributions. When you combine individual returns distributions of your portfolio, the principles of 'dampening and amplification' apply to the resultant emergent return distribution of the entire portfolio.

Armed with this principle of bath time experimentation, you can then confidently apply this principle to any interaction of return distributions and immediately recognise that provided two return distributions are not perfectly correlated, you will *always* achieve a better risk-adjusted return under a portfolio that is diversified against what can be achieved by the simple summation of the return distributions of each individual contributor. This is where the 'free lunch' arises.

Now armed with this knowledge, you can apply principles of correlation to create a tsunami from the composite parts that delivers stunning risk-weighted returns and a great equity curve with little volatility.

Blending the Discretionary Portfolio's
Now up until this point in this thread we have been discussing the application of discretionary systems such as the DTT, EDTT, EDTT1 and DTTR in isolation. Given our penchant for a diversified approach to trend trading, what we need to do now, given that we have a bit of historical data from our walk forward testing, is to see how we can blend these individual discretionary systems under a broader portfolio.

We now have walk forward data from the EDDT1 that commences from 1 Jan 2015 and walk forward data from the DTTR that commences from 27 April 2016. Unfortunately these don't have the same commencement dates....but don't worry, portfolio blending does not need this requirement as we continuously adapt our portfolio to 'evolve' with emerging market conditions by adding individual contributors on a progressive basis as we find worthy candidates. This is how we ensure that we keep up with emerging market conditions and never rest on our laurels that a particular portfolio configuration will stand the test of time.

In going forward on this thread, I will therefore be regularly posting the results of the EDTT in isolation, the DTTR in isolation and a composite blend of both the EDTT plus the DTTR and comparing the results. If our assumptions are right regarding the bold claim regarding a free lunch, we should find that over time according to the Law of Large Numbers that the blend using the same initial capital of $200K will always outperform the composite parts in terms of delivering superior risk-adjusted returns.

So let's get into it.......






EDTT in Isolation

Base Model ("The once bitten twice shy version")

Summary result for the testing period of closed trades: 13.61% CAGR with 6.7% Max Draw = MAR (CAGR/Draw) of 2.03

Results of Closed Trades



Unrealised Trades




Modest Scaling of Base Model ("I am a confident bastard version") - 2 x position sizing

Summary result for the testing period of closed trades: 23.77% CAGR with 13.2% Max Draw = MAR (CAGR/Draw) of 1.80

Results of Closed Trades



Unrealised Trades




Aggressive Scaling of Base Model ("I am a confident bastard with a death wish version") - 4 x position sizing

Summary result for the testing period of closed trades: 38.68% CAGR with 25.8% Max Draw = MAR (CAGR/Draw) of 1.50

Results of Closed Trades



Unrealised Trades






To be continued.........

C

Blending the Waves to Create the Tsunami cont'd.......

DTTR in Isolation

Base Model ("The once bitten twice shy version")

Summary result for the testing period of closed trades: 3.91% CAGR with 5.04% Max Draw = MAR (CAGR/Draw) of 0.78

Results of Closed Trades



Unrealised Trades





Modest Scaling of Base Model ("I am a confident bastard version") - 2 x position sizing

Summary result for the testing period of closed trades: 7.65% CAGR with 9.58% Max Draw = MAR (CAGR/Draw) of 0.80

Results of Closed Trades



Unrealised Trades





Aggressive Scaling of Base Model ("I am a confident bastard with a death wish version") - 4 x position sizing

Summary result for the testing period of closed trades: 14.63% CAGR with 17.48% Max Draw = MAR (CAGR/Draw) of 0.84

Results of Closed Trades




Unrealised Trades





To be continued.........

C

Blending the Waves to Create the Tsunami cont'd.......

The Blend - EDTT Plus DTTR

Base Model ("The once bitten twice shy version")

Summary result for the testing period of closed trades: 15.27% CAGR with 6.70% Max Draw = MAR (CAGR/Draw) of 2.28

Results of Closed Trades



Unrealised Trades





Modest Scaling of Base Model ("I am a confident bastard version") - 2 x position sizing

Summary result for the testing period of closed trades: 26.33% CAGR with 13.2% Max Draw = MAR (CAGR/Draw) of 1.99

Results of Closed Trades



Unrealised Trades





Aggressive Scaling of Base Model ("I am a confident bastard with a death wish version") - 4 x position sizing

Summary result for the testing period of closed trades: 42.20% CAGR with 25.8% Max Draw = MAR (CAGR/Draw) of 1.64

Results of Closed Trades



Unrealised Trades





SUMMARY



It is still early days and we will monitor this summary on a monthly basis going forward. It is not a matter of *hoping* that the blend produces a more powerful risk-adjusted return result. It is a matter of *knowing*. Over the next year or so, the results will speak for themselves.

So the moral of this story is this.....the next time you see your child splashing in the bath, don't laugh at them. They probably know more about complex systems than you do and they hate being interrupted when they perform their physics experiments.



Now that's something to sing about.

Aveagreattrading week.

C

Do you know about these CTA lists?

https://ctaperformance.com/wntn

http://www.managedfutures.com/top_cta_rankings.aspx

Yep mate...... but the reason I use IASG is their configurable watchlist with email alerts and also their portfolio blender which is really powerful. I do keep my eye on these other sources however when results sent to IASG each month by the CTA's in their lists are a bit slow.

This lady amezed me....

Wow.....riveting BN. Do you see how she is not looking at the keyboard and just feeling her way. No matter what recursive loop she finds herself in she manages to extract herself out of it like a master with none the wiser. Improvisation at it's best. Thanks for sharing mate

Here is another of those fast hand gunslingers. See if you can keep up :-)






....and a beginners lesson/tic. Warning: The 4 and the 2 over can be a bit tricky LOL...... Don't try this at home :-)

Winner of BGT 2017:

Hopefully this week will find more time to deal with the Donchian channel and the standard deviation which is a concept i am slowly trying to appreciate more when it comes to find a Trend and Pin point the right entry ,,
I had never used the D. Ch. before and when looked at the first pics posted by Copernicus who was explaining the breaking
of the upper Donch. Ch level i was thinking of something else until i found out why by looking at more photos_
I have been particularly interested in UsdCad for some time and on which i was already short from 2 weeks, and unfortunately it made me close the trades
when i thought on Thu and Fri was changing trend direction_
Would have it be any different if i had used this system? Never mind, that is what i am trying to find out
meanwhile I am enjoying this new strategy Thank you Copernicus for proposing it
and all others who contributed to enrich it

I am very glad he won. Very stirring performance. :-)

Cheers J

Things have changed a bit from the beginning of the thread but if you follow it through you will understand the logic that has been applied with the current *Paganini* variations on the theme. :-)

C

Oppss.. yes that's true ... perhaps i should read more pages, meanwhile i will try to get familiar with it
reading while listen to your youtube jazz piano solo

Talking about variations on a theme. Here is a Paginini Remix (dub-edit slyfingers ) :-)

The Science of Creative Improvisation and Freestyle. Harnessing different areas of the brain and overcoming inhibition.

https://www.ted.com/talks/charles_li...rain_on_improv

Goodbye USDCAD....*such tearful parting*....kiss today goodbye :-)

Won't forget, can regret what I did for EDTT



Don't you just luv it when you need to use a higher timeframe (H4) to visually capture the complete trade on the the M30 timeframe.

The 9 Dolphins

Attached Image (click to enlarge)

Isn't it amazing how dolphins attract such a wide audience. Such fun loving sea creatures.......what's that?.....you don't see them?.....but then what are you looking at? Invert that depraved mind sinner and repent.

A Journey into the Mind of a Trend Follower

Let's assume for the moment that Nassim Taleb is right in that the reality of our markets is one of 'fat tails' whereby sigma moves are much more likely to occur than a normal (or Gaussian) distribution would imply. As a trend trader, how do we deal with markets of this nature? Give up........c'mon....time is ticking......oh my goodness......Well.....to avoid a Tolstoy epic let's cut straight to the chase.

"Cut your losses short and let your profits run".

We may all have heard this mantra emanating from that group of arcane goat worshiping trend followers who were occasionally burnt on the stake during the dark ages when Efficient Market Hypothesis ruled the seven kingdoms......but have we ever taken stock of this statement to understand how such a heathen war cry was forged.



In dealing with a 'fat tailed' market the implication is this. That the markets deliver super normal momentum moves in either the positive or negative direction at a far greater frequency than anticipated by the rational mind. If you diversify into more liquid markets, the frequency of these events increases.

Without having to let others know that you are a goat worshiper and risk death by impalement, you can apply this principle in secret by diversifying into a broad range of liquid assets across asset classes and deploy very simple momentum models to capitalise on this market tendency. You don't even have to pick your entries with precision.....crazy huh?

All you have to do is invert your mind and stop worrying about the profits but just take care of the exits. In markets that exhibit 'fat tails', all you need to do is to manage your risk and the profits just take care of themselves.

Given the two-sided head of risk versus return.....if we closely manage our risk at all times (by stridently managing our exits) leaving an open profit condition (by simply letting the profits run), then our assumption about the non-gaussian nature of the market, if correct, virtually guarantees that occasionally we make a huge win but never take a huge loss.

We won't know when this huge win will occur but under this bold assumption the Law of Large numbers virtually guarantees that it will happen....... and far more frequently than a normal distribution would suggest.

This asymmetrical stance to trading price ensures under this "crazy" assumption in the long term, the probabilities of success are high if you apply that simple mantra under a diversified portfolio.

This is why those line drawing broom flying weirdo's follow price action and do not attempt to predict future price.

To be able to foray into this arcane tradition, we need to invert our methods of thinking. "Ying becomes Yang" and "Soft porn becomes 9 dolphins". This is what those heretics do....Rather than focusing on the road to riches, (namely the profits by refining precision entries (as most sane folk do)) these frog boilers focus on the risk and the exits (that most sane traders don't).

They say that alpha is persistent with trend following as it occupies a far less crowded and competitive space than those other trading techniques that the majority practice......and you know why it is far less competitive?.......well in a nutshell it is far harder to endure than what most 'normal' people like.....hence investors avoid it like the plague.

For example:

1. who is prepared to tolerate the enduring drawdowns when they observe other techniques flourishing?
2. who is prepared to let their profits run after 9 consecutive losses?
3. who is prepared to cut their losses short during a mean reverting environment where as soon as their stop loss is activated, price resumes back in trend?

....that's just crazy talk. Pfffft......Show me the money!!!!

The discipline required to be a trend follower is counter-intuitive in nature and considerable effort is required to stay the course. That is why these 'broom flying wart reservoirs' rely on back-testing. A comprehensive back-test provides a blueprint to compare against the 'now' and allow these wand-pointers to maintain the faith. They say that if their back-tests frequently produce 10 losses in a row.....then when they reach the 8th loss in a row, then it's not so bad after all. Now that's just silly isn't it?

Why do they practice mind inversion? Apparently by considering a complex problem from all perspectives, they believe it allows them to control their innate biases.

That's why they say they can see 9 dolphins in the image below. What absolute nutters!

Food for Thought

Attached Image

 

1. 13 Secrets About How Money Really Works
2. Ed Thorp, the Man Who Beat the Dealer and the Market
3. Trading with The Trend
4. Is Another Lost Decade Ahead?
5. Trump's Mistake In Taking Ownership Of The Stock Market Bubble
6. David Varadi, “Managing Risk Is Absolutely Critical”
7. Art Collins Interview with Michael Covel on Trend Following Radio
8. Alan Watts ~ Looking Within , I Discover Myself
9. Managing Monte Carlo
10. Take care of the short term; take care of the long term w/ Mike Agne
11. Apollo Robbins: The art of misdirection

Enjoy C :-)