Diversified Trend Trading Approach

You are here to entertain me

how many pips did you make this week huh ?



jk

study your own behavioral patterns by linda raschke http://lindaraschke.net/wp-content/u...schke_0803.pdf

Nine Rules of Ned Davis Research Group

1. Don’t Fight the [Ticker] Tape The tape provides a stop-loss for “should-be” beliefs. The trend is your friend. Go with Mo (momentum, breadth thrusts, signs of churning). Listen to the cold, bloodless verdict of the market. (Pay special notice to indicators on the leading edge of the market like volume, new highs or lows, the Dow utilities, bonds, relative strength.) Moves with a lot of confirmation are the healthiest, and huge moves are often global in nature.
2. Don’t Fight the Fed Remain in harmony with interest-rate trends (rates dropping is good; rates rising is bad). Money moves markets. Stay in line with monetary trends (money [minus] economic demands equals liquidity left over for financial markets). Economic strains: Inflationary pressures lead to Fed tightness (up commodities, up gold, down dollar, rising real interest rates). Economic ease: disinflation leads to Fed ease.
3. Beware of the Crowd at Extremes Go with the flow until it reaches a psychological extreme. At that point, it pays to take a contrary approach. Liquidity and psychology are inversely related. Extreme optimism equals low cash. Extreme fear equals high cash.
4. Rely on Objective Indicators Rather than using gut emotions to determine the supply and demand balance, use the weight-of-the-evidence approach (computer-derived mathematical measurements).
5. Be Disciplined Our mandate is to follow our models, forcing us to be disciplined. Our benchmark or anchor composite model determines core invested position.
6. Practice Risk Management We are in the business of making mistakes. Winners make small mistakes; losers make big mistakes. We focus on a risk management strategy to keep mistakes small.
7. Remain Flexible Indicators change and data is revised. Scenarios change. Review models on an objective and timely basis.
8. Money Management Rules We are more interested in making money than being right. Be humble and flexible (be ready to turn emotions upside down and thus be open-minded). Let profits run, cut losses short. Think in terms of risks, including the risk of missing a bull market. Buy on the rumor, sell on the news.
9. Those Who Do Not Study History Are Condemned to Repeat Its Mistakes Go back as far as possible. Use bull, bear, and neutral cycles.

Thanks for this M. This sentence really resonated

That's the spirit M. Time to get back to the club.

Nice M. I must admit that most of what Linda discusses here is the reason for my strong desire to become fully systematic.

The same principles however still apply however in various degrees in the systematic space.

I think it was Ed Seykota that said "Systems trading is ultimately discretionary. The Manager still has to decide how much risk to accept, which markets to play, and how aggressively to increase and decrease the trading base as a function of equity change".

How right he is. Fortunately for trend trading, human behaviour is embedded in every system we deploy and hence why arbitrage is so persistent in this technique.

yes, in a way trend trading is like taking advantage of people flaws, trading people perceptions if i can put it like that.

Guys.....I have opened up a new thread to discuss a data mining project currently underway. As you probably realise by now, this thread is where I prefer to reside and chill with my friends to chew the fat.

We can discuss anything here of possible interest in a relaxed manner with mandatory music for inspiration...but if you are interested in further strings to the bow......then please participate in that other thread if it floats your boat.

Cheers

C

....and now for something completely different.

Politics 101

Power Laws and Non Linear Systems

Inserted Video

Nonlinear Dynamics & Chaos

Inserted Video

Last one.....and then some fun :-)

Are you a Divergent Risk Taker or a Convergent Risk Taker?

Unfortunately you need to take an asymmetrical stance to trading. It is this asymmetrical stance that creates the risk-return relationship. If you simply trade a symmetrical strategy such as a perfect hedge, your wins are cancelled by your losses...including the additional real costs of frictional drag. This additional frictional drag makes it an overall negative sum game.

We therefore need to design an asymmetrical directional strategy that hopefully is aligned with how the real market actually behaves and that the real market is not normally distributed over the period of time you trade it. We rely on the assumption that the market assumes a convergent or divergent bias in it's return streams and does not follow a normal distribution so we can hopefully align our strategy design with that bias and hope that the bias is sufficient to exceed the inevitable frictional drag......and that applies to all of us who feel that they are not gamblers in this game.

Obviously it is the market that determines your ultimate success. Your strategy is the means to 'ride the market condition'. As traders (whether convergent or divergent) we all rely on the assumption that markets are non-gaussian in nature which creates arbitrage opportunities in the peaks (convergent) or tails (divergent) of the market distribution. This requires you to asymmetrically position your strategy towards these arbitrage opportunities and your success will be dictated by the markets actual alignment with this assumptive posture.

Now unless we are in the game of Artificial Learning where we adopt adaptive programming, most of us apply stationery solutions to a non-stationery market. This therefore creates risk when the market conditions are not aligned with that static solution (eg. our trade style or EA).

If you design your strategy to cut losses short and let profits run in a convergent market condition, you will experience building drawdowns. Your only hope is for market conditions to change (diverge) where market direction now becomes favorable to your strategy alignment which allows you to experience some significant wins to pay for all those past losses. Some of these wins can be so huge and euphoric that you quickly forget about the painful past and park some of that windfall into your drawdown war chest. Of course if convergent market conditions persist for a period of time, those drawdowns will build to painful proportions.

If you design your strategy to anticipate trend breaks or revert to a previous support or resistance or mean, then provided it does so, you will repeatably win small amounts that reflect your ability to time or predict the future trajectory of price...however, to achieve a high hit rate, you need to open up your strategy to allow for your timing to be slightly wrong as you have conviction that your future predictor is right. What this means is that you open your strategy design to the possibility of the occasional bigger loss when you are wrong. That's no big deal probably for a single event....but let's start looking at a string of unfavorable events when market conditions are truly disruptive. That lenient posture in your risk mitigation can lead to severe losses and possible risk of ruin.

So with one philosophy we are right more of the time...but we can blow up some of the time.......and in the other philosophy we are wrong most of the time, but we can be right some of the time...in a big way!!!!. It's a tough decision, but when you have significant skin in the game, an understanding of this relationship is important. Let's say your life depended on it. A quick life of consistent cashflow ending with an abrupt death and bankruptcy, or a longer life of an enduring slog running against the odds with the occasional windfall and euphoria.

Both convergence and divergence have their role in managing uncertainty but one assumes markets are predictable and stationery and converge to a known future static equlibrium (convergent) whereas the other (divergent) assumes markets are non-stationery where there is no single static known future equilibrium. The asymmetrical shape of the return profiles of successful traders provides a clue to your underlying philosophy. Unfortunately they are the asymmetrical antithesis of each other and their profiles are contingent on your philosophy and associated strategy design considerations.

So given that it is possible to be successful under both philosophies, then the approach is dependent on the market condition. Is it stationary (predictive), non-stationary (adaptive) or a combination of both? For those with significant skin in the game....which approach suits your underlying opinion of the markets best as this will be a major factor that aligns your psyche to your trading style.

Now under diversification this problem can be addressed to a degree by being pregnant in both styles and have an array of different stationery solutions that when collectively applied allow for a degree of adaptability between oscillating market conditions, however ultimately you need to ensure that your solution is biased towards divergence if you have significant skin in the game given the sting in the tail with the loss profile of convergent solutions despite their attractive appeal while conditions last.

By having a convergent bias, you possess a weak spot that gnaws away in the back of your mind. It takes the glow of that attractive winning streak and keeps you awake at night. You hope that the market doesn't see that weak spot (Achilles heal) and that is about all you have to protect yourself....that feeling of hope. If I go into battle, I like to be prepared and have my bases covered. I don't like going to battle with a weak spot. As clever as your derived model might appear, if it has a convergent bias, you are exposed.

In the game of Trading 'Survivor' who will outlive and outlast in this game, and who will be voted off the Island?

[quote=Copernicus;11467965]Are you a Divergent Risk Taker or a Convergent Risk Taker? ....

The best contribution I have read in last months. I`ll read everything again because I`am not a mathematician.
Thank you very much.

These are for someone hating anything.

We have such situation.... very smart trader and money manager is bailing out from trend following....



https://www.winton.com/news/2018/ris...rend-following

[quote=Isabella_D;11482866] Cheers Is