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Attachments: Diversified Trend Trading Approach
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Diversified Trend Trading Approach

Quoting Copernicus
Glenhaven Capital....ouch {image} Probably no need to go on...but it at least demonstrates how the long term fortunes are dictated by Outliers. The rest is just noise...in the scheme of things :-)
I dont have access to these charts.
Quoting Copernicus
....trend followers and the likes of Buffett, Soros etc. ....outlier events .... no retail traders with a sufficient long term track record that I can find in the literature to demonstrate this.
If you’ve decided Buffett, Soros etc. are the best then naturally one concludes outliers derived from trend trading is the way. And no doubt if you can replicate those models you will “succeed”.

But as you admit your data set is incomplete. It doesn’t tell us about the forex prop traders. Are there successful ones that do not rely on outliers from trend trading? I suspect there are….there are always outliers; FPO’s (forex prop outliers).

But one might decide that I don’t have the supporting data so I better focus on the data I do have. Which might be the more sensible thing to do.

….will keep you posted
Here is how we can definitively test for an edge.

Take a very long term 'real' market data sample. Randomise it with an array to eliminate auto-correlation in the series. Then assess the performance of your system against that array of random result. A system with an edge applied to real market data will clearly outperform an array produced by applying that system to random market data.

Here is a Breakout Trend Following Model (uncompounded) applied to real market data (top performer) against that same model applied to that same market data which has been randomly shuffled to eliminate auto-correlation in the series.

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Now that we know there is an edge to that system, we can apply compounding to the series to lift it to the heavens.

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You only need a weak edge under compounding to generate significant wealth building returns. Only 5.3% of these trades from outlier events produced this result. The rest was inconsequential to total performance.

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This is the result of a system with a weak edge under a very large trade sample size which through diversification captures outliers in market data. It is only about 5% of total trades that turn the following profitable performance to a random performance result which is displayed by the lower group of curves which are hard to visually see over the large sample size.

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We always need to keep in the back of our minds that it is the market data that defines an edge that a system can exploit.

The system does not possess the edge itself. There must be a non-random signal in the market data itself. This 'fact' limits the total possible edge that is available to any possible trading system.

A system can leverage this natural edge through money management methods....but it cannot create an edge out of thin air...unless you believe in perpetual motion machines.
The exploitable edge in real market data is very little. Markets are very efficient. This therefore limits the total possible returns that can be extracted from any real market.

The best Funds in the world know how to extract this edge in a sustainable manner without blowing up. I think we underestimate the capability of these FM's when discussing retail traders. They are simply outclassed by the professionals with vast experience and resources at their disposal. We should keep our expectations realistic and very humble.
The prop shops themselves use diversification to make their models sustainable in the long term. The successful prop traders in their group can be collated into a non-correlated and diversified business model for the firm. The individual long term success of the trader however....is another story.
Your arguments appear convincing and may very well be correct. But I remain uncertain.

I require a large amount of data from at least a similar population before drawing conclusions and comparisons.

Consequently, I wont be convinced until the long-term data from forex prop traders is available. Given that’s unlikely I will have to rely on my own personal research. Will reply to this post in 5 years time.
Here is the market data on which this simple breakout system was tested. The red market data is the 'real market data' in the series. All the other curves are random market data sets where the auto-correlation in the market data series has been removed.

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Now if you had a breakout system, you would assume that some of the more volatile curves would produce a better performance result for that system than the real market data.....but here is the rub....they don't.

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The real market data (red) produced the best performing equity curve above in green.

It is not the form of the market data that is important to an edge. It is the 'auto-correlation' in the series that makes a profitable system. So technical traders looking for 'form or pattern' are not necessarily going to able to detect the 'actual bias' that exists in a market data series.

Here is a random trend......plotted against a non random trend (a price series with auto-correlation in it).

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There is no edge to be extracted from the random trend in the future....but there is an edge to be extracted from the non random trend in the future. Visually you will not be able to decide between the two....but the auto-correlation in the non random series produces the drift in the series. It is the drift...or the bias in the series that leads to a system with an edge.

During outlier events....often called capitulation tails......there is an auto-correlated bias in the underlying data series. No such bias exists in random market data....hence your results are just that....random.
Quoting Le.Metier
Your arguments appear convincing and may very well be correct. But I remain uncertain. I require a large amount of data from at least a similar population before drawing conclusions and comparisons. Consequently, I wont be convinced until the long-term data from forex prop traders is available. Given that’s unlikely I will have to rely on my own personal research. Will reply to this post in 5 years time.
No probs Le M. It is great that we can discuss these matters.....as most traders simply don't want to talk about it. It sort of is the elephant in the room sort of discussion to most retail traders. :-)
Quoting Copernicus
{quote} No probs Le M. It is great that we can discuss these matters.....as most traders simply don't want to talk about it. It sort of is the elephant in the room sort of discussion to most retail traders. :-)
Since our conversations I view FF more as a casino than a forum to learn about professional trading. Yes there are an abundance of accounts that show-off huge returns but they typically display these variables: short track record; small balances; huge risks and frightening drawdowns. To publically ask the question, “what is the likelihood of survival of such accounts” is to be electronically stoned. Long-term survival is traded for short-term thrills and certain death.

Now that’s not to deny FF of all value. There is value here (and here), as well as other pages, it is just hard to find and difficult to discern.
Quoting Le.Metier
{quote} Since our conversations I view FF more as a casino than a forum to learn about professional trading. Yes there are an abundance of accounts that show-off huge returns but they typically display these variables: short track record; small balances; huge risks and frightening drawdowns. To publically ask the question, “what is the likelihood of survival of such accounts” is to be electronically stoned. Long-term survival is traded for short-term thrills and certain death. Now that’s not to deny FF of all value. There is value here...
Totally agree.

The real problem with these markets are that they are so monstrously hard to decipher in quantitative terms. Unlike say our universe where the system agents like electrons and quarks dance to defined 'Laws of Quantum Field Theory' that are enduring throughout the system.

These financial markets are so much harder than other 'physical systems'. As Richard Feynman puts it....these markets are so hard to decipher because unlike natural systems, in the financial markets, 'electrons have feelings'. No Universal Laws....just a moving dynamic feast of an evolving interaction between adaptive agents. A dance between 'intelligent participants'.

There is no common knowledge set held between agents unlike say electrons. There is just the unique and limited knowledge set that resides in each of us that defines our trading behaviour. All incomplete and unique....so when they all come together we just get a massively incomplete riddle in which uncertainty has just so much to say.

The difficulty of deciphering these markets is what gives so much room for bullshit-artists to flourish....as they can be pretty sure they can't be held to account.:-)
Quoting Copernicus
There is no common knowledge set held between agents....
You’ve really thought this all through haven’t you. I wonder if there is any hope for a fool.


Quoting Copernicus
The real problem with these markets are that they are so monstrously hard to decipher in quantitative terms.
Forex perhaps one of the hardest to decipher quantitatively. Equities not as hard.
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Quoting Le.Metier
{quote} You’ve really thought this all through haven’t you. I wonder if there is any hope for a fool.
So long as we both remain fools there is hope for both of us. Where traders come undone is when they believe they have worked it all out.....

It makes them say silly things like this...." No Loss Forex Algorithm" or things like this....."Zone Recovery Trading Algorithm".

You gotta laugh. Blatent shonky statements.....and the masses fall for it :-)
A Trend Followers Perspective on Risk

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https://atstradingsolutions.com/a-tr...on-trade-risk/
Why a Trend Follower Uses Portfolio Realised Balance rather than Portfolio Equity for Position Sizing

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https://atstradingsolutions.com/why-...sition-sizing/
Do Day Traders Rationally Learn About Their Ability?

Abstract
We analyze the performance of and learning by individual investors who engage in day trading in Taiwan from 1992 to 2006 and test the proposition that individual investors rationally speculate as day traders in order to learn whether they possess the superior trading ability. Consistent with models of both rational and biased learning, we document that unprofitable day traders are more likely to quit than profitable traders. Inconsistent with models of rational speculation and learning, we document that the aggregate performance of day traders is negative, that the vast majority of day traders are unprofitable, and many persist despite an extensive experience of losses,
Attached File(s)
File Type: pdf Day Trading and Learning 110217.pdf   1.3 MB | 112 downloads
Complexity economics sees the economy — as not necessarily in equilibrium, its agents not super-rational, the problems faced not well-defined and the economy not as a perfect machine but as a dynamic ecology of beliefs, principles and behaviours.

https://www.nature.com/articles/s42254-020-00273-3
The Hard Thing About Learning Hard Things

A great article about unstructured learning :-)
Fred and Rich discuss a script they have developed to visually assess whether an enduring edge is present in a system.

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It's great to be a part of the Top Traders Unplugged crew. Such a privilege.

Looking forward to more sessions and bringing different perspectives into the discussion on Trend Following.

https://www.toptradersunplugged.com/...uly-25th-2021/

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