Diversified Trend Trading Approach

... on this side of the fence....

EDTT - Preliminary Results of Medium Range Tests - Discretionary Systems

.......continued from post 1932


Where we left the portfolio comprising only 2 instruments.

Attached Image (click to enlarge)

At this stage of the game with only 2 instruments included, diversification benefits are not significantly revealing themselves. The blend of instruments (adopting a 17 x position sizing multiplier) produces a 24.1% CAGR over the 7 year period with a maximum drawdown (albeit during tough mean reverting times for trend following) of 21.94%.

Now onto the 3rd instrument for inclusion, namely CADJPY.

CADJPY

Annual Results



Summary



Commentary
CADJPY has had a great run over the period offering protracted swing moves of solid momentum on the short to medium term timeframes.

Now let's see how it contributes to the overall portfolio.


Portfolio Blend - Currently only 3 instruments
Annual Results


Through the simple addition of CADJPY to the portfolio we have effectively doubled our CAGR to 47.1% for the 7 year period without adding to our drawdown which lies at 21.02%.

It is worthwhile having a good look at the equity curve above as it reveals something about trend following (momentum) in terms of correlation. Over the extended time series we achieved benefits from fairly low correlation between the 3 instruments but during particular periods of heightened volatility (Nov 2014 to Jan 2016), all 3 instruments became highly correlated. You need to keep in mind that while correlation is very useful as a tool to construct a portfolio, a better appreciation of how to use correlation is by visual analysis of the composite equity curves.

For example refer to the equity curves below of the individual contributors. I have highlighted periods of varying correlation of return distributions.



Summary



Comments
Still only early days as we have only 3 instruments tested with 21 to go. Hopefully this process of portfolio build gives you some great ideas on how to improve your overall performance returns using the power of diversification's free lunch. Our ultimate aim is to smooth the equity curve and reduce the volatility of return distributions.


Cheers

C

A sign of great things to come.

EDTT - Preliminary Results of Medium Range Tests - Discretionary Systems

....continued from post 1942

Where we left the portfolio comprising only 3 instruments.


Attached Image


With the inclusion of 3 instruments we started to see the benefits of diversification kick in. Namely, the improved risk weighted returns associated with the flattening of the portfolio equity curve. Let's see how we go with 4 instruments through the addition of XAUUSD (gold) which we recognise as possessing low correlation with respect to the majority of instruments contained in the Forex asset class.


XAUUSD (Spot Gold)

Annual Results


Summary



Commentary
Despite a slow start in 2010 where equity turned south and we experienced the brutal taste of an immediate drawdown, persistence paid off in August 2011 with a huge win when Gold surged on a large parabolic long trend. Following this windfall we rarely looked back until current day.

Now let's see how it contributes to the overall portfolio.


Portfolio Blend - Currently only 4 instruments

Annual Results


Summary

Attached Image (click to enlarge)

We have had to tame the multiplier a bit from 17x to 12x and this is to be expected as we increase the size of the portfolio. Through the addition of XAUUSD we have further increased our CAGR from 47.1% to 50.1% for the 7 year period while slightly reducing our maximum drawdown from 21.02% to 20.33%. Now this might not seem much but let's now have a look at the annual returns each year.

Portfolio of 3 instruments

Attached Image (click to enlarge)

Portfolio of 4 instruments


You will see that through the inclusion of this uncorrelated instrument to the portfolio, the poor periods of performance with a portfolio of 3 such as 2011 (with 15.9% Gross return) now becomes a solid year of performance in 2011 for 4 instruments (with a 70.7% Gross return).

Let's have a detailed look at the contributing equity curves to see why.



In those particular periods of time when the balance of the portfolio was in drawdown, XAUUSD given it's negatively correlated nature came to the rescue delivering strong performance returns and assisting in flattening the portfolio's equity curve.

If you closely look at the equity curves and how they blend through addition and subtraction you will see that clearly there is room for another negatively correlated instrument....so this provides a clue as to our next instrument for selection and testing.........namely XAGUSD (Silver).

Stay tuned......

4 instruments down now only 20 to go.

Cheers

C

Dear C

Can you please remind me the TF used when backtesting these 4 instruments?
Also, if possible, can you provide an excel with all trades of one of these four instruments so that to compare them with my data?

Thanks

T

Hi T

I am simply using M30 for these backtests but where possible using 2 sets of SDC's per entry with a mid term lookback and a long term lookback capturing the longer term momentum of a trend and the short term momentum of a swing move in the trend. I am avoiding the longer term due to SWAP and my average holding period is around 9-10 days.....but can vary considerably around this average.

The important bit to remember is that we are chasing shorter term momentum moves with bias. Our choice of timeframe is discretionary....but the momentum observed in a sequence of bars is really what we are chasing here. In other words to simplify our discretionary trading and keep charts to a minimum .....use one timeframe to trade (eg. that deals with price on the M30 and H1 traditional timeframes) but capture the longer term and shorter term momentum on M30 from swing highs and swing lows by observing momentum in the bars on the single chart only. We can use other timeframes to provide a context for the momentum moves which is helpful but we just don't trade off them.

I hope that makes sense. All other rules of EDTT apply though mate...including when to revert to 0.5 width SDC at 2.5 x R. I needed to simplify a bit and the logic appears more valid than an arbitrary choice of timeframes.

More often than not we are correct in identifying where momentum exists by looking at bias in price action....but the hard part is choosing our direction of bias for our SDC projection. If we are wrong in our choice we get stopped out quickly by the trailing stop....... but by having two different forms of momentum bias (if price gives us this opportunity) we have two bites of the momentum cherry. This solves a problem I was previously having in having to choose a single projected momentum move...being stopped out...and then watching price revert back in the direction of the prevailing momentum.

Here is a chart example of what I mean below.



I have attached the data analytics mate which includes trade details.

Cheers

C

Logic of EDTT - Using Chart Visuals

Here you go T. Follow the sequence of processes that occur in managing trades on EDTT.

With some music of course. :-)

















Edit: For the keen eyed out there...yes I did reach 2.5 x R on the slow mover but hey.....this was a demonstration. These sort of errors don't occur when trading live.......cause we are perfect creatures......./ tic :-)



Cheers

C

Perfect explanation as always!

Robots can only dream about such results!

I sense a bit of Bladerunner coming on :-)

I've seen things you people wouldn't believe.
Attack ships on fire off the shoulder of Orion.
I watched c-beams glitter in the dark near the Tannhäuser Gate.
All those moments will be lost in time, like tears in rain.
Time to die.

Attached Image (click to enlarge)

Recent Rutger Hauer work:

EDTT - Preliminary Results of Medium Range Tests - Discretionary Systems

.....continued from post 1944

Doing this medium range backtesting exercise is starting to bring back memories of the performance metrics experienced on DTT in the 2013 and 2014 calendar years. Now that we are focusing on the short to medium term (like the good ol' DTT days on H1 with 0.5% trade risk), our results are closely approximating the stellar results of the live forward test days during this period just prior to us looking at longer term timeframes with EDTT which commenced on 3 Jan 2015.

What is pleasing to note is that the principles and practices of these breakout approaches has stayed remarkably consistent from inception back in 2013 to current day.

.....anyway enough of the reminiscing.

Back to our portfolio analysis between 2010 to current day.

Where we left the portfolio comprising only 4 instruments.



Things were coming on nicely where the benefits of diversification were beginning to take shape. With the addition of XAUUSD we saw CAGR lift to 50.1% for the 7.6 year period with a max drawdown of 20.33%. Surely it can't get better that this? If you remember we identified the ability to add XAGUSD to the mix given the review of individual equity curves and their contribution to the overall portfolio and our knowledge of the close correlation that exists between gold and silver. Well let's see if this assumption stacks up.


XAGUSD (Spot Silver)

Annual Results



Summary


Commentary
Not many trades were made with silver but the ones that were made were well worth it. We had a relatively high win rate of 55.2% and an awesome profit factor of 4.57.

Now let's see how it contributes to the overall portfolio.


Portfolio Blend - Currently only 5 instruments

Annual Results



Summary



Through the addition of XAGUSD we have further increased our CAGR from 50.1% to 59.0% for the 7 year period while slightly reducing our maximum drawdown from 20.33% to 19.5%. The joy of discretionary trading is starting to come back in spades. Here I was thinking that it was time to foray into the fully systematic space...but you can't turn your back on these results.

Just look at the Gross annual returns. Sure we need to subtract SWAP and slippage from these results....but there is more than enough joy to spread around.



Of note are the paltry returns of 2017 which signify the difficult times we have endured over the beginning of the year.



So where to now. What new instrument do we add to the mix to hopefully improve things further?

It's time to have a look at the contributing equity curves again.



Two weak spots have been identified that we would like to fill (refer to chart above).....so where to next. We obviously need something that is non-correlated to our instruments already that include forex pairs and precious metals.....you guessed it.....now it's time to add a few indices.

Next stop DJ30. Let's see what further damage we can do :-)

Stay tuned......

5 instruments down now only 20 to go.

Cheers

C

Interesting article :-)

Thanks, but unfortunately behind paywall...

Hey buddy..
I just wanna say :
Really an excellent piece of work you´re delivering here.
We do backtesting and mainly forwardtesting with a different strategy and a different moneymanagement.
Means long term trading by Multi Entry and Multi exit.
But these enormeous potential on analytic work is very rare in any forum.

Thanks for showing us your work.
Stay tuned
Guido

It's a pleasure Guido :-)

Damn...sorry R. It must be your permissions or I am accessing via LinkedIn. I am not a subscriber??????? T'is a conundrum.

Or I am in a poor country. I will try through LinkedIn or VPN.

DTTR worked this week. DD recovery mode? Likely causes: more congestion box drawing and less trigger happy fingers


EUR NZD long


GBPNOK short 3xR reached


Example of congestion box:

Nice R. :-)