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Diversified Trend Trading Approach

  • #2,621
  • Dec 9, 2017 5:00pm Dec 9, 2017 5:00pm
Quoting thomasK
{quote} Indeed! Here are some points I found really interesting and thought provoking: 1.When you build your portfolio don’t focus on the strategies used but on the distribution of draw down periods, that is the most important aspect you need to cover in order to have good diversification. 2.Having many systems trading one same instrument is better than having a single system trading many instruments because different trading tactics provide more robustness than adding other instruments. This can perhaps be explained by the fact that all forex instruments...
Hi T. Totally agree. The method we use to 'plug' the weakness in the drawdown signature of the portfolio through system design gets to the heart of the matter.
  • #2,622
  • Dec 9, 2017 5:10pm Dec 9, 2017 5:10pm
Quoting Ramadas
{quote} How do you exactly determine position sizing with ATR (14/2)?
Firstly define your trade risk exposure you are after....for example 0.25% or $500 on a $200k account.

1. Define true range of desired timeframe for each bar;
2. Define average true range of selected period (eg. 14 bars);
3. Apply multiplier
4. Apply ATR multiplier to entry price to calculate long or short stop positioning;
5. The distance in ticks between the entry and positioned stop now becomes $500 or 0.25% trade risk;
6. Calculate lot size for this desired risk and tick distance.
  • #2,623
  • Edited 5:40pm Dec 9, 2017 5:21pm | Edited 5:40pm
Quoting bluesoul
Hi C, I have been backtesting your strategy manually on different pairs, as I mentioned earlier I was looking for something where there is the least discretion of trader to trade, so I picked it up. Your system is good and combined with a strong diversified portfolio it can definitely generate consistent profits. But my original trading system I had only one problem that it's mostly dependent on traders discretion. I can't find anything which works 90% of the time like my current selection i.e volume spread and volume zone analysis (VSA/VZ). 90%...
Hi B. Thanks for popping in. I totally agree with your verdict mate. The basis of portfolio construction can be applied to any system provided it has a an edge to make your desired solution more robust. The nature of strategy chosen by the trader is just a means to an end. If I had my time again I would probably have set up a new thread focusing on portfolio construction alone as many might think that the 'secret sauce' lies in the strategy deployed (such as EDTT). This is not the case however. The EDTT is simply used as it fits my lifestyle and personality and has the requisite edge and characteristic equity curve signature than can be sculpted by portfolio blending.

What I have found over my journey is that the real fun begins in portfolio construction where you design your distribution of returns as opposed to leaving this outcome to the whim of the market. There are just so many ways under portfolio construction that you can proactively make great returns using very simple systems.....it is a much easier path to take......whereas if you choose the hard path of a single system with no diversification....it is like finding a needle in a haystack.

The basic logic of portfolio construction is as follows.

1. Invest your efforts in finding very simply strategies that fall into either the divergent camp with positive skew or convergent camp with negative skew. Ultimately you need a portfolio with positive skew if you want the strategy to be robust and stand the test of time. Avoid the black swans at all costs and allow your solution to benefit from white swans.
2. Test each strategy across as broad an investment universe across asset classes that you can muster and across as large a data set as you can find. Nearly all optimised complex strategies fail when market conditions change so the aim of this exercise is to simplify to find the most robust candidates that simply survive and offer a small edge. You will not find a solution that suits the average retail traders expectations here....but you will find robust candidates that protect your capital and when market conditions dictate....allow you to outperform.
3. From that shortlist you then visually examine the return distributions and select candidates that provide drawdown offsets and help to flatten the distribution of returns of the blend;
4. Choose you desired risk tolerance in terms of risk-weighted returns and apply your position sizing multipliers;
5. Continuously look for new additions that help plug the weaknesses in your distribution of returns.

.....and that's about it :-)
  • #2,624
  • Dec 9, 2017 5:52pm Dec 9, 2017 5:52pm
Quoting Copernicus
{quote} Firstly define your trade risk exposure you are after....for example 0.25% or $500 on a $200k account. 1. Define true range of desired timeframe for each bar; 2. Define average true range of selected period (eg. 14 bars); 3. Apply multiplier 4. Apply ATR multiplier to entry price to calculate long or short stop positioning; 5. The distance in ticks between the entry and positioned stop now becomes $500 or 0.25% trade risk; 6. Calculate lot size for this desired risk and tick distance.
Thank you!

Since I plan to start reverting strategy of portfolio on Monday manually (unfortunately I cannot program ATR sizing into EA) I would like to check my understanding and sorry for asking on Sunday

Could you please check?
1. My risk for reverter system is 0.38% of capital and ATR for AUD JPY (15 days) is 62.6 pips. I assume 2 in ATR 14/2 means 2*ATR (14)?

2. I am using my position sizing calculator to calculate number of lots for 62.6*2 = 125.2 (illusory SL only for position sizing).

3. For my capital on demo account of 4299.81 EUR I would need to buy 0.02 lots.

Picture worth 1000 words:
Attached Image (click to enlarge)
Click to Enlarge Name: IbHa5pt.png Size: 331 KB


Or by ATR 14/2 did you mean half ATR?
Cut short your losses. Let your profits run on. David Ricardo (1772-1823)
  • #2,625
  • Dec 9, 2017 6:03pm Dec 9, 2017 6:03pm
Quoting Ramadas
{quote} 1. My risk for reverter system is 0.38% of capital and ATR for AUD JPY (15 days) is 62.6 pips. I assume 2 in ATR 14/2 means 2*ATR (14)?
Yes R. Once you have ATR over a 14 bar period then multiply this x 2



Quoting Ramadas
{quote} 2. I am using my position sizing calculator to calculate number of lots for 62.6*2 = 125.2 (illusory SL only for position sizing).
Exactly. We apply an illusory stop for position sizing only.

There is no actual stop used on this mean reverter as it uses a performance exit as opposed to a hard stop. Note that trade risk % needs to be very small on the mean reverting system itself (which it is as 0.38%) so a black swan event doesn't cripple the portfolio. In the land of reality stops are frequently useless anyway when slippage is extreme.


Quoting Ramadas
{quote} 3. For my capital on demo account of 4299.81 EUR I would need to buy 0.02 lots. Picture worth 1000 words: {image}
Picture looks about right mate with regard to illusory stop positioning. Just check that with your applied position sizing of 0.02 lots that the distance between entry and the illusory stop translates to a 0.38% trade risk capital exposure.....and then you know that you have nailed it. :-)


Quoting Ramadas
{quote} Or by ATR 14/2 did you mean half ATR?
No mate you were right before. It is 2 x ATR and not ATR/2. Cheers C
  • #2,626
  • Dec 9, 2017 6:23pm Dec 9, 2017 6:23pm
Quoting Copernicus
{quote} Hi B. Thanks for popping in.
Great piece of advice. I will consider all of it.
Holy Grail - Patience and Acceptance
  • #2,627
  • Dec 9, 2017 6:46pm Dec 9, 2017 6:46pm
An interesting finding i thought should share here.

GU and GJ at prefect place at right time
Brexit deal about to close. and both pairs are having support within Brexit week area.
GJ on the middle of Brexit week and GU on the bottom.
Interesting week and month it will be, GU 300-500 pips GJ 500-100 pips.
Colored bars on charts are all high volume bars.
Attached Image(s) (click to enlarge)
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Click to Enlarge Name: GBPUSDWeekly.png Size: 53 KB
Holy Grail - Patience and Acceptance
  • #2,628
  • Edited 10:18pm Dec 9, 2017 6:52pm | Edited 10:18pm
Monthly Performance Review - November 2017 - Bollinger Mean Reverting Complement

.....continued from post 2612....

Inserted Video



Ok....so we were kicked in the guts with mean reversion with our EDTT for November so let's see how our short term- long only- Bollinger mean reverting system performed over the same period. The aim of the game under a multi-system portfolio is to reduce the negative impacts of a single return distribution with the positive impacts of it's blended counterpart.

The fully automated mean reverter trades across a universe of 45 instruments selected from 6 asset classes:
1. Forex;
2. Equity Indices;
3. Treasuries;
4. Soft Commodities;
5. Metals; and
6. Energies.

The month of November saw trade activity on 22 of the 45 instruments with 17 being profitable contributors and the balance being loss contributors. With a 0.25% trade risk the system produced a positive return of 1.22% for the month.

General historical stats between 1 Jan 2010 to 30 Nov 2017 are as follows:

Attached Image (click to enlarge)
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This system has all the statistical hallmarks of a convergent system....namely a relatively high Pwin% of 69.8% and a return to risk ratio of 0.582: 1.

Now let's look at the blend

Boll Mean Reverting System - Convergent
Here are the results of the Boll mean reverting strategy in isolation (if we scale results to 0.5% trade risk by applying a 2x multiplier to position sizing of the raw system). We do this to align the system with our max drawdown tolerance over the historical data set to approximately 10%.

Attached Image (click to enlarge)
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In isolation the mean reverting system produces a CAGR of 7.87% and a Max Draw of 10.96 with a MAR ratio of 0.72. Note the negative skew of -0.58.

EDTT Breakout System - Divergent
Here are the results of the EDTT breakout strategy in isolation using a 4 x multiplier (or trade risk of 1%) to achieve a desired max drawdown of approximately 10%.

Attached Image (click to enlarge)
Click to Enlarge Name: Capture3.JPG Size: 92 KB


In isolation the breakout system produces a CAGR of 27.19% and a Max Draw of 10.71 with a MAR ratio of 2.54. Note the positive skew of 0.99.


Now the Blend
Let's see the result of the blended solution having now included the November result from both systems. Remember that under a blend we can afford to be even more aggressive in our position sizing to achieve the same level of drawdown exposure. In post 2501 we settled on a blend with the following weightings:
1. Boll MR 0.19% trade risk
2. EDTT 1.31% trade risk.

Attached Image (click to enlarge)
Click to Enlarge Name: Capture4.JPG Size: 109 KB


Look how the blend blows the socks off under a similar max drawdown exposure.

As a blend the portfolio produces a CAGR of 40.13% and a Max Draw of 10.58 with a MAR ratio of 3.79 with a great positive skew of 0.99. We still got hit over the head with a wollop for November given the poor performance of the EDTT over the period, but it's effect was diluted by the Boll mean reverting system.

Cheers Guys

Aveagreattradingweek.

C
  • #2,629
  • Dec 9, 2017 9:17pm Dec 9, 2017 9:17pm
[quote=bluesoul;10576611]An interesting finding i thought should share here. GU and GJ at prefect place at right time Brexit deal about to close. and both pairs are having support within Brexit week area. GJ on the middle of Brexit week and GU on the bottom. Interesting week and month it will be, GU 300-500 pips GJ 500-100 pips. Colored bars on charts are all high volume bars. {image} {image}[/quote

The perfect time to long Gbp. Looking fwd for the best reverse point
  • #2,630
  • Dec 10, 2017 1:16am Dec 10, 2017 1:16am
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  • #2,631
  • Dec 10, 2017 3:19am Dec 10, 2017 3:19am
Quoting Copernicus
{quote} Good points R....but don't be too hard on yourself. Clearly November was a tough month for EDTT. Both you and I were slammed with flying sumo's. Remember that the backtest had a 5% decline at 1% trade risk despite our different universal composition. If the hit came at one period of time during the month....then yes, you could probably attribute this to correlation exposure....however if the losses were spread throughout the month, then you could attribute this to 'style'. It is clear from the testing that this technique has 'style drift'...
Well actually it was at the same 1-2 days, when USD positions reversed (USDSEK, USDMXN, GBPUSD). Therefore I am doing diversification according to exposure as Mr. Clenow advises here:

There are also a growing number of non-USD crosses, such as the Euro/Yen future and
so on. This sector offers some interesting diversification possibilities if you use these types of crosses.
Always be aware of the danger of stacking up USD risk and be sure to monitor the risk you are taking here.
If you are long the euro future, long the CHF future, the yen future, the British pound future and the Aussie
future, you are really just short dollar and when the dollar recovers, you get hit on all positions at once.
Taking these positions may still at times be a good idea, just as long as you are aware of the risk and model
it properly so you know what to expect when things turn against you.
Cut short your losses. Let your profits run on. David Ricardo (1772-1823)
  • #2,632
  • Dec 10, 2017 3:25am Dec 10, 2017 3:25am
Quoting Copernicus
Look how the blend blows the socks off under a similar max drawdown exposure. As a blend the portfolio produces a CAGR of 40.13% and a Max Draw of 10.58 with a MAR ratio of 3.79 with a great positive skew of 0.99. We still got hit over the head with a wollop for November given the poor performance of the EDTT over the period, but it's effect was diluted by the Boll mean reverting system. Cheers Guys Aveagreattradingweek. C
I hope I will have better trading week. I am hunting for better MAR:

0.375% and 1,25% risk distrubution between two systems with MAR 4.67 (DD 9.66% and CAGR 43,5%). Skew 0.9.
Cut short your losses. Let your profits run on. David Ricardo (1772-1823)
  • #2,633
  • Dec 10, 2017 3:26am Dec 10, 2017 3:26am
Quoting Ramadas
{quote} Well actually it was at the same 1-2 days, when USD positions reversed (USDSEK, USDMXN, GBPUSD). Therefore I am doing diversification according to exposure as Mr. Clenow advises here: There are also a growing number of non-USD crosses, such as the Euro/Yen future and so on. This sector offers some interesting diversification possibilities if you use these types of crosses. Always be aware of the danger of stacking up USD risk and be sure to monitor the risk you are taking here. If you are long the euro future, long the CHF future, the yen...
Sound logic mate :-)
  • #2,634
  • Dec 10, 2017 3:27am Dec 10, 2017 3:27am
Quoting Ramadas
{quote} I hope I will have better trading week. I am hunting for better MAR: 0.375% and 1,25% risk distrubution between two systems with MAR 4.67 (DD 9.66% and CAGR 43,5%). Skew 0.9.
Go for it R. ;-)
  • #2,635
  • Dec 10, 2017 5:14am Dec 10, 2017 5:14am
Legendary Watts

Inserted Video
Holy Grail - Patience and Acceptance
  • #2,636
  • Edited 6:19am Dec 10, 2017 5:42am | Edited 6:19am
Quoting Copernicus
{quote} Go for it R. ;-)
Even very positively correlated instruments on daily give different signals in reverter, so I will go wild (As Jerry Parker says: "Diversify like crazy") and include all instruments I have. Indexes, silver, gold are out of question because of low capital for ATR*2 position and 0.375% risk.

And additionally almost 100% negative correlation doesn't matter, because it is long only.

So it seems we enter long on reverter signal tomorrow on

AUDNZD
EUR USD

?
Cut short your losses. Let your profits run on. David Ricardo (1772-1823)
  • #2,637
  • Dec 10, 2017 6:24am Dec 10, 2017 6:24am
Quoting Ramadas
{quote} Even very positively correlated instruments on daily give different signals in reverter, so I will go wild (As Jerry Parker says: "Diversify like crazy") and include all instruments I have. Indexes, silver, gold are out of question because of low capital for ATR*2 position and 0.375% risk. And additionally almost 100% negative correlation doesn't matter, because it is long only. So it seems we enter long on reverter signal tomorrow on AUDNZD EUR USD ?
Mate....I don't have this set up on MT4 yet as all the testing was done in Excel. I will see if I can get an EA up and running in the next few weeks to fully automate the Mean reverter which will make life easier for you. Best of luck tomorrow R. :-)
  • #2,638
  • Dec 10, 2017 6:33am Dec 10, 2017 6:33am
Quoting bluesoul
Legendary Watts https://www.youtube.com/watch?v=mMRrCYPxD0I
Luv it B :-)
  • #2,639
  • Dec 10, 2017 12:15pm Dec 10, 2017 12:15pm
Quoting thomasK
{quote} 2.Having many systems trading one same instrument is better than having a single system trading many instruments because different trading tactics provide more robustness than adding other instruments. This can perhaps be explained by the fact that all forex instruments are correlated to a certain extent while different trading tactics can be almost fully uncorrelated.
It sounds interesting and I am planning to make and test a portfolio as follows.

2 Euro Pairs (Dollar & Yen)
2 Pound Pairs (Dollar & Yen)
2 Commodities (Gold & Wheat)
2 Indices (Dax & S&P)
Risk 1%

My Idea is to take trades on hourly TF with standard predefined risk and move to higher TF,s. when H4 confirms the trend take another trade of 50% of the standard risk. when daily confirms take another trade of 50% of the standard risk and let it run as it allows with trailing stop on highest TF
Holy Grail - Patience and Acceptance
  • #2,640
  • Dec 11, 2017 4:29am Dec 11, 2017 4:29am
Litecoin trend is nice:

Attached Image (click to enlarge)
Click to Enlarge Name: c6YNicB.png Size: 119 KB
Cut short your losses. Let your profits run on. David Ricardo (1772-1823)
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