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Diversified Trend Trading Approach

  • #3,401
  • May 6, 2018 9:44pm May 6, 2018 9:44pm
Quoting alphadude
{quote} Spot on; the hayenas are definitely circling. no more Tesla stocks to short anymore. they can smell blood miles away, watch out Elon; no sleeping in factory couch is gonna help. that will only attract more hayenas! {image}
Cute little fellas. Who has been rolling round in the carcass again boys!!!!!!!!
  • #3,402
  • Edited May 7, 2018 1:31pm May 6, 2018 10:16pm | Edited May 7, 2018 1:31pm
Example of how to deploy diversification to achieve stellar risk-weighted returns.

Here are ten individual equity curves of fund managers who deploy divergent strategies with full risk release between 1 Jan 2000 to 31 March 2018. Notice that none of them have that characteristic linear return of the Martingale or grid progression....or a more diluted form being the mean reverting convergent strategy.

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The stats are as follows. Pay close attention to the MAR ratio (CAGR/Draw). Notice that the max draw for any strategy in isolation is between 10% to 20% and the max CAGR for any individual component is 12.53%.

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Now look at an equal weighted blend of the results represented by the thick white equity curve. Simply through the principle of superposition....look what we have achieved in producing the blended equity curve.

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The performance stats are as follows.

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Look at the MAR ratio of the blend. What this means is that I can apply twice the position sizing to the blended portfolio and achieve an approximate 20% Max draw with a CAGR of approx 19% which surpasses any result achievable through it's individual contributors......simply through the applied principles of physics in increasing the signal to noise ratio through superposition. Also note that a failure in a single contributor to the portfolio is not going to bring our world crashing down.

Compare and contract this to a single strategy in isolation. Can you see the forest for the trees yet?
  • #3,403
  • May 6, 2018 11:50pm May 6, 2018 11:50pm
Quoting Copernicus
{quote} V I am not sure where to start other than state a very simple physical principle in relation to risk management......that the summation of discreet equity curves with unique volatility signatures reflected by simple statistics such as Drawdown, sharpe, standard deviation or sortino ration etc. all improve with diversification. You may be familiar with Markowitz and the efficient frontier. The theory behind this is sound but its practical application can be applied simply by superimposing return streams on top of each other. Assume you invest...
Thanks C for the elaborate explanation. I certainly appreciate the time.I think in your case, backtesting of various strategy curves makes perfect sense especially when incorporating professional funds. Unfortunately, my strategy already has a lot of diversification features built in that cannot be viewed in screnshots I have shared. I can only hope to convince you one that a single universal diversified strategy is possible. It won't work in a strategy tester as it incorporates 28 pairs, 9 timeframes, 62 MTF inception alignments across time slicing of world clock (sessions, news etc) using 8 trend phases (4 up and 4 down) to determine whether to use diversion from mean or convergent/reversion to mean. All this is just for entries. When it comes to exits, I have over 32 techniques of profit taking and loss taking which also encapsulates a combination of scalping, day trading, swing and position trading. While all this is happening around the clock, I am also secretly managing my risk exposure by time diversification, country currency diversification, price diversification, active liquid/illiquid session diversification, mathematical correlation diversification and finally, frequency diversification. If I were to track/create a unique magic number for each of these diversification controls, there would be over 450K possibilities across 8 country currencies. There is just no way to backtest this in MT4 but I have run many simulations on individual components as part of this component design via plug and play. My only fear is with profit taking at strategic volatility spots affecting these fancy statistical measures.... which at some point, I will have to ignore and not worry about it. At this point, I am just trying to get myself ahead of it to see what I need to keep a close eye on.

I know you have shared the equity curve superposition in the past when the timing was not right for me to focus on. I had to tackle drawdown controls first before getting into portfolio optimization. I will look into it if it is not too labor intensive. I was able to implement all magic numbers this weekend to fully equip myFXbook to aid me in analysis so that should help further with my journey. Now it is just a matter of bringing MT4 to its knees and make money while I sleep :-
Staying in my lane...
  • #3,404
  • May 6, 2018 11:56pm May 6, 2018 11:56pm
Quoting VEEFX
{quote} Thanks C for the elaborate explanation. I certainly appreciate the time.I think in your case, backtesting of various strategy curves makes perfect sense especially when incorporating professional funds. Unfortunately, my strategy already has a lot of diversification features built in that cannot be viewed in screnshots I have shared. I can only hope to convince you one that a single universal diversified strategy is possible. It won't work in a strategy tester as it incorporates 28 pairs, 9 timeframes, 62 MTF inception alignments across...
I recall taking the picture that is on my profile which I was testing diversification across 72 pairs last year. This was during London+US overlap all ramped up as and when opportunities came knocking from Tokyo to Tokyo+EU to London to London+US in a clock work.
Attached Image
Staying in my lane...
  • #3,405
  • May 6, 2018 11:57pm May 6, 2018 11:57pm
Quoting Copernicus
Example of how to deploy diversification to achieve stellar risk-weighted returns. Here are ten individual equity curves of fund managers who deploy divergent strategies with full risk release between 1 Jan 2000 to 31 March 2018. Notice that none of them have that characteristic linear return of the Martingale or grid progression....or a more diluted form being the mean reverting convergent strategy. {image} The stats are as follows. Pay close attention to the MAR ratio (CAGR/Draw). Notice that the max draw for any strategy in isolation is between...
super
WaBaS Where are Buyers and Sellers
  • #3,406
  • Edited 6:57am May 7, 2018 1:25am | Edited 6:57am
Quoting VEEFX
{quote} I can only hope to convince you one that a single universal diversified strategy is possible. It won't work in a strategy tester as it incorporates 28 pairs, 9 timeframes, 62 MTF inception alignments across time slicing of world clock (sessions, news etc) using 8 trend phases (4 up and 4 down) to determine whether to use diversion from mean or convergent/reversion to mean. All this is just for entries. When it comes to exits, I have over 32 techniques of profit taking and loss taking which also encapsulates a combination of scalping, day...
No need to convince me V as I can see what you are doing here and in a similar manner I am doing exactly the same thing under my explanation. What you are doing is diversifying within your single system playing a range of both divergent and convergent scenarios and what I am doing is diversifying to achieve this by combining multiple systems. Same thing.....just a different way of explaining it. The bottom line is that our scenarios allow us to capture diverse market conditions and through our different techniques managing the adverse uncertainty around future market movements.

Here is an example of the discussion you might have between a single systems trader and someone who diversifies.

Single Systems Trader:
The turtles system used to be great until it didn't work. I then have to find a new system to make my bread and butter.

Diversified Trader:
What you talkin' about Willis? The system still works and represents 10% of my portfolio.

Single Systems Trader:
I used to be a trend follower but the game has changed nowadays. The only way around this is to become a convergent trader with a high win rate?

Diversified Trader:
What you talkin' about Willis? Trend following still works. In fact 80% of my portfolio is allocated towards variants of this method.

Single Systems Trader:
Markets aren't the same as they used to be and those EA's just don't work. You need to be a discretionary trader.

Diversified Trader:
What you talkin' about Willis? Have you ever thought about what hundreds of EA's would achieve that address different market conditions. How does that brain of yours cope with that?

Single Systems Trader:
Your system should never have drawdowns that exceed 10%.

Diversified Trader:
What you talkin' about Willis? If you want to stay poor.....then go ahead and repeat that mantra. Have you ever heard of diversification and its method of controlling drawdowns allowing you to trade some very volatile systems provided that you do not over-allocate towards them?

Single Systems Trader:
You should be like Bruce Lee and practice that kick a thousand times. Diversification is a fools errand. Learn how to trade a single market with the finesse of a trained martial artist.

Diversified Trader:
What you talkin' about Willis? You actually do not need complex systems or spend years at the monastery to trade. Just learn how to avoid crippling hits in the first place and diversify like the clappers.....oh and stuff the chanting and meditation sensai :-)

etc etc etc....you can probably see where I am heading in this discussion. Namely.....to the lost world of incoherence and beyond *sniggers* :-)
  • #3,407
  • Edited 10:41am May 7, 2018 2:43am | Edited 10:41am
Quoting Copernicus
{quote} No need to convince me V as I can see what you are doing here and in a similar manner I am doing exactly the same thing under my explanation. What you are doing is diversifying within your single system playing a range of both divergent and convergent scenarios and what I am doing is diversifying to achieve this by combining multiple systems. Same thing.....just a different way of explaining it. The bottom line is that our scenarios allow us to capture diverse market conditions and through our different techniques managing the uncertainty...
Thank you Sir. Your validation means a lot. Up until recently before I began my quest to tackle max drawdown, I too felt diversification is a fools errand to tell you frankly. I felt diversification as in making less % to make my returns less volatile was a foolish innovation. Now that I have max DD control (like no other solution out there if I may add), I feel I have combined by aggressive style (damn you millipede!) with diversification to reflect the perfect mix of ingredients to capture market volatility to my advantage and slow down or avoid (smoothen the curve so to speak) when markets are calm.

Thinking further, I can now simply live with just my drawdown protection scheme and completely eliminate targeted Profit and Loss taking functions. This way, I will have unlimited upside floating profit potential and limited/capped/targeted loss potential protected by maxDD %setting as currently shown in one of my account. My account is in profit (by text book definition as equity is greater than balance) but drawdown is showing 2.12% from threshold i.e. from peak account equity for the duration of this account since open). When new equity heights are reached, I do NOTHING and when account equity drops from the highs to say 10% max DD. I can do a partial exit or close all and still capture majority of moves that the market presents.

This is what I tried to express in the Pivot Trading thread and idiots started to defend the OP with their closed mindset. Anyways, I have shared enough. Thanks for listening bro. It helps to discuss with like-minded individuals. Rest is all just forum noise :-)
Staying in my lane...
  • #3,408
  • Edited 3:39am May 7, 2018 3:05am | Edited 3:39am
Quoting VEEFX
{quote} Thank you Sir. Your validation means a lot. Up until recently before I began my quest to tackle max drawdown, I too felt diversification is a fools errand to tell you frankly. I felt diversification as in making less % to make my returns less volatile was a foolish innovation. Now that I have max DD control (like no other solution out there if I may add), I feel I have combined by aggressive style (damn you millipede!) with diversification to reflect the perfect mix of ingredients to capture market volatility to my advantage and slow down...

Spot on mate. All power to you . Profits are just an outcome. You don't have to worry about the whens? In a market that is only sometimes inefficient .......all you have to do is manage your capital like a miser and participate in as much of the market as you can. :-)
  • #3,409
  • May 7, 2018 4:28am May 7, 2018 4:28am
EUR is idle.

EUR CAD cannot be entered as we are already in 2 CAD pairs
EUR USD cannot be entered, as we are already in 5 USD pairs. Also no slope.

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Exploiting CHF on two fronts:

USD CHF has now 0.25 SDC.

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and CHF JPY:

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Cut short your losses. Let your profits run on. David Ricardo (1772-1823)
  • #3,410
  • May 7, 2018 5:51am May 7, 2018 5:51am
Quoting Ramadas
EUR is idle. EUR CAD cannot be entered as we are already in 2 CAD pairs EUR USD cannot be entered, as we are already in 5 USD pairs. Also no slope. {image} Exploiting CHF on two fronts: USD CHF has now 0.25 SDC. {image} and CHF JPY: {image}
Nice trades R. I wouldn't be too prescriptive on the fact that you are trading correlated pairs. If your portfolio heat allows and a new correlated pair emerges and meets the setup then I would be taking them. During crisis alpha periods, most instruments become very correlated. If we simply avoid them due to being 'over-correlated' in the portfolio we are not going to capitalise on crisis alpha. Correlation only matters when it is adverse to our system rules. Positive correlation is a bonus.

For example my portfolio heat is almost at zero (below) which allows me to open up on new correlated pairs if they emerge. The logic surrounding momentum is frequently found in correlated pairs. If fundamental 'real' momentum is evident in an instrument, it will be reflected by all the relevant correlated pairs. We want to be riding the enduring momentum when it exists. If however my portfolio heat was approaching 10% then I would be very careful about taking on any new position especially if they are correlated to the balance of the live portfolio...because the correlation is adverse to the portfolio.

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  • #3,411
  • May 7, 2018 6:35am May 7, 2018 6:35am
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  • #3,412
  • May 7, 2018 6:35am May 7, 2018 6:35am
Quoting Copernicus
{quote} Nice trades R. I wouldn't be too prescriptive on the fact that you are trading correlated pairs. If your portfolio heat allows and a new correlated pair emerges and meets the setup then I would be taking them. During crisis alpha periods, most instruments become very correlated. If we simply avoid them due to being 'over-correlated' in the portfolio we are not going to capitalise on crisis alpha. Correlation only matters when it is adverse to our system rules. Positive correlation is a bonus. For example my portfolio heat is almost at zero...
Thanks for the suggestion!
Cut short your losses. Let your profits run on. David Ricardo (1772-1823)
  • #3,413
  • May 7, 2018 6:38am May 7, 2018 6:38am
Quoting Ramadas
{quote} Thanks for the suggestion!
I hope it helps mate. Just my opinion....and it hasn't been tested....so treat it with a grain of salt...unless it meets your logic :-)
  • #3,414
  • Edited 7:43am May 7, 2018 7:31am | Edited 7:43am
A treasure trove of info for the diversified trend following enthusiast. Happy hunting :-)

From AHL

AHL does not have fundamental expertise. No trend following trader keeps fundamental experts on staff. They do not have an in-depth understanding of the companies that comprise whatever stock index. Their expertise is to take these different markets and “make them the same” through price analysis. When you look at trend following performance losses are offset by winners. No one ever knows which market will be the big trend that pays for the losses—hence the need for diversification.

AHL is even more precise about diversification:

“The cornerstone of the AHL investment philosophy is that financial markets experience persistent anomalies or inefficiencies in the form of price trends. Trends are a manifestation of serial correlation in financial markets—the phenomenon whereby past price movements inform about future price behavior. Serial correlation can be explained by factors as obvious as crowd behavior, as well as more subtle factors, such as varying levels of information among different market participants. Although they vary in their intensity, duration, and frequency, price trends are universally recurrent across all sectors and markets. Trends are an attractive focus for active trading styles applied across a diverse range of global markets.”

Check this out :-)
  • #3,415
  • May 7, 2018 8:00am May 7, 2018 8:00am
Quoting Copernicus
{quote} I hope it helps mate. Just my opinion....and it hasn't been tested....so treat it with a grain of salt...unless it meets your logic :-)
I am thinking about applying this logic, but only if heat in given sector is at least 0. For example enter CAD on 3rd pair if other CAD pairs are above BE... More conservative, but still catching crisis alpha if crisis will be long enough?

I was burned few times, where I had -6% day move on capital, because 3 pairs containing for example AUD suddenly reversed and there was 1% risk per position.
Cut short your losses. Let your profits run on. David Ricardo (1772-1823)
  • #3,416
  • May 7, 2018 8:09am May 7, 2018 8:09am
Quoting Ramadas
{quote} I am thinking about applying this logic, but only if heat in given sector is at least 0. For example enter CAD on 3rd pair if other CAD pairs are above BE... More conservative, but still catching crisis alpha if crisis will be long enough? I was burned few times, where I had -6% day move on capital, because 3 pairs containing for example AUD suddenly reversed and there was 1% risk per position.
Good idea R. It makes perfect sense especially when applied to sectors :-)
  • #3,417
  • May 7, 2018 8:11am May 7, 2018 8:11am
In case of Cotton, not using automated trailing stop saved the position.... I know - it also could go other way and I would lose more.
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Cut short your losses. Let your profits run on. David Ricardo (1772-1823)
  • #3,418
  • May 7, 2018 8:15am May 7, 2018 8:15am
Quoting Ramadas
In case of Cotton, not using automated trailing stop saved the position.... I know - it also could go other way and I would lose more. {image}
Hehehe.....butterfingers..... but in a good way :-)
  • #3,419
  • May 7, 2018 8:22am May 7, 2018 8:22am
Quoting Copernicus
A treasure trove of info for the diversified trend following enthusiast. Happy hunting :-) From AHL AHL does not have fundamental expertise. No trend following trader keeps fundamental experts on staff. They do not have an in-depth understanding of the companies that comprise whatever stock index. Their expertise is to take these different markets and “make them the same” through price analysis. When you look at trend following performance losses are offset by winners. No one ever knows which market will be the...
Now that's a lot of value material. How did you find it?
Cut short your losses. Let your profits run on. David Ricardo (1772-1823)
  • #3,420
  • May 7, 2018 8:52am May 7, 2018 8:52am
Backtests are more important than having a profitable idea. here is why:

- any strategy that failed in backtest will fail in live trading for sure
- any strategy that is profitable in backtesting; have a good chance of being profitable in live trading.

backtest improves your trading career by milestones in time, effort and capital.

good luck trading without a backtedt.

also good like finding a job as a trader if you insist that backtedt is not important . you will be a laughable stock.
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