Diversified Trend Trading Approach

I am back after a brief nap thinking what else I have not shared that I came here to present.

Here's one thing. There is only one book by Dean Lundell I would recommend as it does not mention any market wizards. I am not recommending it as a buy, read and put in in your library of books but to use it as part of your "trading plan". This book has been on my desk every day since I began my research-based journey in 2015.

https://www.amazon.com/Sun-Tzus-Art-.../dp/0071590242

Any comprehensive trading strategy must have ateast 2 pages for each

1. "Sun Tsu said..."
2. "Sun Tzu recommends..."
3. Sun Tzu reminds us of..."
4. "Sun Tzu concludes..."
5. "Sun Tzu tells us..."

page on the left side of this book. It will bring pearls of wisdom to your journey. I will vouch 100% successful strategy if any trading plan can relate to every page in this book! It makes you think long and hard.

I judge a book not by it's cover but from reading the last chapter. This is from last chapter "Conclusion" and the only page in this chapter.

Bonds are where all the action is today. We had mid-day reversal, but the trend is still up.

Suddenly CHF is bought:

Concerning hard stops and last resort stops and performance stops. Better for a market to show you the exit than rigid system. I was thinking about EDTT and arbitrary narrowing the SDC when achieving 2.5R or 5R.

What if we move the beginning of SDC, so it will embrace price action as closely as possible? In this way market auto corrects the SDC and exits are organic.

Thanks for the reference mate. Will look into it :-)

Exactly R I think this is what robustness is all about. We can trick ourselves for a while at least with our clever system design....but the last laugh is always by the market itself.

Divergent statement about the PAST market state "That's nice Dear...but can you switch channels because the footy is on the Telly"....or "I need to update the guys on FF about my music tastes or sense of humour"....or "I need to get a friggin' life"
Convergent Statement about the PAST market state "If I plan for this trade and execute with preciseness I can catch that falling knife and take profit on the crossing of the 5th Fibonnaci....with a lemon twist"...... or "If I plan for this trade and execute with preciseness I can catch that falling knife and take profit on the crossing of the 5th Fibonnaci....with a lemon twist".....or "If I plan for this trade and execute with preciseness I can catch that falling knife and take profit on the crossing of the 5th Fibonnaci....with a lemon twist".

Divergent statement about the FUTURE market state "I don't give a flying f... about the future provided it is different to the crap past and then we will all crap ourselves but I will win. I have my systems waiting for that moment but until then....please move away from the screen because the footy is still on"...."my music needs me"....or "my life still needs me".
Convergent Statement about the FUTURE market state "If I plan for this future trade and execute with preciseness I WILL catch that falling knife and WILL take profit on the crossing of the 5th Fibonnaci....with a lemon twist"...or "I am Bruce Lee...watch me kick lotus leaf with thousand kicks".....or "If you snatch stone out of hand...then you will be a man Grasshopper".

As price followers....we as divergent shadows attempt to mimic market movement and capture all trends to new equilibria (future mean) and play it safe in terms of risk by avoiding convergent moves back to a past equilibria (historic mean). Divergent systems try to float with the market towards a future state. Convergent systems try to dictate terms to the market about holding onto a past state and are therefore more rigid.

Beta is exactly mimicking the market. Alpha is outperforming the market. These are forward facing benchmarks. But maximum alpha without leverage is simply getting your future direction right ALL THE TIME. There is only so much alpha the market can give...and participants with their systems are always limited by this. They can employ tricks of leverage to kid themselves they can 'beat the market'...but ALWAYS to their ultimate peril. It is akin to the fool who looks for perpetual motion machines using principles THAT DON'T EXIST in physical systems.

Look at the world track record of the FM's and you realise that the vast majority underperform beta....and only a very very slim minority achieve any form of alpha. This is the physics of the market dictating to it's participants what is achievable and what is a pipe dream.

The reason why Mr Brown is so suspect of the 'too good to be true' equity curve....and the reason I am also suspect....is because he knows the market from his long experience through system testing....and I know my physics and what is achievable in reality land in any complex system. You also know this from your long experience. Those who don't have this 'knowledge' have no benchmark to determine 'what is real and what is not'. You can't blame some of them as this is the lesson you learn from a market, an ocean, a weather system etc....or any complex system which is self-regulating. The market is the master in this equation....not our ego's or supposedly clever engineering ideas. This 'cleverness' is a toxic recipe under leverage in the longer term and what sank the Titanic. In the convergent space we think we have it sooooo right with the high win rate....and we dupe ourselves further by leveraging this rightness....until BLAM....we are wrong. We don't fall for this same trickery in the divergent space. We assume we are always wrong and apply the principal while benefiting from as little leverage as possible. Any form of leverage is left to the PORTFOLIO LEVEL and is applied in an agnostic fashion across all the composite return streams......and we always keep the leverage low....to allow for a worse future regime and a drawdown that is always greater in the future.

In the divergent space provided we get our direction right we can achieve a bit of the alpha state by stealing a bit of the F---ups from the convergence guys during those times when the market is feeling generous towards divergence by mimicking the market but with shorts and longs provided there is momentum in the market that also gives overshoots. The market however is always long in terms of risk profile to it's participants. When the market reaches drawups of 50%, a divergent trader reaches a maximum possible linear ascent in his equity curve unlevered of 50%. When the market tanks and achieves drawdowns of 50%, a divergent trader in his linear descent reaches a maximum possible unlevered state 50%.

We assume that there will be a future time when market price is higher or lower than it's current price. This is not a bad assumption for non-stationary complex systems. This assumption protects us from future market risk and this is actually what serious risk is....an unforseen future event of some degree of likelihood with potentially vast catastrophic consequences. The way we do it is simply leave our system 'open' to this future adverse event with a correct directional sign while we close our system tightly to any other event that goes in the other direction. We will be right about half of the time....but then there is a bit of further gravy from human nature with the overshoots and undershoots and that defeats the 50:50 equation in all this. If we follow price closely enough...despite a few whipsaws...we could catch the gravy train on the other side if we reverse direction soon enough however to get a bit of that other side.

Given our scepticism in using the past as a reliable guide for the future, we just avoid convergent conditions like the plague that contributes nothing to future beta where price retreats in the reverse direction from it's excursionary future highs and lows. We therefore cut losses short as soon as this occurs and suck it in.Our success actually works from our uncertainty about everything and we block any supposed fact (fundamental, news or otherwise apart from participant behaviour of fight or flight which is in all participants DNA) that is apparrently 'certain in nature' as this relates to a past that we simply refuse to believe has any future benefit.

Convergence requires us to believe in the robustness of our system and a future past. It makes us backwards looking and requires us to 'predict' price movement back into the past......and yes....we will be right much more of the time as we have a known benchmark of apparent certainty (a past equilibria) to do this. In fact we can configure our system for this degree of certainty with constraints about this known past state by adding stops, profit targets, average down, dare I say Martingales etc. and applying a vast array of historic indicators.....but we will be wrong in the end with the Nassim Taleb and Mandelbroit feature of complex systems...which is more frequent than we assume. This is what will kill you and in fact a whole species in a complex system.....but we can't be too mean on the convergence guys as they feed us divergent guys. Convergent guys as a species get lots of new lives as they start up again and again after being wiped out.... and you got it ..... again think they have got the market licked (Bwahahahahahaha)....but the divergent guys smell a bit...are old wise farts....but like Highlander can never die.

Divergent traders unlike their convergent cousins don't pretend to know the future however....... so our assumptions are based on faith in stooooooopid human nature (not a bad assumption....have you read the posts in FF) and the objective historical performance stats of divergence relating to momentum and trend following and the track record of the divergent CTA's. While we have faith in our approach and a few rare things we are very uncertain about the future. In fact we have faith that the future is uncertain and rely on this assumption...and we design our systems accordingly with that in mind. We therefore cut losses given our uncertainty ....and simply leave our system constraints open to unlimited positive future moves that may or may not occur.

If we exactly mimic the market we get beta....but if we make profits when the market goes up and make profits when the market goes down with extra gravy from the overshoots we get ultimate alpha from the overshoots....but with the lag of the shadow we can never achieve this ultimate state. As divergent practitioners...we want as much of the meat of new future market ups and downs' but recognise that there needs to be a sacrifice of some of the meat to the God of Convergence......while we actually worship the God of Divergence.

We are the uncertain about certainty....but those poor misguided fools over there are certain about uncertainty.



Yes mate....add it to the list of projects. The more I think about it....the more I realise we may have to adapt our EDTT as I think we can do better....much better :-)

Very nice, indepth and insightful post C. I had to read it every times with pauses which makes it more interesting :-
I agree... all my divergent systems are a stroke of luck or atleast there is an element of "being at the right place at the right time and executing in the right direction" protocol going on in my strategy at all times. Some get it right... take profit off, some get it wrong and my strategy says "wtf...why? let's wait till the next volatility boost or the next or the next until I reach my threshold (I will get to threshold in a bit)....So with this principle and mindset, speed of action into reaction is always on my side with divergence trading style. Pullbacks are a different story with truly a hit or miss but let's keep that aside for a bit. Even with divergence style, I disagree we have to "cut losses short and keep profits running". That is old school conventional thinking and does not apply to a tiny guy like me with a tiny account focussed 100% of capital appreciation. That is all I am thinking right now. Capital growth. Why? Because, capital is at risk the moment it leaves my safe bank account, in-flight and into the journey of depositing funds in my trading account and every second thereafter. Please keep in mind why I have this mindset. You guys have the luxory of trading FX fulltime with a ROBUST regulated broker. Being in US and trading with a unregulated broker to bypass FIFO, I do not have the same peace of mind and comfort you guys have. With that in mind, I am FORCED to apply a risk mgmt strategy that protect my initial investment (a huge risk mitigation strategy that FMs do not have to even consider... hence comparing what I do with what FMs do is simply apples and oranges. I 100% agree with every word you said about alpha and beta.

Regardless of my personal situation with brokers, let's get back to why I disgree with the conventional mindset of "cut losses short and keep profits running". This is where we may disagree and that's fine. We are allowed to have a different POV on this complex market :-)

Cut Losses Short - It's a concrete and definite action taken by the strategy owner based on KNOWN parameter within the context of strategy rules.
Let Profits Run - It's merely a decision resulting from inaction to "see what happens or how far it can go" with risk containment protocols in place to address downward risk. All good.

Now compare this with flipping both to action-based that I employ:
Cut Losses Short - only in Drawdown Mode or Margin Call prevention mode to protect my initial capital level (which is initial deposit on day one and then start of week/month as growth takes place. I do not use stop loss and have turned on my LossManager as well. Drawdown+Margin manager is adequate to control downward risk
Let Profits Run - I do not! I take as frequently and quickly profits as possible. This is required and key to keep it action-based or not "see and what happens" based. I want to take profits now off the table while I can. This results in 100% realized profits with very ease using a 400:1 high leverage and still use 1.5% risk per position across the board ( there was a reason why I highlighted my journey on free and used margin). I can achieve similar rapid growth even even with 1% or 0.5% risk. It is market condition agnostic and relies only on volatility in either direction to work with me.

So now, I have a situation where I am indeed running floating losses (within my % threshold) and I have fantastic looking balance curve with realized gains reaching 100% every 24-36 hours... I have one account approaching 2000% MTF realized gains with the same 1.5% pisition risk. Fixed risk infinite realized profits. But I CANNOT ignore my floating losses. They are there going up and down and I HAVE to keep them in check via my margin and drawdown management functions..... If market reverses, I WILL have 100s of consecutive losses before Friday close or on Friday close.... but guess what. it is within my actionable reach to do what it takes to keep my floating equity loss at bay. I am in charge and control of my destiny with this model... and stab the mindset of "let's wait and see what market does with my running profits". If I do a close all in the middle of the week when I have 500% realized growth and 50% floating loss.... guess what? I am still closing my books at 250% absolute gain for the week! This portfolio and strategy design puts me on the driver seat because I am not letting PRICE dictate my actions. I am only letting my equity movement make me decide the next steps.
Hope I am making sense. What I do simply cannot be compared with professional fund managers who CAN wait for the entire year and still get paid regardless of performance. You and I in retail space do not have that luxury no matter who much effort you guys put in to mimic portfolio diversification. If and when I lower my leverage, the structural design will still be able to cope with slower 'speed' of growth and risk containment. It's the damn FIFO that reduces my performance big time or I would have stayed with Oanda. My model works with Oanda as well but I am forced to keep unique position size to address FIFO and that goes against my universal risk % as it skews the exposure.

EDIT: There is a reason why I am still around and participating in the "Market Manipulation" thread by FractalFreak. This philosophy of risk management works very well in highly manipulated and decentralized FX markets by scalping my profit taking during bouts of volatility. One simply cannot compare the portfolio management principles applicable to other markets used by institutional investors, traders and FMs compared to what is available to us retail spot FX traders. As I said many times, I come with the mindset that the second, I open a trade, market competing forces are always working against my trade. Scalp and quick profit taking off the table is our best defense giving me better tools for account management techniques.

Yours too mate. Some great stuff in there and lots of food for thought. Based on the performance you have shown....there is something very wicked but good happening with your philosophy mate....so I am all ears and absorbing some very interesting ideas.....but also sceptical at the same time....but you know now how I tick and totally understand this. :-)

You must ALWAYS remain a skeptic and not get smitten by fancy looking balance curves. I have fought with idiots from the pivotfactory who only want to show their balance curve and not their floating positions. I will say this one more time as this is absolutely crucial for retail traders to understand. EVERY performance statistical measure can be very easily manipulated when you have open positions running (and this applies to professional fund managers also). One must for performance analysis with ALL positions closed out at the end of accounting period. If FMs are not doing that, i don't know what else to say here.

EDIT: Sorry, need to clarify, professional fund managers are doing "Marked to Market" at the end of their accounting period... which is exactly what I am referring to. you have to mark it to make your statistical measures valid and accurate.... otherwise we will have a Bernie Maddoff in every corner of America :-

They don't mate as this would scare the crap out of the investor.Convergence or fraud is the reason for the occasional blowups of LCTM.....the Valeant Pharamceuticals saga with Bill Ackman the hedge fund manager......the Bernie Madoff's etc. etc etc etc......however to sink a divergent ship takes a shit load of time....in fact infinite time for those that scale their risk down with increased drawdown...so it is always exposed with full risk release on closed trades. They might go out of business when investors have had enough through death by a thousand cuts...but they don't blow up with everyone saying WTF.......They never hold trades longer than what is necessary given the 'cut loss short mantra'. While you may not see the fully story with their black boxes unrealised curves....the story is told by those who have lasted 30 years plus....which are ONLY the divergent diversified guys....and wait for it...while Buffet is a value investor....he really is a divergent guy.

Edit: FFS You are totally right. Their results are marked to market monthly....My stuff up as well mate....so I have edited the wrong parts. WE are a different beast in this retail space and should be applying the lessons from these guys. Unfortunately plenty of threads on FF hold unrealised losses or future losses in their equity curve signature. While I measure drawdown in terms of realised trades....I am never too far away from 'mark to market' as we cut losses short to retain that all important positive skew. :-)

V...... I won't quote your posts as this is precious stuff....but let me just tell you that this is pretty well exactly what Nick Radge does with unlevered equities and many others who fully deploy their portfolios into positions and then manage things from there....so I can definitely see this working in principle..particularly the sell in bulk concept. You wait for your PL to conclude this which is drawn from a diversified sample and then you clean up on the take recognising that the balance of positions left floating are still diversified.

Absolutely fantastic mate....but do you need to be this aggressive with leverage? How much is enough mate? .......is what you should be asking yourself. There is more than enough for your kids and their future if you tone it down......as it doesn't take much more info than you have generously shared to see the power of your approach. Apply this approach in unlevered equities or if you want the leverage...then tone it down.

I just worry about the fine line you have left between spectacular gazillions and a train wreck from a bit of dust that clogs the server in your VPS.

This is all about capital management mate which is also what DIBS and Millipede were all about (trading was the way to get there)...but where you have the edge is that if you add up those profit segments of your very diversified portfolio....and manage the clappers out of margin and keep frictional costs low....you get the occasional Millipede bonanza but much more frequently than those approaches do. I get it mate....and this thread gets it.....but we just tone it down a bit so we can surf more or listen to 's***t' or read a book or 700. :-)

Agree again. I have no idea who Nicke is but knowing that someone legit does the same gives me a lot of comfort (and satisfaction). There is also a hidden gem in all this in regards to human behavior. How many times we idiots have waited on floating drawdowns just to get account blown? "Cut your Losses" is VERY difficult emotion for humans both in drawdown and in floating profits But "Cut my Losses which I am still ahead" is a very different emotion resulting in a similar outcome.

Agree... I will HAVE to tone in down the notch as account grows. 400:1 is just not sustainable in the long run.

It can be sustainable (the theory in principle) on a diversified basis as you are taking alpha snips out of every market and timeframe with a multi-strat approach....however you will never know the when part and given my very conservative posture is just too 'full kelly' for my appetite.....and no matter how well we think we know risk....you just know that the unforeseen lies right around the corner. As a consequence we just tame down our multipliers to just get wealthy. I am not in such a rush....as evidenced by my contribution here on this forum when I should be more focussed on the doing...but power to you V :-)

Agree Bro. All we have is our analysis and drive.

39 Powerful Trading Tips by Ed Seykota That Will Rock Your Trading



He is not a fan of short term... because of transaction costs...

https://www.tradingwithrayner.com/39...me-ed-seykota/

Nice mate. Such a legend :-)

Regarding the short term stuff we are doing.

1. We know the CTA's are pretty weak in this area and this could be our strength. Refer back to to Marty from Dunn and his comment.
2. While our trade activity is conducted on M5...our Donchian is based on a 2000 Donchian on M30. This therefore makes this solution more a short-medium range solution than a traditional M5 solution in its own right.
3. Ed doesn't trade CFDs like we do and SWAP is a major issue for us. In his world of futures, holding costs are much more lenient. We need a solution to deal with these higher costs....but we get the benefit at our scale of liquidity and hence diversity....... unlike ED and the big CTAs. For example...when you get scale....trading the softs can be a real obstacle to the big boys as the volumes they trade move the markets......and if ever we get to that scale....then that is a nice problem to have.....but at the moment we have potentially unlimited diversity through CFD's, EFT's and FX provided we have the range of brokers that provide them.....Ideally IG....but the problem there lies in our scale.

EA Development Update from KAMA

Just by way of update without getting into the long winded diatribe of prior posts on the subject we are finding short term fully automated candidates that meet the 'non curve' fit criteria for either the current portfolio blend as further divergent solutions or outright standalone solutions (autocorrelated divergent/convergent mixes) that may also be candidates for the blend.

Standalone or Blend
Autocorrelated Solutions - We now have a bundle of these offering superior risk-weighted metrics for the testing period.......and need to narrow them down which we will do with more gruelling long range tests on M5. A solution for the long range data is currently being worked on for testing.

Blend
We now have a divergent solution on M5 using M30 as a filter which stacks up and is a bit more effective than the example posted previously....but not curve fit. Here are the 4 test curves. We are going to use Test 6D to take for further long range testing as above. The strong positive skew of 1.38 for Test 6A is skew attributed to the system design....hence we rejected that one.



I am currently also working on a more long term solution of the M5 solution to get further diversification in timeframes and add to the blend.

Still need to punch through more test data received...but might take a while to get this cracked.

Once this is done we will look at the blended result of these fully automated solutions....the intent being to wean ourselves off discretion of EDTT. If it fails we still have a better blend...but if it succeeds....we can do more sun-baking at the beach

Cheers

C

One more thing to consider: addig to a position on lower highs/higher lows when the market favors us. This way we could maximize profits in long trends

spot on.

am a beleiver on 'what got you on; should get you off too'

the same rule that got me to the trade; will get me out; purely on market conditions.

A true edge lies in the market conditions.

I can write a 10-page article (from a quantitative analysis POV) that what I have underlined in your post is 100% inaccurate.

VeeFX: Market condition on both Entry and Exit will NEVER EVER be exactly the same.

There is ZERO edge in entries based on "market conditions" resulting from price alone or time alone or price and time