Systematic Trend Trading

"This is an age of hyperbole.

Every day provides a new false emergency.

A stable and centered individual has a real advantage in an environment where overreaction has become the norm.

Make your own moves.

Avoid getting carried away by the passing moods of the crowd."

I'm never going to say this is the only way to trade. But, if you have been trading for years and have not really gone anywhere or are still not confident enough to risk meaningful money, maybe a change in approach will help.

A simple trend trading approach with limited risk of blowing up can easily generate 20% returns a year, if you can compound for 3 1/2 years you will have doubled your money. (I know, surely you can do more than 20%... but set yourself achievable targets and then smash them)

You won't be required to spend hours in analysis or trading, you could easily continue your other work or commitments and once you have adopted a longer term approach many of the stresses of trading evaporate. In the future you may even make yourself wealthy in money AND time.

The answer to the best approach is all around us, in nature, in biology and in our everyday lives. People who get rich quick are usually lucky, destined to lose it or rich already. Wealth is built and earned, YOU are required to do the hard yards and show some resilience.

I think the right instruments at the right time are also important. Meaning that not all pairs trends all years to get you a +20%..

Definitely, David. Certain instruments are consistently better. But, all my testing has shown that some simple diversification is the answer. Pick a mix of instruments, timeframes and timing and it will smooth out the volatility.

Spot on 60. :-)

Over certain periods of time, some instruments trend better than others and then they just stop trending entering protracted periods of mean reversion and general equilibrium.

To say that some instruments trend better than others is a bit of a misnomer as it depends on the length of time you have been observing them....eg. over 50 years, over 20 years, over 10 years, over 5 years etc.....so the way around this is to maintain a watchlist and backtest across all instruments over as much data as you can get your hands on eg. 20 years plus.

Then rank your watchlist based on their trending tendency over the past 5 year lookback period or so using a benchmark trend following system (and this is the important bit) that approximates the trend following system you want to apply live. Take the top 10 to 20 of this watchlist or as many as you like in ranked order and define that as your current trading universe......but remember that diversification is so very important to improve your risk-weighted returns.....and the more the merrier.

As time elapses your watchlist ranking will vary and some markets will come into trend and out of trend over time. At least by following this exercise you are adopting a quantitative judgment as opposed to a qualitative or anecdotal one.

Note that this exercise is so much easier when adopting systematic processes as opposed to discretionary processes.

Also note that there are trending conditions and then there are outliers. Most of your alpha in diversified trend following approaches is made with the outliers. They are unpredictable and can happen in any liquid market. General trendiness of a market is simply good to stop you building too much drawdown. They do not really contribute to your overall edge. It is the outlier that pays for em' all that you should be targeting through setting asymmetrical traps that simply catch them when and if they occur.

One of the major reasons why diversification is so important is that when hunting for outliers, the wider you diversify across markets, timeframes and systems....the better chance you have of catching more outliers. The non-linear impact of outliers to your overall performance metrics is what makes the alpha in this style of trading. If you miss the outliers then the game is like any other trading game and predominantly influenced by 'noise' and random luck where you can be lucky, unlucky or never getting anywhere. Markets are mostly efficient....and occasionally unpredictably inefficient. It is the latter market condition that makes this game a wealth builder over time.

Long term success is defined by a very few outliers. This is what separates the very successful from the unsuccessful. Buffet made a killing on a few outliers as did Soros......as did all success stories of the Wizards. These outliers or success stories could never have been predicted....and the bottom line is that luck defined them. The reason they exist however is that you have to play the game to participate in them. To stay in the game 24/7 requires protection of capital at all times.....but an open ended profit condition where you strive for infinite yield with luck. The more you diversify, the more chance you have for a lucky strike.

That 36R trade of 60's last week was an outlier. Look how this giant dwarfs the overall performance results. It could never be predicted and it could have happened on any liquid market. A bit like medical research stocks and tech startups that trade for a few years in a range-bound way...and then kaboom, they take off into the stratosphere. If you had excluded these instruments from your watchlist then you are unlikely to participate in them when these unpredictable events occur.

[quote=Copernicus;12413676]{quote} Spot on 60. :-) Then rank your watchlist based on their trending tendency over the past 5 year lookback period or so using a benchmark trend following system (and this is the important bit) that approximates the trend following system you want to apply live.

At least by following this exercise you are adopting a quantitative judgment as opposed to an anecdotal one. Note that this exercise is so much easier when adopting systematic processes as opposed to discretionary processes."



So much to take in from this post. How exactly may this ranking be done?

I love this Copernicus, I toss you the ball and you hit it out the park...

It is so much easier if you use algos.....but the principle is this. Always maintain a backtest environment in conjunction with your live trading. You use the backtest environment to validate your live trading performance results as close to real time as possible.

In your backtest world you apply your trend following algo/s (or portfolio of algos) that you use live across as broad a universe as you can muster. At least across your broker's universe or if you use multiple brokers, then you can widen the watchlist.

Maintain the backtest (best in a demo account in walk forward) across this watchlist and track individual market performance for your algo/s monitoring return and drawdown (preferably CAGR/Max Draw) and rank this list (over a defined lookback of your preference eg. 5 years if you are a long term trendie or 1 year if you like shorter trends). Having software to do this significantly reduces the burden.

This ranked list provides you a method to select the top 5/10/20 etc. that you want to trade live. It just ensures that you are trading more suitable environments that help to minimise your drawdown and is tuned for your system. Hopefully within this more trending environment you may occasionally catch hold of an outlier and then your fortunes are made :-)

Here is an example of a trend market barometer used by futures traders. The only problem is that to use it, you need to understand what system they applied to generate it. Without that info..it is less useful.

https://www.toptradersunplugged.com/...market-trends/

It was a good pitch. I hate curve balls :-)

a good article on diversification

https://www.followingthetrend.com/20...of-the-sp-500/

The Stormtrooper Problem: Why Thought Diversity Makes Us Better
READING TIME: 6 MINUTES
Diversity of thought makes us stronger, not weaker. Without diversity we die off as a species. We can no longer adapt to changes in the environment. We need each other to survive.

***

Diversity is how we survive as a species. This is a quantifiable fact easily observed in the biological world. From niches to natural selection, diversity is the common theme of success for both the individual and the group.
Take the central idea of natural selection: The genes, individuals, groups, and species with the most advantageous traits in a given environment survive and reproduce in greater numbers. Eventually, those advantageous traits spread. The overall population becomes more suited to that environment. This occurs at multiple levels from single genes to entire ecosystems.
That said, natural selection cannot operate without a diverse set of traits to select from! Without variation, selection cannot improve the lot of the higher-level group.
Thought Diversity
This is why I find it frustrating that we often seem to struggle with diversity of thought. This type of diversity shouldn’t threaten us. It should energize us. It means we have a wider variety of resources to deal with the inevitable challenges we face as a species.
Imagine that a meteor is on its way to earth. A crash would be the end of everyone. No matter how self-involved we are, no one wants to see humanity wiped out. So what do we do? Wouldn’t you hope that we could call on more than three people to help find a solution?
Ideally there would be thousands of people with different skills and backgrounds tackling this meteor problem, many minds and lots of options for changing the rock’s course and saving life as we know it. The diversity of backgrounds—variations in skills, knowledge, ways of looking at and understanding the problem—might be what saves the day. But why wait for the threat? A smart species would recognize that if diversity of knowledge and skills would be useful for dealing with a meteor, then diversity would be probably useful in a whole set of other situations.
For example, very few businesses can get by with one knowledge set that will take their product from concept to the homes of customers. You would never imagine that a business could be staffed with clones and be successful. It would be the ultimate in social proof. Everyone would literally be saying the same thing.
The Stormtrooper Problem
Intelligence agencies face a unique set of problems that require creative, un-googleable solutions to one-off problems.
You’d naturally think they would value and seek out diversity in order to solve those problems. And you’d be wrong. Increasingly it’s harder and harder to get a security clearance.
Do you have a lot of debt? That might make you susceptible to blackmail. Divorced? You might be an emotional wreck, which could mean you’ll make emotional decisions and not rational ones. Do something as a youth that you don’t want anyone to know? That makes it harder to trust you. Gay but haven’t told anyone? Blackmail risk. Independently wealthy? That means you don’t need our paycheck, which means you might be harder to work with. Do you have a nuanced opinion of politics? What about Edward Snowden? Yikes. The list goes on.
As the process gets harder and harder (trying to reduce risk), there is less and less diversity in the door. The people that make it through the door are Stormtroopers.
And if you’re one of the lucky Stormtrooopers to make it in, you’re given a checklist career development path. If you want a promotion, you know the exact experience and training you need to receive one. It’s simple. It doesn’t require much thought on your part.
The combination of these two things means that employees increasingly look at—and attempt to solve—problems the same way. The workforce is less effective than it used to be. This means you have to hire more people to do the same thing or outsource more work to people that hire misfits. This is the Stormtrooper problem.
Creativity and Innovation
Diversity is necessary in the workplace to generate creativity and innovation. It’s also necessary to get the job done. Teams with members from different backgrounds can attack problems from all angles and identify more possible solutions than teams whose members think alike. Companies also need diverse skills and knowledge to keep a company functioning. Finance superstars may not be the same people who will rock marketing. And the faster things change, the more valuable diversity becomes for allowing us to adapt and seize opportunity.
We all know that any one person doesn’t have it all figured out and cannot possibly do it all. We can all recognize that we rely on thousands of other people every day just to live. We interact with the world through the products we use, the entertainment we consume, the services we provide. So why do differences often unsettle us?
Any difference can raise this reaction: gender, race, ethnic background, sexual orientation. Often, we hang out with others like us because, let’s face it, communicating is easier with people who are having a similar life experience. And most of us like to feel that we belong. But a sense of belonging should not come at the cost of diversity.
Where Birds Got Feathers
Consider this: Birds did not get their feathers for flying. They originally developed them for warmth, or for being more attractive to potential mates. It was only after feathers started appearing that birds eventually began to fly. Feathers are considered an exaptation, something that evolved for one purpose but then became beneficial for other reasons. When the environment changes, which it inevitably does, a species has a significantly increased chance of survival if it has a diversity of traits that it can re-purpose. What can we re-purpose if everyone looks, acts, and thinks the same?
Further, a genetically homogeneous population is easy to wipe out. It baffles me that anyone thinks they are a good idea. Consider the Irish Potato Famine. In the mid-19th century a potato disease made its way around much of the world. Although it devastated potato crops everywhere, only in Ireland did it result in widespread devastation and death. About one quarter of Ireland’s population died or emigrated to avoid starvation over just a few years. Why did this potato disease have such significant consequences there and not anywhere else?
The short answer is a lack of diversity. The potato was the staple crop for Ireland’s poor. Tenant farms were so small that only potatoes could be grown in sufficient quantity to—barely—feed a family. Too many people depended on this one crop to meet their nutritional needs. In addition, the Irish primarily grew one type of potato, so most of the crops were vulnerable to the same disease. Once the blight hit, it easily infected potato fields all over Ireland, because they were all the same.
You can’t adapt if you have nothing to adapt. If we are all the same, if we’ve wiped out every difference because we find it less challenging, then we increase our vulnerability to complete extinction. Are we too much alike to survive unforeseen challenges?
Even the reproductive process is, at its core, about diversity. You get half your genes from your mother and half from your father. These can be combined in so many different ways that 21 siblings are all going to be genetically unique.
Why is this important? Without this diversity we never would have made it this far. It’s this newness, each time life is started, that has given us options in the form of mutations. They’re like unexpected scientific breakthroughs. Some of these drove our species to awesome new capabilities. The ones that resulted in less fitness? These weren’t likely to survive. Success in life, survival on the large scale, has a lot to do with the potential benefits created by the diversity inherent in the reproductive process.
Diversity is what makes us stronger, not weaker. Biologically, without diversity we die off as a species. We can no longer adapt to changes in the environment. This is true of social diversity as well. Without diversity, we have no resources to face the inevitable challenges, no potential for beneficial mutations or breakthroughs that may save us. Yet we continue to have such a hard time with that. We’re still trying to figure out how to live with each other. We’re nowhere near ready for that meteor.

Luv'd your post 60.

It makes so much sense to view complex systems like our markets from a biological evolutionary perspective.

Imagine first a new currency exchange market which comprise initially a few different species of participant defined by their behaviour. It may include bankers and institutions, commercial risk hedgers and a small population of speculators (that includes all of us).

Price movement in this primitive environment is dominated by the big players and the behavioural impacts of these dominant players create predictable patterns of price oscillation that makes it easier for the predictive speculator as a species to survive. Alpha is readily available from the general lack of competition and those that take advantage of the repeatability of this emerging market thrive and reproduce. In these emerging markets, inefficiency rules as the speculative spoils are easier to capture as a speculator. As markets mature and the participant mix expands and more and more influential sub groupings are created with different behaviours, efficiency starts to rule the roost and competition for finite alpha is intense.

It is easy to survive as a predictive speculator in a relative unexploited context and a variety of behavioural predictive styles arise. As competition for finite alpha in that predictable market environment rises from increased participation by predictive speculators, the finite available alpha from predictable behaviours of the dominant players is more readily distributed across a greater range of predictive speculator and alpha per predictive participant dilutes accordingly. Also the impact of the increase in behavioural sub groupings of predictors starts to exert their own impact on market behaviour where collectively the predictive speculator acts like a large institution.

This rising dominance of classes of speculative predictor and the dilution of available alpha per participant sows the seeds that ultimately lead to the next market transition. When environments are stable, they exhibit predictive behaviours which you can learn to exploit provided that context is enduring. For example during equilibrium, price oscillates between extreme ranges centered around mean range or an intrinsic value. Now complex systems are sticky systems. They tend to have feedback loops that keep them fairly steady and resilient within tolerance thresholds....but they have their weak spots that cause brittle failure. They don't change slowly....they tend to snap and move to new equilibrium ranges. This is partly due to the one to many inter-relationships that exist within complex systems...such as a single large intermediary with a narrow behavioural agenda and it's many clients with a multiplicity of agendas. Consider a modern city as a complex systems. It seems pretty enduring and predictable doesn't it...until the grid goes down and those past predictable behaviours fly out the back door. The financial markets are complex nested sub systems and failure can and does regularly (but not predictably) occur at all levels. The overarching 'stickyness prevents the whole house of cards from collapsing....however as a nested subsystem affects another and another...a domino effect can create turmoil across the entire financial system.

As financial markets reach their thresholds for critical failure then we have a market disruption (or transition) which significantly disrupts the way the market previously behaved....and those predictable patterns may never arise again as new emergent phenomena from the transition shape new price behaviour such as the loss of a key institution or two and a plethora of bankrupt speculators.

With market disruptions the prior predictive behaviour is therefore no longer suited to the now transitioning environmental context where the market is moving to it's next semi stable equilibrium. When the transition subsides and equilibrates a few speculators remain....but many sub species in the predictive camp have been wiped out. Those who survived the transition with an advantageous trait to that new market condition and those that can reap the bounty available from disruption during the transition with a significant bounty to survive over the next equilibrium phase. A new breed of adapted participant configured for the new equilibrium emerges as the dominant species and rapidly multiplies with the less dominant but more robust survivor capable of surviving significant market disruption and thriving during transitions, waiting for the next possible windfall transition.

As competition increases in this new environmental context we again have a proliferation of the new 'predictive' breed that start aggressively competing with available alpha being distributed wider amongst the predictors. The survivor as a speculator who is far fewer in number is more robust and continues to dip into his prior surplus and eat his weak alpha arising from the decay of the failed traders.

.....and so on and so forth. So what emerges are two breeds of speculator (trader)....well three actually including the gamblers but let's exclude them. The successful is the breed best adapted to the current market who has a finite shelf life while current market conditions persist.....and the successful price follower (or survivor) who has survived the equilibrium phases when predictors make the killing...... but who has made their nest eggs during the transitions to provide a store of wealth until the next transition.

The advantageous anomaly for the price follower are when a market transition (like a meteor crash) is of significant magnitude and wipes out predictive breeds. These major transition events ensure that all predictors drop their crystal balls and suddenly in concert all become more coordinated in behaviour (from fear). You see this impact with market capitulation events. An anomaly is created which is of potentially huge magnitude. The prior sticky state of the market that contained price movement within predictable ranges is no more and all hell let's loose with large many sigma events.

A predictor capitalises on 'greed' in that with an emerging arbitrage opportunity there is an explosion of competitors that attempt to harvest that alpha opportunity. The first to arrive are the most successful but as competition increases the wealth is distributed wider and the edge per 'new breed' participant is diluted. A stable market of long duration allows for a proliferation of a new breed of trader where there is sufficient alpha for a broad range of 'new breed species' to survive.

We have ample predictive opportunities in stable market conditions leading to uncorrelated behaviour bu sub groupings of predictive speculator. ....however when market transitions are of sufficient magnitude to create an extinction event in relation to these various behaviours)...then we have a market route where behaviour of fleeing new breed participants causes correlated behaviour. The mass of participants pulling the pin makes a huge resource of available wealth for redistribution amongst fewer participants sitting on the other side of this behaviour. The protracted drawdowns of the price follower vaporize very quickly during transitions of sufficient magnitude.

A price follower on the other hand capitalises on 'fear' by being on the other side of the dominant new breed who collectively scarper from an unforseen event (transition). There are far less price followers given that you are wrong much more than you are right in stable conditions hence the alpha that emanates from failed predictors when markets transition causes non linear wealth redistribution to those fewer survivors that are available to the opportunity. A huge pie is reallocated across a far smaller competitive mix.

So in a nutshell, predictors that harvest greed have a temporary lifespan that usually commences with euphoria for the early bird but typically ends in tears...while price followers harvest fear and simply predate on the fallen predictors with an occasional anomaly arising from market capitulation events adding to their long term survivability.

Greed can be both long or short. Fear can be both long or short. There is a symmetry at work here. It is not whether the market is long or short but rather how the participant mix behaviour is configured for that market context.

Predictors in a short market environment jump on the band wagon and multiply until a transition event (where it reverses) and then fear strikes and they exhibit coordinated behaviour pushing price direction in a single direction. The price follower who is now long simply following price action is positioned to capitalise on this opportunity. Predictors in a long environment jump on the band wagon and multiply until a transition event (where it reverses) and then fear strikes the predictors and they exhibit coordinated behaviour. The price follower who is now short simply following price action is positioned to capitalise on this opportunity.

Provided you follow price with tight stops and an unbounded profit condition....you have a better chance of catching the spoils from a transition event. The key is to ensure you are positioned against general predictive consensus. If price has been rising for an extended duration then follow price and buy long. Predictors are anticipating what price will do next and are likely to be anticipating when to place a short in the anticipation it is overvalued or over extended.

Pavlov's dog. If I throw a treat to a group of dogs long enough I can elicit a particular behaviour. The first dog to adopt a conditioned response gets strong...and then other dogs learn the behaviour and so on and so forth...with less treats to share around per dog. I therefore condition those dogs to wait for my signal. The dogs become predictors. The day I die (a transition event) the dogs will be ill equipped to handle the lack of treats but will stick around long enough with some getting weak and ailing. The lean price following vulture however does not adopt a conditioned behavioural response....despite the lure and temptation of the regular treats. They simply follow price (their prey) with strict rules at all times to preserve capital and wait to exploit the weaker dogs. One vulture gets many dogs in this windfall event.....stuff the tiny treats :-)

Tip: Perhaps we need to stop talking about trends as it might mislead as that is not the secret sauce and can lead to false conclusions. You can have both random trends and real trends exhibiting levy flight. Virtually every trader (predictors and price followers) trade trends of varying magnitude. The only exceptions are range bound traders (eg. option strategies). Instead of thinking trend....think prediction or price following.

The secret sauce of long term survival and wealth building lies with price following in cutting losses short and letting profits run to exploit outliers when markets transition...and to find transitioning markets you need broad diversification. Diversification also helps in reducing the volatility of your overall return profile. There is no downside to diversification. It is all upside. The cutting losses short defends your capital base in stable market conditions from predictive price movement. The letting profits run allows you to ride the transition (market anomaly) for these very long transitions lead to eventual market capitulation from the predictors where you clean up the spoils.

The secret sauce to cashflow generation from prediction is being able to correctly predict the current market condition and you need to be the early worm to catch the spoils...but that comes at a cost (with swings and roundabouts) with respect to your ability to have long term wealth building due to market transitions.

QUESTION:
Using this hypothesis, why is price following suited to longer timeframes whereas price predicting is suited to shorter timeframes?

ANSWER :
Markets are either in equilibrium for a period of time or transitioning and unstable for a short duration between equilibrium conditions. The timeframe you trade in dictates your frequency and success within these periods of time.

Fact: Long term traders have less trade frequency than short term traders. Well duuurgh.

Predictors: High frequency for predictors is good during equilibrium but bad during transitions. Low frequency for predictors is less good during equilibrium but better during transitions.

Price followers: High frequency for price followers is bad during equilibrium but good during transitions. Low frequency for price followers is less bad during equilibrium but less effective during transitions.

Solution to Test:
As a predictor how do I identify transitions and turn my trade frequency down to protect adverse losses during transition? How do I therefore distinguish between a natural drawdown and risk of ruin? You will find that solving this is an impossible task as transitions are by definition unpredictable in nature.

As a price follower how do I reduce my frequency during market equilibrium and increase my frequency during transitions? Use a filter such as a 200 SMA to avoid trading during the everyday market noise and only trade during more exotic market conditions where uni-directional anomalies (outliers) lie. An anomaly is sufficiently large to extend well beyond the range of everyday market noise or predictive range. By using a 200 SMA to restrict your trading simply reduces losses from whipsaws but allows you to participate in a lot of the meat of the anomaly (but not the beginning or the end of it).

brilliant Copernicus, took me a few reads to get it all.

There's a lot of info out there on trading psychology, in my opinion, some of the best comes from Denise Shull. If you watched the tv show 'Billions' she worked with HBO developing the Wendy Rhoades character who coaches the traders at AXE Capital. What I like is her systematic way of dealing with emotions and using the information to make the right decision. Give her blog a read or even better purchase her book

"Which Strategy for Trading Emotions Actually Wins?"
https://therethinkgroup.net/which-st...actually-wins/

EJ giving multiple runners again, missed a better entry this morning - extra hour in bed cost me...

I had to clean it up 60. No wonder you needed a few reads. It wasn't very clear :-)

I read everything twice - protects me from my own stupidity which is half the battle

https://fs.blog/2019/01/how-not-to-be-stupid/

'Stupidity is overlooking or dismissing conspicuously crucial information'

10R locked in on position 1. Position 2 left to breathe

but it has all been losing to this point...