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Systematic Trend Trading

  • #901
  • Aug 10, 2019 10:02am Aug 10, 2019 10:02am
Quoting djo
{quote} Is it fixed risk Vs compounding or fixed risk Vs Trailing? Compounding in reeal sense will be atough one, cos you don't know when you will get a winning run. A system such as this with a 20% win rate will blow up if you get the 80% losing run at first. What do you think?
Both runs were the same data with the same trailing exit. Run 1 risk was set at $10 for the complete 3000 trade test. Run 2 risk was set at 1% of the account balance for every trade.

Indeed the risk with the compounding is that drawdowns/volatility go wild... But you don't have to be so aggressive with the compounding - you can compound every 10 trades, every 100, you will still get positive effects but reduce the volatility.

Maybe C could chip in here with his thoughts?
tradewith60
  • #902
  • Aug 10, 2019 10:08am Aug 10, 2019 10:08am
Fixed targets
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Trailing exit
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trailing exit adds nearly 1% to the average winner across the range - with a minimal effect on the win rate
tradewith60
  • #903
  • Aug 10, 2019 10:11am Aug 10, 2019 10:11am
Quoting 60minuteman
5R trailing - fixed risk vs compounding is a real mind blower 5R - takes $1000 - $7286.90 5R compounding - takes $1,000 - $177,778.41 {image}
Mate....There are some great curves in there. It makes me salivate when thinking how we could deploy them at the portfolio level to go to infinity and beyond. :-)

The great thing about all of them is:
1. We know they have positive skew. Portfolio compilation of positively skewed strategies gives huge upside potential in terms of applied leverage at the portfolio level. There are no 'weak deficits' that will compromise the overall portfolio returns when leveraged;
2. They all have a strong edge (much stronger than I am used to). This will lift your portfolio to the moon with a bit of portfolio treatment applied. We can compile these to produce returns that will be the envy of the pro's;
3. There will be weak spots in the total compilation in terms of drawdown exposure given the fairly correlated nature of those return streams....but that's ok...you then just need to then turn your attention to finding strategies to fill the drawdown gaps. They do not need a strong edge. You do this by system design as opposed to diversification across markets or timeframes. These latter forms of correlation (markets and timeframes) are moving feasts. However design diversification is static in nature unlike these other forms of diversification. You use system design therefore to plug the deficits at the portfolio level.
4. Having plugged those gaps and straightened the equity curve at the portfolio level, you can then globally increase leverage through position sizing to reach your drawdown risk tolerance.
5. Then all you have to do is monitor progress and as the portfolio drawdown achieves 10%, we periodically rebalance to ensure it remains at around that level. This is referred to as volatility adjusting the portfolio.

Over the next few days I will post a step by step visual set of examples that will give you a basis to do this yourself :-)

Cheers C
  • #904
  • Aug 10, 2019 10:18am Aug 10, 2019 10:18am
Quoting 60minuteman
{quote} Both runs were the same data with the same trailing exit. Run 1 risk was set at $10 for the complete 3000 trade test. Run 2 risk was set at 1% of the account balance for every trade. Indeed the risk with the compounding is that drawdowns/volatility go wild... But you don't have to be so aggressive with the compounding - you can compound every 10 trades, every 100, you will still get positive effects but reduce the volatility. Maybe C could chip in here with his thoughts?
Mate in regards to compounding you hit the nail on the head. The problem with it is that compounding accentuates volatility inherent in the return streams.

Here is an example. The charts below represent the same portfolio with no monthly compounding and with monthly compounding. Notice how the compounded example is extremely volatile. If you like striking for filthy returns and can stomach the pogo stick ride...then ok....but I avoid compounding like the plague.

I simply compound at annual intervals and may need to more periodically rebalance to avoid the pogo stick....but at the same time build the bank.

Attached Image (click to enlarge)
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  • #905
  • Aug 10, 2019 10:21am Aug 10, 2019 10:21am
Quoting 60minuteman
trailing exit adds nearly 1% to the average winner across the range - with a minimal effect on the win rate
There is a nugget of gold in that statement 60 :-)
  • #906
  • Aug 10, 2019 10:35am Aug 10, 2019 10:35am
Quoting Copernicus
{quote} There is a nugget of gold in that statement 60 :-)
With you on the compounding, have been doing it annually - perhaps a little conservative, but when I don't fully understand something I like to remove as much risk as possible.

Have a lot of work to do, thankfully I have the EA's for all these systems in a dusty cupboard somewhere..
tradewith60
  • #907
  • Edited 9:25pm Aug 10, 2019 10:43am | Edited 9:25pm
Quoting 60minuteman
{quote} With you on the compounding, have been doing it annually - perhaps a little conservative, but when I don't fully understand something I like to remove as much risk as possible. Have a lot of work to do, thankfully I have the EA's for all these systems in a dusty cupboard somewhere..
The problem with compounding is that it applies a slight bias to the return stream. In the first few years you will not notice it but as time elapses and the curve builds, then the volatility accentuates. This is not a problem of the actual system....but a problem faced by leverage from compounding. Compounding can lead to risk of ruin without actually having a bad underling portfolio of systems.

Here is a FM who applies regular compounding. Look at the wibble wobble it is going through now. Do you think the investors are happy? I have a feeling that redemptions are the current order of the day for Mulvaney. :-)

Attached Image


Here is a FM who doesn't apply any compounding.

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Guess which one I prefer.

The benefit of not compounding is that the tough years are in the beginning but as the pie grows without compounding, your drawdown actually lowers over time. You can manage this at periodic intervals to occasionally lift return....but as a general principle make this discretionary as opposed to a systematic feature of the portfolio....otherwise you will wobble yourself to death over the long haul.
  • #908
  • Aug 10, 2019 10:45am Aug 10, 2019 10:45am
Quoting Copernicus
{quote} Mate....There are some great curves in there. It makes me salivate when thinking how we could deploy them at the portfolio level to go to infinity and beyond. :-) The great thing about all of them is: 1. We know they have positive skew. Portfolio compilation of positively skewed strategies gives huge upside potential in terms of applied leverage at the portfolio level. There are no 'weak deficits' that will compromise the overall portfolio returns when leveraged; 2. They all have a strong edge (much stronger than I am used to). This will...
it's a bizarre rule that commercial members can't like posts?...

Would really appreciate your help as I have funds waiting to allocate to something
tradewith60
  • #909
  • Aug 10, 2019 10:48am Aug 10, 2019 10:48am
Quoting Copernicus
{quote} The problem with compounding is that it applies a slight bias to the return stream. In the first few years you will not notice it but as time elapses and the curve builds, then the volatility accentuates. This is not a problem of the actual system....but a problem faced by leverege from compounding. Compounding can lead to risk of ruin without actually having a bad underling portfolio of systems. Here is a FM who applies regular compounding. Look at the wibble wobble it is going through now. Do you think the investors are happy? I have a...
looks like my gut instinct to be wary of compounding aggressively was spot on -
tradewith60
  • #910
  • Aug 10, 2019 10:52am Aug 10, 2019 10:52am
Quoting 60minuteman
{quote} it's a bizarre rule that commercial members can't like posts?... Would really appreciate your help as I have funds waiting to allocate to something
That's quitter talk 60. I reckon your systems have the juice with a bit of sculpting to do it yourself.....however I certainly keep track of the FM's in the trend following space and could share a fund of funds solutions that you might want to use for allocations. The problem with these big boys I track is their minimum investment criteria...but there are a few that might fit the boot. :-)
  • #911
  • Aug 10, 2019 11:00am Aug 10, 2019 11:00am
Quoting Copernicus
{quote} That's quitter talk 60. I reckon your systems have the juice with a bit of sculpting to do it yourself.....however I certainly keep track of the FM's in the trend following space and could share a fund of funds solutions that you might want to use for allocations. The problem with these big boys I track is their minimum investment criteria...but there are a few that might fit the boot. :-)
Was thinking more about an automated portfolio of my strategies that I could run, with a view to eventually dropping these manual systems. I have a lot of my money sitting in diversified global equity funds which do ok and are safe but I feel could be better allocated
tradewith60
  • #912
  • Aug 10, 2019 11:05am Aug 10, 2019 11:05am
This is a GOLD system that uses 200sma as a filter with varying R based trailing stops. My systems seem to work well on commodities, these tests were run over H1 timeframe but it shows more promise on higher tf's

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tradewith60
  • #913
  • Edited 11:24am Aug 10, 2019 11:07am | Edited 11:24am
Quoting 60minuteman
{quote} Was thinking more about an automated portfolio of my strategies that I could run, with a view to eventually dropping these manual systems. I have a lot of my money sitting in diversified global equity funds which do ok and are safe but I feel could be better allocated
It is hard not to be impressed with Nick Radge mate. He offers a signal service for his portfolios which have been doing very well over the past decade or so...but I hate giving personal recommendations.

Keep your eyes on this monthly report as well. It gives a state of the diversified systematic FM's who have been in the Biz for at least 20 years. The reports contain downloads that you can use to choose the ones that float your boat. Then you just need to find them on IASG to get more info on them and their minimum investment criteria.

PS Regarding automating your portfolio....I and a programmer mate of mine could certainly help you there but we would need to speak offline about that. Let me know if you want me to send my addy to you by PM.
  • #914
  • Aug 10, 2019 11:11am Aug 10, 2019 11:11am
Quoting 60minuteman
This is a GOLD system that uses 200sma as a filter with varying R based trailing stops. My systems seem to work well on commodities, these tests were run over H1 timeframe but it shows more promise on higher tf's {image}
Definitely mate. I use the CFD space extensively to diversify across futures derivatives and ETF's. Lot's of great markets that suit our styles in there. Yes there is a bit heavier transaction cost with CFD's as opposed to futures but there is a lot less stuffing around with them and our systems have more than enough juice (edge) to cover the additional frictional cost.
  • #915
  • Aug 10, 2019 11:21am Aug 10, 2019 11:21am
I see weekends are for research

good stuff
  • #916
  • Aug 10, 2019 11:44am Aug 10, 2019 11:44am
got to love how the world works, came here to share my little bit of knowledge on simple trend trading strategies and received an education in portfolio design, diversification and correlation.... mirrored reciprocation I believe it's called

off to cook dinner for the wifey
tradewith60
  • #917
  • Aug 10, 2019 11:48am Aug 10, 2019 11:48am
Quoting 60minuteman
got to love how the world works, came here to share my little bit of knowledge on simple trend trading strategies and received an education in portfolio design, diversification and correlation.... mirrored reciprocation I believe it's called
This is how it should be. Levererage in its true form. You give me a leg up and I try to give you a leg up. FF can be toxic or it can be sublime. It is what you make of it I s'pose.

Cheers 60
  • #918
  • Aug 10, 2019 6:27pm Aug 10, 2019 6:27pm
How much do you leave on the table?

The following chart looks at 35 winning trades. The trades trailed the exit at 5R by a distance of 1R (Red line).

How far did they go before they reversed and stopped out (blue line)

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tradewith60
  • #919
  • Aug 10, 2019 7:23pm Aug 10, 2019 7:23pm
The pain of losing is a short term effect:

3 Equity curves: (using exactly same system I am trading on this thread)

RED : win rate 25%

YELLOW : win rate 19%

GREEN : win rate 14%

BLUE : average

Short term pain avoidance just costs you in the long term
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tradewith60
  • #920
  • Edited 8:18pm Aug 10, 2019 7:43pm | Edited 8:18pm
Quoting 60minuteman
The pain of losing is a short term effect: 3 Equity curves: (using exactly same system I am trading on this thread) RED : win rate 25% YELLOW : win rate 19% GREEN : win rate 14% BLUE : average Short term pain avoidance just costs you in the long term {image}
That is so right. It is the mind and it's biases that causes this 'pain'. The need to be right is a huge bias in itself. The mind that has evolved in a different complex environment to the trading floor and possesses features that we naturally want to re-use when presented with a different complex system. Fight or Flight which was a very appropriate (competitive advantage) for our dangerous and bountiful natural world is not so appropriate for the trading world when there is an auction at play.

Fight or flight (aka Fear and Greed) is arse end about when looking at the natural world versus the trading world. You need to be contrarian to our natural tendencies in the trading world. The exact reverse. This is what makes our brain so powerful in trying to intervene in systematic processes. The brain has evolved in a different complex system so you can't blame it...but you can choose systematic over discretionary to avoid this huge issue.

We like to naturally buy low and sell high when buying and selling things given our understanding in a natural world where the benefit lies (in deep discount on purchase or in significant profit on sale)...but the reality of the trading floor is that we are in an auction where the buyer offering the highest price wins the trade and the seller offering the lowest price wins the trade. If you think in 'auction' terms, then the bias that lurks in the breakout traders mind is eased somewhat.

Interesting when looking at how much profit we left on the table. This causes pain in the mind....but do we think about entering trends late in the same light? It is the 'in your face statement' of looking at your unrealised equity high versus your final balance which causes all your pain. Because we don't have a representation of the loss incurred from entering trends late....we simply don't worry about that.

The bottom line is that what makes trend trading so successful is the unbounded nature of profit potential. We will never get the tops and bottoms...only ever the meat. In the carnivores world we should be happy with that.

The heuristic mind can be a godsend or a devil. Our 'clever?' minds try to override our systematic rules all the time.

The following example is a bit like Troxler fading.

"Aoccdrnig to a rscheearch at Cmabrigde Uinervtisy, it deosn't mttaer in waht oredr the ltteers in a wrod are, the olny iprmoetnt tihng is taht the frist and lsat ltteer be at the rghit pclae. The rset can be a toatl mses and you can sitll raed it wouthit porbelm. Tihs is bcuseae the huamn mnid deos not raed ervey lteter by istlef, but the wrod as a wlohe.[1]"

The reason we can actually understand quickly what initially appears as gibberish is how the brain heuristically solves pattern recognition. In reading, we are not actually reading every letter. What is actually going on is a heuristic shortcut adopted by the brain to fast track signal analysis. On first glance the brain uses the first letter and last letter and then fills in the blanks with it's own interpretation from memory. It is only when we specifically focus our attention on the pattern and resolve it bit by bit that we actually 'see' the complete signal.

Imagine the problem this presents to the discretionary trader who needs to quickly resolve patterns in a feverish market before pulling the trigger.

Here is a great TED talk that looks at the power of the brain to create controlled hallucinations.

Your Brain Hallucinates your Conscious Reality - Anil Seth
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