Systematic Trend Trading

LOL. How to stuff up 60's day in a few minutes. Throw him the quantum bone and he won't look at trading for the next week. Sometimes there are more important things to churn the mind than trading....I mean there is this universe thingo to work out. Trading is harder and can come later.

was more thinking along the lines of trying to use the entry signal generated in the other direction to close out the initial position.

I agree anything based on moving averages is doomed to failure.

I'm happy to code this up.

pls clarify your rules for trailing.

I assume you trail at R multiples? If not pls advise.

I like to run a few different styles of trailing, I always use R multiples and always use a 'close over R' rather than just price hitting the level.

So for examples:
1.price closes over 3R - B.E, price closes over 5R - trail to 3R, price closes over 7R - trail to 5R

2. Price closes over 5R, trail 4R, over 6R, trail 5R, over 7R, trail 6R

Sounds a little over complicated but means I can run many variations of trade managements for a single entry, wide then tight trails, stepped trails etc etc

Well that is I thought I have always had for traders who use predictive analysis - If you can read price action to time an entry then surely the exit is just waiting for a signal to say the move is over.

For me personally, I think a trailing exit is the best I can do, but I'm open to the possibility it could be improved.

Which I guess is why we can have anagrams.

Fully agreed.

Many occcurences seen, that if one would close a position (trailing) on a counter signal (15-25% win rate) - would limit your average Rwin significantly.
Trailing step is what I reckon is the best on average.

Backtesting and Diversification - The Essentials for Price Following

There is always the inevitable debate between those who think backtesting is a waste of time and those who treat the process like gold. This argument typically splits us into our two major trading philosophies we have discussed before........ that of prediction, where the emphasis is placed on recent market conditions (hence backtesting long data sets is meaningless) and that of price following (where future conditions are unpredictable and we like to test the robustness of our systems over a broad set of market conditions in the past to see how well our systems manage risk).

Let's dig into why price followers like to use the long term as opposed to the short term in our testing assumptions.

You might be aware of the enduring feature of ALL liquid markets where academic studies have demonstrated across a vast array of different markets that there is a persistent anomaly in the data referred to as momentum. Well as 60 has already pointed out in a past post, when something is persistent, it really shouldn't be referred to as an 'anomaly'. As an enduring feature...it really should be part of the overall description in which markets simply behave. The fact that markets move between different equilibrium means that transitions (or momentum) is simply a necessary feature of the markets for this to occur.

....and the argument that some markets don't trend is a misnomer as already discussed. To check this for yourselves, just open up a monthly chart on any liquid market with a history of 20 years or more and you can see this for yourselves.

For example, a market that has plagued me for many years now is AUDCAD. It is tempting to assume that it just mean reverts around an equilibrium and doesn't trend....however look at the following monthly chart.



We had a monster fast short trend in 2007 and some great easy trends in 2000 - 2003 and 2004 - 2006. Sure for the past 10 years it has been messy where each monthly bar has been wide with no clear directional movement. A trend trader dedicating his fortunes towards AUDCAD would have been whipsawed to death..... but the bottom line is this....... no-one can predict when markets simply stop trending or not. It is easy in hindsite but a different story when trading the rightedge.

Now more often than not....the throwing the hands up in the air and declaring that this market doesn't trend is a granular statement based on expectations from the system you are trading....not the characteristics of the market itself. For example I am a D1 trader in general, and my medium term to longer term expectations have really been tested by AUDCAD over the last 10 years....so much so....that it is tempting to throw in the towel and simply exclude AUDCAD from my universe. An M30 or M10 swing trader might be staring at this sentence with a quizzical expression stating...what you talkin' bout Holmes.....AUDCAD has been trending like the buggery on my timeframe. The granularity at which you address the market is the issue here which is a timeframe diversification problem.

So you see the conundrum here. It is not that liquid markets don't trend, in fact they have to as economies change over time and are never static...but what really is the problem is that they don't have to trend when we want them to....and further the system we deploy to catch those trends is a huge obstacle in catching the market trend. Each variable we include in our strategy can be the snag that whipsaws us out of a generally trending market condition. We therefore need simple systems with lots of room to breathe if we want to tackle them.

Let's look at drawdowns for a moment. Let's assume that you commence trading AUDCAD in March 2010 where you are not diversified and you simply selected AUDCAD as a good market to trade based on its recent trending history over 2007. You would have immediately entered drawdown....and it would have kept on going. The rate of descent would be partly attributed to the market itself but also dominantly attributed to your position sizing (leverage). If your leverage was high, your descent would have been faster. Can you see now why leverage is perhaps your biggest factor to address in managing drawdowns? You can't blame the market here....but you can blame your position sizing based on past expectations and your single system that has been configured to exploit the past historic condition.

This reliance on a single future outcome that represents an extension of the past is what kills you here. Not the market....but rather that grey squishy stuff in your skull...being your expectations about the future. The future will never be the same and therefore you need a diverse armory of different systems, different markets and different timeframes (granularity).

So what do we get when we summarise all this.

1. We need to test our philosophy over a very long term data set. This ensures that our position sizing is not too over-leveraged for the future based on what has recently occurred in the past.
2. We test over a long term horizon to challenge our biased assumptions. We need to test to remove that bias that may exist in our head that certain markets do not trend.
3. We test over a long term data set to deliberately capture 'different market conditions' and observe their impact on our choice of systems we deploy. The future is many possible paths....not a single path that is an extension of the past. We therefore need to test across a broad range of different past market conditions to see how your choice of systems fares with many possible market conditions in the future. You will never get an exact repeat, but in specifically looking at the worst conditions of the past, you are more robust in terms of your ability to address an uncertain future.
4. All markets trend....but they do so at times the market dictates.....not at our whim. We need to ensure we maintain a watchlist over a vast universe of markets and continuously test our systems across all of them. This does not mean that we have to trade all markets all the time....we will get to that later at the end of this post. We therefore need to maintain a diverse watchlist over an array of different liquid markets (and across asset classes if possible).
4. A single system in it's configuration provides variables that are obstacles for trending markets. We cannot dictate how a trend will unfold. It is wiggly and does not take a trajectory of nice straight paths. Our stop and trailing stop are the major obstacles we need to address here. They must be sufficiently wide to capture the volatility inherent in a broad class of different trends. We can never select simply one of them as the best....we need a range of them to give us the greatest chance of what the market delivers to us. You need diversification of systems to achieve this.
5. The level of granularity we use to address trending markets is another major obstacle. We need diversification across time (not necessarily timeframes) to address this issue. For example using a 50 period Donchian with a 5ATR trailing stop exit as a single system addresses a particular trend duration..... using a 200 period Donchian with an 8ATR trailing stop address a different trend duration. This can all be achieved on D1 using the same system design with varying parameters without having to trade off different timeframe charts.

So what is the result of all this......well you will find that you have a vast array of different markets to choose from, a vast array of different timeframes to choose from and a vast array of different systems to choose from....talk about choices.

Now even though the Jerry Parker's and Moritz Siebert's of this world insist that you can never be too widely diversified.....the reality is that your margin and capital requirements will dictate that a finite selection from this huge array of options is always necessary.....but which to pick...*scratches head*.

Now this is where we are faced with the decision of a diversified portfolio. This is where you need to follow the processes outlined in the prior series of posts on this thread to compile your robust solutions. You throw all the trade statistics of these various swathe of options into your compiler and let it do the rest of the decision making. Ensure the compilation method you deploy is quantifiable and not simply an adhoc subjective decision.

 

1. Your compiler will address which markets to currently trade (those that have a slight profit factor over the test period (aka greatest chance of having a slim edge));
2. Your compiler will risk adjust each option to ensure that leverage (position sizing) is not influencing your overall decision and that each option can be compared to each other in a standardized way;
3. Your compiler will eliminate any weak deficiencies that may compromise the overall portfolio;
4. Your compiler will ensure you adopt a risk target that you stick to such as a max 20% drawdown...and adjust the mix of options to achieve that result on an ongoing basis. No longer do you have to guess if your system is broke or simply exhibiting a drawdown. The compiler will take this burden from your shoulders and dynamically adjust the portfolio to achieve this going forward; and
5. Your compiler will eliminate those options that do not contribute to the overall portfolio result.

Do not let that brain of yours step in the way of systematic processes. Avoid the temptation to override.

Your first portfolio is a bit like the sourdough starter of your fine bread of the future. Look after it and grow it. You never have to go back to ground zero to start again with it. You simply improve it on an ongoing basis with the rinse and repeat process we have outlined here where you options are added to the mix and your compiler discards the crap objectively.

Cheers

C

Thank's for that C, you have a real talent for explaining these complex ideas.

I will try and add another important concept, LUCK

I believe it is important to understand the role of luck in all this, everything has a mix of skill and luck involved in outcomes and that includes trading. If you understand the mix of skill and luck in an endeavour you will make better assumptions of how to get the desired results.

If we considered the 100m sprint and Usain Bolt we would be looking at something that is mainly skill and very little luck. If we studied Usains short term results we would expect them to represent his long term results. i.e You only need a small sample to get an accurate prediction of future results.

The other important idea is that as skill levels across the board rise then winners are more likely to be a result of luck. A recent example of this was the cricket world cup, over 10 group matches we could assume that the 2 teams in the final were likely to both be highly skilled and the team that won the final would stand a good chance of being on the receiving end of some good luck...I think you'll agree this was a startling example of the concept.

If we turn to fields more closely associated with what we are doing then we can look at skill and luck in the investing world. If skill was the determining factor we would expect to see the funds from 2017 that had the best performances to also have the best performance in 2018, what we find is that this is rarely true, they are in fact more likely to have a losing year or results closer to average at best. Similarly, with picking stocks you would think that investors with high skill levels should be able to outperform based purely on their skill but over 10 year cycles(and indeed shorter periods) just buying every stock in the market beats 80% of them (this figure is probably nearer 90% now). Picking winners is as much about luck as skill and the approach with the highest probability of outperformance is diversifying over the long term. Diversification and long time horizons (small bets) is how to deal with higher degrees of luck.

But wait a minute, what about Warren Buffet, he doesn't have a deeply diversified portfolio, he doesn't rely on any luck. Well he does, he does diversify to an extent, he also works over very long time horizons and he has very deep drawdowns(im talking more than 50%) So there is a trade off, if you can play the long game and can accept deeper drawdowns you can diversify less.(you still need to ensure you can stay in the game).

I am not saying there is no skill in trading, you need to be highly skilled. But, you have to understand the role luck will play so you are aligning yourself with the strategies that have been shown to work

If you want to get deeper into this idea, beyond my rather clucky explanation then I suggest getting hold of M.J. Mauboussin's books, they really switched a lightbulb on for me

“When luck plays a part in determining the consequences of your actions, you don't want to study success to learn what strategy was used but rather study strategy to see whether it consistently led to success.”
― Michael J. Mauboussin, The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing

Great post 60 That book recommendation is now on my hit list :-)

this post is from 25iq, it's one of the best blogs on the internet - you should read it, often, until the concepts are ground into you

Lessons from Annie Duke (Author of “Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts”)
https://25iq.com/2018/10/13/lessons-...all-the-facts/

for me it comes back to that counter signal not always right too, probably 50-60% at most, so there's still 40-50% chance of that counter signal is wrong, thus giving us 40-50% chance that trade can give more R multiply that we all love

only a notch above pure luck LOL

I believe we all need training to accept those fact,
since our human mind is so conditioned to like those constant stable win,
thus demoing or microlot trading M1 with any low win rate system with any kind of trailing is beneficial
trading simulator works well too for this
besides its also for entry pattern recognition, patience training etc

Definitely Danzka, there's a certain amount of grind and repetition you need to go through, it is easy to believe in long term effects but nothing trumps actually living through the process. After a while, the entries just become a habit and little to no thought is given to their outcome. At many points through the year you could look at the results on this thread and jump to the conclusion that it won't work, the 36R drawdown in the first 8 weeks for instance. But, you stick at it and now it starts to look like there really is some merit in it. I would encourage everyone to journal systems over longer periods - you learn good habits and collect data at the same time. Don't ditch systems you are unsure about, just diversify and keep collecting the data.

@60minuteman

Darren is that you?

yes

There is a coder trying to code your strategy with the rules you set some pages ago.
Guess what?
On backtesting he is not getting your extraordinary results of this year.

BTW, did you closed your trading year?

I have 2 weeks to go for a full 52 week test. (the exact length is more than 1 year as I had time off to get married)

I have seen many EA's give different results that are all based on some simple rules, this can be for many reasons: a mis-understanding of a rule, different data etc, etc. What I always suggest is to do extensive testing with different instruments and settings and see if the edge exists.

If you sent me some charts from the backtest I may be able to see if something is obviously off?

Darren and Copernicus,

Does it really matter to extensively backtest any entry system? As Darren stated several times in earlier posts, if the math suggests that asymmetrical reward/risk over a LARGE number of trades is profitable, then conceivably, ANY discretionary/technical/fundamental method that gets you to open a position should be long-term profitable IF you are methodical in executing your trailing SL/exit strategy. The best way to run such an operation, as Copernicus so elegantly described, is to diversify over many instruments and use multiple trailing/exit strategies to capture short-term trends as well as to ride longer-term trends.

Is this a correct assumption?