Diversified Trend Trading Approach

Copernicus, very nice thread. thanks a lot for sharing.

for next week, I would like to short EU based on the EDTT primary trend. but it appears that a fierce retracement could be coming at any moment. YTD PA is a hell of slow grinding down, not trendy at all.

Maybe I shall wait for the secondary trend to long, then short based on the primary? or just stay on the sideline for now?

appreciate your thoughts on dealing with the current scenario.....

Hi B.

Mate...it has been a while since I have put my thinking cap on with EDTT. I personally adopted an approach of not second guessing....as I often missed some big outliers by doing this which became monster regrets to me...... so it taught me to place my pending order entries in blue sky and if the SDC says so backed with short term momentum....pulling the entry trigger. Frequently got the 'sumo' flop (which you read about later in the thread) but it was a minimal loss in the scheme of things. You just don't want to miss the non-predictive biggie (aka the second order error) so 'trade em' all mate.

It is counter-intuitive mate as after a great trending session it is natural to assume a reversion is just around the corner......but you just gotta wrestle with that desire to predict if you price follow (as opposed to predict).

Cheers C

B...you inspired me to update my EDTT trader to current day. Here is where I would have taken EURUSD trade based on pending order placement. Disregard the sell order in the chart below as it relates to another method.



Here is the current position and the trailing stop placements. The short term SDC is almost at BE. The long Term SDC is at worst case going to get hit with a 0.5R loss if it all falls over.



So in a nutshell....all is going according to expectations.

Below are the latest performance stats updated to 29/8/2019 based on an initial balance of $20K to ramp things up a bit for you more aggressive types :-)











It has been quiet the last few years, but is starting to pick up steam now. Hopefully a good 2019 :-)

Update on EURUSD M30 - EDTT for baldmonk




Still going strong. The trailing stop of the short term momentum trajectory is now in profit. The trailing stop of the slower momentum trajectory is approaching BE. Due to the higher position sizing of the short term trajectory over the long term trajectory, the combined position is now just above BE.....so everything from now on is *Kaaacching*. The short term trajectory has fully funded both positions so far.

Remember if price gets top 2.5xR, then adjust SDC settings by half to ensure not too much profit is left on the table.

Cheers

C

lots of negative here...but waiting for the months to make it pay
once again, lots of orders triggered, expecting 2 winners out of 10

waiting for all of the survivals to trail the PL out. Now, only few trailing - around 2% in positive territory (open trades)..while lots of -1R trades every day.

We should team up to make a nicer curve

Nice J. :-) You are nailing it for August mate.....and Jan makes my eyes bulge.

As per system nature, the wrong skinny pigs are getting slaughtered every day, every month. So, we see mainly negative months. But system is trying almost every day with several trades. As we are trying to follow some good entries, system tries to trail the route as deep as it can. Tried several trailing systems and found that original (primary in my mind) was actually the "best" average one - and it also tries to close positions with relatively stable equity and balance curve (need margin for new entries and for lots of loosers).

While dead pigs are dead, we have some good behaving pigs in line with price..then is just a matter of market reaction what we get out of them. We surely want that we see lots of modification instructions of moving trailing stops deeper in positive. (actually at this point around 120R of floating PL).

Year 2018 started relatively stable on the downspiral. Few good trades did manage to save the curve around -5 % territory and then 2018 May came with some great closing which were subject of system nature. While we end up around 0 end of half year results we finally got a paychecks in 2018 december with nzdusd, nzdcad, audcad and nzdchf trades. In January we had a jackpot on xxxJPY pairs which were opened in November, december respecfully. Also few trades on other pairs made a difference. So, end up the year 2018 with relatively nice results with 2019 start in heaven.

Then again slow start of the 1st and 2nd quarter, and then all survived hefty pigs got trailed in July and August.

While August again did a great job it was mainly contributed by gbpchf (80R - record high), gbpaud and others. The trend in the making. It offsets all the negative trades which occured in Q1,Q2 - and there were lots of them.

Nowadays, still have live some on EURUSD (floating 30R ); and few gbpjpy and still gbpchf with higher trailing management on a sell presenting additional 50+R at this point. And new ones of course..

So, lets see where we end up at the end of the Year

Can we put in the category of price follower the traders who follow news, rumours, tips, fundamentals, price momentum, trade pickers or copy trades? How about Technical traders? Price Action traders ? which category they belong to and why?

I am able to relate spot or futures trading easily to the two styles you have stated so succinctly.

How about hedging? options selling ? options buying?

How can we use these derivatives for diversified trend trading or mean-reverting trading style?

Hi S :-)

We need to understand the difference between price following and price prediction to answer this. Price following is based on the principle of following the 'now'....not anticipating the future. So techniques such as 'following news, rumours, tips, fundamentals are not operating off that principle'. They are adopting a predictive posture based on derivative methods of anticipating what price will do in the future and not simply following where price is now.

For example following news is based on anticipating sentiment to that news feed. Is it above or below anticipated expectations? Rumours/tips are based on an assumption about what is going to happen in the future based on that rumour/tip. Fundamentals is based on an understanding of what is 'intrinsic value, in relation to those fundamentals and whether price is above or below that 'intrinsic valuation'. Will it mean revert to that intrinsic valuation in the future?

...... Can be a bit of both price following or prediction. Trading based on certain chart patterns such as consolidation patterns, heads and shoulder etc. tend to be predictive in posture....but price following techniques such as trend following and momentum breakout trading use broad patterns such as trending condition or momentum breaks off key support/resistance as a basis for trade entry....however, it is not the entry that is of key importance to price following techniques but rather the trailing stop and exit that is critical.

They tend to be more predictive than price following in nature. There are a few general classes of condition (that a trend is present or momentum is present) that is sufficient for price followers to enter their trades....but it certainly does not require finesse and understanding candle patterns etc.

Hedging is typically predictive in nature. It either results from negating future losses through applying a hedge or waiting for an opportune time in the future to release one side of the hedge.

Nearly all options trading (buying calls and puts etc.) is predictive in nature except writing/selling options'. The time value associated with the option price assumes a predictive stance is taken for the trader who buy the call or put. The writer of the option however tends to disregard the future and is simply looking to earn a premium for the writing of that option.....however writing options has negative skew....which we want to avoid.

There are a few curly ones S....but rather than classifying different methods in black and white.....you need to break down each instance of trading style and determine whether they are taking a position based on a future expectation, or simply taking a position and following price. The reason why the Pwin% of a price follower is so low, is that they are not taking a predictive posture and are wrong many more times than they are right.....but the edge of the price follower is always taking the trade and following price with a trailing stop.....and sometimes that price movement becomes an outlier. It can never be predicted in advance. The applied method simply assumes that the market posses fat tails occasionally and is more frequent than what a Normal distribution would imply.

Cheers

C

Guys

I thought I better give a heads up. I have requested to Twee that he tags me as a commercial member. I know that many of you are a bit touchy about members with commercial status....but in the interests of transparency, I need to declare my intent.

I will be kicking off a commercial website on 1st October which I have been solidly working on with others. I have been a bit limited in my ability to share stuff that I have been working on given that I am now part of a development team, but under the commercial umbrella will be able to open up a bit with some of the methods and techniques I might spout about in this thread and others.

You guys know me by now....and I hope you understand that R&D and education is my passion. In fact, I far prefer R&D to trading itself as you probably have guessed.....so I am working in a team, where I have a role to play in that capacity. So much of my time is spent in R&D that it was such a waste of my effort if I did not at least consider commercialising my work.

We are a pretty unusual mob in that we do not offer any form of predictive forecast and deliberately focus on reducing a traders expectations to more realistic levels with only a modest application of leverage.

We are all about 'price following' and applying and sharing knowledge in the skills of creating and compiling diversified systematic portfolios targeted towards FX markets and CFD's ......that have been able to stand the test of time across a broad array of different market conditions.

.....anyway, see you hopefully on the commercial side of this forum in a few days from now.

Cheers

C

PS I apologise for the impact this status change will have on my buddies......but life will be a bit different for me in commercial land.

Dear C,
As I am following your writing quite a while, trying to grasp as much as I can form your wisdom, change of your status does not hurt…
Content is what matters to me …
Good Luck !!!
Jacek (BN)

Cheers BN. :-)

Hi C,

I wish you success with your commercial website.

Who knows....maybe in a few years Downunder has their own version of Renaissance Technologies....or even better

Good luck, Hudi.

Cheers H. It is going to be an interesting ride ahead. I could be on a park bench sooner than you think.....but hoping otherwise :-)

I have to express my gratitude to you to make me aware of the big picture. I really avoid details and get lost. Somehow I have always found a way out easily with the help of big picture.

It does not matter whether you are commercial or not as long as you are accessible for doling out your wisdom.

I am sort of still not clear as to how to classify a trading style in price following or price forecast.

Price Action falls into which category and why.

So also Range trading, swing trading , intra day trading, range-trading, news or event trading, Swing trading.
Thanks to you now I understand the difference between trend trading, momentum trading and mean reversion trading.

The best way to interpret whether the technique is price following or predictive is look at the importance of the entry to the overall strategy. If the entry is critical, then the technique is predictive in nature (on the assumption that the chosen price at entry is significant to the overall trading result). Swing trading is predictive and a different kettle of fish to diversified systematic price following. You make assumptions about your prediction of when the swing begins and ends and entry is far more critical.

Price followers are far less concerned with the entry. In fact there are studies to suggest that a random entry over the long term offers an edge by virtue of the fact that the entire emphasis is placed on the trailing exit condition with no profit target. Given that markets occasionally exhibit fat tails, there will be times when your trade event captures these abnormal moves and generates sufficient bang for buck to pay back any deficit that may exist with your small losing trades .

Here is a monthly performance table of a simple but highly diversified price following system.



Have a good look at the results and note those results in gold. They are the outlier results of the table. All other monthly results are effectively a random outcome after applying strict risk mitigation methods that cut losses short. It is deceptive to think of all positive results as being planned for.....as they are simply a random result when trading a system with a slight negative bias (being frictional costs). What creates the necessary frequency of the outlier results is diversification. This particular price following model was a composite of 101 discreet price following systems applied across 12 different FX markets, each configured to capture a different class of trend. You will note that the past few years have not delivered any significant outliers. You can confirm this by looking at more recent volatility in FX pairs which has been quite subdued over the period. There is a slight edge delivered in the plethora of breakeven results attributed to the aggressive diversification deployed....but if you were relying on your bread and butter being delivered by a single trend following system in a single market....you would be sorely disappointed over the last few years and in a world of pain.

95% of the price followers trades are effectively a random outcome hovering around breakeven....so you can see that it is not then entry that matters. The meat of the edge for a price follower lies in those 5% of abnormal winners that pay for em' all and then some. Entry is insignificant to achieve this...but trailing stop with an open profit condition is a necessity. You can never predict which of your trades will turn into these outliers....so you follow all those trades that meet your broad class of entry condition.

The only thing that is required to validate an entry with price following techniques such as trend following or momentum breakouts, is that there is a sufficient signature in recent price to suggest that it may possess a degree of momentum either long or short. So for a price follower, a filter is first applied to detect overall trendiness and the general direction and that is sufficient to attract an entry.

So if that condition of trend is met, an entry is taken and like a shadow, we follow price with a trailing stop to an unknown destination. The guarantee offered by an asymmetrical but simple trading technique adopted by price followers is that losses are cut short (the trailing stop condition) and winners are left to run (no profit target). These days however you need to be very diversified to apply this as markets have become far more efficient and there can be very long periods where the market does not exhibit trends of sufficient duration and magnitude to make a single return stream worth it. You therefore need many different uncorrelated return streams to make it a wealth building exercise.

Price followers do not apply any finesse to a chart pattern. Trends and momentum patterns have a range of different characteristics. If you are too prescriptive in addressing them, your system will be continuously whipsawed out of the volatility that exists within these general conditions. Your prescriptive system design will attract drawdowns....which is not a problem associated with the trends in a market....but the design floors in your system which are too deterministic and don't give enough room for random noise that exists within the general trending condition. You need many different trend following systems to throw at a market to allow for some of them to hopefully get thru the inevitable variability that exists in the overall pattern of movement.

Remember that trends do not occur in straight lines.. There is volatility (noise) that exists while a market is trending and the outcomes in terms of general pattern and nature is vast given this level of uncertainty that exists at all times in the market. To capture trends across a broad class of different patterns. you need systems that give room to breathe and lots of different styles of them. Your system parameters act as snags that prevent you from staying in a trend just as a paper boat with edges can be snagged by obstacles when placed in a running stream.....so reduce your system parameters and simplify your rules to loosen up when catching trends.

It is a bit like using a machine gun to hit your target as opposed to a sniper rifle. In a world where the Law of Large Numbers matter....you need to deploy methods that use Large Numbers (aka large numbers of different systems across large numbers of timeframes and markets) to harvest any available alpha that might exist in an otherwise random price series. This guarantees that you need to become systematic as opposed to discretionary in applying these approaches as the degree of diversification is unmanageable as a discretionary trader.

I hope this makes sense.

Cheers

C

Trading the Distribution of Market Returns

Below is a frequency distribution of a sample of S&P500 Daily returns which is compared to a normal distribution. A very large portion of the positive daily market returns lies within the normal distribution. A lesser portion of the positive returns lies outside it. This is symptomatic of a modern fairly efficient market. The more efficient it is, the more it characterises a normal distribution. There is only limited alpha available in a modern efficient market characterised by the positive portions that lie outside the normal distribution of returns.



The first thing to look at is the normal distribution curve. Any return that plots underneath that normal distribution curve is a potential random outcome. The normal distribution characterises the frequency distribution of an efficient market or during periods of time when markets are acting efficiently. You can be lucky and have a great profit or you can be unlucky and achieve a significant loss. This is allowed for by random outcomes.

Notice how you can have significant profits (to the right side of the normal distribution up to 4%) and significant loses to the left side of the normal distribution (down to -4%) but the vast majority of trades centre around the mean of 0. Now when including frictional costs of trading such as spread, SWAP, commissions etc. you can slightly adjust where your trading strategy performance plots with a bias towards a slightly negative result (being the impact of those frictional costs). So the profit distribution of a strategy with no edge is likely to plot somewhere under this normal distribution with a slight bias towards the left of the curve.

Now look at the chart again below.



Notice how I have highlighted two areas in red that lie outside the normal distribution of returns. These two areas represent where an edge resides in a market that can be capitalised on by a trading strategy. One class of strategy capitalises on the peak of the distribution that lies outside the normal distribution, and the other lies in the right hand tail. These two types of 'edge' coincide with our discussion on what separates price following versus predictive methods. Kurtosis (or peakedness) occurs during stable market conditions when markets are very predictive in nature. Fat tails however are associated with unpredictable conditions when markets are in transition and trending between periods of stability (equilibrium).

Now the thing to remember is that dependent on the sample size, the market distribution of returns can plot in a vast array of different shapes from normal distributions, to distributions with high kurtosis, to distributions with large fat tails and is dependent on the prevailing market condition. Over the very large data set however you start to see how it all settles out in a distribution curve that is dominated by a normal distribution but with a small kurtosis and fairly high degree of fat tail. This more subdued distribution tells you where you need to plot to garner long term sustainable returns. The problem with the kurtosis is that it shuffles the peak and what was predictable in a previous market condition is now a different form of predictability with a new peak.

Successful predictive methods that rely on stable and predictable market conditions plot within the area of kurtosis of the distribution to the right of the 0 return line. Strategies that seek this available edge in stable market conditions with high kurtosis (predictability) have correspondingly high Pwin% (they are right in their prediction very often as markets behave) and the Pwin% increases as the profit targets get tighter.

To allow for this correct prediction in the future, they need to give room for this prediction to play out, so the lack of applied tight stop measures necessary to give the high Pwin% rate, makes them vulnerable to the negative fat tails that exist in the market from time to time (refer to the left hand fat tail that is slightly higher than the normal distribution plot). This is why....... despite the high Pwin% and only the occasional large loss, they are vulnerable to those times when the market behaves unpredictably and delivers consecutive large losses. Unsuccessful predictive methods can quickly plot on the far left of the distribution of market returns. Even worse if the applied strategy continues to warehouse risk and not release it through stop loss measures (such as grid trading and martingale methods).

Price following strategies simply capitalise on the far right side of the market distribution of returns where the positive outliers exist. The chances of an outlier are limited when not diversified...... but given that all losses are cut short, we restrict the ability of the trading strategy to encounter black swan events that exist on the left hand side of the distribution of returns. We therefore skew our trade results towards the right hand side of the distribution of market returns.

As speculators we need a non-efficient market. This therefore forces us towards a choice of prediction or price following. The vast number of traders prefer predictive methods as they like to feel in control and have many wins to make them feel good...however this is a market deception while they are stable and stationery. When unpredictable conditions occur from time to time....the predictors are left exposed with their pants down.

Trade the right hand side of the distribution of returns my friends. You will be wrong many more times than you are right, but at least you cover your risk exposure and from time to time with sufficient diversification you may be the beneficiary of a significant bonanza when you wake up one morning.

The market is always right...despite how clever you may think your prediction machine is for when you are wrong....there is a chance you could be dead wrong!!!!!

Cheers

C

Cutting Through the Noise

Zat Rana puts his masterful quill to the question of habits.....and why most of them fail.



https://medium.com/personal-growth/t...l-b48596e44df1

Enjoy

C

Place the Emphasis on Risk Management and the Profits will Take Care of Themselves

I hope by now that I have convinced you that a price follower's bread and butter can be attributed to the outlier....which cannot be predicted in advance. A price follower pins their hopes on an assumption that liquid markets possess 'fat tails' but can never predict in advance when these 'improbable events' occur. So we diversify far and wide to be in a position to participate in the 'unpredictable' fat tails that a liquid market can deliver from time to time.

So......for many retail traders, they may be asking the question right now......"If fat tails cannot be predicted in advance, what is the point of price following in this game of speculation?"

Well the simple fact is that to be able to participate in the unexpected outlier, you must be participating in the game of speculation at all times. To be able to achieve this, then your entire emphasis needs to be placed on capital preservation and risk management with your diversified portfolio in ready alert 24/7 to take every signal that comes your way. Provided you can stay alive long enough and continue to systematically apply your entry signals, then the Law of Large Numbers virtually guarantees that you will benefit from the bonanza that any positive outlier will bring.....so if you are not available to the opportunity as you now no longer have sufficient capital to participate, you are out of the game of price following.

Now this is where the backtest comes to the rescue. It is not the basis upon we determine future expected returns.....but it is the basis upon which we assess a system's means of preserving capital based on a simulation of how that system fared amongst an array of different past market regimes. We can therefore use it as a benchmark for comparing against results arising from an uncertain future.

Back testing is so very important to the price follower as most of your time is spent wrestling with drawdowns and deliberately trading against your psychological urges. If you do not continuously monitor your live performance against your backtest, then when times get tough, you are highly likely to desert the price following camp.....and this tends to be just at the wrong time to do so.

While your backtest tells you nothing about the future, it does tell you how the future path differs from the past path. This information is invaluable to the trader as without a guiding benchmark to track your future performance, you have no means to therefore determine the validity of your model in navigating the future. Obviously if your system is highly successful in navigating the future, then you do not need a guiding benchmark to compare against....however that is the unlikely story. The power of the backtest is in providing an objective benchmark to identify when things are performing to plan or more importantly, going against your plan and Is a method to assess when to legitimately intercede and override your system when benchmarks are exceeded and your finite capital is under threat.

So whenever you see a long term backtest, you need to prevent your mind from projecting that backtest into the future. The backtest is a single path of what has occurred in the past with the benefit of hindsight. From the moment of 'the now and going forward', the way to view the future is a possible array of different possible paths (like a Monte Carlo array into the future) of which each possible path represents a potential outcome in a sea of unknown future market conditions.

You have no knowledge today about the possible future path you could be taking. That future possible path offers an array of different potential outcomes that can lead to rags or riches.......however if your system is robust in navigating past market conditions, it severely restricts the options of failure to a far more limited set than what would be presented to a trader who attacks the market with a system which has not been rigorously back tested. With the Law of Large numbers, any process that assists in reducing unfavourable possible paths is not to be disregarded as it helps to tilt the array of future possible outcomes in your favour.....just like the house edge enjoyed by a casino.

Do not underestimate the power of a robust backtest. The information you can glean from well prepared backtests will significantly increase our degree of confidence in navigating future uncertainty and prevent you from attempting to over-ride your systems when the future does not play out quite as anticipated.....but remember not all backtests are the same in terms of their rigour or in what we can interpret from them. Care needs to be taken in how we undertake them and the inferences we obtain from them.

Cheers

C