Diversified Trend Trading Approach

Sold!!!!! Great advice B. I am going to cancel my pendings and wait to see which way the finger of death points :-)

ANNOUNCEMENTS OF IMPACT

To avoid double guessing yourself in this situation going forward I am going to develop some rules around pending announcements of impact so at least going forward I can face them consistently and from results adjust accordingly if necessary. The approach to-date has not considered single announcements as material to the strategy, but they have been problematic at times of entry when execution of pending orders were imminent and their entry conincided around announcements of impact. Fingers of death have an unnerving ability to shatter one's confidence and I personally hate them but previously have just sucked them up but it has made me battle weary.


What to do with existing open orders?
Do you hedge the order or not? For the purposes of this test I am not going to hedge prior to announcements for the following reason:

1. The reason I am in the trade in the first place is that I have chosen a position based on my assessment that the trend is of 'substance'. Given that the trend is in line with longer term timeframes, my assumption is that it is the fundamentals associated with the instrument that are leading to trend drift. By and large the assumption I am making here is therefore that the pending announcement has a greater chance of being in the direction of overall fundamental driving factors and therefore leading to an overall probability bias is in my favour. I could be wrong but remember this is a hypothesis at this stage that needs to be tested.
2. Another reason for adopting this viewpoint is that this approach adopts a non-dsicretionary methodology following trade committment. To be faithful to this significant feature of the approach, once the trigger finger has been pulled you are locked in. The risk management parameters of this approach ensure the damage is never significant if you are just wrong...... which will happen often but that is just part of this game. Discretion is a feature of entry and not post execution.

What to do with pending entries that coincide with relevant announcements of med-high impact?
This is where I am going to err on the side of caution and delay my entry till direction is confirmed post announcement. The reasons for that decision are as follows:

1. The decision for entry is currently made according to the guidelines:
   1. Wait for trend confirmation before entry - Effectively when it shouts out using the SDC on the D1 timeframe and coincides with the viewpoint of whether the trend is a primary trend or retracement trend on W1 and M1 timeframes;
   2. Has a consistent price history within the H1 SDC exhibiting typical trending behaviour, has an H1 SDC that is consistent in width and slope with longer timeframe SDC's and is in a breakout condition (using the Donchian); and
   3. Ensure consideration is made of significant S/R that are likely to be obstacles in the path of entry decisions;
   4. So now I will also include that decision making needs to evaluate the impact of med to high impact announcements immediately prior to entry decisions. To add another clause in my opinion is justified given that entry invariably has a significant discretionary component. This addition is really no different to looking at S/R prior to determining entry levels.

   
   
   
   
   
   

Let's see how these assumptions play out over the longer term. At least this allows me to stop frickin' second guessing myself and puts the approach under the crucible and not my lousy intuition.

Regards

C

After dilly dallying with EURUSD for so long now and given the trend is screaming at me, I'm in .....(PS thanks to Bass). Less concerned about support at 1.164 and more interested that long term S/R associated with an M1 congestion pattern since 2008 has been breached.

Thought I better give a heads up on this trade as it differs from earlier predictives set.

Regards

C




PS Given the recent approach amendment (Post 191) I am starting to load up with trending trades that have significant room to breathe. It's a good feeling. Trade frequency is far lower which is making me think at some time soon I am going to further diversify by including additional indices that reduce the current bias towards forex.

Searching for Order in this Chaos

I admit it, I am a nerd as you may have guessed but one of the benefits of my nerdy tendency is that I read a lot.....and I mean a lot....particularly in the fields of physics which therefore necessitates a knowledge of how complex systems behave. This nerdiness which I like to call focus, as it appeals better to my insane selfish tendencies, does compromise the necessary day to day functions that ‘normality’ is meant to include so I have my problems.....ok.....big problems.

In my nerdiness, I was lured to a book on the Amazon shelf titled “Evidence-Based Technical Analysis”by David Aronson due to its bold claim of applying the scientific method and statistical inference to trading signals. I thought, that’s right down my alley, so I patted my dog, ensured all my trades were on alert and put my thick horn-rimmed glasses on to enjoy a ride into the disputed science of Technical Analysis.

Now I think we all know where this is going and I had the tissues next to me as it was a harrowing story about the results of using 25 years of historical data to test 6,400 binary buy/sell rules used by the TA community in the S&P 500 including almost every pattern in the sun.....in which there was absolutely no conclusive proof that trading signals undertaken produced a non-random performance return. None of the binary (long/short) signals beat the performance of a non-predictive rule by a statistically significant margin. Of course just because the results appear to close the door for the TA profession, it does not rule out long term performance from chance alone. In fact while the distribution tails get very thin on each side of the Gaussian distribution associated with randomness, there are always some winners no matter what the timeframe.........but the message here clearly is......ladies/gentlemen place your bets.

This was the result from a mission by Professor David Aronson, an ex-advocate of TA with a scientific background who decided to put TA to the rigorous scientific test. Now the likes of Mingary on this forum would be saying.....I told you so?........and I respect that opinion.....as like it or not......it was my hunch also given the thousands of EA’s I have tested over the long term horizon.....but I thought I would mention some of the interesting insights of this analysis which offer hope and are the important foundations of this DDT approach.

The conclusions surrounding the DDT approach adopt the premise that while there may be no repeatable pattern of reliability, there is a small but significant bias associated with longer term price data which reflects a non-random drift component associated with underlying economic factors. If there wasn’t, then why do we have fiscal policy, why do we have investors, in fact why do we have markets at all if this wasn’t the case?

Here is a major caveat that I have honed in on in the book as it offers hope to all that are looking for at least a pinch or order in market chaos. The entire analysis used de-trended market data to compute rule returns to eliminate performance distortions. Well as it turns out there is an acceptance in this analysis by the author that markets do trend over the course of the longer timeframe with a statistical competency level that is in accordance with the long term buy and hold strategies associated with the equity market....however the ability to predict the future based on this tendency cannot with a degree of non-random certainty be determined by a single pattern of buy/sell signal.

I can live with this assumption therefore as this approach does not use rely solely on signal patterns in its implementation. In fact it is looking like we can abandon the use of the Donchian as a breakout signal in the SDC and enter at any time provided price is within the long term channel of price history associated with the SDC. I have always suspected this but am growing more confident in removing the Donchian as an entry signal.

What this means to the approach is that it would be indicator free apart from the SDC which is the only tool of meaning to assess drift in long term price data. In my next adaption to this approach I will closely look at removing the Donchian to observe the effect on performance.

Now I am not having a go at ‘the Turtles approach’ here as it appears to me at least that the foundations of the approach are almost identical to mine. Rules were embedded in their system to simply allow them to ride the trend and ensure consistency in application. I think this is the central take-out out of all long term trend riding strategies.

The analysis also did not assess complex rules. This is a saving caveat for the TA practitioner as few traders, discretionary or non-discretionary in technique, restrict themselves to decisions based on one rule......but given the outcomes of this comprehensive analysis....we could be just ‘hoping that this exclusion’ in the analysis save us....which probably we are.......however.............what gives me hope in using the SDC as a tool to assess price history is that discretionary decision making used in determining whether a trend exists or not by this approach does not use a single pattern. It actually uses the trend of price history over the entire history of the trend prior to entry to simply determine whether a trend of potential substance exists and it’s most likely trajectory.

...so does this mean that this approach is safe and free from the verdict of this horrible analysis. Well no and yes. Unfortunately the use of discretion prior to entry can never be rigorously tested by statistical measures which unfortunately does not rule out that this approach is just another form of game of chance. The need for discretion prior to entry is a big bug bear of mine but until an EA can be as rigorous as the human brain in detecting where a trend starts and ends, this is going to continually be a vulnerable component of this approach.

On the plus side, the mechanical application of the strategy from entry to exit can be evaluated statistically and this is exactly what I am doing. Is 2 years enough.....well clearly the law of large numbers says no, but at least it is better than nothing.

What I am seeking with this approach is to reduce my performance expectations of a single instrument to hopefully achieve returns that are in accordance with the long term returns familiar with market indices such as the S&P 500, ASX, FTSE etc. To believe that you can pull a return of 5% per month from a single instrument in trading to me at least flies in the face of reality. Of course there will be months where these returns are even exceeded but I am after a more sustainable approach that gives me peace of mind. You all may snigger and say that a 2-3% return per annum per instrument is simply bizarre as a trader, and I would like to agree with you all, but the scientist in me rails against that opinion. One of the sure fire ways to detect an unsustainable strategy is the statement frequently made by the advocate that a particular approach is only appropriate for a particular instrument. That is a red flag in the face of an analyst. To be statistically valid, you need to determine the validity of your approach across all price instruments as this will ensure that the technique applied has the greatest probability of detecting and harvesting the very small non-random bias that is associated with he instrument. So if you have confidence in your strategy you should be able to apply it to any liquid major market instrument.

I am therefore seeking a good return through diversification of instruments. To achieve plus 20% returns over the long term, in my opinion you must be diversified. As a long term trend trader, this is your only chance to beat this beast of a market.

Provided you approach has a small but significant bias in expectancy, leverage will be your friend and not your worst nightmare. Be realistic, be cautious, stay safe, be very patient and be consistent and let the knowledge that the entire economic system exists due to the small but existant non-random feature of an otherwise chaotic market.

Regards

C

C

Then of course there is the Warren Buffett response to diversification.

"Diversification is protection against ignorance, it makes little sense for those who know what they’re doing.”

Or or put another way. If a person knows what they are doing there is no need for broad diversification. He/she should be able to easily identify the winners and load up on those winners.

Buffett only recommends diversification for the non-professional investor.

Hi Pak. I hope the holidays are treating you well. I am imagining you in a cabin somewhere in NZ with a pipe and a trusty hound at your feet...and of course a port.

I must admit this rationale flies in the face of Buffett's 'deep value investment technique' but with the instruments I play with, I have no hope of identifying the critical drivers surrounding the longer term price moves. In that way I am therefore cheating through diversification by compounding my performance returns, but the huge assumption made here is that the small non-random fundamental drivers are built into stochastic price action otherwise I am tilting at windmills.

Buffett's investment world has different risk parameters where business risk plays a large role in success in addition to sector and market risks. If I could, with any degree of certainty assume that economic decision makers were rational creatures, then perhaps I could sure up the odds a bit more.

Anyway, shouldn't you be doing the haka or fly fishing in a glacier somewhere?

Regards

C

c

As we discussed your MTF analysis starting with MN/WK has been a proxy for determining the trend via fundamental analysis and it seems to work. However, you may want to think about whether forex, metals, indices are ultimately driven by the same core fundamentals (with specific nuances obviously) and whether further diversification really makes a real difference, other than the cumulative impact of just adding more instruments. So does it make sense to add more instruments or in the words Buffet load up (a bigger punt) on the ones you know will be winners.

..... And yes after a couple of pinots I have been known to do the Haka.

Back to the vacation.

Cheers.

Yep Pak, it certainly appears that way.


I certainly get your point and I need to be very careful in my considerations.

One of the biggest dillema's I face now is that given the alteration to the approach as detailed in post 191, my trade frequency is going to be far lower (already experiencing it now) despite the fact that my judgement says that this is the right decision to take (eg. bias the approach towards the longer term timeframe). It is going to be difficult to assess this revision against the earlier rudimentary strategy but time may tell.

The rudimentary approach was already a powerful beast and I am sufferring from the 'if it ain't broke don't fix it syndrome', however experience has taught me to never rest on my laurels and assume past performance will be repeated. In my search for a sustainable strategy, I am happy with the decisions I have taken but the verdict is still out on this.

So, what happens if Pwin and Expectancy increase but overall portfolio return decreases. This would give substance to the assumption that the amended aproach is a good one but now the decision comes to how to increase trade frequency recognising that trends of substance are seldom in each instrument. This is where I stand at the moment in this dillema:

1. Consider adding to existing position in the 24 portfolio when in trend. That means that on any given trend of substance we may have multiple trades running. Of course this pyramiding into a trade is common practice but unless you are confident of trend bias, can get you into a pickle. However there is a lot of strength in this assumption for to be able to add to positions, we know that a trend of substance must be in progress (and that by and large is a rare event); or
2. Increase the instruments in the portfolio to simply compound returns. When you look at the profit performance of this strategy you can see that on average (almost without exception) every instrument over the longer term is producing a positive return of on average 3% per annum leading to annualised returns for the past 2 years of approximately 80%. This is also evident when you look at each monthly return and average the result across the entire portfolio for each month. For the last 24 months, only one month was a (minimal) negative result. The easy conclusion to make therefore is that you can simply go on adding instruments ad-infinitum and benefit from this approach.......but the logic of alternative 1) has more strength to it in my opinion. Furthermore the trade management of a smaller portfolio has significant benefits in oversight and execution alone.....but Curtis Faith is ringing in my ears here. The only excluded market that the Turtles were not prepared to trade were illiquid markets. Diversification was their central premise only limited to their brokers capacity to offer a diverse range of instruments. I am aware of Buffet's issues with diversification but on the other hand it is hard to dispute the track record of the Turtles. I am aware that significant correlation exists in my current portfolio and it is evident during winning times and more subdued times. The search for uncorrelated instruments might be a very useful approach to assist this approach in trading for a living.
3. The final option is simply to do nothing and wait and see the result of the amendment made to this approach. I am thinking that I will progress down this path for the moment. If I find my hunches are unfolding in the analytics then we can look at options 1) and 2) in more details and catch up with a bit of backtesting.....but I have problems in backtesting when compared to forward testing as it is so east to curve fit from bias alone, let alone from deliberate manipulation.

.........oooohhh decisions, decisions?????

Enjoy it Pak. Looking forward to when you get back though and can assist in my deliberations. Don' worry, I will look after things here and work, work, work and mind the fort. You just have a swell time swanning it/ tic

Regards

C

This is too much nerdiness for me, i'm already lost, but i have one question though, does it work or not ?

It's a work in progress. I am not here to crystal ball gaze. Now pass me the plasma ball please B. :-)

Franz Kafka, frustrated with his living quarters and day job, wrote in a letter to Felice Bauer in 1912, “time is short, my strength is limited, the office is a horror, the apartment is noisy, and if a pleasant, straightforward life is not possible then one must try to wriggle through by subtle maneuvers.”

Kafka is one of 161 inspired, and inspiring, minds — among them, novelists, poets, playwrights, painters, philosophers, scientists, and mathematicians — whose daily rituals are recorded in these pages. Like Kafka, they worked in the face of countless obstacles (some of them self-inflicted) and developed a fascinating range of “subtle maneuvers” to get their work done each day, from waking early to staying up late, drinking vast quantities of coffee to taking long daily walks and precisely timed naps. Thomas Wolfe wrote standing in the kitchen, using the top of the refrigerator as his desk, dreamily fondling his “male configurations.” Jean-Paul Sartre chewed on Corydrane tablets (a mix of amphetamine and aspirin), ingesting ten times the recommended dose each day. Descartes liked to linger in bed, his mind wandering in sleep “through woods, gardens and enchanted palaces” where he experienced “every pleasure imaginable.”

Selected for NPR's Best Books of 2013, The Tim Ferriss Book Club, and The Millions 2014 Year in Reading

Here u are C.

Thanks B. You know how to shut me up. All this pondering and not much doing.........but in the waiting time between doing, it doesn't hurt to let the mind wander a little.

What is it about books that are so appealing....or is it just an escape from life itself? There is a lifetime's read in those lists....I better get cracking. :-)

wasn't Kafka's dying wish that he wanted all his manuscripts and books to be burned?
Perhaps he realised, right at the end, that regardless of what you try to enlighten folk to, at the end of the day, they'll believe what they want to believe?

According to wiki, his friend Max Brod ignored Kafka's wishes to do so. So thanks Max Brod.....whoever you are.

Now that's just crazy talk Mr C...../tic :-)

Weekly Update
This week saw a return to form following the festive season break with great trending opportunities attributed primarily uncertainty in the Euro.

Trades Closed During the Week
Nil, zip, nada. Nothing to report.

Trades Opened During the Week

GBPSGD


Note that in this instance the H1 SDC (yellow channels) mimicks the D1 SDC (dotted Orange channels) in width and trajectory allowing for considerable breathing room in the trade. Trade entry short at 2.0181 was placed immediately below S/R at 2.0196.

EURAUD



EURUSD


Finally I had the cohonas to enter into this trade after I was convinced that any very long term S/R was breached. You didn't have to be a rocket scientist to know where this was trending but Mr Evil on my shoulder was continually whispering in my ear about a possible bounce at the base of the extended congestion period.


......next post coming up will reflect the status of current open trades.

C

Current Open Trade Status
Below are trades currently open in the portfolio.

USDCAD (R Multiple = 1.78)


Note how price is entering a resistance zone at the upper SDC.

GBPUSD (R Multiple = 1.19)


Oversold on H1 SDC with current retracement occurring. Nothing to worry about at this stage and is symptomatic of the rhythm of the trend.

DJI (R Multiple= -0.30)


I deserve to get a flogging with this trade as reported in Post 183 but lady luck is being gentle with me so far.


USDSGD (R Multiple = 0.42)


I must admit that I am getting a lot of joy from this currency pair at the moment.

USDCHF (R Multiple = 0.41)


Note the resistance on the D1 SDC upper channel. It is in overbought territory at the moment and a mean retracement is possible.

EURJPY (R Multiple = 2.31)


Bouncing down the H1 SDC with some powerful short moves.

GBPSGD (R Multiple = -0.09)


S/R at 2.0196 is proving to be an obstinate blighter.

EURAUD (R Multiple = 0.49)


EURUSD (R Multiple = -0.11)


......weekly outlook coming up over the course of the weekend.

Cheers

C

Outlook for the Week Ahead

But before we start, some music to keep you occupied :-)




AUDJPY


AUDUSD


CADJPY


GBPUSD


ASX


DJI



......more to come this weekend.

Regards

C

Weekly Outlook continued.......

EURAUD


Amendment to this post. I am currently short in this trade and not long (refer to Post 216 for details). Oooops :-)

EURJPY



EURUSD



EURCAD



Nikkei



FTSE




....more to come later.

C

Weekly Outlook continued...

USDCAD


USDCHF


USDJPY


AUDCAD


DAX


XAUUSD (Spot Gold)



.....one more post to come to wrap up things for next week.

C

Weekly Outlook continued......

USDSGD


NZDUSD


XAGUSD (Spot Silver)


NZDJPY


NZDCAD


GBPSGD



That's it for the week guys.....now it's time to put the feet up.

Best of luck next week.

Regards

C