Diversified Trend Trading Approach

Pssst...... I am that ugly polish astronomer Copernicus. But thanks for the post. :-)

Lol..

Hey C.. welcome back... I hope you and your family enjoyed the break...

Thanks Ja

It was a great break. Family is great and I am refreshed and figting fit and in the thick of a few descent trends and then of course there is the real work......*groans and thinks about the next holiday*. Is all Ok at your end?

AlbinaGrande's small oversight (which I also have been guilty of in the past) made me laugh as we trend followers do all tend to look all alike. :-)

C

You know it was a good break when you return to work and the first thing you do is check your leave balances.

Using Profits to Magnify Returns - An Alternative Method to Pyramiding

As trend followers are aware, when you find yourself deep in profit in a trend, a decision needs to be made whether to pyramid (add to the position or not). As we all know, techniques of adding to an existing position is not restricted to trend following, and there has been a lot written on the subject with some nay sayers demonstrating that such a technique actually in the long run may compromise the expectation of your strategy.....whereas I can find even more supporters of the technique who hold a totally contrary view.

So obviously the choice to be made is whether the technique of pyramiding suits your trading style and can be demonstrated through extensive statistical testing that it actually further assists in giving your trading strategy an edge over the long term. If your results conclude it is a valuable edge enhancing technique, then you would be wise to pyramid...but of course the contrary is also applicable when pyramiding compromises the edge of your trading technique.

Of course we all shout with glee when it goes in your favour as it can assist in significantly amplifying the profitability when riding a single trend, however what is not so often reported is when that current 2R or 3R return on a single trade is compromised through profit pyramiding when the trend bends early resulting in a significant reduction in your profit to say 1R or less.

The results however of course will vary dependent of technique and you can strictly manage any possible downside by the way you pyramid through judicious techniques such as taking a reduced risk per trade for subsequent trades to the initial trade taken when entering the trend. Others may scale into a position but this in effect is a very similar process with similar issues to face as traditional pyramiding techniques.........

.....anyway, past experience over a range of different trading techniques undertaken combined with intensive back-testing makes me currently sit in the 'naysayer camp' for the traditional way of pyramiding into trends ON A SINGLE TIMEFRAME. This should not be taken as a definitive statement as I can only comment on the varying techniques I have specifically tested over the years...........

However all is not lost.....is there another way to supercharge performance utilising profits from trend trading? Well yes there is. In fact when there is a sniff of a trend in action, the technqiue that I will discuss shortly significantly multiplies expectancy further than what can be achieved on a successful outcome of profit pyramiding on a single timeframe.

So here we go in explaining what I mean.

Sample Demonstration of Traditional Technique - Pyramiding on a single timeframe

Below is a simplified example of pyramiding on a single timeframe for demonstration purposes. There are significant variations you could employ to this generalised scheme but I will just illustrate a simple example to compare and contrast with an alternative 'supercharged' approach.

Let's take a current trend of substance that some of us may be riding, namely EURUSD and assume our favourite timeframe we trade on is the M30 timeframe. Once again this is an assumption as many of us like to bias our timeframes to the longer term horizon such as H4 and above.



Forgive the clutter on the chart above but it contains info that I am using for current trading purposes which I don't want to delete....but anyway, look at the trades entered at A, B, C and D. Let's assume that we are currently riding a trend with these 4 trades undertaken and for simlification purposes we had say 4 x 48 microlots each with 0.25% risk and we are now at 1.06502. I won't bore you with all the calcs but in summary this is our current position:

1. On Screen Profit = $5,501.76
2. Total R = 11.01

Of course when the trend bends we are going to lose some of this hard earned but given we have taken conservative positions with tight stops, we are only going to have to sacrifice a small amount of this on screen profit. But importanly when the trend does bend and probably create a small loss on our last position taken, you will be forced to take profit on all prior trades undertaken (yes there are exceptions to everything but you should be getting my gist in this generalisation).

The Alternative Proposition on a single trend

There is not much to this alternative approach as it has been described through the EDDT content on this thread but the result is powerful. As the EDTT approach recommends, simply trade on multiple timeframes for the same instrument. For example, as you know with the EDTT I am trading on the M30, D1, H4, D1, W1 and MN timeframes with trade risks as follows:
M30 = 0.25%
H1 = 0.25%
H4 = 0.25%
D1 = 0.50%
W1 = 0.50%
MN = 0.50%

I commence with the lowest timeframe (M30) and when it shouts at me that a trend is underway I take my initial position. When the trend shouts out on the H1 timeframe I then take a trade on that timeframe and so on and so forth until all timeframes have active trades underway. As a result, on the same trend I progressively enter the trend like the traditional approach but here is the catch and the power of this approach........

For the traditional Technique - Once the trend bends on the single timeframe under the traditional pyramiding approach, you will be encouraged to take all the profit at that point and close all trades. Unfortunately however you may find that it was a hiccup and that the trend actually continues on forcing you to star from scratch and start again (a long way down the primary trend move). As you have to start again, to build a significant position takes time while meanwhile the alternative proposition is continuing to grow big profits and this is where the alternate approach will leave the traditional technique in it's wake.

For the EDTT approach (refer to charts below) - With this alternative approach, look at how this is avoided. Look at where the stops are for each timeframe (each timeframe's upper SDC line (which is extended as a dashed inclined line). The MN stop is a long way away from current price at 0.50% trade risk as is the W1 stop (but to a lesser degree....and so on and so forth. You will find that each trade is tailored for each timeframe and enters at the optimal position as early on as possible in a trend of substance. If the trend bends it may only wipe out a couple of timeframes yet you may find the trend continues allowing you to extend your profits further on the higher timeframes. You can then quickly top up the trades on the lower timeframes with staged re-entries in the same sequential manner if the trend resumes and get back to full strength rapidly without compromising risk.

The following charts are current live trades on multiple timeframes.




Like the traditional approach, if the trend dissipates early I find that I have only for example entered the M30 and H1 timeframes with no signal being generated for the higher timeframes. So like traditional pyramiding there is a sequential progression of entering but you are actually optimising the entry for each associated timeframe (giving progressively greater room to breathe the higher the timeframe) without having to worry about whether it is late in the trend for a particular timeframe and whether the possibility of a bend is going to take all those hard earned profits away from all timeframes. Furthermore look at the results below and see how a similar profit result is generated but that you are not forced to close the trend trade early...... just maybe on say one or two timeframes only as opposed to all of them. As a result the MN, W1, D1 and H4 timeframe trades may just run on for months and months if the trend continues and I only have to top up on M30 and D1 timeframes again to get back to full strength.

1. On Screen Profit = $6,401.76
2. Total R = 12.85
3. But more importantly if the trend bends and say just knocks out 1 or 2 timeframes before continuing on, I then am already well loaded up in higher timeframes and can enjoy the profit on those established trades and just focus on topping up to full strength with lower timeframe re-entires that were previously stopped out.

Anyway, I hope this makes sense to you. Both techniques are suitable ways to consider supercharging profits but there are certainly some powerful benefits with this alternative technique that you may like to consider.

Regards

C

WEEKLY OUTLOOK

The Week Past
Well for any trend trader amongst us, we must be revelling in joy at the moment as a number of instruments are strongly trending and this is where a trend trader makes his bread and butter and then some..... to save for a rainy day. The power of the EDTT approach is shining at the moment with an acceleration in on-screen profit that I had not anticipated. While I have been harvesting already on some trades in the shorter timeframes that have moved into a breather pattern, I am currently enjoying an on-screen profit of 68.37R yet to account for, which is well above the record set in the last 2 years for the DTT. This will keep me going for many months to come with the worst case scenario (with current stops in force) being that this already will translate into a 55R profit if these positions all inexplicable reverse in direction.



I am currently uncertain whether this is an anomaly or whether this is what is to be expected for the EDTT whenever trends pick up steam in a particular month. Anyway, we will see whether this is the case as the results emerge during the course of this year.

The Week Ahead
But before we get into it. A bit of Elgar to keep you occupied.




ASX

Attached Image (click to enlarge)

AUDCAD

Attached Image (click to enlarge)

AUDJPY

Attached Image (click to enlarge)

AUDUSD

Attached Image (click to enlarge)

CADJPY

Attached Image (click to enlarge)

DAX



.....more to come.

C

Weekly Outlook continued......

DJI

Attached Image (click to enlarge)

EURAUD

Attached Image (click to enlarge)

EURCAD

Attached Image (click to enlarge)

EURJPY

Attached Image (click to enlarge)

EURUSD

Attached Image (click to enlarge)

FTSE

Attached Image (click to enlarge)

.....more to come.

C

Weekly Outlook continued.......

GBPSGD

Attached Image (click to enlarge)

GBPUSD

Attached Image (click to enlarge)

Nikkei

Attached Image (click to enlarge)

NZDCAD

Attached Image (click to enlarge)

NZDJPY

Attached Image (click to enlarge)

NZDUSD

Attached Image (click to enlarge)

......more to come.

C

Weekly Outlook continued.....

USDCAD

Attached Image (click to enlarge)

USDCHF

Attached Image (click to enlarge)

USDJPY

Attached Image (click to enlarge)

USDSGD

Attached Image (click to enlarge)

XAGUSD (Spot Silver)

Attached Image (click to enlarge)

XAUUSD (Spot Gold)

Attached Image (click to enlarge)

Well that's it again for the week. Let's keep our fingers crossed that these trends continue into the end of the month.

All the best for the week ahead.

Regards

C

Nice stuff Copernicus..... it is that simple

4x

Many thanks 4x. It's taken me a while to see the light :-)

C

APPROACH AMENDMENT

Just a note for the journal that today I have ceased the application of Support and Resistance lines for the EDTT given the fact that the rationale for their use has never been put through the back-test crucible and their inclusion was based on subjective notions derived from past experience. It is best therefore to simplify the approach using only those elements that have been thoroughly back-tested as opposed to muddying the water with simple hunches.

Note the very interesting post from Fartist regarding S/R. We have to ensure that decisions are based on empirical evidence as opposed to human bias.

I note that the use of S/R lines in determining entries has actually hindered the entry of valid trends such as that expressed in the following post.

If you are interested please refer to this thread that also discusses issues relating to pattern recognition.
Regards

C

I agree though I may move out to Monthly and if there is a real *stand out point* put a line on it for ref: otherwise I dont bother either.. The Institutional traders tend to look for points with much more weight imho.. but each to there own..

Morning from here Ja..... :-)

Just to be able to get rid of S/R on W1 and D1 templates is significantly reducing chart noise and concentrating my focus on the SDC......"Blessed be the clean chart".

I see where you are coming from with long term S/R like on MN timeframes. I will play it by ear with clean charts and see how it goes. If long term results deteriorate I will get them back pronto and take it from there :-)

Hey C

Great thread

I know you are a fan of the trend so I thought you and the other readers of this thread would find this study quite interesting. You may have seen it already, if so im sure it will be useful for the others.

sis.

Much obliged Sis :-)

So glad that you have joined this thread. I understand that you have different trading techniques but your input and nimble mind is greatly appreciated.

PS That paper Sis is a cracker. Thanks for that. Will delve into it in more detail tonight.

C

Summarised Extracts from "Two Centuries of Trend Following" by Y. Lempérière, C. Deremble, P. Seager, M. Potters, J. P. Bouchaud Capital Fund Management, 23 rue de l’Université, 75007 Paris, France - 15 April 2014

We establish the existence of anomalous excess returns based on trend following strategies across four asset classes (commodities, currencies, stock indices, bonds) and over very long time scales. We use for our studies both futures time series, that exist since 1960, and spot time series that allow us to go back to 1800 on commodities and indices.

1. The results makes the existence of trends one of the most statistically significant anomalies in financial markets.

2. We find no sign of a statistical degradation of long trends, whereas shorter trends have significantly withered.

3. Are markets efficient, in the sense that all public information is included in current prices? If this were so, price changes would be totally unpredictable in the sense that no systematic excess return based on public information can be achievable......serious doubts were raised by behavioral economists who established a long series of pricing “anomalies" of which the propensity to trend is a well-known anomaly.

4. In the list of long-known anomalies, the existence of trends plays a special role. First, because trending is the exact opposite of the mechanisms that should ensure that markets are efficient, i.e. reversion forces that drive prices back to the purported fundamental value. Second, because persistent returns validate a dramatically simple strategy, trend following, which amounts to buying when the price goes up, and selling when it goes down. Simple as it may be, this strategy is at the heart of the activity of CTAs (Commodity Trading Advisors, an industry that now manages (as of Q4, 2013) no less than 325 B$, representing around 16% of the total amount of assets of the hedge fund industry, and accounting for several percent of the daily activity of futures markets. These numbers are by no means small, and make it hard for efficient market enthusiasts to dismiss this anomaly as economically irrelevant.

5. The strategy is furthermore deployed over a wide range of instruments (indices, bonds, commodities, currencies...) with positive reported performance over long periods, suggesting that the anomaly is to a large extent universal, both across epochs and asset classes.

6. In this study, we have established the existence of anomalous excess returns based on trend following strategies across all asset classes and over very long time scales.

7. We have found that the trend has been a very persistent feature of all the financial markets we have looked at. The overall t-stat of the excess returns is around 10 since 1800, after accounting for the long-only bias. Furthermore, the excess returns associated to trends cannot be associated to any sort of risk premium. The effect is very stable, both across time and asset classes. It makes the existence of trends one of the most statistically significant anomalies in financial markets. When analyzing the trend following signal further, we found a clear saturation effect for large signals, suggesting that fundamentalist traders do not attempt to resist “weak trends”, but might step in when their own signal becomes strong enough.

8. We investigated the statistical significance of the recent mediocre performance of the trend, and found that this was actually in line with a long historical back-test. Therefore, the suggestion that long-term trend-following has become over-crowded is not borne out by our analysis.

9. Faster trends have actually progressively disappeared in recent years, without ever showing a period where they strengthened. Coming up with a plausible mechanism that explains how these fast trends have disappeared would be highly valuable in understanding the fate of trends in financial markets.

Regards

C

Well just to ensure I didn't get too cocky the FOMC result from early this morning (AUS time) decided to put a spanner in the works and knock out many of the great trends I had been riding on the shorter timeframes (M30, H1 and even flowing through to the D4 timeframe).

Suck it in Copernicus.........

Below are the before and after results to on-screen profit with the EDTT. Note that approx $13K was crystallised as realised profit but from the significant impact on unrealised results, you will get the idea. It is making me eat humble pie in relation to a statement I made in a prior post that from 68.37R the worst case scenario would be about 55R in realised profit (Post 326). The actual result is a profit reduction to 39.53R (realised and un-realised)....still a profit is a profit and given the nature of the moves last night, this is not a bad result. The moral of this story is that pride comes before a fall. :-(



Some of the important things that came to me as I approached my screen from a deep slumber with the sounds of alerts waking the entire house and the neighbours dogs was..........make sure you are awake immediately prior to FOMC announcements.

The trauma of having to watch so many instruments on so many timeframes was quite a challenge. Fortunately all stops and pending orders were observed but trying to track the movements when you are half awake is not what I would call relaxing by any measure.

Apart from the whinging....here are some of the strength's that arose from the approach used in this thread:

1. The reduced width of the SDC channel when deep in profit ensures that most of the on-screen profit is preserved on close. Unfortunately all trends come to an end but the result last night was a spectacular display of a trend bending at high speed;
2. Despite the closure of many short term trend trades, a profit is a profit and to convert an onscreen profit to a realised profit is the name of the game and in this aspect, the strategy performed well. You do not have to worry that a good onscreen profit will disappear into cyberspace with this techique;
3. Announcements such as the FOMC was just a mere blip on the longer timeframes and the longer term trends are still preserved. Whether or not these conditions hold however are a different matter. Future consecutive announcements of a nature like this morning will obviously challenge even the longer term timeframes;
4. It is imperative that you automate your trading with this technique as much as possible through trailing stops and pending orders. You simply won't be able to manually trade through these conditions. You may be fast, but never underestimate the speed of the market.

....anyway as I write this, feel as though I have been put through a rinse cycle and reminds me of the feeling at the end of exams....it's time to chill.

Regards

C

Thanks for the post Sis Thanks for the post sis...

Hey C.. Thanks for the trend following summation..

It will be interesting to see how large the fall-out is from the FOMC..