Diversified Trend Trading Approach

HFT....The Nemesis of the Markets!!!!

​A very interesting perspective from someone who knows the ins and outs of HFT. In a nutshell, all traders suffer in this rigged market (particularly the US market) and it is legitimized by cosy deals between exchanges and HFT traders who pay lucrative fees to exploit zero risk opportunity and lobbyists who have the regulators in their pockets. If all traders experienced a level playing field then all is at least fair, but clearly this is not the case with this form of exploitation.

To avoid the long winded startup for those interested specifically in the issues surrounding HFT commence at 22 minutes into the podcast.

HFT provides liquidity .....pffft....it's the exact opposite!! The only benefit is that it encourages innovation in communications and the drive towards lower latency. All other benefits get swallowed like a black hole by HFT traders.

I wish I could say enjoy the podcast....but perhaps it's best to say 'Get enraged by this podcast'. We know this happens but it is great to hear the details from the horses mouth. :-(

Worth The Wait

Well the wait has been worth it. We are in for a treat today with a cracker of a podcast from Neils of Top Traders Unplugged. This is Part 1 of an extended interview. We will just have to wait for Part 2.

Neils is offering a new 'panel format' which brings together 3 very talented professionals, Robert Osario from Dunn Capital (coincidentally this is where Neils hails from), Alex Greyserman (ISAM) and Kathryn Kaminski (Campbell & Co) who all are deeply involved in the FM trend following space. The panel format discusses the history and the need to breakdown and closely look at what is meant by the term 'trend following'.

Katy and Alex co-authored 'Trend Following with Managed Futures - The Search for Crisis Alpha'. This happens to be one of my favorite reads of late that discusses in depth the specific market conditions where trend following shines, namely during market crisis events. The results are drawn from over 800 years of market data.

The broad theme surrounding this book which is plainly evident if you closely study the nature of current markets is that success in trend following is becoming more punctuated and less consistent in nature. For example prior to 2000 (eg. between 1970 to 2000), diversified trend following using relatively shorter term filters was a consistently profitable technique to apply to the markets. Nowadays however you have to apply longer term filters to reduce impacts of 'noise' and wait longer between high performance periods. However trend following as a technique is not dead in the least, it is just that the times when this strategy shines are fewer and farther in between. However when the crisis events arise, that's when TF get's paid it's dues and significantly outperforms other techniques given the correlated nature of markets fundamentally supported by irrational fear and greed of market participants (herd behaviour) which is hardwired into participants.

Where the odds of winning or losing approaches 50%, that is when overconfidence starts to rear it's head and provide an exploitable edge for those predating on human behaviour. Trend following preys on overconfident traders by utilising systems that are specifically geared to counteract normal human behaviour....to let profits run and cut losses short. Crowd behaviour will always be represented by asset bubbles and provided there are bubbles, trend following will shine. You can kick the can down the road and allow those bubbles to get big.....real big......but sitting quietly in the bushes will be the predators that just rub their hands together with glee and patiently wait for the fallout.

You may hear that trend following doesn't work in FX and should be restricted to other asset classes such as commodities or equities etc. That would be the take of those ill informed traders that view trend following as a technique for the everyday. The bottom line is that trend following is not an everyday strategy but a technique that must be applied everyday to ensure that when crisis alpha occurs, you are participating. Trend following works best in liquid asset classes as it relies on collective behaviour of it's participants to shine. Sink this in your skull to then realise why there are Trend Follower's in the FX space. It is to predate on collective behaviour and the correlated nature of FX. For example, while you may hear some say use TF for equities.....once again they are not thinking like a trend follower....Trend following is not as successful in individual equities as you may think. Trading indices are better due to the greater liquidity and correlated nature of assets within the equities class. The more effective technique for trading individual equities are rotational momentum based strategies.

What defines whether you are a trend follower or not is not the details of the specific technique but rather the behaviour of the trader between entry through to exit. If you let profits run (open ended) and cut losses short, then you are a trend follower no matter what timeframe or technique we are dealing with. What is inbuilt into this technique is the ability for significant win's when conditions are favorable and far greater profits than would otherwise be achieved by human behaviour. The open ended nature of exits defines the positive skew of the technique and sets it apart from convergent strategies such as mean reversion.

There are three decisions every trader must make:

1. When to get in;
2. When to get out; and
3. The position size to take.

Most traders think getting in is the most important feature. While this may be appropriate for some asset classes such as housing etc., but for liquid asset classes it is the LEAST important as in liquid markets, every moment is a potential decision point that allows you to determine whether to increase or decrease your position size or get out completely. It is the ongoing trade management at every point between entry and exit that defines whether or not you are a trend follower. You stay in provided that momentum upon entry remains in your favour and you let this go on for as long as price tells you this is so. You never form a subjective opinion of when enough is enough. The market can only decide that. Entry can be random but position sizing and when to exit (trade management) defines a trend follower.

Trend following is not easy and diversification is an essential component that most conveniently avoid....Professional trend followers recognise that the techniques to TF are many and varied and that each delivers a small portion of alpha (perhaps as low as 0.1 annualised Sharpe)......so the pro's swallow all forms in their diversification across hundreds of instruments, system variations and time-frames to smooth performance and deliver acceptable return profiles for the investment community. Each individual component contributes to the overall pie to deliver sufficient returns and the accumulation of components serves to reduce the overall volatility of these returns. It is the requirement for diversification that makes a significant barrier to entry into this space by the retail trader.

The market has fundamentally changed and so have the performance metrics of TF, however it is still the superior trading strategy when talking long term 'sustainability' and given it's positive skew is geared to thrive (steal alpha) when the rest of the world turns to _ _ _ _!!!. It is the strategy of choice when it comes to having the last laugh and a particularly relevant stance to adopt today given the current disequilibrium observed in modern markets. Keep the powder dry peoples but keep on systematically applying the TF technique. Patience will reward you as markets inevitably have to diverge to achieve new equilibrium. The Edge in Trend Following is knowing what we don't know. :-)

Enjoy the podcast.

C

That was a great read C. If the podcast is anywhere near as good as what you wrote then it's going to be a cracker!

Afternoon NT on a lazy Saturday. :-)

You need a few bites at the podcast to form conclusions. The commentary above was following the second crack at it. These guys excel in their field and it is worthwhile breaking things down slowly and ruminating on it as what might seem to be an innocuous comment has a bit of depth in it.

Have a great weekend mate. C

Yeah, good afternoon mate. (Or should that be G'day ). I was just about to get down to some backtesting when I saw your post. Now wondering whether to immerse myself in the podcast instead! Hmm... decisions decisions...

Maybe I'll leave the podcast for now and check it out in the evening. Got to make the most of my research time while the rest of the family are busy with other things! I'll sneak off and listen to it tonight while they're watching some crap on TV. And believe me, most of the TV up here really IS crap

Have a good one!

May Interim Performance Summary - Discretionary Systems - Breakout Techniques (DTT, EDTT, EDTT1)

Well the beginning to May has been fairly ho hum for the breakout methods described in this thread.

Without further ado.....into the breach we go.



Statistical Summary of Closed Positions for the period 1 May 2016 to 7 May 2016

Attached Image (click to enlarge)

Top Trade so far for the Month


Current Open Positions


What's Trending at the Moment According to this Technique?







That's it for the discretionary breakout systems. My next post will feature the interim results of the latest addition to the suite....namely the discretionary retracement Entry approach (DTT Retracement)

C

I always listen to these podcasts as an excuse to avoiding weekend chores. That gives me spare time to listen to the crap TV when the rest of the family are relaxing. I really am a model father you know

May Interim Performance Summary - Discretionary Systems - Retracement Entry Techniques (DTTR)

Below are the interim results for the recent entry into the discretionary systems currently being trialed.

If results prove to be sufficient over a sufficient data sample, then both the breakout and retracement approaches will be consolidated under a single portfolio umbrella.

So far so good. I have a sneaking feeling that this will be a worthy addition to the system arsenal.



Statistical Summary of Closed Positions for the period 1 May 2016 to 7 May 2016



Top Trade so far for the Month



Current Open Positions


What's Trending at the Moment According to this Technique?








Well that's it for the moment guys.

Aveagoodweekend.

C

great

great

Why you don't use donhian? When I should enter trade? On the chart below prize hit lowest low and touch donhian - this is entry point?

Don't get me wrong, I love Donchian breakout techniques and use them extensively in my fully automated systems. Donchian entries in conjunction with the Standard Deviation Channel are also worthy of consideration as you suggest........ I used to use them extensively (at the beginning of this thread for example).

However on the breakout techniques I employ now using these discretionary strategies, I prefer to place predictive entries manually using pending orders and at my discretion rather than utilising Donchians that apply a standard look back. Both my predictive entry placement and a Donchian break ensure you are in blue sky in regards to a breakout, but I prefer to stretch things a bit further that a Donchian and be flexible about the where's and when's of entry using these particular techniques.

The reasons I like to place my breakout entries manually are for the following:
1. I always want to ensure that the entry is located well away from market noise to avoid where possible false breakouts and also visually be satisfied that the volatility and trend definition I am comfortable with meets my criteria before entry. I specifically look for a good momentum surge (impulse move) in conjunction with an overall directional price bias before I pull the trigger. I want price to clearly have to work for an entry and that means placing my predictive entries at distal locations well away from the mean of recent price action and this therefore may require discretion in placement. A one size fits all Donchian lookback has it's limitations in this regard;
2. As discussed previously in the thread I trade multiple time-frames and need to stage entries across time-frames to manage the potential for excessive portfolio heat. That therefore requires me to adjust manual entries on various time-frames to ensure that a new trade on a different timeframe is only entered when a breakeven result will be achieved on an active timeframe;
3. I like to ring fence all my instruments with predictive entries at distal locations so no potential major trend trade get''s away from me. In this regard predictive entry placement at places of my choosing is the solution for me rather than waiting for a breakout signal from a Donchian to tell me when to enter.

PS Jarek, that was a good entry point you chose. Note the impulse move before entry. Momentum was clearly ramping up at the point of entry in that minor swing component of the trend. With or without a Donchian channel for confirmation, I would probably have entered at a similar point to you.

I got you. So good entry points for donchian is when we have highest high - lowest low - and price touch donhian, right? Do you provide mql5 signals for us?

Yes J, that's the way using the Donchian break, but sorry mate, I don't provide signals.

thanks for what you do, do so well

Cheers N

I have just got back home after a day trip to your beautiful region (Brunswick Heads and surrounds). What a great day and what a great part of the country.

The worst part about today was acknowledging that the daily grind commences tomorrow. :-)

I listened to the podcast, C. It was very good, as you said. But to be honest I preferred your summary. You managed to express all the important points very well, and it took me a lot less time to read! Really hoping you might do one for Part 2 too　
Thanks!

I 2nd that .

I Hear you NT & Bass. I will give a shot as a summary when the next episode arrives....but I do take a bit of artistic licence in forming opinions that might not be explicit in the commentary. :-)

Thank you, C. And I personally think you have a knack for it. Any jobs going as Podcast Summarisers, I wonder? People have less and less time these days and unless they have a long commute (I don't), they might not be able to find the time to listen to podcasts regularly.