Diversified Trend Trading Approach

Thanks Copernicus

I honestly enjoyed reading your thread, can I PM You if I have questions?
I have a question, regarding the relative strength, eg USD against all currencies (EUR, GBP, CHF, JPY, AUD, NZD and CAD)


BP

Sure BP but I am not an expert on Relative Strength as correlations are my major reason for system selection. However if I can help I will. C

Thanks Copernicus

I send via PM my question

Regards

BP

Easy start for the day for ya Sir easy workout

Nice J. It made be squeeze my widening girth and look favourably at my free weights. A bit late after New Year but it's probably time for a resolution. Cheere mate. I hope all is well

Music or Podcast.....mmmmmmm..which to choose......damn......both!

Greetings all on another hot day in sunny Queensland...great if you are a lizard. :-)


A bit of Risk Management with Robert Carver and Andrew Swanscott
http://bettersystemtrader.com/070-ri...robert-carver/

....and a necessary musical interlude.



Cheers

C

CTA Performance Report 2016 Trend Following Fund Managers



Overview
Well the results are finally in and now is the time to have a close look at the performance of Active Fund Managers in the Managed Futures space for 2016. Namely the Commodity Trading Advisors (CTA's).

Overall 2016 has been a bleak year for the trend following fraternity, but despite the gloom, we are still tracking well within long term historic volatility levels. This is just how the cookie crumbles.

Apart from some fortuitous volatility in early 2016 and the impetus from increased volatility surrounding Brexit and the Trump election, there was not much else to enjoy as in general, mean reversion has been the order of the day for 2016. This current prevalence for mean reversion can probably be attributed to Central bank intervention and the dominance of High Frequency Trading which blossoms in times of predictable boringness.however it pays to not become too cocky. There is probably a fat tail coming to a cinema near you shortly.

The Trend Following programs that shined in 2016 in comparison to their colleagues, were those that protected their capital base and limited their exposure to generally ugly market conditions all year.

Of course given the very low (almost zero) correlation between Diversified Trend Following in the Managed Futures space versus a Buy and Hold approach to investing in the Equity Market, you can expect that when the equity market outperforms, the CTA's usually are entering a drawdown during this period and licking their wounds. So the question on all of the lips of the Trend Followers is..how long is this bull phase of the equity market going to last?

Well get rid of that crystal ball as no-one knows.but inevitably what goes up always comes down and usually in a spectacular fashion and as trend followers, we just know that it is the crisis alpha event where all our hard work pays off.



Clearly the supply of money being injected into the system and Central Bank intervention since the GFC is drawing to a close now, as the can has been kicked further down the road, but with the horde of money now released into the market, it is not surprising that given that bonds have absorbed as much as they can take, a lot of this excess by simple lack of available investment alternatives, has by default entered the equity market.

Unfortunately it is therefore very likely that the current bull phase of the equity market has been once again built on false illusions. There have been few alternative investment options since the GFC rout and we all know that bonds with their absurd low or even negative yields are now starting to get on the nose. So the lure of simple dividend yield has been sufficient for the good ol' equities market to absorb worthless value. The result of this 'flight to equities' has simply moved the value of equities further away into 'pink unicorn land' and away from having any logical common relationship with a definition of fair value commensurate with underlying risk.

Given the impending likelihood of a major market conniption, the TF community are simply being patient and preserving their capital waiting for it to blow.

Who knows what would be the trigger or when this would happen, but my intuition tells me that the next market rout may be a big one as despite the Central Banks ability to plug the holes in the dam through market intervention..at some point in time there will be a Day of Reckoning. The question we need to now ask is, how much more dry gun powder do the Central banks really have now?

Time to become familiar again with the 'Big Short'. Despite the current short squeeze that some may be experiencing (aka Soros), we just know what lies down the road in times of irrational exuberance.



Introduction

This report examines the performance of 47 programs offered by long term Fund Managers (FMs), many of whom are Commodity Trading Advisors (CTA's), that have a penchant for trend following and have been in operation at least since 2002 to now. Some of the programs described in this report have actually been in operation since the early 1980s.

The performance results are derived from industry sources such as IASG and represent validated performance results, net of all fees, (namely the result that is delivered to the humble investor before tax).

We utilise an index derived from the composite results of these 47 programs referred to as the Trend Following Index (TF Index), all equally weighted and re-balanced each month.

Each of the 47 different programs (systems) are compared in terms of their correlation and risk-reward performance metrics against the following index measures:

1. The TF Index itself;
2. The S&P500 Total Return (S&P500TR) Index (Total Return includes both capital growth and dividends); and
3. The Fidelity Spartan 500 Index Fund (FUSEX) which allocates 80% of the fund to the S&P 500 and mimics the performance of the US equity market.

Of the 47 different programs, only 2 of them (namely the two worst performing) are discretionary trading strategies. The balance of the programs are systematic demonstrating that the game of trend following under diversification is one that is geared for full automation. It is simply unwise in the diversified portfolio space (eg. across say 60 assets, 4 timeframes and 10 different applied strategies) to even attempt any form of trade management discretion. Those that flout the need for automation typically become our next train wrecks in this alternative investment space.

12 Month Results
Table 1 below lists the Fund Managers and the style of systems employed by each of the 47 different programs.

Table 1: Established Trend Following Programs and Nature of Systems Deployed

Legend: Div = Diversified. TF = Trend Following, CT = Counter-Trend, Patt = Pattern Recognition, Mom = Momentum

Table 2 below contains performance results for the 2016 Calendar Year and results for the month of December 2016.

Table 2: Performance Results for the 2016 Calendar Year


In general results were widely distributed with overall poor returns for the period. Points of interest are as follows:

1. Byron Capital Partners Ltd and the SAF12 Program was the best performer with an annual return net of fees of 21.84% (refer to the Chart below)

 

1. The S&P500 TR Index significantly outperformed the TF Index for the 12 month period with a 12 month return of 20.16%.
2. The TF Index that is representative of the 47 programs failed to exceed breakeven in returns producing a small loss for the 12 month period of -0.13%.
3. The best performer for the month of December 2016 was Dunn Capital Managements DBest Futures Fund (refer to Chart below).

Continued......

Continued....

Historic Performance

While it is tempting to use the last 12 months as a basis to spurn the Trend Following CTAs and even declare that trend following is dead, it is very important to understand how these results fit within the bigger picture of long term historic performance results. After all, it is only through a large trade sample that we we can develop our confidence that we are dealing with a program offerring a likely edge as oposed to simple random luck. Without a historic context, it is very easy to make snap judgements that in reality hold no weight from a long term investment performance perspective.

So below, are 2 charts reflecting the performance of trend following CTAs in general, using the TF Index compared to the S&P500 TR Index and the Historic Risk Free Return using 3 month Treasury Bills. Let the use of statistics and a few graphical aids set your biases free.





Note that the grey line in the chart above represents the Risk-Free rate.

Not so bad when viewed in the context of historic performance is it. Salient points are as follows:

1. The TF Index has clearly outperformed the S&P500TR Index between Jan 2002 to Dec 2016 producing a Compound Annual Growth Rate (CAGR) of 8.09% with a maximum drawdown over the period of 18.46%. This compares to a 6.73% CAGR and associated maximum drawdown of 50.95% for the S&P500 TR Index. On a pound per pound basis, using the risk weighted return of Scaled CAGR, the TF Index produced a risk weighted return result of 17.54% that was 3.32 x higher than the S&P500 TR Index of 5.28%.
2. Despite the lacklustre result for 2016, the chart above clearly demonstrates that the TF Index is trading within historic volatility levels and that trend following is not dead at all.
3. The rapid accelerated growth in returns of the S&P500 TR Index post the 2008 GFC appears to be unsustainable. Given that there is no clear sign that economic fundamentals reflect this overheated equity market, prepare yourselves for a meltdown sooner or later.
4. The 3 month risk free rate of return has flat lined since 2008 indicative of a subdued market economy with a very low interest rate environment. We are now entering a period where the only direction for short term interest rates is up. Prepare to watch a mass evacuation from equities when dividend yields become less attractive.

Table 3 below highlights the historic performance results of the 47 different programs and their relative rankings.

Table 3: Historical Performance Results for the period 1 Jan 2002 to 31 Dec 2016.

Points to note from Table 3 are as follows:

1. The green highlighted cells in the column titled TF Index Correl reflects those FMs that utilise a similar trend following recipe as identified by historic correlation between the program and the TF Index.
2. The S&P500 TR Index has a correlation of -0.16 with the TF Index indicating that the performance of the TF CTAs are about as uncorrelated with the equity market as you can get. As a result, this alternative investment class continues to represent an ideal inclusion into any portfolio dominated by equities.
3. The best raw performance using CAGR is attributed to the Dreiss Research Program delivering a CAGR of 16.73% for the period with a maximum drawdown of 51.44%.

1. The best risk weighted return using Scaled CAGR of 30.21% for the period is attributed to the Global Diversified Program of Fort LP.

Conclusion
Despite the poor showing by the TF industry during the 2016 year, all is not doom and gloom. Sure the equities market outperformed us this year but in terms of historic performance results, Trend Following CTA's eat passive managers for breakfast, so for 2016 we just shrug our shoulders, take the spanking and keep on keeping on..Just dont tell the wife!

Cheers

C

Melody Gardot....For those chilled moments. :-)

What has Evolutionary Biology got to do with Trend Following?

(a rework of a prior post in this thread)



As you peruse the popular posts of any investment or trading forum, you inevitably have the banter between those who treat this game as a lucrative venture offering the chance to live the life of dreams versus those that adopt the spectral opposite and suggest that this is a negative sum game for the gamblers out there.

Is there a middle ground between these diametrically opposed viewpoints?

What this article explores is a middle ground between the notion of 'efficient markets' or what others may view as 'predictive markets' by exploring a concept referred to as 'Adaptive Markets'.

For the evolutionary biologists out there, the ideas surrounding a stable ecology occasionally punctuated by 'shocks' or disequilibrium events is an accepted viewpoint that recognise that complex systems (ecologies) can exhibit prolonged periods of equilbrium whereby systems appear very stable but occasionally, due to the intricate set of relationships that exist within every complex system, come crashing down from a seemingly insignificant and unpredictable failure in a critical element of that network of relationships.

As the foundations of every complex system are forged from their inter-relationships, the more complex the system becomes, the more vulnerable to critical failure they become. A simple failure in a single element (such as the power supply, a financial institution, a water source etc.) can result in a cascading failure that ultimately translates into an avalanche of disequilibrium for a period of time, until a new equilibrium is achieved when a new set of relationships is established that restores the system into a 'quasi steady state'.

It is important to note that every complex system is perched in a quasi steady state withion a broader context of higher entropy. While it may appear unbreakable, complex systems have the ability to lure us into a false sense of belief regarding their stability. The reality however is that complex systems as discussed in my prior article have intrinsic risk that is far higher than the sum of it's parts.

Occassional system shocks are therefore a simple fact of life for every complex system and actually a necessary condition to drive out creeping inefficiencies whereby following a system shock, a system can restore itself into a better shape than was previously the case and head towards a new equilibrium of higher entropy.

Let's then apply this concept to the markets.

Let's assume that the market (and for the sake of this discussion let's assume this relates to any liquid market as no single asset class stands alone as all are interconnected) is efficient 'most' of the time and let's assume that this representation of the market is when orderly markets reign that appear predictable in nature.

What are some of the symptoms that an investor or trader would face under these conditions where markets are stable and efficient?

During orderly market conditions when volatility is within 'normal' limits, the markets are incredibly efficient, but also due to the relatively stable regime, quite 'predictive' in nature whereby repeatable patterns of price behaviour are typified by reversion around a stable mean. The multiplicity of participants and their various strategies in an efficient stable market make it exceedingly difficult to extract a sustained edge in the market while these conditions exist. Competition for alpha is extreme and during orderly times, price action exhibits repetitive features that a nimble discretionary trader/investor and pattern recognition algorithm can quickly adapt to.

Within these 'orderly markets' noise is a common characteristic. When referring to noise, we refer to the notion of 'unpredictability'.

The noise is a manifestation of the multitude of investing/trading/hedging activities undertaken in this efficient market, but it must be noted that noise is a 'relative' concept. What I mean by this is that what is noise to a particular trading style, may be 'alpha' to another trading style. The prevalence of noise however is a feature that ensures that any expolitable oportunity (alpha) for a particular trading style is ephemeral in nature and quickly evaporates.

Due to the intense competition for alpha in orderly markets, the potential for exploitation is very quickly removed as discretionary traders/investors and pattern recognition algo's rush to exploit the 'new' opportunity. With the evaporation of a repeatable pattern, the composite mix of participant behaviour then creates a new ephemeral pattern ...and so on and so forth. Also during times of normal market conditions, the opportunity to identify when price exceeds it's normal volatility variation is able to be predicted with a degree of confidence enabling convergent strategies such as mean reversion strategies to shine during these periods.

A speculative retail trader (a very small part of the total participant mix) who identifies an exploitable repetitive pattern has a very small window of opportunity to capitalise on this opportunity while it exists. Markets are dynamic and respond to participant behaviour and within a short space of time the influx of participants who exploit this temporary opportunity find that their cumulative market impact actually removes this opportunity and it reappears elsewhere with another repeatable pattern.

So here are some of the symptoms that a trader/investor may face during these 'quasi stable periods' :

1. They would find that the exploitable opportunity identified through back testing or forward testing over a short time interval (when those specific market conditions prevailed), would quickly evaporate, and after a short hiatus in the sun of live trading, would no longer work....a familiar outcry on many trading forums.
2. They would scratch their head and perhaps declare that the markets were rigged.......another familiar outcry on any trading forum.
3. They may find that the short term magnificent returns upon which they projected their vast future wealth in Costa Rica evaporated leaving them a progressively greater drawdown until sanity prevailed and they pulled the pin on the strategy, hopefully before blowing up their accounts.

It is during these specific times (market regimes) that a convergent risk taker (those that assume that risk ultimately reverts to a mean) dominates the trading forums. They are the ones that:

1. State boldly that markets can be predicted;
2. That long term back-testing or demo testing is worthless as an endeavour and that true trading is about 'live trading';
3. That trader skills and discretionary trading beats the stuffing out of systematic trading;
4. That no algorithms (EA's) work as they are incapable of reading price action with the finesse achieved by a trained brain;
5. That reading price action is everything;
6. That accuracy of entry and setup are tantamount to trading success;
7. That trend following is dead and that if you really want to make the bucks you need to scalp predictive price action;
8. That mean reversion is safe as houses;

.....do I need to go on.

And the reason that the numbers of convergent risk takers swell during periods of market 'quasi steady state' is that during this regime of stability, their beliefs are reinforced until they become 'Lords of the Domain' with a legion of loyal supporters.

It is during these times that a divergent risk taker (also called the trend follower) who recognises that divergence away from a mean offers significant exploitable opportunity in any complex system keeps his powder dry and avoids overly committing their diversified portfolio to trades when alpha is scarce and highly competitive. Frequently those trend followers that find they over-commit during stable market conditions, endure progressively larger and larger drawdowns and if not careful, run the risk of such significant drawdowns that they are unable to recover.

Now this is 'why' the diversified trend follower back-tests over as many different market regimes as they can muster as it is imperative to scale your trades and trade frequency in such a way to 'keep your powder dry' and avoid these excessive drawdowns. Over 800 years of history have told us that market regimes frequently change, and during these disruptive times, trend following makes it's return in spades to recover from these protracted drawdown periods during stable efficient markets.....so typically just when you start second guessing yourself and start to think like a convergent risk taker.............an innocuous 'something' happens to disrupt the apple-cart and bring chaos for the convergent risk taker.

The prevalence of these market regime shifts are much more frequent than you might think yet are impossible to predict. So while stable market conditions might prevail most of the time, market transitions occur 'some' of the time, but enough of the time to allow diversified trend followers to outperform the competition.
This is what gives the fat tails to the distribution of market returns. This frequency of occurrence of market regime shifts is the reason why convergent risk takers rarely can post an audited verified track record of more than a few years and why so many curve fit EA's get sent to the sin bin.

The regime shift itself disturbs the ecology (it's participants and network of relationships that have previously emerged) and the false sense of security that have been lulled into it's participants due to previous market stability. We get panic and system disruption as fight or flight pandemonium set's in. The bulk of convergent risk takers start acting like a herd scurrying for the exits and across asset classes, and on the other side of those trades lies the 'divergent risk taker' who is simply following price action and relying on extended directional price behaviour during these chaotic periods of disruption before the market achieves a new equilibrium where then the convergent risk taker starts to emerge from their bunkers ....to repeat the cycle again and again and again.

This is when the competition for alpha becomes far easier as the bulk of previous competition are heading for the exit gate, and this is when diversified trend followers start pillaging the chaos. The availability of alpha during these periods is extreme due to the 'sudden' dramatic reduction in competition and a time when the lion's share of performance for the trend follower emerge which starts paying for their enduring patience and associated drawdown legacy.

Think of ecologies that have had a major disruption (such as an asteroid strike) where the bulk of the competition is wiped out and the 'meek' robust species who survive rapidly exploit the uncontested environment.....well us trend followers are the meek that will inherit the earth. :-)

Now this disruptive feature is simply symptomatic of the dynamic nature of markets. Once an equilibrium is reached, a new network of relationships emerge that create inertia and 'stick' the market into it's stable enduring state...for a period of time at least....until that small flap of a butterfly wing occurs at a strategic weak spot that sends the market into short term pandemonium.

Now the thing about complexity is that as systems become more complex, they become more prone to critical failure. ..... so the future of trend following is indeed bright particularly given the nature of global markets and their current 'manipulated nature' by government intervention and the onset of a flurry of High Frequency Trading (HFT). The thing however about HFT, just like mean reversion or indeed any negatively skewed strategy is that when the collapse comes, it will be sublime......so keep on keeping on and don't lose the faith as sooner or later we will be 'bringing in the sheaves'. The 2016 year might have been a tough one for trend followers out there but now is the time to keep the faith.

What we are discussing here is simply evolution in action of a complex system....... and to be a survivor and have a track record in this market of more than a few years beyond a single market transition, you need to become a divergent risk taker. This however does not preclude the trend follower from dabbling with convergent systems provided it is a supplement as opposed to the main game of his/her strategy that is uncorrelated and assists in reducing drawdown impacts.

This is the preferred way to deal with uncertainty and the reason for 'how' life has evolved on this planet. Not by design, but simply by being sufficiently robust to survive in a dynamic environment. To all those diversified trend followers out there......take a bow from Charles Darwin.

Thanks to Bass for linking me to these new format You Tube links :-)

Some worthwhile podcasts to sink the fangs into for systematic traders in both macro and statistical camps and also for those interested in mean reversion under diversification plus some Jerry Parker magic.

Enjoy C

The Big Picture - A Participatory Universe


(Illustration in memory of the late great John WheelerRIP)

(A recap from the physicist Richard Feynman)

"In the beginning of the history of experimental observation, we simply recorded our experience with a system to propose reasonable explanations for the way in which things operated in that system, however as we widened our domain of enquiry to more holistically assess our observations we found that we needed laws as opposed to simple explanation to explain our experimental observations. But what was evident as we expanded our domain of enquiry was that our explanations for experimental observation became more and more unreasonable and more and more intuitively far from obvious.

So what was happening? As we stretched beyond our everyday experience and intuition we found that our understanding based on our knowledge base accumulated through empirical observation represented only a very small fraction, or a special case, or a very limited experience of a systems totality".

Given that we apply the scientific method to explain our observations with a best fit model of the time, you can then clearly see that there is really never any truth statements. Rather the pursuit of science is a progressive journey that is never complete.

In statistical terms we define our arena of examination (a total population or system) and then draw on an ever increasing sample of that total population to derive a model for how that sample works. As our domain of enquiry expands, so our models adapt and change to progressively get closer and closer to understanding how that total population (or system) works.

Unfortunately however, we need to understand, that in accepting this process, we need to divorce ourselves of our narrow opinions based on our everyday intuition and be prepared to stretch ourselves and our imaginations to the utmost if you want to keep up with the pace.

Sometimes a picture however (or a demonstration) allows us to strike to the heart of the matter where we can short cut the process and have a sneak preview of where we are heading. A step into the future so to speak that makes us realise that we need to be prepared to accept that we have so much more to learn and in embracing it, we need to let go of our nave simplistic intuition and be prepared to question the bedrocks of our classical reality.

For example, there is no better slap in the face than Thomas Young's Double-Slit experiment which demonstrates the simple fact of wave-particle duality. The implications of this are far reaching in that it demonstrates that there is a fundamental limitation of the ability of an observer (human or apparatus) to predict experimental results. This does not relate to the accuracy of our measuring instruments but rather that reality itself is probabilistic in nature.

Now for those that are really interested and want to revel in the magnificence of a mind at work, then ponder the following remarkable lecture from a remarkable inquisitor of nature.



However for those that like the sound bite as opposed to the magnificence of listening to a great mind at work, here is a fitting video that may shake your notions of reality.



Now to save you time in head scratching in attempting to understand the why's of this demonstration, like any magical illusion, you need to focus on the entire experimental setup and do not trust your eyes. What we see in our classical world, by focussing on the 'things', provides a radically different interpretation to that which is interpreted if we focus on the entire experimental setup (including the observer or measuring device and that which it is observing/measuring).

If we focus on the 'things', our universe, or the small section of any system we are evaluating takes a discreet form of apparent certainty. That is the magical illusion.

We fail to recognise that the observer or measuring device itself (a participant) is a system configured in a very specific way, and how we participate in a complex system has radical implications to any associated reality that emerges from this participation.

If we adopt the principle that what we observe is simply the reality, we fall into the trap of 'bias'. This is simply because we apply our reasoning based on that very small amount of knowledge we have accumulated from our narrow experience.

Like my prior post where we started to understand the importance of systems and processes, to make sense of it all,..its time to dig deep into a system once again with critical reasoning that avoids the tendency to pollute the mind with preconceived bias.

A reality (or what is observed) is an interaction event comprising a dual relationship between that which is doing the measuring and that which is being observed. While we think in our experiments that we are standing outside the system and observing how a system operates, a reality actually is forged by who or what is doing the measuring. We need to embed ourselves in the context to interpret an outcome.

Think of the Double-Slit experiment. If we do not observe which path the electron (or thing) went through the slits towards the photographic plate, then without disturbing the system, we see that a thing such as an electron does not exist during its passage from the source towards the photographic plate. It only manifests its presence (or emerges as a classical reality) when it reaches the photographic plate itself. At this point a record of its presence (an interaction event) is recorded on that film.

If however we decide to observe which slit the electron passed, we need to interact with the system under observation prior to the electron reaching the photographic plate but at the slit itself and that interaction actually causes a classical reality to emerge at that instant in spacetime.

As you can see, what we refer to as an electron is simply a residual 'interaction event' at an instant in spacetime. Otherwise there is no such electron, just a probability wave of potential. Physicists refer to this duality as follows.....an electron (or any particle) travels as a wave and interacts as a particle.

There is nothing spooky about this. What has blind-sided us is our naive perception that an electron is a real particle that just exists independent of its context.

The actual process of observing requires that we must interact with a system, and transcribe our system state (or the experiments system state) into the system under observation. In doing so we must disturb the separate system states by merging them. The result is now a more complex system comprising the simpler system prior to observation plus the addition of the system of enquiry resulting in a more complex system attributed to the process of measurement.

A 'thing' or 'event' is an interaction between an observer/measuring device (a measuring system) and a system state. A 'thing' is created through the interaction itself. It does not exist before that interaction takes place. It is an emergent outcome of a process.

There is no electron or thing that simply is. Prior to investigation there is just a potential outcome for a thing to exist through interaction. We use a classical instrument called a measuring device to look for an electron. This measuring device is simply a system that is preconfigured to detect electrons.

Its classical pre-configuration necessitates that it is designed to detect a 'thing' which has defined attributes (that classically we call an electron). We then merge this system configuration within the system under observation by adding this separate configuration state to the system under observation.

The result is therefore the context prior to observation (eg. System State A), plus the addition of the new separate classical system configuration state (System State B) prepared by Observer B, resulting in a new system state (System State AB). System State AB now includes the observer/measuring device in its total state definition.

Now where does the electron in all of this arise? You will note that we have added a system configuration which is designed to detect an electron. Its system state is therefore configured like a container to record whether or not the stuff inside a system at a particular location and time exactly fits within that container. If so, then an electron exists. If not, then no electron exists at that specific location.

When we insert this container (system state) into a system under observation, we define the boundaries (or attributes) of an electron at the time we measure it. Not before. We therefore add information to the original system under investigation during our interaction with it. We constrain the outcome through our interaction with the system to give rise to a result that is configured (or mapped) to a classical condition we define as an electron.

In the words of the physicist John Wheeler, "the boundary of a boundary is zero". I will leave this riddle for you to problem solve but it strikes at the heart of the matter and provides a clue of how "its arise from bits".....another riddle of Wheeler's. Those dreaded 'things' we like to cherish. Anyway, I digress...

Importantly, through the merging of system states we add a pre-configured classical state into the original system under observation. Note that what we are doing here is resolving that an electron exists by system addition. We are contaminating the original system with an enquiry to render a result....... as opposed to identifying whether an electron existed in the system prior to observation.

Prior to observation there was only a 'potential' defined by a superposition of states that a thing configured to that state of an electron existed at any discrete location within that system. After observation however we added a new configuration state to the original system to define whether or not an electron will or will not be found at a particular location. Before observation there was no such thing. At this point in time once the measurement has been performed an actual outcome is resolved from a prior superposition of potential states. This is what is referred to as 'collapsing the wave function'. A wave function is a description of the potential outcomes that may arise from a classical experiment and is probabilistic in nature. Prior to measurement there was only a potential for existence. After observation our inputs disturb the system (by addition) to alter the new state and allow for an electron to classically emerge for that participant (eg. Observer B).

To another class of observer (Observer C), they cannot now interrogate System A as it no longer exists. If they want to interrogate the supposed same system (System A), it no longer exists as it has been fundamentally altered into System State AB through interaction by Observer B. Observer C therefore needs to interrogate System State AB. In doing so a new system state is produced called System State ABC. You can probably see where this is heading. Both participants B and C, can only share the same reality (eg. that an electron exists if they are both participating in the same system state). A shared reality is therefore created as more and more participants interact with a system.

As participants in a system, our interactions add inputs into the system. In doing so we fundamentally alter the system state. We can never in reality observe anything without interacting with it. It is the entire context of how systems inter-relate that creates our reality.

The profound difference in interpretation between those that see things as a reality versus those that recognise a reality is created by the way we participate in a system, prevents many of us from seeing the forest for the trees. Our classical nature (restricted viewpoint) actually prevents us from experiencing the wider reality of the system. We do not need to navigate into parallel universe or hidden dimensions to understand this. It is right at our disposal here and now, but only if we open our eyes and remove our innate biases.

To an alien race who inhabited a far wider domain or different scale, they might say, "well of course this is the case, it is intuitively obvious"..but for us mere mortals living in a very narrow niche of a greater system, we rail against the conclusions of this experiment that strike at the heart of our classical notions of a reality. Such an experiment allows us to stretch our imagination beyond that which is common in our everyday realm and allow us to see the wood for the trees. It was the great Richard Feynman who was fond of saying that all of quantum mechanics can be gleaned from carefully thinking through the implications of the Double Slit experiment.

So how does this relate to trading? We are participants in a complex market. We interact with the market at only two times. Our entry and our exit. It is through our participation that we create a new system state and this system state continually evolves under the degree of participation. We simply cannot predict how the system will unfold over time as the two very short times we interact with the market represent only two brief instants where we have a chance to contribute to the market dynamic.

At all other times, we are victim to the impacts of participation from third parties. Unless we understand the intent of other participants and their degree of impact on the system state, we really have no idea about any form of future reality. The same can be said of our futurt in this universe. We can never anticipate it due to the unfathomable complexity arising from the impact of systems upon systems.

Any attempt at prediction is stepping into woo science. So why do we do it? Lets start thinking like scientists and start accepting that prediction is useless. If you can't predict the future, the next best thing to do as a trader is to simply follow the immediate past (namely price) and manage your risk. If you have a system that can manage the risks of uncertainty then simply follow the trend my friends.....until it bends.

Trade well

C

For another balmy summer day in Queensland, Australia :-)

Making the most of the weekend before the dreaded W word......:-)



Living in the moment....I agree :-)

Hello Copernicus,

I wanted to break my silence to say a MASSIVE THANK YOU for the huge amount of time, effort, honesty, openness and detail you've provided throughout this thread. I started on post 1 and carefully read and thought about every post until the EDTT was introduced on post 230 (where I'm at now). You mentioned you trade for a living and were open with your performance and trading history which was plenty enough for me to commit to fully understanding and implementing the DTT and not jumping to the end. I'm really glad I did. I often tried pulling up the charts and drawing the SDC's, entries and exits myself and then compared them to your actual charts to test my understanding and adjust myself. I kind of also feel I've gotten to know you a bit because you describe in detail how you think and look at the charts :-). I really really REALLY appreciate the huge amount of time and effort you put in to explain it to me so that I could really understand how you work.

Secondly, the SDC - WOW what a revelation!! I've always had issues with things like MA's because their parameters are too rigid. In fast markets they're too slow and in slow markets they're too fast. The SDC dynamically configures itself to the exact bars it is selected on and gives you position sizing, trade progress and trailing stops all in one! Coming from a background where I have thought of and programmed countless ways to manage trade risk, volatility and exits, this is a huge eye opener. Seriously really thank you for sharing this tool and teaching how to use it effectively.

I have a lot more to learn and try out. I'm already brimming with ideas to extend the DTT and now EDTT has come which is taking it to a new level. So it will keep me busy for the next few weeks for sure. I hope to start trading it later this month, but for now just wanted to drop a note to say hello and massive thank you for your dedication to this thread over the past 2.5 years.

Hi Mun. It's so great to hear you are getting something out of it. Keep me posted on your progress and insights and if you need to troubleshoot with me on the techniques, then just let me know on this thread.

I have also been getting a degree of success on another variant to this approach that enters on retracements. When combined with the breakout techniques, it is proving to be a very worthwhile addition in capturing the general momentum sought by the breakout techniques supplemented with mean reversion to smooth the equity curve through their system combination.

While I haven't gone into the detail of this variant much on this thread....down the track when you bed things down you may be interested as it provides another string to the bow.

Thanks for your kind words as well mate. :-)

Cheers

C

Dear C

According to your system, you don't have any predefined take profit target when entering an order.
The trade goes until the opposite line of the SDC is hit.

I was wondering.
Have you made any test on how your results would look like if you exited trades according to a predefined RR ratio?

I am asking since you may recall that I exit trades in a similar to yours manner and sometimes I feel that we leave quite a big chunk of profits on the table...

Hi T

Yep, that is how I trade it currently for all methods and variants of this discretionary technique.

I actually did test a pre-defined range of profit targets about 4 years ago when looking at various exit options for this technique....however 3-4 years ago, market conditions were considerably different than what has been experienced over the last 2 years using this technique. Back then, the 'letting the profits run' with a trailing stop on the SDC vastly outperformed a pre-defined profit target.

It has been a tough market for trend followers particularly last calendar year due to the limited volatility and the tendency for mean reversion to reign supreme. Under those conditions, then yes.....it is very tempting to take whatever limited profit you can without leaving profit on the table after a momentum move ......however there are a few things to consider here.

 

1. In 2013 and 2014 when letting profits run, this technique cleaned up, as unlike other trend exit methods, the narrowing of the SDC after a long momentum move actually did not leave much profit on the table when compared to alternative trailing exit methods.
2. In 2015 and 2016 with generally very bad trading conditions for most trend following methods, this technique still produced solid yet reduced results without having to alter the technique. I can live with this.
3. The encapsulation of price by the SDC gives a very clear definition of what I categorise as a trend in my system. When price touches the SDC, that clearly indicates according to the rules of this approach that the trend has ended with this technique. Not many other trend following systems are so clearly defined which is a big plus for this technique. Using a profit target removes one of the key strengths of this approach.
4. I simply can never predict how long these momentum bursts can last for and simply by nature, I like the appeal of potentially unlimited returns provided it meets the criteria of trend with this style of approach. I suffer post trade blues if I exit from a trade prematurely yet to find that this was the actual trend of my dreams. A rare occurrence yes.....but just look at post 1162 to see where my returns are generated from. It is the outliers, or those few significant trends, where all my profits are generated from. The rest of my trading activity is simply to keep my head above water. If I alter my exit to a take profit technique, I believe this will cripple the success of this technique.......but you are right.....I should test this logic in these market conditions as assumptions are the mother of all evils.
5. With major moves that strike from 'nowehere'....you need to be onto them as soon as you can. Using a market regime filter, is not ideal for this strategy as by the time a regime filter tells you that market conditions have now changed to say trending from mean mean reverting so now adopt a trailing stop as opposed to a profit target, you can miss out on some big winners. I therefore make it easy on myself and simply apply the rules of the system again and again. That way I don't kick myself if I find I miss the major winners.

My intuition tells me to stick to the rules of the strategy as if the results this technique is achieving during poor market conditions are still good, then when trending conditions return, this technique will quickly revert back into a very solid performer.

The difficulty with a discretionary strategy such as this is that the backtest process is painstaking....so I am currently quite happy with how things are progressing.....perhaps I am lazy. If I could run this technique through an EA, then testing these alterations would be a cinch......but as simple as it may look to a programmer....it ain't that easy due to some necessary discretion applied in determining the quality of the trend prior to entry and in the discretion of selecting, based on momentum, which is the optimal swing high and swing low to commence the draw of the SDC from, Semi-automated yes, fully automated no....unfortunately :-)

C