Diversified Trend Trading Approach

Dow Jones Firing on all Cylinders - Jump on Board the Trend Train

Attached Image (click to enlarge)

C, Thank you for your posts, entertaining music and other selections, as always. Curious about your view on position sizing in your models. It seems a number trend traders have differing views on position sizing and I am unsure if one is correct or not, perhaps it is more a matter of risk appetite. Some risk 1-2% up front on one initial trade, do not add positions, and do not scale out, i.e., it runs until exit conditions occur. Others start off small, say 0.25% and then add positions if an when the trend continues, supposedly to control drawdown -- the theory being that it is better to take a number of small losses and then scale in when the whale surfaces. I suppose the choice is keyed to the trends that one is targeting.

Hi Nonlinear :-)

Yep.....there are so many variants to trend trading. There probably is no right or wrong but I will just explain the logic for the discretionary systems described in this thread as it makes sense to me at least. Hopefully it might make sense to other 'trendies' out there.

I do not pyramid on a single trend (add to positions).....but I do enter multiple timeframes for a single trending instrument in a staged way to progressively build my position in a momentum move that progressively reveals itself through the higher timeframes. As a result, each entry and trend definition for each timeframe is scaled according to that timeframe using the SDC using fixed fractional position sizing. The result of scaling in by timeframe is that as volatility in the market starts to pick up I progressively become more and more fully loaded on an instrument but am not kicked out of all of the positions across timeframes when the trend on a particular timeframe ends. This therefore allows me to capture swings and trends depending on what timeframe you are looking at.

I also only risk 0.25% to 0.50% per trade. The reason for this is that I diversify across timeframes and instruments and my whole aim is to make the returns through a combined portfolio approach. By having such a diversified stake, I can avoid jumping onto anything that moves, and that way keep away from a lot of the noise and avoid overtrading. I therefore set a pretty high bar in terms of the trends that interest me on any instrument or timeframe. Diversification allows me to be very selective in what I pull the trigger on.

By having such low trade risk exposure on any single instrument or timeframe, I am ensuring that an adverse event on a single instrument is minimal to the portfolio. It really helps manage risk and avoid over-exposure. It saved my bacon on the Swissy event. Unfortunately I copped a hit on USDCHF but it only represented a 2% risk event due to slippage.

By diversifying I am flattening my equity curve and getting far less volatility than a trend trader who is trading a single instrument. This is simply due to the fact that any form of diversification flatterns the equity curve by virtue of the slight anti-correlation that exists between equity return distributions through diversification. I am really surprised there is not much discussion on this forum on diversification as the more I get into it.....the more I realise that retail traders in general are missing out on a significant free lunch.

Furthermore with diversification I am able to sigificantly up my trade frequency which is a major bug bear for trend followers..... but still only focus on trends of substance and avoid the tendency to over-trade.

....anyway I hope this helps a bit NL.

Cheers

C

Discretionary Systems - Breakout System Performance (EDTT and Variants)











Cheers

C

Discretionary Systems - Retracement Entry System Performance (DTTR)











C :-)

The weekends drawing to a close....but that doesn't stop the music :-)

Dear C

Have you ever seen that before?

Hehehe. That is a new one for me T.......but it explains so much. I was born in the cat food by the way T then moved north to around the cat's nose to catch the sun as a teenager. :-)

a bit quicker for your taste but excellent background for research time

https://soundcloud.com/djbaly/baly-c...promo-mix-2015

Prosper!

Nice J. Steady rythym has got my toes tappin' :-)

Review of Long Term Trend Following Fund Managers

Let's go for a light hearted (and tongue in cheek) romp into the mysterious world of Trend Following in the professional fund management space.

I have decided to spice up the monthly performance report of the long term active Fund Managers (FM's) in the Trend Following space to make bean counting fun, shed more light on the quiet achievers in this alternative investment space and compare and contrast what the performance results are telling us versus what you might be hearing from the uninformed.

The performance report evaluates 70 long term Fund Managers who have been operational for the last 16 years (eg. since 2000 to current day). Data is drawn from IASG's wonderful Managed Futures database. Such a long term investment horizon ensures that the results are more likely attributed to funds with a robust and sustainable edge that have tested a broad range of market conditions as opposed to those 'fly by nighters' that may experience a spectacular burst of glory in responding to a particular market condition and then disappear into obscurity, bankruptcy or the Cayman Islands with your dough, when market conditions change.

Of the 70 managers, 55 are from the trend following camp, 8 are from the Fundamental camp and the balance of 7 FM's employ are variety of different methods such as option writing/spreads, pattern recognition, technical analysis etc.

While including a number of non-trend following FM's in this report for compararive purposes, the intent of this article is to particularly focus on the Trend Followers that diversify across asset classes. As you are probably aware by now, that is my cup of tea. It does not mean to say that other methods are not valid in generating alpha, as they most certainly are....but there is enough opportunity in the trend following space (as demonstrated by this report) to keep me happy and perhaps you as well.



Given the large size of the list I am not going to drown you in long-winded tables. The approach I will be taking is a top 10 list across various performance metrics that will demonstrate the power of this particular trading/investing approach. I also am also a visual kind of guy as opposed to a raw data guy, so there will be lot's of charts used to paint a thousand words. The beauty of charts is that you can look at them while listening to music as well.....heheheheh. Never miss the opportunity for a bit of funky disco :-)



So here goes with the Top Ten Lists for the period 1 January 2000 to 28 February 2017.

Best Raw CAGR Performers
Below is a top ten list of the top 10 performers in the trend following space in terms of annualised returns to investors (net of all fees and expenses) over the past 16 plus year period.


Data Source: IASG

Comments:

1. Is trend following dead.......well it certainly doesn't look that way. Times have however been a bit tough over the past 2 years or so...but there is nothing in the charts to suggest anything other than an extended mean reversion cycle post 2010 and in particular 2014-2017, so no need to get your knickers in a knot.
2. Notice how in the scatter plot that in terms of CAGR versus drawdown, the TF community tend to cluster. This is a sign of the general power and consistency of returns generated by TF under a diversified portfolio when compared to alternative methods.
3. Also notice the very low correlation between the returns of the top ten trend following funds when compared to the S&P500 Total Return Index. This is a very well known feature to portfolio managers who are looking at generating superior risk weighted returns by allocating some % of their total portfolio to this alternative investment class.

Here are the equity curves of the top 6 in this top 10 ranking. Nice curves :-)

Best Risk Weighted Performers

Now here is the category to get excited about. I use the CAGR/Drawdown as a metric to see which funds deliver superior risk-weighted returns. This is the category you would be referring to closely as a portfolio manager with the ingredients at your disposal to deliver eye bulging performance metrics to your investors.



I will give you time to sink this in. In particular look at what an equal weighted blend of the top ten delivers (refer to Top 10 TF Funds (LT) metrics). Not bad eh!

Let's put this into context.

Here is the equity curve of thre S&P500TR Index over the same period that might excite the passive mutual fund.



Note the 5.1% CAGR with the pain of a max drawdown of 51% of the GFC and another nail-biting 42% drawdown in 2002. Let's compare this with a blend of the top 10 risk-weighted TF FM's.....now have a look at where the S&P500TR Index sits in this context....oh dear, now where has it gone?.....*sniggers*.



Sure for the sceptic out there screaming....."your blend is a hind-sight curve fit solution, and what about Fund of Fund management fees or rebalancing costs if you want to do it yourself?".......Ok smarty pants.....so just be impressed with the visuals now and let's assume as a theoretical exercise we had enough capital to meet minimum investment requirements so we could blend an equal allocation now. I will continue to monitor this blend in my future posts and keep you informed of the results. There is a statistical reason for that superior equity curve, and we are going to demonstrate it with future results, so let's just see how it plays out. Place your bets all you punters out there.

Here are the equity curves of the top 6 in this risk weighted category.



Well all good things come to an end, and the best form of report is a brief one......so that's it for the report this month.

aveagreattradingweek :-)

C

For everything under the sun there is a Season, time to trend follow and time to Revert to the Mean (Seasonality, Cycles or condition), the last 2-4 Years wasn't Favorable to Trend Following but things are slowly Changing and like u can be sure that there is Spring after the Winter and Summer After the Spring u can be sure that the Market conditions will Change giving a Little time and Trend Following Models will start again Working like a Charm.

The Trick if you are a Purist is to Minimize your Exposure to the Markets when the Conditions is not Favorable to your Trading Models and to Maximize it when it is to Make up for the Small cuts that u took when battling the not so Favorable conditions.

If you are not a Purist and u want a more Smoother equity curve u can Mix it up and Diversify Models, Markets and Timeframes which will make u money in all Seasons or Cycles, and who doesn't want that .

But i'm sure that u already know all of that.
Thank you for the Info, greatly appreciated.

Best,
bassramy

Great points Bass. In a nutshell, as a masterchef, use your seasonal menu.

Time to resurrect an oldie but a goldie :-)

Charts of Interest

XAGUSD - DTTR

Silver seems to be shaping up well with the DTTR. Let's see what happens.

Don't you just love the fractals? :-)



DJ30 - DTTR and EDTT

Up and up the Dow just goes.....where it ends.....well nobody knows!!!!. A DTTR snapshot.



Almost fully loaded on all time frames with the EDTT: 4 out of 6 timeframes aren't bad.

It's almost Saturday Night. :-)

.....who said that ads don't get cut-through anymore? It's not just a jammed paper tray you need to worry about. Now you have to watch out for "The Wolf". Great fun Oliver-Stone inspired ad campaign from HP that raises the profile of that devious piece of office equipment that is probably staring at you right now.