Taking Part Profits and Trend Trading

[Kiwi 16]

The Trend Dynamics course introduces the concept of NTL .. Non-trend Liquidation.

 

When you plan a "with trend entry" you look for the point that you'd expect price to reach if you are wrong and the trend is reversing ... the NTL point ... and you plan your entry so that you can exit xx% of your position at that point and the rest becomes a free ride plus if, as you anticipate, the trend actually does continue.

 

This really is (imo) the ultimate trend following course ... and yet they plan a half off at the NTL (and if you don't have a decent NTL then you probably shouldn't enter or should put on only a part position).

 

Food for thought.

[DugDug 10]

Kiwi thanks looks interesting and I like their structure regards selling modules, if you dont like it - $50 or $100 is not going to kill you.

(mind you to participate in their live sites it seems you need to complete about 18 courses, and then still pay on a per month basis... worry about that later)

Funny how you often miss such sites. I will shoot of for a random book to see what its like.

The problem is if I buy the info I cant share it due to to the non disclosure agreement.

From an ethical point of view - if you sign the document and buy the course - you dont divulge - simple... if I were selling something I would not want people to supply the info for free elsewhere, so I would not do it do someone else.

As an aside - What is the strict wording of this in terms of forums, ideas and sharing based on knowledge?

Edited February 1, 2010 by DugDug

[Head2k 10]

Kiwi thanks looks interesting and I like their structure regards selling modules, if you dont like it - $50 or $100 is not going to kill you.

Funny how you often miss such sites. I will shoot of for a random book to see what its like.

The problem is if I buy the info I cant share it due to to the non disclosure agreement.

From an ethical point of view - if you sign the document and buy the course - you dont divulge - simple... if I were selling something I would not want people to supply the info for free elsewhere, so I would not do it do someone else.

As an aside - What is the strict wording of this in terms of forums, ideas and sharing based on knowledge?

Why to pay for it? If you enter on a pullback into a trend, then you in fact enter in an intra-trend range. Now if the trend is reversing, then you can expect at least a target implied by this small range to be hit.

Same with reversals. If you wait for sort of a climax at S/R and then you enter on a re-test, you are in fact entering within a small range defined by the bounce between the climax and the re-test. Then you can expect a target implied by this small range to be hit, even if the trend eventually continues.

I don't use these small targets for scale-outs, but for stop reduction.

The only question which remains to be answered is what the target is within a range. And I guess you don't need to pay $50 to find it out.

[DugDug 10]

Had to laugh Head2K - there is logic in what you say.

 

However, I also know that sometimes you might pay a little bit of money to get something that "speaks" to you if you like. If it says nothing or its in another language, not a problem.

If you like it, can always refer back to it and find that it helps the cause very quickly then its worth it. I have plenty of trading and investing books, I got something out of all of them.

Plus its a matter of time - a book can be read, in a day, paid for by a few hours work or a trade..... experimenting takes time to reinvent the wheel.

 

example; I love cooking and experimenting a bit, but I will still always pay for a cookbook that I can refer back to.....( I dare to guess there are more cookbooks than trading courses out there even if they are cheaper.....probably holding up computers and computer desks everywhere)

On that note there are so many adverts now in the UK of learn to trade the easy way.

 

Anyways - back to thinking.... my only fear on this behalf is over complication.:doh:

 

 

EDIT - read more on trend dynamics - there seemed to be a lot of talk similar if not identical to the Ray Barros book - the nature of trends.- 5 and 18 days, impulse moves,whole point counts........ seems I may already have the book/course.

Edited February 1, 2010 by DugDug

[thalestrader 14]

most trend following systems utilize fairly aggressive pyramiding of winning positions to produce acceptable returns. Without this approach to MM they are unlikely to perform well.

 

Hi Blowfish,

 

Do you think that would be true of an intraday trend following type day trader as well? In other words, a day trader who always played for a potential trend day, using a trailing stop or a MOC strategy rather than scale out at targets, etc. Would such a trader need to pyramid to be net profitable, in your opinion?

 

Best Wishes,

 

Thales

[Kiwi 16]

I don't think I believe that "most trend following systems utilize fairly aggressive pyramiding of winning positions to produce acceptable returns. Without this approach to MM they are unlikely to perform well."

 

I've seen a few trend following systems (aberration, gsx, etc) and they didn't use pyramiding. Gsx still gets extremely good returns; I don't have and thus don't know aberration.

 

Pyramiding seems to be more common in discretionary trend following though. Locking current profit in and adding to your exposure with another position is attractive in some ways especially with macro trends that are likely to persist over multiply liquidity increasing cycles. But adding does have the issue that you are now part way though the trend rather than entering at the bottom like your first entry so equations change.

[DugDug 10]

Thales -"Would such a trader need to pyramid to be net profitable, in your opinion? "

 

 

I would say the same as for other trending systems. NO.... not necessarily in intraday or long term.

While pyramiding can be but is not necessarily a part of trend trading - Trend trading is different to pyramiding

 

Trending is more about running a trade, and is largely reliant on the exit..... or how long you will run something.

In short to me....

Pyramiding is just something that increases PnL vol but also then total cumulative PnL as over the long run the system works.

Also a lot of longer terms systems pyramid in different manners to the initial entry, its still all about having the biggest position you can when a trend continues.... someone mentioned once something along the lines of the biggest trends usually have the bigger part of their move, at the last 30% of the time..... so it still pays to pyramid. (I dont know how true this is)

 

Also as Kiwi just said... there are a lot of discretionary traders that pyramid.... though they may not necessarily call them selves trend traders.

 

This is why the actual thought process for me is causing me a lot of thought..... and involves more than just pyramiding, but the issue of taking profits as well.

[BlowFish 10]

Hi Blowfish,

 

Do you think that would be true of an intraday trend following type day trader as well? In other words, a day trader who always played for a potential trend day, using a trailing stop or a MOC strategy rather than scale out at targets, etc. Would such a trader need to pyramid to be net profitable, in your opinion?

 

Best Wishes,

 

Thales

 

Interesting question my hunch would be yes though it is just a hunch really. It would certainly improve things if it is a 'real' trend following system. I guess it depends what you call a 'trend following system'. I actually have a personal category 'old fashioned trend following system' which might be different to other peoples definitions.

 

One of the characteristics (for me) is ensuring you are positioned for every single trend (so channel break out PA break out or similar) by taking every single BO you will get whipsawed somewhat and hence the 60 65% figure. To me this epitomises trend following systems. Of course there are all sorts of methods that attempt to trade with the trend or 'run one unit' that are perhaps more discretionary but I view those as 'methods that trade with the trend' rather than 'trend following systems'.Could be that I am talking at cross purposes.

 

Kiwi would be better qualified to comment and may very well tell me that I cam completely wrong. I should say it is more a hunch based on lots of anecdotal evidence. I should say if you are scaling out then those portions that you scale at 1:1, 2:1 and even 3:1 I would evaluate separately and would not classify those portions as 'trend following' even if they where entered 'with the trend'.

 

Incidentally I re-read Market Wizards over Xmas and was surprised the rather high number of the wizzes that used good old fashioned trend following (simple trigger, solid money management).

[Kiwi 16]

My answer would be "you have to test it."

 

If you get persistent trends then scaling could be a good solution. It depends whether the number of persistent trends you jump into outweighs the number of reversals you get because a second entry is "late."

 

My own strategies are trend based and profitable. Adding is absolutely unnecessary ... much better to catch one of the early pullbacks with a full load than catch one partially loaded and add some half way through the trend. But if you had a solution that really worked (proven) then cool.

 

IM experience scaling in and out has much more to do with smoothing the discretionary experience as any form of optimization of results. But there are lots of ways to skin the cat - just define a strategy and test it.

[DugDug 10]

Incidentally I re-read Market Wizards over Xmas and was surprised the rather high number of the wizzes that used good old fashioned trend following (simple trigger, solid money management).

 

This is exactly why over the years I have tried to best capture trend trading- in previous trading i was always get long get short and hang on. I guess now though (in my current situation - more time, more disastisfaction ) I am trying to see if you can get the best of both worlds. Intraday jobbing, and getting on trends early to minimise the losses inherent in taking every trend breakout. Smoothing the PnL.

But I am approaching it from the point of view of building a position from the intraday jobbing. This may be tough/hard/impossible, and I am leaning to the opinion that while it all forms part of a portfolio strategy, you really do need to actually separate the entries and exits out and match them to their time frames and individual strategies. Like a mini fund to funds. This creates its own issues, as even having a very simple trend trading strategy in itself has so many variables in terms of what can make it profitable etc; plus the varying markets it needs and the capital drawdowns etc;

This also raises the issue of trading a portfolio using trend trading v trading the trends in an individual instrument..... very different.

 

However - on saying this my thoughts are still going back to the simple method of for whatever strategy you use, take two thirds off, and let one third run when the strategy goes with the overall larger trend (counter trend trades by definition should not be run)... this will naturally allow you to participate in a trend, allow you to pyramid (off the smaller time frame entries) and allow you to also take part profits - smoothing the PnL. Without really doing too much more than letting the market dictate what it wants to do. No real need to worry about multiple strategies etc; you kind of end up being a trend trader by default. (Clearly however this raises the issues of when to exit....this should be covered in some definition of the longer term trend)

 

The only downside I see (assuming you can combine strategies) is that what would be considered a profitable intraday strategy would have its PnL results/returns bastardised.

In two ways...

1) you either have to take a bigger number of contracts on entry (than normal), and hence any losses would be larger OR

2) if you take the same number of contracts on entry, your wins will be smaller as there will be many trades that you should have taken a profit on, but did not, and they return to BE or a loss.

Edited February 2, 2010 by DugDug

[BlowFish 10]

Kiwi,

 

from your previous posts you said pretty much what I expected. However your "trend based" strategies I don't think I would classify as 'old fashioned trend following'. OFTF

 

Just out of interest will your system catch every trend without fail or do some slip through (presumably by missing 1 or 2 trends you miss 3 ,4 or more whipsaws)? Personally I tend to think of pullbacks after a trend is established somewhat differently to OFTF. I guess as long as there is a pullback somewhere you will get a position? If there is not an 'acceptable' (deep enough and close enough to the start of the trend) I guess you don't?

 

it all depends on how one defines a trend and then how one chooses to enter. Waiting for a pulback is certainly a valid approach, I am just not sure I would call that 'trend following' in the 'old fashioned' sense.

 

I am not sure I am contributing much here, though if I can coax stuff out of Kiwi maybe so

[BlowFish 10]

This is exactly why over the years I have tried to best capture trend trading- .

 

After re-reading wizards it made me think too. I figured use a spread bet account so you can trade small size and diversify. Diversification is another important factor imho, these systems tend to use diversification to smooth the equity curve. The thinking being that all you need is one or two instruments on a roll to offset any whipsawing in others. If you approach it from a portfolio point of view trading different systems on the portfolio is likely to help but simply taking 20 fairly un corelated instruments in the first place is likely to be simpler). The turtle document lists there basket for example. Actually there is quite a lot to be learnt about other aspects of trend following from it.

[DugDug 10]

Yes - trend following is the ultimate educator in many aspects - running profits, cutting losses, position sizing, discipline etc;

 

I actually started reading the Soros on Soros book the other night.... I think his track record shows he is the ultimate market wizard.

 

"Being so critical I am often considered a contrarian. But I am very cautious about going against the herd; I am liable to be trampled on"

"most of the time I am a trend follower, but all the time I am aware that I am a member of a herd and I am on the look out for inflection points"

 

He also does not necessarily diversify.... like typical trend traders in the CTA managed futures camp. His forte is really going for the jugular when all the ducks line up and as he says :"be a pig", pyramiding in, running it. (it was Drukenmillers idea to short the pound, George told him to do it in a bigger size and go for it.)

 

(Now to emulate George Soros and only do a fraction as well as he would be nice....however his returns over the long term are only high 20% - great returns on large money - but it was his business that really helped make him the money. Starting with 5mil getting 30% a year, still will not make you a billionaire unless you trade other peoples money as well.)

 

There are great websites devoted to trend trading by itself.... very different to here. They cover a lot of this. but its not as fun a site, and not applicable to many here.

 

I digress, this is more intraday trading, and building a position.....

[BlowFish 10]

I found the Jim Rogers interview interesting (he formed Quantum with Sorros, broadly speaking he decided the plays, Sorros executed them analyst & trader if you like). Interesting on all sorts of levels but just not something you or I (or anyone else probably) could emulate. Tudor Jones was another (though he perhaps was less discretionary basing a lot on Elliot)

 

That is the big appeal with simple trend following systems they are something anyone can learn, probably in no more than a day. Of course having the confidence and discipline to follow one is a different matter, particularly with the lumpy equity curve.

[Plaste 10]

After re-reading wizards it made me think too. I figured use a spread bet account so you can trade small size and diversify. Diversification is another important factor imho, these systems tend to use diversification to smooth the equity curve. The thinking being that all you need is one or two instruments on a roll to offset any whipsawing in others. If you approach it from a portfolio point of view trading different systems on the portfolio is likely to help but simply taking 20 fairly un corelated instruments in the first place is likely to be simpler). The turtle document lists there basket for example. Actually there is quite a lot to be learnt about other aspects of trend following from it.

 

Well, that's exactly what I do. I trade a long term trend following system, basically a stop and reverse system. I then trade a medium term trend following system that exits on a time stop and then in addition to that I trade a short term divergence system on a basket of stock market indexes. All end of day. All with a spread betting company. The graph shows the results of every trade I'd made up to the end of last year. (Only the last couple of years were traded as outlined above. I started out trading Aberration but as its results degraded over time I've added my own systems). One losing calendar year, compound annual growth of about 21% per year.

 

Hope that's interesting to you.

 

Tom.

[DugDug 10]

Hi Tom, I have done a lot of work similar to this, and was looking at expanding more into intraday trading (too much time on my hands!) hence the tread to look at combining strategies in order to get the most of it by taking profits on smaller trades to smooth the PL

Do you only trade the short term divergence and the trend trading on the stock indexes, or do you have a more diversified basket of commodities, FX, rates, and stock indexes?

Do you find that it sufficiently smooths the returns without detracting from the PL (21% pa is good)

how are the max drawdowns? (seemingly inherent in most trend following systems - however stop and reverse may be different)

How was the recent 12 months (it looks good on your chart)- most long term trend follwers have not enjoyed them - even if 2008 was good?

(plus if you PM me there is something organised via another site you might be interested in if you are in the UK specifically related to trend follwing)

[Plaste 10]

Hi Tom, I have done a lot of work similar to this, and was looking at expanding more into intraday trading (too much time on my hands!) hence the tread to look at combining strategies in order to get the most of it by taking profits on smaller trades to smooth the PL

 

Do you only trade the short term divergence and the trend trading on the stock indexes, or do you have a more diversified basket of commodities, FX, rates, and stock indexes?

Do you find that it sufficiently smooths the returns without detracting from the PL (21% pa is good)

 

how are the max drawdowns? (seemingly inherent in most trend following systems - however stop and reverse may be different)

How was the recent 12 months (it looks good on your chart)- most long term trend follwers have not enjoyed them - even if 2008 was good?

(plus if you PM me there is something organised via another site you might be interested in if you are in the UK specifically related to trend follwing)

 

Sounds like we're both in the same boat at the moment. I'm currently reworking an ORB index system to help smooth returns and trading S & R a la ThalesTrader in very small size for the same reasons.

 

The divergence trades are only on the indexes, the rest is on everything (but not individual stocks). Here's my current portfolio:

 

Shorts: Gilts, Euros, Spanish SM (SM = stokc market index), Italy SM, EuroStoxx 50 SM, France SM, Corn, Brent Crude, Swiss Francs, Gas Oil, Silver.

 

Longs: Dax, Nasdaq, Australia SM, Yen, Canadian Dollar, Euros Schatz, Eurodollar.

 

I've been through 50% drawdowns (though I didn't know as much then) and it is a problem with the method to some extent. 2008 returned 12.4%, 2009 9.3%. If I get a chance I'll run some simulations on Mechanica to show how adding systems improves things.

 

Tom.

[Plaste 10]

Here are the edited highlights of backtest results from my current systems:

 

Long term trend following only:

 

Compound annual return: 22.91%

Max Drawdown: 37.1%

Longest Drawdown: 1.65 years

Sharpe Ratio: 0.99

 

Add the medium term trend following system to the above:

Compound annual return: 32.57%

Max Drawdown: 32.57%

Longest Drawdown: 1.07 years

Sharpe Ratio: 1.17

 

Add the divergence stock index system to the above two:

Compound annual return: 41.48%

Max Drawdown: 31.17%

Longest Drawdown: 1.34 years

Sharpe Ratio: 1.48

 

Obviously we're not going to see figures as good as this in practise, but the principle certainly held up last year in practise when a lot of trend followers had a hard time but the above mix of systems still came out ahead.

[DugDug 10]

Thanks Tom.

Definately the best way to go to smooth returns over a portfolio is to add various strategies - if they actually increase returns over the long run they are even better. Did the website I directed you to help, or did you already know about it? (very different to this one - more tailored to trend trading) There are endless discussions about combining strategies there. Thats why I use this site more to ask and learn about day/short term trading - or associated trading ideas.

[Plaste 10]

Thanks Tom.

Definately the best way to go to smooth returns over a portfolio is to add various strategies - if they actually increase returns over the long run they are even better. Did the website I directed you to help, or did you already know about it? (very different to this one - more tailored to trend trading) There are endless discussions about combining strategies there. Thats why I use this site more to ask and learn about day/short term trading - or associated trading ideas.

 

Thanks DugDug, I'd been there in the past but not for a long time. If they've got some useful stuff about combining strategies I'll go and have a root around. In my experience it takes a lot of work to come up with two trend following systems that, when traded together, actually improve risk adjusted performance rather than just returning an average of both.