Advantages in Trend Trading

[SIUYA 11]

Hi SIUYA,

 

Some thoughts . . . I imagine that one of the difficulties that a lot of the trend following funds have faced (vs the turtle era, for instance) is as follows:

 

- To try and keep things the right side of breakeven when there's not much going on, greater diversification is used. Look at Winton, for example (although I know they're not the purest exponent of trend trading) - there's probably scarcely a single liquid market anywhere in the world that they don't trade. This is fine, generally seems to work, and makes good sense.

 

- When key markets begin to exhibit the more volatile and sustained trending behaviour that has the potential to generate the stellar 50% plus return years, this process is diluted by the extreme level of diversification at work. There's evidence of a slow slide to mediocrity specifically in the outlying returns that this trading style should produce. As an example, take a look at Dunn. They modified the markets they trade for greater diversification a few years back after a string of losses. The diversification seems to have achieved its aim. But then look at 2008, when there was plenty going on for trend trading to profit from - the return was far from outlying. I can only conclude they couldn't properly exploit moves in US equities etc because to much off the portfolio was tied up in obscure markets.

 

If the above is correct, then this would mean that the nature of the returns from this type of strategy have changed, rather than that "trend following is dead"?

 

Another interesting point is that the approach Sergso describes is arguably not trend following: it's breakout trading. Shouldn't a "true" trend follower be always long or short?

 

Finally, I imagine that there are some "secrets" to how such traders operate successfully, but they probably have less to do with knowing when to buy and sell and more to do with things like position sizing, and using interest rate products to generate returns from cash reserves (easier to do when you trade a leveraged/low margin derivative).

 

Kind regards,

 

BlueHorseshoe

 

I think you have nailed one of the issues people come across - the change in return profiles over time, the issues regards diversification and what is a trend follower (the secret and the idea of 'true' trend following)

Which is why there is debate and is not as simple as - i backtested this and it does not work. (you cant effectively backtest many things most day traders do does that mean none of them make money?)

 

Some of the key attractions of trend following are that it is easily systematic (there will be issues around this), and yet you can also trend follow without being systematic;

Breakout trading is just an easy way to ensure you take every trade.

There are so many other variables within each system as well ranging from the issues of money management and position sizing, correlations between instruments, the universe of instruments, the maximum and minimum limits, the use of hedges, filters, long only, long or short in particular instruments, levels of discretion, what to do with the excess cash.... etc.. It can depend on if you are after something that is robust etc, and can be tailor made to the types of returns an investor is looking for and what trades off they are willing to suffer.

(As for the issue regards purity - IMHO who cares, i can leave that for the the 'theorists', even if it makes money on paper, imagine the slippage when dealing in size!)

 

Also - that it provides uncorrelated returns and hence becomes part of an overall portfolio. (Not great if you are trying to make money out of it by yourself)

 

Here is a question to ask regards trend following.....lets say you have a system that works, it provides good returns for the style (25% a year compounded) with normal worst case scenario drawdowns of 30% (peak to trough)......

Even if you have 1mil to trade and live off you had better hope you get the returns quickly otherwise taking out costs etc and a few bad years your capital base is degraded very quickly. In other words its probably best approached from an investing point of view.

Basically if you have 1mil and expect to only get the same returns after costs of doing it yourself as opposed to other professionals already doing it, then you may as well give it to them and do something else - either work or sit on the beach.

 

The large trend followers employ a bevy of Phd guys - there is another debate....what for? better execution, on going research into new ideas - and yet their returns can be replicated???

There is the business of funds management and capacity issues, v personal trading and the basis for why an individual may want to invest in it.

So many questions!

 

As for why returns have changed.....the debate will continue....I think its a combination of factors and hence impossible to nail it down - eg; increasing liquidity from short term trades maybe means more intra range volatility. Government intervention in markets, more market correlations....

[sergso 10]

Trend following no longer makes good money. Maybe a little money but not good money. Just look at the CTA indices for the last years. There is no better proof than that.

 

BarclayHedge | Barclay CTA Index

 

This is sh***ty performance after 2009. S&P 500 has gone up about 120% in the same period these trend-followers have not even made CD returns. Forget about backtesting and things like that just look at the index of these CTAS. Most are following turtle-like methods. They were not able to even trend follow the S&P 500 that even a fool can buy and hold through SPY and make tons of money.

[bobcollett 10]

Trend following no longer makes good money. Maybe a little money but not good money. Just look at the CTA indices for the last years. There is no better proof than that.

 

BarclayHedge | Barclay CTA Index

 

This is sh***ty performance after 2009. S&P 500 has gone up about 120% in the same period these trend-followers have not even made CD returns. Forget about backtesting and things like that just look at the index of these CTAS. Most are following turtle-like methods. They were not able to even trend follow the S&P 500 that even a fool can buy and hold through SPY and make tons of money.

 

Hi sergie

Why has trend following stopped making money?

regards

bobc

[SIUYA 11]

Trend following no longer makes good money. Maybe a little money but not good money. Just look at the CTA indices for the last years. There is no better proof than that.

 

BarclayHedge | Barclay CTA Index

 

This is sh***ty performance after 2009. S&P 500 has gone up about 120% in the same period these trend-followers have not even made CD returns. Forget about backtesting and things like that just look at the index of these CTAS. Most are following turtle-like methods. They were not able to even trend follow the S&P 500 that even a fool can buy and hold through SPY and make tons of money.

 

now you are just being plain ignorant/foolish/disingenuous.

 

Using Yahoo finance so anyone can check....

S&P 500 23 June 2008 - 17th June 2013 The return has been 24.57%

 

Other questions which one should take into consideration....

why only compare one equity market? Because it suits your opnion......

Are all the CTAs long term trend followers? No.....

 

Your data set is so selective its a joke.

 

Taking a period of a few years and claiming a strategy designed to be used over the long term is dead is simply one persons opinion and hence why many others are debating the issue - others have other opinions.

 

Maybe you should compare a basket of pure long term trend following models .... for those interested here is a very good blog written by someone who simply runs similar models and offers insights into some of the debates....

 

State of Trend Following in May | Au.Tra.Sy blog - Automated trading System

http://www.automated-trading-system.com/wp-content/uploads/2012/02/NewNormalization.html

 

There is a large range of different but similar styles, and many invest in trend following methods as their returns ARE different and are uncorrelated to a simple equity market.

The simple turtle method is simply one method.

 

I am a fan of trend following, but I think like many styles and strategies it needs to be understood and not just using a knee jerk selective data set to support or prove ones own beliefs.

It is not suited to everyone, its best as part of a portfolio and its likely not suited to day trading.....even though a lot of the methods/philosophies are applicable.

[BlueHorseshoe 10]

Trend following no longer makes good money. Maybe a little money but not good money. Just look at the CTA indices for the last years. There is no better proof than that.

 

BarclayHedge | Barclay CTA Index

 

This is sh***ty performance after 2009. S&P 500 has gone up about 120% in the same period these trend-followers have not even made CD returns. Forget about backtesting and things like that just look at the index of these CTAS. Most are following turtle-like methods. They were not able to even trend follow the S&P 500 that even a fool can buy and hold through SPY and make tons of money.

 

Something like the GS commodity indexed tracker has barely moved since 09 - these are commodity trading advisors, not equity funds - the S&P comparisson is tenuous at best (though I concede it's a widely used benchmark) - as SIUYA has pointed out.

 

That whole comparison is meaningless due to the arbitrary and short window of time - yes there's a nice S&P return since 09, but what if you invested in equities in late 07? Somewhere around breakeven.

 

And the whole point of these funds is that they are aimed at sophisticated (read "very rich indeed") investors, and are intended to be an uncorrelated smoothing component of a broader portfolio (which may contain long-only equity investments such as the S&P).

 

Finally, I don't know the full details of how the index is put together, but anything like that is going to contain all sorts of nasty survivorship bias type gremlins.

 

BlueHorseshoe

[Guest OILFXPRO]

There are trend set ups almost every day , but one requires the skill of a master to identify low risk opportunities i.e master trend trader versus master writer michael covel.

 

Would you go and watch and learn from the footballer (trader) or the journalist covering the sport (michael Covel )?

 

I would rather buy a buy a book from someone who is not a journalist ..............but the real thing with real stuff.

[Guest OILFXPRO]

Once we start to look at technical price analysis from an academic perspective, it can be difficult to remember some of the foundational aspects of the practice that got us started in the first place. The idea of what makes a trend creates a basis for most of the more “advanced” technical analysis techniques that follow. So, it is surprising that so many active forex traders dismiss trend analysis as overly simplistic and only worthy of limited attention. But the simplicity of any price analysis method is not something that should be immediately disregarded as a negative, and trend analysis is something that should be used by traders of all experience levels. The ability to understand what makes a trend can bail a trader out of a strategy that is imperfect and help prevent the excessive losses that can break a trading account.

 

“The Trend is Your Friend”

 

The most commonly used phrase in technical analysis is “the trend is your friend.” Whether your strategy agrees with it or not, the phrase has stood the test of time because it does form the building blocks for the way most people view price activity. There are many traders that use trends as an opportunity to work in reverse (using contrarian strategies), but even when thats the case, you will still need to have an understanding of how trends are defined in order to know what you are working against. Here, we will look at some of the benefits of trend-based strategies so that investors can use these ideas (for or against) when establishing new positions.

 

Trends and Imperfect Strategies

 

There will be many cases where an alternating strategy will fail against an uptrend or downtrend. When markets are bullish the majority of the price momentum is set in a clear direction and this is the main argument trend traders will use to base their positions. Trading in the direction of the majority of the market’s momentum allows you to focus on other aspects of your strategy (such as stop loss levels and profit targets).

 

This also allows you an added advantage when using a strategy that is less than perfect. When trend trading, the timing of your exact entry isn’t as important (when compared to contrarian or swing strategies). Of course, this does not mean that trend trading will result in gains in all cases. But when using these methods, you will gain some protection against the inherent flaw seen in any strategy and the exact time of exits and entries becomes less critical because most of the market is already on your side. In recent months, one of the stronger trend instances have been seen in the JPY pairs (as carry trades become more popular). The activity in these pairs has shown significant rebounds from long term lows, essentially suggesting that a new uptrend is in place.

 

Combining Trend Moves with Indicators

 

Once your underlying trend direction is identified (higher lows and higher highs vs. lower lows and lower highs), some of the less commonly used indicators can be added as a way of getting an edge on the rest of the trend trading market (where traders tend to focus on many of the same charting tools). One example of a less commonly used (yet effective) market indicator is the Commodity Channel Index (CCI). Helping remove some of the difficulty of timing entries in a trend, the CCI is an oscillator used to determine the strength or weakness in cyclical trends. The CCI helps traders identify price activity that has reached extreme points (become overbought or oversold) by quantifying the relationship between prices, moving averages, and deviations that are typically seen relative to the moving average. In the attached chart, we can see that rallies are expected once the indicator falls below -100, whereas declines are expected after the reading rises above +100.

 

The CCI cannot guarantee 100% success even used in conjunction with a forceful trend. But when, for example, a strong uptrend is in place, buyers are more likely to enter the market when prices have become oversold relative to their near term averages. One of the biggest problems seen when trend trading is the fact that it is difficult to “buy low and sell high.” Looking for oversold activity is one way of combating this problem as it gives you an opportunity to capitalize on short term reversals within the larger trend. When strong trends are seen, you will usually have multiple opportunities to enter and re-enter, and using the CCI is one way to find these opportunities.

 

Choosing Your Markets

 

If trends make up the majority of market price activity, we will need to take some trading opportunities while dismissing others. The main focus, at all times, should be in finding which price trend will allow you capture the most pips at any given time. If you are looking to implement a contrarian strategy, the argument can be made that there is greater opportunity in a reversal (became the previous trend made prices too expensive or cheap). But this is only the case when a trend has actually reached its end. When you align yourself with the direction of the trend (and choose your markets based on underlying strength), your positions are exposed to larger pip potential and reduced possibilities for losses.

 

Conclusion: Turn the Odds in Your Favor Until Reversals are Seen

 

When looking at trend-trading strategies, there are several advantages that allow traders to turn the odds in their favor and to protect against the flaws that are inevitably present in any trading system. As long as a trend is in place, there is an enhanced potential for gains as most of the market is in agreement with the positions you will be taking. The first step is to identify the main trend direction and, in many cases, this will not be immediately apparent. But when this is the case, it is better to look for other opportunities, as much more money can be made after the most obvious trending moves are seen.

 

The forex market has an impressive selection of available currency pairs to trade (even when using some of the smaller brokers), so there are always alternative options when your chosen pair is not expressing clear trend activity. For this reason, it is important to filter your signals in ways that allow you to only focus on those pairs with the strongest trends (and the best potential for gains). For positions that are already open, it is important to watch for counter-trend reversal signals to either stop out the position or to take profits.

 

At some stage, even the strongest trends will come to an end as uptrends turn into downtrends and vice versa. The best indication of these changes when an uptrend fails to proceed with higher highs and higher lows (momentum stalls too early when attempting new highs, or support levels break). In a downtrend, this would mean prices fails to proceed with lower highs and lower lows (downside momentum stalls too early when attempting to push to new lows, or resistance levels break). Other than this, trading rules can be altered but the central goal is to find the most obvious examples of a trend before any trades are placed.

 

You missed the advantage of trend trading .

 

Trend bars a bigger (profits are bigger ) in trend follower's advantage , trend support gives an edge.

[gianno 10]

You missed the advantage of trend trading .

 

Trend bars a bigger (profits are bigger ) in trend follower's advantage , trend support gives an edge.

 

...or bigger drawdown. Trend in stock indices has been good but CTAs are having a problem after 2008. The biggest problem is not how to follow a trend but where to look for one. If you are in the wrong market the price paid is high.