Systematic Trading research and development, with a flavour of Trend Following
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Trend Following Wizards in September ’11

October 18th, 2011 · Trend Following, Trend Following Wizards

Here is another Trend Following Wizard report, which comes with some volatility again – mostly on the down side.
The average return for September is -1.31%, with the YTD reading about equal at -1.54%.

Unlike in 2008, Trend Following Wizards did not seem to be able to capitalize on the “crisis mode” seen in the markets in the last quarter, which was quite reminiscent of the worst periods of the credit crunch or GFC (Global Financial Crisis). Indeed, hedge funds reportedly just had one of their worst quarters on record and the Wizards did not seem to buck the trend as much as they did three years ago.

I have also changed a few minor things in the report this month.
Mainly, the Trend Following Wizards welcome two new additions – from Canada – this month: Auspice Capital and Acorn Global Investments.
I have also updated a couple of Wizards with the actual program being tracked, mostly to reflect program termination (JWH’s historical Financials and Metals portfolio does not seem to get updated any more for instance), or for re-aligning to the “main” program for the CTA (as per AUM). Details of all programs tracked can be found in the (updated) footnotes.

Finally, I realise that this blog has been on the “quiet side” lately, staying updated mostly with these monthly reports (TF Wizards and State of TF). This is mostly due to being busy on other projects and a general re-organisation on my side. I intend to get back to more regular posting at some point in the near-future.

In the mean time I leave you with this Managed Futures can save your tail article (rather topical), linked to from new Wizard Auspice’s September commentary letter.

Below are the full results for the Wizards as of September 2011:
[Read more →]

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State of Trend Following Report – September ’11

October 3rd, 2011 · the State of Trend Following, Trend Following

State of TF
 
This month of September has been quite similar to that of August, in terms of the increased nervousness of financial markets in general. In parallel, the state of Trend Following also shows characteristics similar to that of last month: strong but volatile returns. The index is now in the black for the year. Please check below for more details:

Detailed Results

[Read more →]

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Trend Following Wizards in August ’11

September 19th, 2011 · Trend Following Wizards

This month’s report comes a bit later and less complete than usual. Some of the websites used to retrieve the performance figures seemed to have had some delays or technical problems, and as a result three of the usually tracked Wizards have missing performance results.

The rest of the pack shows varying levels of performance in what was a volatile month.

Please find below the individual results for August 2011, showing a slight negative trend collectively, both for the year and the month: [Read more →]

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State of Trend Following in August

September 5th, 2011 · the State of Trend Following

State of TF
 
August – What a volatile month! Instead of the more usual quiet Summer market lull, markets got really nervous.

And this also shows in the results of the State of Trend Following – albeit with a positive outcome, completely opposite to “traditional investments”.

Let’s cut to the chase with this month’s results:
August return: +13.46%
YTD return: -6.71%

Despite a strong month, the report is still in the red for the year. Below are the more details results:
[Read more →]

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Summer Reading by Covel – Take II: The Little Book of Trading

August 29th, 2011 · Books

Little Book of Trading

Trend Following Strategy for Big Winnings is the subtitle of Michael Covel’s latest book (link on Amazon), an addition to the “Little Book of…” series (“Trading” in this instance).

I find it quite surprising for an author to come out with two books roughly at the same time but this book is fairly different from the recent Trend Commandments.

Similarly, this is an easy, short read – good for one sitting on the beach or by the pool, as the cliche has it.
And once again, one should not expect an actual specific strategy per se, in the form of a ready-to-be-traded system, delivered in the book – for this, a better place would probably be the Trading Blox forums or even this humble blog (start with the State of Trend Following report, which uses and points to several basic Trend Following systems provided by Trading Blox). Unless you prefer to purchase the author’s course…

No, this book is mostly about inspiration from successful (Trend Following) stories. Whereas Trend Commandments is all about “principles over personalities”, this latest Covel instalment revolves around some famous Trend Following personalities. And successful stories are one of the best ways to get inspiration and motivation, in my opinion. I actually felt this was one aspect missing from Trend Commandments, especially compared with the original Trend Following book (which contains a variety of philosophy, trading aspects, successful stories, performance charts, trader insights, etc.).

It seems that Covel decided to split out [Read more →]

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Trend Following Wizards in July ’11

August 17th, 2011 · Trend Following, Trend Following Wizards

All positive performances for the Wizards in July… CTAs seem to have enjoyed the high-volatility ride.

A strong month (+5.27% on average, with a few double-digit returns) which brings the YTD performance to nearly flat (-0.98%).

Below are the full results for July 2011: [Read more →]

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S&P make the news… with a Trend Following Index

August 10th, 2011 · Equities, Fund Review, Futures, Trend Following

They say any publicity is good publicity…

If that’s the case, Standard and Poor’s might have achieved the “marketing coup” of the year/decade/century (time will tell) with their downgrade of US credit rating last Friday (possibly thanks to a $2 Trillion Mistake).

SGMI: a new Trend Following Index

But this is not the piece of news that caught my attention today.
Standard and Poor’s announced the creation of the S&P Systematic Global Macro Index (SGMI).

With this index, S&P basically intends to track – or rather replicate – the performance from the Managed Futures / CTA space:

London, August 9, 2011 – S&P Indices has launched the S&P Systematic Global Macro Index (SGMI), which aims to reflect price trends of highly liquid global futures, representing the general level of volatility taken by managers in the global macro and managed futures/Commodity Trading Advisor (CTA) space.

This is a rules-based index, which will implement a trend following system to [Read more →]

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Summer Read: Trend Commandments by M. Covel

August 8th, 2011 · Books, Trend Following

Trend Commandments - Michael Covel - Summer Reading
 
 

You want confidence and inspiration? It’s here.

Michael Covel’s Trend Commandments is a new book on Trend Following, which focuses mostly on the psychological and philosophical aspects of this trading strategy.

You want a “how-to” book, including a “turn-key” Trend Following system? It is not there (The Complete Turtle Trader did this with the original Turtle system rules though).

It is a fact that you need to have faith in a system or idea before you can start trading it. This is a central premise of this book, which seems aimed at “would-be” trend followers, to give them the conviction required to start and keep trading this strategy – “a real, proven way to make money in the markets”.

The contents and format of the book make for an easy read, good to pick up for the beach (or the metro if you are not blessed with a Summer holiday). It is divided in many short chapters (50+) each dealing with a specific topic in a few pages.

In some way, there is some overlap with Covel’s first book, Trend Following (after all, the main principles have not changed since), but this book does it in its own ways:

I thought a different approach to get that story out was required.

About 25% of the book is composed of [Read more →]

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State of Trend Following in July

August 1st, 2011 · the State of Trend Following, Trend Following

State of TF
 
After the rather dramatic May-June move to the downside, the State of TF index is registering a small uptick for July. A Summer respite amongst the chaos in the financial markets that the US debt latest development seems to have created. One thing for sure is that this all strongly reinforces the point of systematic trading (and trend following) and its advantages. How can you trade markets like this another way? Psychologically speaking it must be nerve-wrecking…

Back to the report and its numbers, the July performance was positive at 8.44% with the index still registering a loss (of nearly 17%) in 2011, now standing at 83.04 – from 100 at the beginning of the year.

Detailed Results

Please find below the detailed results for the strategies included in the report (strategy details can be found at the end of the post) for July:
[Read more →]

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Execution: Benefits of Algorithmic Trading for CTAs

July 25th, 2011 · Software

Complex Traffic Light Tree at Canary Wharf

Recently, Man AHL, a “Trend Following Wizard”, announced in this press release some of the benefits from their “hard work to increase trade efficiency”:

In the past two years, the Asia desk has reduced Asian trading costs by more than 20%, and 98 per cent of regional trading can now be processed electronically […].

We have honed our execution style and algorithmic trading services to boost risk management and performance […]. These improvements have enabled us to add new asset classes to our trading models and we’ve recently expanded trading of several instruments including Asian stock index futures, interest rate swaps, relative value strategies, and a number of Asian currencies.
[Emphasis mine]

Algorithmic Trading: Really a Novelty?

You will have noticed the use of “algorithmic trading” in the copy above.
The recent rise of High-Frequency Trading (HFT) has placed algorithmic trading in the spotlight, making it appear as the new trendy (and controversial) development in financial markets.

But algorithms are not necessarily [Read more →]

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Trend Following Wizards: Red June

July 19th, 2011 · Trend Following, Trend Following Wizards

Another monthly results column full of red for the Wizards in June: the Summer did not start all “sunny” for the CTAs tracked in this report.

To keep with last month’s analogy, the yo-yo’s string seems to have now broken, with no bounce back up from last month’s negative results (after several months of strong up-down sequences). The monthly average return for June is -4.39%. The yo-yo is not yet “lying on the floor” (ok – I’ll stop with this metaphor…) but most YTD performance figures are now in the red, with only 4 Wizards holding onto a “black” YTD number, and several now in double-digit losses territory..

Below are the individual results for all the Waizards as of end June ’11: [Read more →]

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Futures Trading and Small Account

July 12th, 2011 · Futures, Money Management, Strategies

I recently spent more time doing “reading research” rather than “testing research”. As result, this post resembles a collection of links on ideas seen on the web of how to trade futures with a small account – one of the topics I have been interested in.

The Issue: Diversification with Small Account

A small account size – or starting equity – can make it difficult to achieve diversification (a “free lunch” with a high “cover charge” as described in this post – you can read more on diversification and correlation from this blog here and here).

Diversification can be achieved by trading a large number of components in a portfolio, whether “components” represent:

  • Instruments
  • Systems
  • Timeframes

Instruments Diversification

“Instruments” is usually the first aspect that comes to mind when thinking about diversification.
Including more assets/markets/instruments in a portfolio is often described as the “free lunch” – and this is one of the main reasons why large CTAs often include upwards of 100 markets in their portfolio selection.

A small account most likely cannot trade a portfolio of 100+ instrument. This is an issue that [Read more →]

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State of Trend Following: sharply down

July 4th, 2011 · the State of Trend Following, Trend Following

State of TF
 
As there was no report last month, this month’s edition is a combined version for May and June.

The Trend Following Wizards had a strong down month in May, and so did the index used for this State of Trend Following report. However the up-and-down “yo-yo” pattern seen every month from the beginning of the year has been interrupted: June continued in the same (down) direction as May.

With a cumulative return of -28% over the last two months, the index is now standing at 76.44 – from 100 at the beginning of the year. Most of the damage occurred in the first few days of May – when several markets reversed sharply giving up earlier gains – with the index dropping by more than 15% in 5 days (note that this version of the index is more levered than Trend Following Wizards, so numbers are not directly comparable).

DETAILED RESULTS

Please find below the detailed results for the strategies [Read more →]

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May for Trend Following Wizards: Yo-yo back down

June 29th, 2011 · Trend Following, Trend Following Wizards

+3.64% in February, -3.70% in March, 6.11% in April…
And now -6.11% in May.

The up-and-down performance of the Wizards for 2011 creates volatility but not much return with the YTD number currently standing at -1.46%.

The month of May was strongly down with only negative postings, with the most aggressive ones in “red” double-digit territory.

Below are the individual results for May 11: [Read more →]

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Back Online

June 28th, 2011 · Blog

Hibernation over – I am back from my “self-imposed” off-the-grid isolation.

I will gradually resume posting on the blog, starting with an overdue update on Trend Following Wizards performance tomorrow (covering the results from May). It is so late in the month that there is not much point running a May edition of the State of Trend Following report: I will post a combined May+June State of Trend Following report in the first few days of July. Other posts will follow once I am back “in full swing”.

For those interested, I’ll leave you now with the answers to the “Summer puzzle” from my last post.

It is indeed possible to add a strongly anti-correlated instrument to a portfolio, without improving either return or risk of the portfolio. The “trick” was in the definition of “risk”: not the usual volatility/standard deviation but rather Max Drawdown.

The answer with two simple pictures:

And with the extra portfolio component:

Both the base portfolio and extra component have an identical (arithmetic) average monthly return, and their monthly returns are strongly anti-correlated, with a Pearson correlation coefficient of -0.87. However, the Max Drawdown of the combined portfolio is higher than that of the base portfolio.

I also attach the Excel spreadsheet for readers wanting to poke at, and check the numbers.

I obviously designed this example purely to play around and fit within the conditions of the “puzzle” but it does show that low or even anti-correlation is not necessarily the “magic bullet” – if calculated on a single timeframe only, as highlighted by Pumpernickel in the comments section below.

His/her comment actually represent a much better conclusion to this post. In summary: When looking for low or negatively correlated additions to a portfolio, do not focus on correlation calculations on a single timeframe (as per this “puzzle) but instead on multiple timeframes. Check the comment for a more detailed explanation from Pumpernickel.

Finally, the mountain pictured on the last post is Mount Kailash (as rightly guessed by some readers), one of the most famous mountains in Tibet – where I spent most of the time off in the past month.

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Off-The-Grid

May 26th, 2011 · Blog

Just a quick post to let you know that the blog will go into “hibernation mode” for roughly a month, as I am going travelling to very remote places for the next 4-5 weeks, most of which will be without internet access or even electricity… It will be an interesting “jump” into a “disconnected” world, which should hopefully bring me back refreshed and full of new ideas.

There will be no new posts and I will not be replying to emails or approving new comments. The State of Trend Following and Trend Following Wizards report for May will be delayed to the end of June – apologies for the inconvenience.

Correlation Thoughts

It is often said that “Diversification is the only free lunch on Wall Street”.

Adding a new instrument or system usually improves a portfolio’s risk/reward profile, thanks to the non-correlation of the new addition – with the improvement usually increasing when the correlation decreases.

I’ll leave you with this “Summer puzzle“:

Is it possible to add a strongly anti-correlated instrument to a portfolio, without improving either return or risk of the portfolio? If yes, how?
Note that to make this puzzle less obvious the new instrument should have positive average return and volatility/standard deviation both similar to that of the portfolio (with risk being defined as Max Drawdown, and strongly anti-correlated with Pearson coefficient < -0.8).

Most readers will probably find the key to that puzzle fairly easily, but I still find it worth to ponder the answer, and the impact it can have on how to use correlation in system development. Without thinking about it, it seems fairly counter-intuitive.

As an extra, deciding question, you can try and guess where I will be in the coming month...
Hint: the main clue is in the picture above + the fact that this is a circumambulated mountain (rather than climbed).

Feel free to send your submissions by email or comments. Nothing to win though...

Until the end of June.
Jez
 
 

Picture credits: vitafluida via flickr (CC)

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Some Complications of Monthly Trading

May 18th, 2011 · Equities, Strategies

I was recently looking at monthly momentum/rotation trading systems with stocks. The concept seems to have become quite popular in the blogosphere in the last few years. See this earlier post for another monthly trading discussion

The generic concept for a rotation strategy is usually fairly simple: pick a relatively large set of instruments, calculate a monthly ranking (based on 1-month, 6-month returns, etc. or a combination of several monthly returns and/or other factors) and allocate your equity to the top N instruments. Repeat every month by selling instruments that have fallen out of the top N and by buying new entrants.

The system appears simple enough to operate and to backtest, but as with everything, the devil is in the details.
There is of course other devil in other details: rebalancing, volatility consideration, position sizing, etc. are not taken into account in this simple model “description” and the discussion below.

Using Monthly Close data

Lots of (free) historical data – going back far enough for relevant back-testing – only contains monthly closes. The usual assumption made when backtesting using this type of data is to use the monthly closing price to generate the entry/exit signals as well as for the entry/exit prices themselves. Operationally, this is obviously not possible: you cannot wait for market close to get prices and generate signals, then go back to trade at market close.

This is one of the reasons [Read more →]

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April: Trend Following Wizards Bounced Up Too…

May 16th, 2011 · Trend Following, Trend Following Wizards

Following the trend (no pun intended) of strong up-and-down months exhibited by the State of Trend Following, the Wizards also had a strong bounce back up in April.

100% of monthly returns were positive in April, showing an average over 6%, with only a few red marks in the YTD column, with an average over 5%.

Below are the individual results for the Wizards for April 11: [Read more →]

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Book: The (mis)Behaviour of the Markets

May 12th, 2011 · Books

When Benoit Mandelbrot passed away last year, I thought it would be nice to re-read his (mis)Behaviour of the Markets, to symbolically “pay tribute” to this visionary maverick. I really enjoyed the book first time round and it still reads very well. It is more of “vulgarisation” book, telling the story of how Mandelbrot developed his theory of fractals (it is an easy and quick read: not a single equation in the main text) and how the models can have a relevance (or even provide a new paradigm) in the financial markets.

The book is really divided into two main parts: first the classical modern finance theory, later opposed to Mandelbrot’s fractal view of the Markets, risk, ruin and reward – where he introduces his two main model components: H: the exponent of price dependence and α: the parameter characterizing volatility.

A History of Modern Finance Theory

Mandelbrot traces the origins of Modern Finance Theory back to little-known French mathematician: Louis Bachelier, who, in 1900, published his Théorie de la Spéculation thesis, mostly ignored at the time. The theory introduced its key model: the random walk or brownian motion, which forms a large part of Modern Finance Theory’s foundations. It is not until the 1960′s that Bachelier’s ideas would catch up, when translated to English and republished. Fama’s Efficient Market Hypothesis simply represents a broader version of Bachelier’s work, which “would be developed into a great edifice of modern economics and finance (and five Nobel Memorial Medals in economic science)”.

Mandelbrot first presents the stepping stones of Modern Finance before arguing that there are basic flaws in the theory: [Read more →]

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State of Trend Following: Strong April Rebound

May 2nd, 2011 · the State of Trend Following, Trend Following

State of TF
 
Another strong move follows that of last month, albeit in the opposite direction. Whereas March saw a drop of around 10% for the Trend Following index used in the report, April saw an equally sharp rebound of just under +10%, taking the index back in positive territory for the year at around +7%.

Detailed Results

Please find below the detailed results for the strategies included in the report (strategy details can be found at the end of the post). [Read more →]

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