I just have to get something out on this
1st beginning of March. I could keep polishing this report until Christmas… But instead here is a first draft. The State of Trend Following report will be published at the beginning of each month (expect it to be evolving for the first few months).
The idea is to track several classic Trend Following systems over a wide range of instruments and different timeframes. This should, in theory be a good complement to tracking the Trend Following Wizards to get an idea of how well Trend Following is doing as a strategy.
For this first report, I picked (arbitrarily) 3 standard Trend Following systems that ship with Trading Blox:
- Moving Average Crossover system with ATR-based stops
- Bollinger Band Breakout
- Triple Exponential Moving Average
Each system is tested over a short, medium and longer timeframe. Details of the system rules, parameters used and instruments traded can be found at the end of the post.
The Background Picture
As an initial run – to give a long-term idea of how each of the 9 systems performed (3 systems x 3 timeframes) – the whole futures data available in Trading Blox (provided free by CSI) was used for the backtest simulation.
One of the main interest of the study is how trends evolve over time and different systems. Therefore, the simulation parameters include no trade friction (ie no commissions and slippage at all). The equity curves below are therefore over-optimistic but they should really be used for relative comparisons.
If there is one trend that seems to be shared across all 9 systems, it is the increased volatility – expressed by the larger drawdowns having appeared in the last 4-5 years in all systems.
Imagine starting trading the Golden Crossover system (50-200 MA Crossover) on January 1st 2003 – after good backtesting results (CAGR>20% and worst drawdown around 10% – a MAR of 2), only to see drawdown figures quadruple in the next 5 years!
This could be down to the fact that most instruments have become more correlated in the last few years, in effect negating some benefits provided by diversification.
Zoom in to 2009 and 2010
We are also interested in the most recent picture. Below are 2 charts comparing our 9 systems on the 2009-2010 and 2010-only time horizons (each system adjusted back to 100 at the start of the period). Each type of system is represented in one colour and each timeframe in one line style:
Nothing very exciting in 2009, and with addition of trade friction, it seems to correlate with the (negative) results witnessed on the Trend Following Wizards. Also note that most systems follow the same path (apart from the short-term Bollinger system, all over the place with extreme volatility – the chart does not show it, but it closed February 2010 at around 60).
2010 seems to be a continuation of 2009 so far: with a slight downward trend emerging across all systems.
Improvements to the report
There are quite a few things that could be added to this report, starting with integrating more systems and parameters (probably aggregated as an average per timeframe to avoid the data deluge syndrome). It might also be interesting to be able to break down the performance by type of markets/sectors.
But I am also open to your suggestions and requests. So please let me know in the comments below and I will integrate the best ideas.
Until next month…
Appendix: System Details
System Rules and Parameters
All the systems were tested with the same simplistic position sizing rules of 1% per new trade. No other Money/Risk Management rules were used.
The system rules are detailed on the Trading Blox online documentation.
The MA Crossover system was used with moving average pairs of 10-20, 20-50 and 50-200 days. The stops are set at 5 x ATR(39).
The Bollinger Band system is the classic use of the Bollinger Bands with entries taking place at Breakouts. The parameters used were 20, 50 and 200 days with 2 standard deviations.
The Triple moving Average system was used with moving average triplets of 10-20-50, 20-50-200 and 50-200-800 days. The stops are set at 5 x ATR(39).
The instruments included in the simulation are a semi-diversified list of futures, contained in the All Futures Trading Blox set:
|CSI Num.||Futures Contract|
|AD||Australian Dollar-CME(Floor+Electronic Combined)|
|BP||British Pound-CME(Floor+Electronic Combined)|
|C||Corn-CBT (Floor+Electronic Combined)|
|CD||Canadian Dollar-CME(Floor+Electronic Combined)|
|CL||Crude Oil-Light-NYMEX(Floor+Electronic Combined)|
|ED||Eurodollar-3 Mth-CME-Globex(Floor+Electronic Combined)|
|HO||Heating Oil #2-NYMEX(Floor+Electronic Combined)|
|JY||Japanese Yen-CME(Floor+Electronic Combined)|
|MP||Mexican Peso(Floor+Electronic Combined)-CME|
|NG||Natural Gas-Henry Hub-NYMEX(Floor+Electronic Combined)|
|S||Soybeans (Floor+Electronic Combined)-CBT|
|SB||Sugar #11-NYCE(Floor+Electronic Combined)|
|SF||Swiss Franc-CME-(Floor+Electronic Combined)|
|TY||T-Note-U.S. 10 Yr w/Prj A-CBT(Floor+Electronic Combined)X|
|US||T-Bond-U.S.-CBT (Floor+Electronic Combined)|
|W||Wheat-CBT (Floor+Electronic Combined)|