Systematic Trading research and development, with a flavour of Trend Following
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The State of Trend Following report – Draft V0.1

March 2nd, 2010 · 13 Comments · the State of Trend Following, Trend Following

State of TF

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 Concept

The principle was inspired to me by Michael Stokes from MarketSci with his very smart State of the Market report describing how the markets are behaving.

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.

Systems Equity curves and Drawdowns. Each column represents a system (MA=MA Crossover; TMA=Triple Moving Average; BBBO=Bollinger Band Breakout) , with each row representing a timeframe (short, medium, long from top to bottom)

Chart showing Systems Equity curves and Drawdowns. Each column represents a system (MA=MA Crossover; TMA=Triple Moving Average; BBBO=Bollinger Band Breakout) , with each row representing a timeframe (short, medium, long from top to bottom) - Click to zoom in

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:

State-TF-2009-2010

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).

State-TF-2010

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).

Portfolio Instruments

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)
CC Cocoa-CSCE
CD Canadian Dollar-CME(Floor+Electronic Combined)
CL Crude Oil-Light-NYMEX(Floor+Electronic Combined)
CT Cotton #2-NYCE
EC Euro(Floor+Electronic Combined)-CME
ED Eurodollar-3 Mth-CME-Globex(Floor+Electronic Combined)
EM LIBOR(1Mth)-CME(Floor+Electronic Combined)
FC Cattle-Feeder-CME(Floor+Electronic Combined)
GC Gold-COMEX(Floor+Electronic Combined)
HG CopperHG-COMEX(Floor+Electronic Combined)
HO Heating Oil #2-NYMEX(Floor+Electronic Combined)
HU Gasoline-Reformulated Blendstock(Combined)-NYMEX
JY Japanese Yen-CME(Floor+Electronic Combined)
KC Coffee-CSCE
LC Cattle-Live(Floor+Electronic Combined)-CME
LH Hogs-Lean(Floor+Electronic Combined)-CME
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)
SI Silver-COMEX(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)

 

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13 Comments so far ↓

  • Paolo

    Hi Jez, nice start. What about using Log scale for the equity lines charts? You’re using constant 1% position size so it would make more sense.

    Paolo

  • Jez

    Hey Paolo,
    Thanks, I agree – log scales would be better, and my preference too. But for this report, I re-used the standard Trading Blox-generated charts – and the log scaled ones do not show drawdowns so I had to compromise…
    Will probably maintain some report enhancement ideas on a spreadsheet and that will be on it.
    Cheers – Jez

  • RiskCog

    You could create a morningstar like style box with the 9 systems/periods you are following. You could maybe track the Sharpe ratio in the boxes I guess…

  • WTP

    Jez,
    Excellent work, thank you very much for sharing.

    Could you clarify the “system rules” a bit. I take it the trades go both long and short, with equal allocations of equity to each instrument? The – position sizing rules of 1% per new trade; you take only one signal in the same direction, right? When all instruments fire long, are you using 100% of the portfolio equity?

    No commissions, slippage, etc. I assume.

    Thanks

  • Pumpernickel

    What weird system choices you made. Sure, it’s very convenient to use the demo systems and demo data that ship with a retail software product. Less effort 4 U. However, convenient is not the same as representative.

    Two of your three systems are blood relatives — half brothers as it were. “Bollinger Breakout” and “ATR Channel Breakout” are both volatility envelope systems. Both draw a moving average on the chart, and both draw an UpperBand and a LowerBand on the chart, whose distance from the moving average is some multiple of volatility. Both enter long when price exceeds the upper band, enter short when price falls below the lower band, etc. The only difference is the choice of how to measure volatility; BB uses StandardDeviation for volatility, ATR-CBO uses ATR. A bit of a distinction without a difference.

    All three of your systems trade using “market on the open” orders. Astonishingly, you purport to build a proxy of professional trendfollowing traders without ANY Donchian Breakout systems (buy at the highest high of the past N bars) and without ANY stop-orders for trade entry! Holy mackerel.

    I would recommend you rejigger your choice of parameter values that define “Short”, “Medium”, and “Long” term trendfollowing. Since you’re using Blox, leverage its handy (and regrettably uncommon among competitor sw) Round Turns Per Year per Million statistic. Short term TF would have >5000 RT/y/M$, Medium term TF would have 1500 to 2000 RT/y/M$, and Long term TF would have <1000 RT/y/M$. Just like the pros. Also choose the betsizes to normalize standard deviation of monthly returns, juggling the per trade risk until all 9 systems have the same SD.

    Finally, the convenient portfolio is not the representative portfolio. Yours is diversified in the sense that it has contracts traded both in Chicago AND in New York. But there are exchanges in Europe too. And Asia, Australia, Africa. Professional trendfollowing traders actually do trade them. In fact the contract with the world's highest Front Month volume, trades on Eurex in Frankfurt, Germany. Just FYI.

  • Jez

    @RiskCog – thanks. The departure from static content to dynamic (drop-down) would involve some web dev which I am trying to minimise (for now at least)… But I’ll keep that in the list of “nice-to-haves”.

    @WTP – thanks for the kind words. The system rules are detailed in the linked pages from Trading Blox. But in essence, systems trade long and short, there is no fixed instrument allocation (ie the systems take the signals on any instrument that generate them – risking 1% of equity, a sort of dynamic allocation if you like). So if positions for all instruments are flat today and “fire long” tomorrow, the system risks 1% times the number of instruments (this is not sophisticated MM strategy but a) this is a draft version and b) this is not the main objective of the report). No trade friction indeed (no commissions, slippage).

    @Pumpernickel. Thanks for the comments. I agree with most of them actually: as mentioned this is version 0.1 of the report and I just wanted to get something out there to get things flowing (and also generate useful comments/improvements). Re: Donchian system – this is actually the system I use all the time and I just wanted to use other ones for this first draft. In my mind the report/”benchmark” will have at least 7-8 systems and I fully expect the Donchian to be one of them. I did not use the ATR Channel system though, only Bollinger Bands, MA Crossover and Triple MA…

    Good idea about using the RT stats from TB – although similarly, I might try and run systems over a more granular choice of parameters anyway (ie more of them) – grouping them by RT “like the pros” is indeed probably the best way to classify them

    Re; portfolio: this is something I havent got round to doing: I have the World Futures package from CSI (for the same reason that you highlight) but havent extracted/linked them to TB yet… Will probably include some of your points on-board for next month’s version

    Jez

  • Rise-T

    Very nice blog, Jez – especially the sections about Trading Blox!

    One question: Did you consider Mechanica when buying Trading Blox – as I would guess that Mechanica is the primary competitor of Blox (comparable functionality – similar price)?
    It seems like it’s even harder to get info about Mechanica than about Blox.

  • Jez

    Thanks Rise!
    I “vaguely” considered Mechanica but as you said it is hard to get information about it.
    I think the excellent Trading Blox forum is a great “plus” wrt TB (and they havbe a free trial also!).
    From what I can tell Mechanica is second best to TB (judging by the way many TB serious users use Mechanica as a back-up platform) – of course this is biased as I got that info from the TB forum – but it shows it is probably similar enough
    Cheers,
    Jez

  • Rise-T

    Thanks for the quick reply!

    Another short question:
    Now that you own Blox, would you buy Amibroker if you didn’t own it already?
    I’m asking because I’ve been following Blox’ development pretty much from the start in 2003 (when Curtis Faith was still there), and in the long run I guess I have to buy it.
    But right now – rather than classic porfolio-level testing – I am looking for a decent piece of software to quickly test isolated ideas and validate claims I read in books etc (in other words – rather simple stuff). And for doing this I am considering Amibroker Pro.

  • Rise-T

    Btw – Dean Hoffman (traderstech.net) seems to use Mechanica a lot. One can find a pretty good collection of screenshots there.

  • Jez

    I think TB is very good and I havent come across any situation where I had to use AmiBroker instead of TB – Charting is better in AmiBroker (TB is not really good for just browsing charts)…
    As mentioned in a post, the only thing I regret about Trading Blox is not having bought it earlier ;-)

  • Salvador Veiga

    Hello Jez, love your site and come here often.

    I am starting to think on investing on a new platform as well.. currently i’m with metastock but i find this one lacks so many things in terms of testing strategies…

    you speak very well of TB and from the looks of it, it seems very good… but what about traders studio? I also hear very good things from it… TB versus traders studio ? do you find that traders studio is worse than TB ?

  • Jez

    Hi Salvador – thanks. I appreciate that.
    I made the “mistake” of getting TS instead of TB first and I regret it – I wish I’d gone straight to TB… I think I talk more about it there:
    http://www.automated-trading-system.com/trading-blox-teaser-review/
    Cheers,
    Jez

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