Systematic Trading research and development, with a flavour of Trend Following
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State of Trend Following in August

September 3rd, 2013 · 11 Comments · the State of Trend Following, Trend Following

State of TF
 
Another negative month for the State of Trend Following report, bringing the index very close to zero for 2013. We have not been this low since January. And the index was flirting the +15% level a couple of months of ago.

Please check below for more details.

Detailed Results

The figures for the month are:
August return: -2.23%
YTD return: 2.54%

Below is the chart displaying individual system results throughout August:
 
StateTF August
 
And in tabular format:
 

System August Return YTD Return
BBO-20 -4.07% 6.69%
Donchian-20 -3.9% -3.88%
MA-10-20 -0.45% 1.04%
TMA-10-20-50 -4.53% -0.48%
BBO-50 -5.35% -2.42%
Donchian-50 -6.47% -9.22%
MA-20-50 0.39% -3.87%
TMA-20-50-200 -0.83% 6.24%
BBO-200 0.62% 0.81%
Donchian-200 -1.41% 6.48%
MA-50-200 0.51% 23.15%
TMA-50-200-800 -1.25% 6%
COMPOSITE -2.23% 2.54%

 

Composite Index for 2013

Below is the performance of the average of all system/timeframe combinations used in the report for the year 2013:
 
StateTF YTD

The promising start to the year is shrinking month after month. We’re still above water for the year but not by much!

Appendix: System Details

System Rules and Parameters

All the systems were tested with the same simple position sizing rules of 1% per new trade. No other Money/Risk Management rules were used. No trade friction (slippage or commission) was applied. No return on margin is added to the system performance

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/position sizes are set at 2x, 3x and 5x ATR respectively.
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/position sizes are set at 2x, 3x and 5x ATR respectively.
The Donchian System is a simple version (with no Trade Direction filter) with channel lengths of 20, 50 and 200 days for entries (and 10, 25, 100 for exit). The stops/position sizes are set at 2x, 3x and 5x ATR respectively.

Portfolio Instruments

Covering over 50 instruments across Equities, Interest Rates, Currencies, Agriculturals, Metals and Energies, from around the world, the portfolio contains the following futures (CSI Symbols): AD, BP, C, CC, CD, CFC, CL2, CT, CU, EBL, EBM, EBS, ED, EOX, ESM, FC, FEI, FFI, GC, HG, ICL, IND, JK2, JP2, JP6, JR2, JRB, JTI, JY, KC, KPO, KTB, LC, LGO, LH, MFX, MP, NG2, RA, RS, S, SB, SF, SI, STW, SXE, TRY, US, W, YM, YTC .
Click here for a tabular view with description and exchange information.

Result Normalization

The system performances are adjusted for volatility to normalize the results. The normalization applied “baselines” the Max drawdown of the systems to a common value, and derive the resulting performance for each system.

A table showing each system performance numbers from 1990 to 2009 can be found on this page. Two extra columns have been added to show the “normalized return” and the multiplier coefficient to obtain this return (the multiplier coefficient is itself calculated by dividing an arbitrary Max Drawdown figure of 25% by the actual system Max DD).

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11 Comments so far ↓

  • STEVO

    Looks like this will be pretty much the worst Month for those Wizards.

    I was personally down a lot, in August. And I had a quite high correlation with Wizard too, in the first half year of 2013.

    Abraham is printing worst down month in August…

    Bleeding…

  • Fred

    Trend following as a strategy is flat over the past three years as witnessed by the performance of the Newedge CTA Index. If trend following is your only trading strategy, when are you going to decide what to do when you realize it isn’t working in the current market? I’m not saying trend following is dead but I don’t understand why an experienced trader wouldn’t analyse his trades and reduce position size when a given strategy is providing a negative expectation.

  • Jez Liberty

    Good point – When do you start to question your trading strategy?
    One potential problem (about reducing position size): once markets return back to more trend following favorable conditions, you’re trading at half-size or whatever your reduction is and it takes that much longer to “get out of the hole”. Maybe a key is to trade trend following in a portfolio of strategies (non-correlated preferably)

  • Fred

    Jez:

    I believe in performing statistical analysis of closed trades. If a system deteriorates and has a negative expectation over the past X trades, there are three possibilities going forward: 1. the system will maintain its current performance level, 2. the system will improve or 3. the system will deteriorate further. For robust systems, often the performance improves but it is possible that performance could deteriorate further. The trader has to decide whether to continue trading a strategy on the hope that performance will improve or reduce position sizing recognizing that performance could deteriorate further.
    I decided last November to reduce my allocation to trend following strategies based on a statistical analysis of closed trades. That turned out to be a very good move for me as my trading performance has since far outpaced the Newedge CTA Index.
    If you decide to reduce position size or stop trading a particular strategy, you can still analyze trading signals and once a positive expectation is reached you can return to a full position size.
    As Howard Bandy says, “The correct position size for a trading system with a negative expectancy is zero.”.

    Fred

  • Jez Liberty

    I hear you Fred, but how does this perform on more than one empirical event? i.e. you’re happy because you reduced exposure AND trend following performance went down afterwards. what if the opposite had happened?
    Not saying one approach (cutting after bout of bad performance) is wrong over the other.. Just thinking of the other side of the coin…
    I have back-tested what could be called similar approaches with trading the equity curve MA and this is usually detrimental to overall performance, but maybe easier to handle emotionally.

    By the way, I believe I saw a demonstration in one of Vince’s book that showed that an allocation to a system with negative expectancy could be positive overall if said-system’s correlation to rest of portfolio is negative enough. the details escape me now though…

  • Fred

    I continued to monitor the signals of my trend following strategies but the mathematical expectation remained negative. Had the expectation turned positive, I would have started trading the strategies again.

    Let’s use another example. The original Turtle rules worked very well in the 1980′s as I understand it. However, they do not work well now. Had you been trading that strategy and performing a statistical analysis of closed trades you would have seen the deterioration in performance to the point that the expectation was negative (or at least very low). At that point, you could have searched for ways to improve the strategy or you could have hoped that the days of glorious performance would return and continue trading the strategy as is.

    One can cite examples of trading strategies faltering and then rebounding. One can also cite examples of trading strategies that faltered and never rebounded. You simply cannot predict whether a strategy will recover.

    Because my TF strategies faltered didn’t necessarily foretell that TF in general would falter but that is what happened.

    There are better ways to analyze trades than trading a MA of the equity curve.

    Good discussion in my opinion.

  • Jez Liberty

    I agree.. That’s a good and important discussion.. And not an easy one at that as your examples point out. Now that I’m “rebooting” the blog I’ll try and spend more time thinking about and researching this topic..

  • neelam

    next week hte Hindus say an event occurs of great signifigance rahu hits saturn so hte markets will implode hue and trneds will be in eidence in an unexpected way hte peace trade; deflate all futures markets to the max get short!

  • Jez Liberty

    Hi neelam,
    Not really the type of trading input that this blog deals with ;-) unless you maybe have a back-test of Hindu-based trading system?..
    No offence, but this sort of reminds me of this story of the “Martian coke bottle” trader.
    Jez

  • Fede

    Hi Jez,

    I’m trying to use TBlox to play around with the systems described here.

    What stop level did you use for the Bollinger Bands systems?

    Thank you!
    Fede

  • Jez Liberty

    Hi Fede, no stops for the BBBO system: the entry/exits are only triggered when the price touch the bollinger bands.

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