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

February 7th, 2012 · 5 Comments · the State of Trend Following, Trend Following

State of TF
 

Red and a bit late.

This is how this State of Trend Following report is served this month, for the first edition of 2012. The negative momentum from 2011 seems to have carried over in the new year.

One small modification to note regarding the report and its index: I have cut down on the leverage of the underlying systems to reduce the overall volatility (see appendix note for more details).

Please check below for more details.

Detailed Results

The figures for the month are:
January return: -4.79%

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

System January Return YTD Return (from Jan-2011)
BBO-20 -4.42% -25.3%
Donchian-20 -1.98% -20.73%
MA-10-20 -0.91% -13.03%
TMA-10-20-50 -4.36% -15.73%
BBO-50 -5.23% -15.81%
Donchian-50 -4.68% -18.03%
MA-20-50 -6.42% -12.88%
TMA-20-50-200 -7.19% -12.18%
BBO-200 -6.48% -0.92%
Donchian-200 -6.58% -10.57%
MA-50-200 -9.74% -9.85%
TMA-50-200-800 0.53% 0.04%
COMPOSITE -4.79% -12.92%

 

Composite Index for 2011-2012

The YTD chart does not mean anything in February but since I have updated the index with new volatility, here is a chart showing how it would have performed since beginning of 2011 with the new volatility normalization (you can find the individual system results on the table above):

StateTF YTD

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.

Below is a table showing each system performance numbers from 1990 to 2009. 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).

System CAGR Max DD coeff norm. CAGR
BBO-20
26.41%
59.33%
0.42
11.09%
BBO-200
17.65%
39.16%
0.64
11.30%
BBO-50
32.06%
49.45%
0.51
16.19%
Donchian-20
64.20%
52.33%
0.48
30.82%
Donchian-200
19.96%
47.51%
0.53
10.48%
Donchian-50
36.11%
50.29%
0.5
17.87%
MA-10-20
56.10%
72.23%
0.345
19.35%
MA-20-50
40.15%
52.19%
0.0.48
19.27%
MA-50-200
21.87%
41.07%
0.61
13.34%
TMA-10-20-50
61.54%
69.96%
0.36
21.85%
TMA-20-50-200
43.95%
48.40%
0.52
22.63%
TMA-50-200-800
16.08%
47.75%
0.53
8.44%

 

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5 Comments so far ↓

  • Fred

    Hmmm. The Newedge CTA Index was up 0.75% in January and my Trend Trading system was up 4.6%. Why do you think there is such a difference between the systems you tested and Newedge’s index?

  • Jez Liberty

    Fred – not sure. I haven’t looked at the Wizards results yet so it will be interesting to compare to those.
    Obviously, even if all of these are highly correlated, there is still room for some divergence on a month-to-month basis.
    Moreover, keep in mind that the systems used to create the index are box-standard ones with no added “intelligence”. The premise being that this accounts for a large part of “Trend Following fund returns” but you would hope that CTAs and other system developers add some alpha by enhancing these basic systems – and maybe this is showing more clearly this month (or maybe it is just the expression of randomness!).
    Jez
    PS: regarding the absolute return values, these (obviously) need to be taken in context of overall leverage

  • Investment Warrior

    US equities had a great month for trend followers, using virtually any and all trend following techniques. Im sure that depending on what percentage the various CTAs had in US equities will make for the variation of return.

    Jez- Thanks for crunching these numbers each month, it is one of my favorite reads!

  • Jez Liberty

    Thanks Investment Warrior!

  • RiskCog

    I was going to say what Fred said… I expected everyone to be up easily in January – like you say though there are lots of reasons for divergence.

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