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

November 2nd, 2012 · 12 Comments · the State of Trend Following, Trend Following

State of TF
 

Not the worst month of the year… but not far for the trend following strategies in this month’s report. The direct result is the index closing in the red for the year for the first time since May.

Please check below for more details.

Detailed Results

The figures for the month are:
October return: -5.28%
YTD return: -0.39%

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

System October Return YTD Return
BBO-20 -3.18% 7.75%
Donchian-20 -10.06% 24.94%
MA-10-20 -6.69% 2.23%
TMA-10-20-50 -10.43% 5.94%
BBO-50 -4.1% 1.07%
Donchian-50 -5.51% 5.42%
MA-20-50 -8.34% 0.79%
TMA-20-50-200 -7.21% -12.02%
BBO-200 -1.85% -7.91%
Donchian-200 -0.63% -6.37%
MA-50-200 -3.03% -22.71%
TMA-50-200-800 -2.35% -3.78%
COMPOSITE -5.28% -0.39%

 

Composite Index for 2012

Below is the performance of the average of all system/timeframe combinations used in the report for the year 2012:
 
StateTF YTD

As mentioned above, just back in negative territory for the year after giving back all the gains from the highest point of the year in less than 2 months!

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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12 Comments so far ↓

  • Tony

    Jez,

    Great site…

    Can you advise what leverage is used to achieve the above performance levels, if any? It would seem the Donchian performance levels are very high for a 1x’s portfolio. Thanks.

  • Jez Liberty

    Tony:

    “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”

    position size of 1% per trade meaning that each new trade size is calculated so that its risk is 1% of total equity.

  • Tony

    Jez,

    Thanks for getting back so quickly.

    Let’s say the portfolio cash value is $1m. The system generates 15 signals at the same time. Each contract is valued at $100K. So in this case, the value of the position would total $1.5m or a 1.5x’s leverage.

    Does the system generate stats that track the total value of the positions vs. the portfolios cash value?

    I’m trying to determine how much leverage the system is using to generate the stated returns. Perhaps from a systems aspect you would only be concerned with the 1% risk and not the actual leverage? But leverage would still be an important component to measure.

  • Jez Liberty

    “Perhaps from a systems aspect you would only be concerned with the 1% risk and not the actual leverage?”

    Correct – I consider leverage (based on notional contract value) mostly irrelevant. The idea is to target “volatility risk” which is normalized across all positions. If two contracts are valued at $100K but one moves by one point every day on average, while the other one moves by 10 points, you’re going to want to trade the second in a 10x lower position size (if you want to have equal volatility risks across positions). From a leverage point of view, the “leverage” would be 10x less for the second contract compared to the first one but from a “real risk” perspective, they are mostly equal.

    Bonds and Soybean futures are two examples of contracts that would have drastically different volatility risks for an equal leverage (and vice-versa).

    I hope this makes sense. That notion (volatility-adjusted position sizing) is fairly well introduced in the Turtle books.

  • Tony

    Jez,

    Thanks for the clarification.

    Tony

  • Alex

    Hi Jez,

    First let me congratulate you on a great blog.

    Secondly, how far off it’s all time high is the composite index, and how does this drawdown compare to the ones in the past?

    Cheers,

    Alex

  • Jez Liberty

    Alex – thanks!
    Right now (as I am compiling the report as of end November), we stand at -47.5% so close to the historical levels of 50% for which the position sizing had been “calibrated”. May 2011 and 2006 saw slightly greater levels but it will be an interesting nest few months to see if these levels get taken out this time around (they will be at some point since the probability of hitting 100% DD tends to 1 as time tends to infinity) or if we see a nice bounce back.
    Note that I rand the composite index from 1990 but it did not contain all the markets at that time so drawdowns levels are logically lower then so hard to compare on a long track record.
    Cheers,
    Jez

  • Alex

    Thanks for the info Jez. Would you agree that with slippage, execution costs and a little bit of a management fee included, the index would probably be at an all time low right now?

  • Jez Liberty

    Alex, not necessarily because slippage, execution costs, etc. would also apply and drive the previous high equity down.

  • Alex

    You are absolutely correct Jez, I went a bit fast in my deduction: the equity curve is path dependent.

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