Systematic Trading research and development, with a flavour of Trend Following
Au.Tra.Sy blog – Automated trading System header image 2

State of Trend Following: October, best month of the year so far

November 2nd, 2010 · 9 Comments · the State of Trend Following, Trend Following

State of TF
The “winning streak” carries on and accelerates for the classic Trend Following strategies featured in this report.

The best monthly performance of the year – for the traditionally most-feared month for stock markets – has naturally taken the index to new high territories, closing the month at +27.68% YTD.

The performance for October alone is +18.98%.

Of course, the fact that Cotton, for example, which is currently trending in an accelerating (blow-off top?) fashion, was included in the portfolio did help most of the strategies (by 5 percentage points for the Donchian-50 system for example). But this should serve to illustrate the fact that having a large diversified portfolio is an excellent way to capture trends wherever they occur. This time it’s Cotton, next time it might be Crude Oil, who knows?…

Detailed Results

Please find below the detailed results for the strategies included in the report (strategy details can be found at the end of the post):

Strategy Equity Curves

And in tabular format, showing the normalized returns for each strategy and the composite index:

System October Return
BBO-20 7.07%
Donchian-20 17.41%
MA-10-20 17.05%
TMA-10-20-50 26.37%
BBO-50 21.18%
Donchian-50 27.11%
MA-20-50 26.74%
TMA-20-50-200 27.21%
BBO-200 12.56%
Donchian-200 11.72%
MA-50-200 22.84%
TMA-50-200-800 10.56%

A slightly better “showing” from the intermediate-term systems, but fairly strong all round…

2010, through the Composite Index

The equity curve of the composite index is starting to look interesting, after a good few months languishing in low negative values:
Composite Index - YTD

Some might complain that this is not a smooth ride, but they just need to look at this equity curve for a reality check.

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. See why and how here.

Related Posts with Thumbnails


9 Comments so far ↓

  • Roy

    Hello… always following your blog… thanks for all the sharing.

    Quick question on the market selection….. what was the process you followed to select the markets? How did you contructed the portfolio?


  • Jez Liberty

    Hi Roy,

    I tried to keep the concepts of the system very simple with no optimization, whether it was for the system parameters, money management or portfolio selection.

    The way I went about the portfolio selection was in the same “spirit”. I still wanted to have a relatively large selection of diversified instruments so I picked more or less at random several markets from each type of asset classes (currencies, equities, bonds, metals, agriculturals, meats, etc.)

  • Roy

    Hi Jez

    Thanks for the explanation. Trying to come up with a portfolio selection of my self, but for equities and ETF’s.

    May ask you more questions:

    I know the systems you are testing are plain vanilla – pretty simpole systems…. but in your own trading, do you use some additional filters in your systems to increase probability of success? If, so would it be possible that you share some of those concepts?

  • Andrew

    A big fan of your blog. Keep up the great work.

  • Jez Liberty

    Obviously filters are a way to enhance the profitability of a system on a back-test but there is always the risk that by applying filters you miss getting on board some great trends… Maybe filters to delay entries or reduce size are a good compromise option.
    Some “basic” filters include volatility, liquidity and direction of longer timeframe (ie only trade long if the longer-term timeframe is bullish)..

  • Stefan

    Hello Jez,

    I am a fan of your blog as well. I looked up but haven’t found in your description of the systems rules: Do you assume a finite capital which limits the number of instruments you can trade at the same time? Or your backtest just trades all instruments which show trends, ignoring captial requirements?
    In case you select which instruments you want to trade, out of many possible showing BUY signals, how do you make this selection? I.e , are you using relative strength or related scoring?

  • Jez Liberty

    Thanks Stefan
    Most of the system rules are described in the links from the appendix.
    Regarding the signal selection, there is no filtering, except for the margin requirement (ie you cannot take new trades when the margin-to-equity ratio is t 100%) – however, because the trade size is relatively small, all trades are taken in practice.
    Note that these systems are not really intended as “trading systems” (although I suppose they could) but rather “monitoring systems” to get a pulse of how Trend Following is doing generally – and hopefully find if there is a correlation with the Trend Following Wizard performances.

  • Stefan

    I see. Thank you. I would like to ask you another question, a bit off topic. I am currently trading 2 trend following systems on a set of ETFs representing stock indices, bond indices, real estate, some market sectors, etc. One is a TAA system (similar in asset classes selection with Mebane Fabers’ & MarketSci TAA approach), the other uses a rotational approach on a larger set of ETFs covering a more granular asset classes selection. I had good results with both this year, but I feel the need to diversify into a strategy completely decoupled from the market. So, I am thinking to try the exact rotational & trend following system I use on commodity ETFs.There is a good set of commodity ETFs available now and I compared them to the futures data and seem to replicate that pretty closely. So, I could use the historical futures data for backtest.
    So, this is the context. My question is: do you think there is any difference in stock/sectors/bond indices trends and commodity futures trends? Can I just switch the portfolios and apply the same TAA rotational and the trend following techniques which work OK on stock indices & bonds (SPY, EEM, IYR, ILF, TLT, etc) and expect they will work resonably similar on corn, live cattle, cotton, copper, etc? Or are there any gotcha’s which a commodity portfolio brings which I am not aware of. Thank you so much.
    PS. Here are my stats this year:
    TAA (6 ETFs) 9% with MaxDD – 5.6%
    Rotational (on 25 ETFs) 9.5% , MaxDD – 7.5%

  • Jez Liberty

    This is quite a “big” topic among system developers: same parameters across all instruments or specific parameters for each instrument?
    I tend to lean towards the former – and have read quite a few statements from Trend Following Wizards going in the same direction.
    Conceptually, it also seems a more robust approach as it is less specialised.

    Other than that, I can’t think of specific “gotcha’s” with adding commodity ETFs – If anything I believe the extra diversification will help you achieve smoother/better returns overall!

Leave a Comment