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

July 14th, 2010 · 6 Comments · the State of Trend Following, Trend Following

State of TF

With some delay, here is the July update of the State of Trend Following report. With quite a few changes this month.

Most systems use ATR-based stops/position sizing and most used to be set at 5x ATR – regardless of the timeframe of the signal (ie. 20 to 200 days) – which was not making the most sense. So, ATR multiples are now adjusted in line with the length of the trading signals (for example 2x ATR for Donchian-20, 3x ATR for Donchian-50, etc. – details of the system settings are detailed at the end of the post).

Additionally, I find that a fair comparison should normalize the results between the different systems. The MAR ratio attempts to do this by dividing CAGR by Max Drawdown; and in a similar manner I decided to “volatility-adjust” the performance of the systems in the report.

Normalizing results

A typical adjustment is the so-called risk-adjusted return (or rather volatility-adjusted return), which usually “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 50% by the actual system Max DD).

System CAGR Max DD coeff norm. CAGR
BBO-20
26.41%
59.33%
0.84
22.26%
BBO-200
17.65%
39.16%
1.28
22.54%
BBO-50
32.06%
49.45%
1.01
32.41%
Donchian-20
64.20%
52.33%
0.96
61.34%
Donchian-200
19.96%
47.51%
1.05
21.01%
Donchian-50
36.11%
50.29%
0.99
35.90%
MA-10-20
56.10%
72.23%
0.69
38.84%
MA-20-50
40.15%
52.19%
0.96
38.47%
MA-50-200
21.87%
41.07%
1.22
26.62%
TMA-10-20-50
61.54%
69.96%
0.71
43.99%
TMA-20-50-200
43.95%
48.40%
1.03
45.40%
TMA-50-200-800
16.08%
47.75%
1.05
16.84%

 
This should remove any dependency on leverage, position size and risk per trade.

Another change resulting from this normalization is the exclusion of T-bill interest. I initially included it to make the tests more realistic and “reward” systems with a lower use of margin. But this return on margin cannot be leveraged up, so it makes no sense to keep including it when multiplying/normalizing results.

2010 for the Normalized Systems

Below is how the updated systems performed so far in 2010:

YearChart

And a zoom on the month of June:

JuneChart

And the table containing the final value of each system (rebased at 100 at the beginning of each period) to help read the charts:

System Final Value (Year) Final Value (June)
BBO-20 119.93 99.38
BBO-200 95.93 96.06
BBO-50 100.52 96.18
Donchian-20 101.88 85.65
Donchian-200 94.4 99.02
Donchian-50 87.09 101.29
MA-10-20 96.81 89.22
MA-20-50 86.5 100.27
MA-50-200 95.48 98.31
TMA-10-20-50 89.67 94.89
TMA-20-50-200 84.21 97.75
TMA-50-200-800 102.13 99.54
COMPOSITE 96.21 96.46

 

No clear global trends stands out in 2010, with the performance of all systems ranging from -15% to +20% so far. This is still very similar with the Trend Following Wizard performances..

June looks like an early peak followed by a dip for most systems. Most volatile is the medium-term Moving Average crossover, which sets both extremes before closing the month even.

Our two star performers from May (short-term Donchian and Bollinger systems) follow along in the peak at the beginning of the month, but their performances diverge at the end of the month, with the Donchian system collapsing to end the month near a 15% loss, whereas the BBO system completes the month even.

Meanwhile the composite index closes the month (and its YTD) at around -4%.

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 slippage was considered and a $15 RT commission 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 60 instruments across Equities, Interest Rates, Currencies, Agriculturals, Metals and Energies, from around the world, the portfolio contains the following futures (CSI Symbols): AD, BP, CC, C, CD, CFC, CL, CT, CU, DJ, EBL, EBM, EBS, ED, EOX, ESM, ET, FC, FEI, FFI, GC, HG, ICL, IND, IRB, JK2, JP2, JP6, JR2, JRB, JSK, JTI, JY, KC, KPO, KTB, KWR, LAC, LC, LGO, LH, LZC, M10, MFX, MP, NG2, NGV, RA, RS, SB, S, SF, SI, SJG, STW, SXE, TRY, US, W, YTC.
Click here for a tabular view with description and exchange information.

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6 Comments so far ↓

  • docdan

    What is the price basis for the ATR stops? The entry price? or the signal price?

  • Jez

    docdan – stop level is determined either by
    entry limit price – N x ATR or
    previous close price – N x ATR
    depending whether it is a limit system (stop-orders for trade entry) or next day entry (“market on the open” orders)

    so in short: signal price

  • Pumpernickel

    The new portfolio is global and diverse, but in some cases, not very tradeable. To wit, “ET” is inactive (no longer traded), and “LAC” has zero volume. A quick peek at your charts will give insight, and may well reveal several other unpleasantnesses. A chat with traders who trade Dow Jones stock index futures in sizable quantity, will inform whether “DJ” (the Big Dow contract) is the best choice, and so forth.

    I doubt strongly that any of your “Trend Following Wizards” whose performance you track, includes ET or LAC or DJ in their portfolios. Their disclosure documents might be a useful resource for sanity checking market selections.

  • Jez

    @pumpernickel

    Oops, and thanks for the input. I have to admit, I’m yet to perform a thorough research and analysis on all instruments and data (ie check if tradeable in real life, average liquidity, contract specs verification , rolling schedules, traded months, etc.), which should pick up these issues you highlighted (and possibly others). The way I’d built the portfolio was somewhat “cruder”.

    I was just chatting with another trader researching a system, who’d just spent months researching and analysing this topic and he found it “illuminating”.

    I’ll take these as pointers that I need to “get on” with this topic too – which, as I put to him, always gets relegated in the backburner (for me), behind “more fun” research projects.

  • Rene

    Dear Jez

    When calculating MAX DD do you use DD on the realized equity curve or the actual daily portfolio value?

  • Jez Liberty

    Rene,
    MaxDD is the “common measure”: on total equity (ie portfolio value). Main reason for this choice is that it is the standard – although I have written an article covering some differences between which equity curve you calculate the drawdown on:
    http://www.automated-trading-system.com/trick-reduce-drawdowns/

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