This, I believe, is exactly correct. But realize that the arbs are chasing something that is finite, cannibalizing their own margins by jacking up the leverage to maintain performance as volatility dwindles. This is unsustainable behavior. Eventually some of them will blow up and a state of equilibrium will be reached. Trend following in the commodities markets works because "long volatility" entries combined with anti-martingale position sizing results in one generally being on the opposite side of hedgers. Hedgers are natural losers in the capital markets; if were not so, they'd be getting paid to transfer risk off their books to speculators (the insurance providers). How WELL a trend following strategy works is mostly (but not completely) a matter of luck (parameter settings, market selection, etc). The lucky will boast and crow and raise tons of money. The unlucky will write the dreaded "drawdown" letter to clients. The process repeats every year. In the stock market trend following (long only) would have worked great in the past as evidenced by the paper my firm wrote: http://www.blackstarfunds.com/files/Does_trendfollowing_work_on_stocks.pdf. Trend following (long only) should work great on stocks in the future. Ask yourself if you would take the following bet: A 50% chance of making an unlimited gain combined with a 50% chance of losing at most 100% of what you risk. You get to break your bankroll up and diversify across thousands of bets. Historically speaking, in the U.S. stock markets, randomly selecting a stock, buying it and holding it has resulted in a 50.3% chance of making on average total return of 484.9% and a 49.7% chance of making a -75.1% total return. Any gambler with an IQ over 80 would kill for such odds but they ignore them every day on their way to Vegas where they get negative expectancy games to play. http://www.elitetrader.com/vb/showthread.php?s=&threadid=78407&highlight=distributions+of+stocks Strategies that use 10 day lows or 10 day highs are hopelessly mired in the natural noise of a mostly efficient market. But no matter how efficient a market is the positive expectancy that results from an unlimited upside combined with a guaranteed to be capped downside can not be denied. That is the beauty of limited liability and those that refuse the simple math earn their fate.
yeah long term things have not change dramatically as intraday, it's daytradin' that has become a tick chase game.
Great post Eric! You've expressed what marketsurfer and a few others are missing. The edge is not in finding a trend. Or determining if stock A has been up for 5 days then it should be up for 5 more days X% of the time. That's for the birds. The edge is simply allocating your money across various instruments that allow the unlimited profit versus limited loss to work in your favor over time. Believing you have anything other than luck when "selecting instruments" for a trend following strategy could endanger the very edge that enables the strategy to work. That is what makes this such a difficult strategy to follow despite its simplicity. It is very humbling to give into the market and let it win. Especially if you have any intellectual wants or needs that you're trying to fulfill. Happy Thanksgiving! MT
i currently trade trend following only and this is my concern as well. though my reasons are different, namely more efficient markets in terms of trend components. do not mix that up with the assumption that there will be no trends. there will always be trends, but the cost of catching them (=the false signals) will increase and thus make it unexploitable.
Upon reading the above posts about "the death of trends", I wonder what one should call the huge moves during the past several years in crude oil, gold, silver, copper, grains, and even the world stock markets, especially the "emerging market" category. I would call many of these moves "major trends", even though many CTAs/traders/fund managers failed to capitalize upon them. Look at any of the various reports on CTA performance for the past several years ---- it's pathetic --- especially considering that most CTAs are "systematic trend followers" (not discretionary). John Henry is probably the most high profile in this category --- just be glad you are not one of his investors... I would suggest that because the behavior of markets changes over time, that the obvious (in hindsight) huge trends of the past several years were missed by the big "trend followers" is because their algorithms were way behind the curve of evolving market behavior. They probably are OK for PAST behavior PROJECTED FORWARD, but useless (as demonstrated) for predicting changing future behavior. In fact, if you look back at performance data for CTAs over the past 15 or 20 years (especially for the "systematic" trend-following types), you will see a repetitive pattern of ups and long downs, as the markets changed behavior and the CTAs scrambled to adjust. Pity the typical investor who went in at the top of performance and now sits at the bottom --- the very typical scenario. You can determine how much capital was thus exposed by looking at the "assets under management" versus performance for each CTA. Clearly much more investor money was lost than made. As regards the long-term uptrend of the stock market over time (mentioned in above posts), this is due to a readily identiable driver: the growth of earnings in the context of the growth of the U.S. (and other) economy over time. This is no mystery: the typical corporation MUST grow earnings per share, or else it is in the doghouse with investors and vulnerable to a takeover. Therefore, all the employees of a typical corporation are directed to work their butts off to contribute to the growth in earnings per share, or they are out. This type of constant upward driver on prices is completely lacking in the price of ALL other assets ---- commodities, bonds, even real estate. That's why the equity market is truly unique in terms of long-term trends --- specifically UPTRENDS. That is why the stock market (especially in developed countries) has a very strong, almost guaranteed, long-term TREND, specifically an uptrend. This is no mystery. The only thing that can derail (at least temporarily) this strong uptrend is the occasional manic "boom/bust" scenario (a la 1999/2002), or a true collpase of the developed country economies --- possible, but not the way to bet. I am not a "long-term trend follower", because I am unwilling to take the drawdowns that this strategy requires. But I certainly do recognize and incorporate such long-term trends in my trading. There are many good trading opportunities in forex, commodities, stocks, etc. that do not require a "long-term trend" commitment, and that offer profit opportunities at low risk --- which is how I play it. But to assert "the death of trends" doesn't seem to square with reality.
I would agree with you IF we had used hindsight to our advantage and curve-fitted the parameters to the data with the goal of maximizing in sample performance. However, since we didn't want to blow up out of sample, we didn't do that. If you had read the paper you'd know this. http://www.blackstarfunds.com/files/Does_trendfollowing_work_on_stocks.pdf There is no need to "imagine" what we will get in actual trading. Two years and thousands of trades later, out of sample performance has shown no deterioration in terms of profit factor, avg win/loss ratio, volatility, or comp ann return. Transaction cost assumptions have been validated as well. So you see, not so scary after all...
Althucher is yet another looser who got taken to the cleaners. His spectacular failure is nothing more then a success for those who are still in the game, prospering and keep on taking the money from those like him... No wonder he is at war with the markets... Althucher = next Marlin... I see the future.... he he he
WinDiff, Please give details about Althucher's "spectacular failure". Where do you get your information?