Hi everyone. I am creating a LT trend follow system. I got the basic parts of the rules to come out pretty good, nice PF, winning %, MDD and average trade. The system is based on the turtles strategy, 50 day high low break out. with an average holding period of 20 days. I just have one problem with my system. The total flat days of the system is just too long. It has got a 1250 flat days, which most of it seems to be coming from 1970 to 1978. Also this system doesnt make money at all around 2005 to 2007. Due to the nature of a trend follow system, I know I have to accept a certain length of flat days, but I believe there should be a way to shorten it. I came up with some ideas like, adding counter trend systems, adding a MA filter, things like that, but it doesnt give me a satisfied result. Could anyone help me to come up with any good ideas to cut down the flat days? Thank you
1) The 50-day breakout and 20-day holding period "rule" is arbitrary. You could modify your definition of an upside/downside breakout merely from prior high and low price activity. 2) After 1972, there were many markets that had enormous trends. There shouldn't be "so many" flat days. 3) 2005-2007 may not have been trendy enough for your system to earn money. 4) Be sure you're including a large enough universe of markets to trade besides financials, i.e. stocks, bonds and currencies.
I have been trading basically the same long term commodity method since 1994 and although I would like huge profits every year, it just not going to happen. I get 1-2 years of trying to stay at breakeven for the year, then get a healthy profitable year which doubles the account, and then go into flat again. I have found that some years almost all markets are chopping around without sustained trends. Of course there are some markets that do trend nicely, and in these years of overal chop, I don't have signals for the nice trending markets. I guess I have just learned to be able to accept what the market will allow me to make and accept that it will not be every year for long term trading.
Consider learning some options trading; you can then trade a delta neutral system along with your trending system. Trade them both all the time and your returns will be smoothed out. Or go heavier on one or the other depending on market conditions.
I use options as a hedge since all my entires are made at new contract highs/lows. I normally risk $500-800 per contract unless there are gaps or undue slippage. Often times I will take the loss in the futures and keep the option up to three days and make an overall profitable trade out of it. But it definitely not an easy method to trade cause the options are always overpriced at highs. Thanks for the advise on the delta neutral, will check it out.
Excellent post. This is IMO the #1 reason why most traders are psychologically not prepared to trade a LT TF system. It takes a lot of discipline to grind your account for 20 months just going sideways while there are big (but choppy) moves in many markets. I have found that running uncorrelated TF systems working on different time scales (e.g. daily and weekly) next to one another helps smooth out equity curves.
I agree with this. That's just the nature of trend following. Few can survive the flat years and drawdowns, but if you can survive the tough journey, then the rewards are there. Absolute/raw returns can be phenomenal. Below is what Jerry Parker said about mean reversion and trend following: "Mean reversion works almost all of the time. Then it stops and you're kind of out of business. The market is always reverting to the mean except when it doesn't. Who wants a system like we have, "40% winners, losing money almost all the time, always in a drawdown, making money on about 10% of your trades, the rest of them are sort of break even to losers, infrequent profits? I much prefer the mean reversion where I have 55% winners, 1% or 2% returns per month. "I'm always right!" I'm always getting positive feedback. Then, maybe in 8 years, you're kind of out of business, because when it doesn't revert to the mean, your philosophy loses."
>>nazzdack >>4) Be sure you're including a large enough universe of markets to trade besides financials, i.e. stocks, bonds and currencies. Thanks for your tips. I will try adding more variattions of markets that has a tendency to trend relatively to other markets. >>Handle123 >>I have been trading basically the same long term commodity method since 1994 and although I would like huge profits every year, it just not going to happen. I get 1-2 years of trying to stay at breakeven for the year, then get a healthy profitable year which doubles the account, and then go into flat again. Right it seems to be the sycle of the market. I totally agree. I guess TF stared working again right after the majority of people gave up saying trend following has died. I guess TF is totally based on the nature of the market structure. >>makloda >>I have found that running uncorrelated TF systems working on different time scales (e.g. daily and weekly) next to one another helps smooth out equity curves. Thank you for your brilliant idea. I will try that right away. I couldn't come up with that sort of idea. >>thetrendfollowe I'm starting to understand that, the most important for TF is what kind of market to choose. Markets that has a relative tendency to trend often might be a good choise to put in the portfolio. Bonds,interest rate, energy, currency might be thos choices I guess? >>"Mean reversion works almost all of the time. Then it stops and you're kind of out of business. The market is always reverting to the mean except when it doesn't. Who wants a system like we have, "40% winners, losing money almost all the time, always in a drawdown, making money on about 10% of your trades, the rest of them are sort of break even to losers, infrequent profits? I much prefer the mean reversion where I have 55% winners, 1% or 2% returns per month. "I'm always right!" I'm always getting positive feedback. Then, maybe in 8 years, you're kind of out of business, because when it doesn't revert to the mean, your philosophy loses." hmmmm.... very interesting. I guess this is all about the market structure. I guess I will have to run the TF system all time accepting the flat days and draw down periods. I guess I wll be holding positions in options to cover the DD and flat days from the TF system.
There is nothing fundamental in this type of strategy to provide an edge. The results are totally random. If this startegy worked in the past, it was only due to pure luck. Diversification may help to smoth returns but to make large gains the risk/reward ratio must be very high. If I were to TF, I would choose a SMA crossover with some type of confirmation. There is more substance to such strategy than the one you described. True, you enter the market later but the chop is minimized to a degree. The problem is with the exit but it is less of a problem as with your strategy there is nothing fundamental in holding for an average of 20 days.
From my experience: 1. There are much better methods than the Turtles'. Try moving average crossovers for a start. 2. Adding extra systems helps but to be really effective they have to be based on different methods of entry and exits. Try a shorter term system that exits on a profit target for example. 3. I trade 4 systems, currently have 23 positions open and I'm a bit down on the year so far. So make what you like of my advice. 4. To see how your system is doing compare it to the fund managers listed at www.iasg.com.