Hi. What does "systematic trend following" actually mean? I know that is based on some solid rules, right? But I don't really understand how does it work. And since it use solid rules, I suppose that this part can be automated 100%.(I'm referring only to the management plan, the long/decision I suppose that is made based on discretion). Because I saw some funds that state that they use a discretionary for decision and systematic for management. Any opinions are welcome. later edit: for example, Winton is a systematic trend following fund, what does this actually mean? (the same with Chesapeake Capital fund). How do they operate?
Systematic means the risk management, trading signals, position size, etc are all testable, quantifiable, well defined rule-based strategies. There are people who overlay the basic technique with a macro overlay, or have discretionary inputs on the position size, entry/exit etc.... I suppose you could also have situations where there is discretionary trading of an asset class while attempting to train a system on the underlying if for example, the data is new or has too much of a specific non-predictable behavior. i.e trading dot coms when they first came out might be hard to manage in a systematic fashion, but eventually, the data on these things might suggest a kind of position management which would be systematic, while the actual selection of ipo's would be discretionary. The same could go with the introduction of Credit Default Swaps in the Market. Initially, they were discretionary traded, and perhaps the arb guys built a systematic strategy to arb out risk in equities or bonds based on the basis etc...all these occasions require an initial period of discretionary input into the final parameters of the system, or of the underlying asset being selected, while the actual trading would be governed by a systematic approach.
Ok, I understand so far. But do you know more specifically from what ideas a systematic trend following plan should start from? thank you
Do some research (i.e. Google) on how people identify/measure trends. Get your Excel up and running, some data from Yahoo, and try out some of these concepts on real data. This will tell you basic ideas from which they build their trading strategies. If you want more specific information I'm afraid you will have to get a job at one of these funds.
You could have a look at the turtle system... It was used in the eighties.. It will give you the basic idea how it worked. You can find it free on PDF if you google it.