Trend Following depends on Prediction

Discussion in 'Trading' started by AFJ Garner, Apr 6, 2013.

  1. I have no doubt whatsoever that there are "trends" - periods of time when prices go from A to B without too much retracement or noise. I have also no doubt that trends are seen in every timeframe - that such patterns are fractal. It is true that you can not see a trend until it is over - as the market trades, you have no idea whether the price will go from A to B relatively smoothly in a given timeframe or to any other point, smoothly or otherwise.

    I don’t care “why” trends exist. I don’t care to argue with those who consider markets to be a Markov chain. I don’t care to argue with those who consider the market to be efficient or those who don’t. I’m damned if I know and I’m pretty sure they don’t either.

    The simple fact is that in the past there have been repeating patterns from which people could have profited if they had been in the markets with the right system at the right time. And some did profit.

    Simple observation tells us that there are trends (which can only of course be properly defined with hindsight) in all timeframes. No need for maths or statistics to tell us that.

    The only real question is therefore is how to design and adapt a system to profit from these recurring patters. Which is incredibly easy if the future continues to look anything like the past.

    As everyone and his uncle, mother, brother and granny now know, trend followers have increasingly hit bumps in the road over the past decade and in particular over the past two years. The patterns have changed – perhaps temporarily, perhaps not. Something has changed at any rate or these long standing CTAs would have ridden smoothly over the bumps without suffering historically high levels of drawdown. Many explanations for the different market conditions have been put forward: the rise of HFT, Government stop/go policies, globalisation increasing correlation between hitherto independent markets, too may trend followers doing the same thing in the same time frames. The list goes on.

    All that really matters is that a trader who makes his profits by following trends with a method which has provided profit in the past must make a “prediction”: will trends continue to form in the future of sufficient duration, sufficient magnitude and sufficient “efficiency” ( a trend with a straight enough line from A to B to profit from without getting chopped in an out with a series of losses) to make a given system profitable.

    Again there will be a lot of argument, doubt and uncertainty. But that is what it boils down to. A prediction about the future; a judgement call which only time will prove right or wrong. A series of tests like those I have been carrying out are helpful (trend efficiency in different timeframes, serial correlation, length of time a given system has historically been able to stick with trend) but no certainty exists. In my view at least. There may be times in the future where simple trend following systems will once again work well, there may not. As always in life, it pays not to put all the eggs in one basket.
  2. slumdog


    This is like saying black jack card counters predict the cards.. they dont.. the cards have been dealt in a certain way and the odds are now in your favour that future cards will fall as expected by probability.

    Trend following, you watch 10 markets, one starts to move so you follow it.
    The market is showing you the way. You are not predicting which of the 10 markets is going to trend. You waiting for one or more markets to give you a hint the odds are in your favour.

    The difference is that unlike card games where the probability is exact, in trading you cant be sure if the expected probability will hold up going forward.
  3. bighog

    bighog Guest

  4. Yes,there are repeating recurring patterns for winners,but the problem is that the same patterns are for losers as well!

    Opportunities are very scarce or rare-sudurlabha.As us with everything in life.Trading is a very unreliable and dangerous business.NO easy money here.
  5. bighog

    bighog Guest

    I beg to differ.............once properly learned, trading gets to where you KNOW your plan (method) will on most days get to your minimum goal to suffer life in style. Losing days become rare and even then the losers will be small. The average winning day is just being consistent, the really good days are gravy. ENJOY!!

    As traders we make our own gravy........
  6. I have been paper-trading & back-testing a couple of different trend-following methods for a while now. I don't think it's right to imply that things are breaking down. On another thread, I showed the results of a ridiculously simple system using weekly ATR14 Renko reversals that gained 10.6% in 2012, a supposedly "difficult" year for trend-followers. (It was difficult in that these results came in slightly behind "Buy & Hold, but I'll take it when the method nets 10% on a bad year but can almost double in a good year.)

    What matters to me is the annualized return. I'm not going to kick myself for missing every peak and valley.

    That said, I'm still not trading real money, so I'm not exactly sold at this point.
  7. kut2k2


    If I say "the sun will rise tomorrow morning", is that a prediction?

    If every statement about the future is a prediction, I'd like to introduce two new terms.

    A sure thing is a statement about the future with a certainty of occurrence. "The sun will rise tomorrow" is a sure thing. "If today is Saturday, then tomorrow is Sunday" is a sure thing.

    An anticipation is a statement about the future which is not a sure thing but is still more likely than not to occur.

    For example, young people routinely anticipate that a college education will open up more opportunities for a comfortable life than lack of such an education. For most people, this turns out to be true.

    I believe the goal of TA is not to predict an unlikely future but to anticipate a likely future. Following trends is a likely road to profits. Not at all certain, but likelihood is plenty good for the prepared trader.
  8. Total words of wisdom.
  9. Lucrum


    Coming from a guy who is a political moron, this is actually a very good post.
  10. Lucrum


    What a steaming smelly pile of shit Jack.
    #10     Apr 6, 2013