Trend-Following Demo – 13 March 2012

(For demonstration purposes only. Not optimized for profitability. Trade at your own risk.)

Hold – AGI, BPI, DMC, MEG

22,000 AGI x 12.12 = 266,640 Pesos; 4,000 BPI x 75.20 = 300,800 Pesos; 6,900 DMC x 50.80 = 350,520 Pesos; 133,000 MEG x 1.86 = 247,380 Pesos; 0 Cash.

1,165,340 Pesos vs. 1,114,630 Pesos, current value vs. starting balance. Not bad for 2 weeks of stone-age trading. The thing is, we are in a trending period. And, whether the trend is up or down, these are the markets where trend-following systems do well. They make their users look good. There are other markets, however. Markets can become rangebound, trade sideways, or become illiquid and hardly trade at all. Those are the markets and the times that make trend-following systems look silly.

One should not become complacent when using a trend-following system. The popularity of this trading style comes and goes, as do the profits and losses. The important thing, if your system is sound, is that your total portfolio value should keep going up.

Discipline and persistence are important. There is truth to the old saying that the biggest trend-following gains follow the periods of their biggest losses.

A word on nominal value, an old trend-following tool used by Richard Dennis and the Turtles: As any old trend-follower knows, paper profits, no matter how large, can vanish in a flash. I consider this tool a bit subjective and actually unnecessary, if one were trading automatically. I imagine the ultimate trend-following system might do away with the nominal portfolio concept altogether. Why not size one’s bets according to one’s exact portfolio value at any given time?

To me, nominal portfolio value serves a primarily psychological need. Sudden outsized gains and losses can be destabilizing. The natural temptation is to trade more when one is losing (risky-with-losses bias) and less when one is winning (conservative-with-profits bias), when actually the opposite is more profitable. To counteract this, big actualized losses (the assumptions here is the proper stops/exits are taken) prompted Turtle-style traders to cut back their trading. For example, a classic example is to trade using a nominal value of 20% less than one’s original nominal trading account, once losses have accumulated to a loss of 10% from the original nominal account. This allows one to safely ride out non-trending periods.

Interestingly,  Dennis advised his pupils to move the nominal trading value upwards only after a long period of time had established that gains had indeed been secured. For example, if at the end of the year one had grown one’s account from P1,000,000 to P1,200,000, then that’s the time to move one’s nominal portfolio value to 1.2-million Pesos. If, however, only a short time had passed, such as merely a month, he did not recommend his Turtles move the nominal value upwards yet.

Nominal portfolio value is important as it’s the basis for computing position sizes (for example, the 2% of portfolio loss per trade the demo system is using).

Food-for-thought: The Turtle trader approach for nominal portfolio value clearly counteracts the “risky-with-losses” bias, but assuming the “conservative-with-profits” bias does indeed affect trading returns, shouldn’t optimal profits lie with systems that aggressively raise nominal portfolio value in the midst of significant winning runs?

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3 Responses to Trend-Following Demo – 13 March 2012

  1. I do hope that that old saying is correct because last year was pretty horrible for me.
    I wish I’ve read about the nominal portfolio value approach way earlier. I was able to double my forex demo account last year so I doubled my position size in accordance to the increase in portfolio value. It took me a couple of weeks to wipe the entire gains so I was back to square one.

  2. abitrade says:

    Personally, I like adjusting nominal portfolio value just once a year. Your portfolio sounds pretty volatile, gaining 100% and giving it all back in the same year. Yeah, the turtle style approach to nominal portfolio value might have helped preserve some of your trading gains last year. It’s best to just leave those things in the past. Focus on what you’re doing now. There are a lot of interesting trends to trade these days.

  3. Yes it was a little volatile but it fitted my trading profile. It was a USD1k account and worked on $1 per pip. I’m over it anyway. I’m glad I’ve read your post as the source my error wasn’t that clear to me before.

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