Trend-Following Demo – 20 March 2012

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


With at least one stop loss/exit under our belts, and a whole bunch of trading entries, you can pretty much go through the entries this month and have a basic idea of what it’s like being a trend-follower. These systems aren’t much in the way of brilliance or creativity. They’re simple but they work. I think, in spite of the speed of technological progress, there will remain a place in trading for trend-following systems. Wheels, for example, still play a very useful role in the modern world despite being a primitive tool. We see them as parts of modern machines like cars and airplanes.

Backtesting has already shown how some of the most profitable trend-following systems may, in fact, be humanly impossible to trade (98-99% drawdowns! Who in their right mind could tolerate such a loss and still believe in their mechanical trading system?). I think some of the brilliant traders of today could be using trend-following systems as a basic part of the larger whole of sophisticated automated trading systems.

No system is foolproof, however. Remember how I like to compare the financial markets to casinos? And how trend-following systems remind me of the “house rules” casinos impose in order to extract profits via a “house edge” in various games? Well, casinos have to be on the lookout for extremely skilled players (such as blackjack card counting teams) and outright cheaters. Similarly, there are markets and financial instruments which shouldn’t be traded via trend-following systems. Actually, stocks, with their potential to become choppy in times of big disclosures, tend to trend less well than commodities. Indices tend to be even more erratic.

Take a look at the past 30 days trading of the KOSPI. Higher highs and lower lows. That’s a pattern, if you’re using a typical channel breakout/breakdown system, that can be most painful for trend-followers. If you see a market that likes to make a lot of higher highs and lower lows, in that order, over time, you may want to avoid using a trend-following system to trade them. They will generate too many false buying signals and trigger too many cut loss stops to be worth your while.

Richard Dennis and William Eckhardt predicted the declining profitability of simple trend-following systems. From personal experience, they do still work. However, it’s important to use parameters that are attuned to one’s risk tolerance and investment horizon. It’s also important to understand why and when they work (and why and when they don’t).

Just keep an open mind. Keep your wits about you even if you use a mechanical trading system.

Before I sleep, there is one more thing….. Elements of classical trend-following can be profitably used in commercial trading of many generic commodities (and I don’t just mean non-deliverable forwards and contracts, I mean the real things). But unlike in modern financial markets, the classical structure or build of trend-following systems cannot be used without modification. Among other things, foreign exchange trends, seasonality, fundamental, credit and social factors come into play.

Thanks for reading!

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7 Responses to Trend-Following Demo – 20 March 2012

  1. genkumag says:

    Hi, Abi. Not sure if you’re Christina Hunt invited you to her Boiler Room group at FB, if not let me extend the invitation to you just so we can continue to touch base even after you close down your blog. In case you’re interested, you can email me at boh618 at gmail dot com

    Thanks and regards.

  2. manlyme says:

    Oh dear. What I wish is to have a prediction tool that will surely maximize profit! But of course it shouldnt be available to everyone (or anyone) else, the market will behave differently. Are you really closing this blog after? What happens after you close then?

  3. abitrade says:

    Hi manlyme. Oh I’ve seen some of those predictive systems actually work. With a very sharp mind and a keen eye for detail, one can pull off profitable predictive trading. It can be done. Unfortunately, I have neither prerequisite characteristic. What I have is a general emotional numbness to trading profits and losses. That’s better suited to trend-following.

    Yes, I’m wrapping up this blog. I’ve basically said what I’ve wanted to say about trading and the financial markets. It’s all in the various articles in this blog. There’s no need to “beat a dead horse” or to “belabor the issue”.

    What happens after? Well, I’ll go back to trading quietly. Not writing a blog will free up my time for other pursuits. There are people to see, places to go. And I remain actively involved in the health & wellness industry.

  4. hey abi, what can you say about the sustainability of those kind of system? Are they consistent enough to be used for the long run?

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