Trend-Following Demo – 21 March 2012

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

Hold – AGI, BPI, DMC, BEL, SCC

BPI and BEL had contrasting fortunes for the day. BPI saw much of its recent gains vaporized. On the other hand, BEL’s uptrend resumption was something to behold.

They say, in life as well as in sports, one should not feel to down when one loses, nor should one celebrate too euphorically after winning. I think the same applies in trading. Keeping things in perspective, profits and losses are temporary things. More important are the principles in acquiring them, the reasons why they were pursued, and what capital gains are eventually used for. Trading profits are a means to an end, not an end in itself.

Rambling aside, the point is that the trend-following demo system has the same current decision on both BPI and BEL trades. Both haven’t hit their 10-trading day lows. No cut loss stop for BPI, no profit taking exit for BEL … yet.

There will be some very discouraging times when you use a trend-following system. As we see in this demonstration, an uptrending market is easy. The system buys and holds and is correct in doing so. Imagine the opposite price movement had happened (i.e. Stock prices now are what they were at the start of the year, and stock prices at the start of the year were actually what they are now). What would the system had done? It would have sold sometime in January and would have avoided repurchases. After all, if stocks were constantly pushing 10-day lows instead of 20-day highs, then the demonstration system would have had nothing to do but stay out of the markets.

Simple enough.

The rough times for trend-following systems are the non-trending periods, which can be as high as 60% – 80% of the time for many markets. Remember that each false breakout results in a loss of up to 2% of the portfolio. It doesn’t take a lot to hurt one’s capital. 5 straight losses could, theoretically, knock one down 10%. This is why trend-followers who risk 2% or more per trade are called “gunslingers”. Yes, they may generate up to triple digit annual gains over a long period of time, but one had better have nerves of steel! Knowing myself, drawdowns of 70% – 90+% are just not my cup of tea, so my risk per trade has always been ratcheted lower than 2%. If you can’t win the freestyle swimming category, try joining the dog paddling competition. You’ll come out ahead.

Be prepared to stay the course during the non-trending periods. They usually shake out the “loose hands” trading trend-following systems, often resulting in some of the best trending periods right after the worst extended non-trending periods (Case in pont: The recent multi-year bull run in gold). Of course, there are some markets that really trend poorly or even never at all. Avoid those like the plague if you value your trading capital.

Keep your wits about you.

Trend-following systems are simple, quantitative, and can be tailored to one’s preferred investment horizon and risk tolerance. I love these things. 🙂

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2 Responses to Trend-Following Demo – 21 March 2012

  1. abitrade says:

    My 400th post. Wow. That’s a bit of a milestone. That’s quite a few hours and quite a few words. Thank you, loyal readers!

  2. manlyme says:

    Congrats on your nth post! In trading, I think resilience is key, not for the faint heart. This is what I’m trying to backtest.

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