Trend-Following Demo – 28 March 2012

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


It’s hard to watch those paper profits vanish for AGI, DMC and BEL, huh? Thus far, this demo has generated only cut-loss stops, with no profit-taking exits yet. That’s about right. On average, trend-following systems are only about 30% accurate. 70% of the time, you have bets that are small losses. About 1-in-10, or even 1-in-20, may be a big win. Whereas losses knock off about 1% to 2% of one’s portfolio, depending on one’s risk tolerance, the infrequent home runs add 10% or more, paying for a lot of the small losers, plus interest. At least, that’s the general idea.

Interestingly, Dennis and Eckhardt believe simple trend-following systems have become less profitable over time. Backtests of Donchian’s classic 20-day/5-day moving average system appear to confirm this. It is quite like commercial trading. A breakthrough product or revolutionary logistics system may initially stretch operating profits to unheard of levels. Then, over time, people start to learn and adopt. The product or system is copied, and eventually the previous advantage dissipates. To overcome the possibility of “system death”, Dennis and Eckhardt trading as short or as long a time horizon as possible, but to avoid the middle. Medium term trend-following is the most naturally attractive option for most trend-followers, and therefore the most susceptible to waves of popularity, signal noise, and in some instances, even system death.

When I look at the website statistics for my blog, it appears I have 50 or so regular readers. I want to thank each and every one of you for visiting and reading my blog. Thank you very much. Maybe someday, in the future, our world-lines will meet again!

Last few days for Abi’s Trading Blog. Enjoy the ride.

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