Trend-Following Demo – 23 March 2012

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

Hold – AGI, BPI, DMC, BEL, SCC

Happy weekend, Traders!

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Trend-Following Demo – 22 March 2012

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

Hold – AGI, BPI, DMC, BEL, SCC

Play of the Day:

Mick Penissi thus dethroned erstwhile World Flopping Champion, Omer Asik.

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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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Trend-Following Demo – 20 March 2012

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

Hold – AGI, BPI, DMC, BEL, SCC

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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Trend-Following Demo – 19 March 2012

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

Hold – AGI, BPI, DMC, BEL, SCC

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Trend-Following Demo – 16 March 2012

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

Hold – AGI, BPI, DMC, BEL, SCC

It’s the halfway mark to my graduation from blogging. I like my current blog entries. I think they’re of relatively better quality than that junk I was spewing out for much of last year.

Anything worth doing, is worth doing well. And though writing about trend-following is a sure-fire way to bore most Netizens, I believe it’s important. This stuff works.

Well, I’m off to the beach. Happy weekend, traders!

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Trend-Following Demo – 15 March 2012

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

Hold – AGI, BPI, DMC

Sell – MEG (1.79, 10-day low)

No Signal – ALI, AEV, AP, BDO, CEB, EDC, FGEN, GLO, ICT, MER, MWC, PX, RLC, SM, SMDC, SMC, SMPH, TEL, URC

Buy – BEL (4.75, new 20-day high), JGS (27), JFC (106.6), MBT (87.75), MPI (3.82), SCC (244)

238,070 Pesos from sale of MEG. % gains from 10-day low: BEL +14.73%, JGS +9.76%, JFC +6.76%, MBT +7.54%, MPI +6.7%, SCC +11.93%. BEL has the best tie-break. 4.75 – 4.14 = 0.61. 20,000 / 0.61 = 32,787. Round up. 32,800 x 4.75 = 152,000.

System has 32,800 shares BEL & 86,070 cash. Next best tie-break is SCC. 20,000 / 26 = 769 shares. But 86,070 / 244 = 352.75 shares is all the system can afford. Round down. 350 x 244 = 85,400. 86,070 – 85,400 = 670 Pesos left.

MEG position is gone. New positions are 32,800 BEL, 350 SCC, and 670 Pesos cash. 22,000 AGI, 4,000 BPI, 6,900 DMC bets are still on.

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