Fully automated futures trading

[sle]

So, if drawdowns are comparable to buy and hold, but upside is significantly higher (30% volatility times .8 sharpe means 24% average returns, versus about 10% for sp500), I think it seems like quite a good strategy.

Except S&P does not have 30% volatility

 

[Napoleon@Dynamite]

Except S&P does not have 30% volatility

True, but if you are able to endure that volatility, which I hopefully am, primarily since I know this money is for my retirement in 20+ years, it's a superior strategy.

 

[truetype]

Of course, that's pre-tax analysis. Buy/hold SPY is taxable only when you sell. If you pass it along at your expiry, your heirs get a step-up, so essentially it's tax-free for your entire lifetime. Whereas trendfollowing throws off taxable 1256 gains (you hope) every year.

 

[sle]

Of course, that's pre-tax analysis. Buy/hold SPY is taxable only when you sell. If you pass it along at your expiry, your heirs get a step-up, so essentially it's tax-free for your entire lifetime. Whereas trendfollowing throws off taxable 1256 gains (you hope) every year.

Put the winners in your qualified account and losers in your taxable account... or at least do that based on expectation (i.e. the alpha leg of the trade and the hedge leg).

 

[newwurldmn]

True, but if you are able to endure that volatility, which I hopefully am, primarily since I know this money is for my retirement in 20+ years, it's a superior strategy.

A 30percent volatility means a 60percent drawdown at 2 stdevs. Very few people can handle that emotionally and two stdevs happen more frequently than you would think

 

[truetype]

Put the winners in your qualified account and losers in your taxable account... or at least do that based on expectation (i.e. the alpha leg of the trade and the hedge leg).

Presumably all of a trendfollower's trades are (believed to be) "alpha legs."

 

[Napoleon@Dynamite]

A 30percent volatility means a 60percent drawdown at 2 stdevs. Very few people can handle that emotionally and two stdevs happen more frequently than you would think

Hmm.... Before I got into trend following, I was a die-hard efficient-market-theory buy/hold vanguard-index-mutual-funds-type. I did well with that strategy, but of course the returns weren't that great (although I probably was doing better than the average Joe, who was buying actively managed funds with a 1.5% management fee with worse returns than the index). As a buy/hold index fund person, I really didn't sell, even when the internet bubble crashed. So, I'm thinking I'm better off in this strategy since I can probably continue to withstand similar bear market drawdowns, with the bonus of higher expected returns.

I appreciate everyone's replies. GAT, I hope I'm not derailing your thread.

 

[isotope1]

Isn’t that vol is the std deviation of returns? So for example, I expect a Sharpe of 0.8 on vol of 25%. So my expected 1std profit and loss for the year is 20% +/- 25%, not just 25%. 2std would leave me in the range -30%..+45%, a 1 in 30 year occurrence (theoretically).

Secondly, I do my back test with constant capital, whereas when I trade live I reduce position as a I lose money, so any drawdown ends up being way less than what the backtest might imply. (I think a 50% drawdown in my backtest might equate to 30% on my real geometric result.

 

[globalarbtrader]

I appreciate everyone's replies. GAT, I hope I'm not derailing your thread.

Not at all - it's a fascinating discussion.

GAT

 

[Napoleon@Dynamite]

Isn’t that vol is the std deviation of returns? So for example, I expect a Sharpe of 0.8 on vol of 25%. So my expected 1std profit and loss for the year is 20% +/- 25%, not just 25%. 2std would leave me in the range -30%..+45%, a 1 in 30 year occurrence (theoretically).

I agree with the ranges you state. I was speaking in terms of average annualized returns. So, over a long timespan you will average out to 20% per year.