I don't trade futures trend following, but my understanding is that such strategies (at least if long term like the Turtles) tend to lose frequently and occassionally have the big win. If that is the case you may need the confidence and patience to wait for the big trend. But if as mentioned earlier, you are down while most trend following CTA's are up, then you may need to look closer at your strategy. Have you tested it to see how it performs historically?
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How to analyze and evaluate momentum strategies?
- Thread starter mizhael
- Start date
Hi guys,
I am new in this forum and I am wondering why I haven't found this webpage earlier.
I had some modules with respect to price momentum and the excessive volatility in the market. So I was wondering, if any of you guys have some experience with a momentum strategy incorporating volatility.
What are your results. How does it work in up, down and side markets.
Eventually, I would like to build my own trading system. So any help and hint would be greatfully welcomed.
Any advice for existing threads about money management and risk management would be great too.
Thanks a lot
sugoi1918
I am new in this forum and I am wondering why I haven't found this webpage earlier.
I had some modules with respect to price momentum and the excessive volatility in the market. So I was wondering, if any of you guys have some experience with a momentum strategy incorporating volatility.
What are your results. How does it work in up, down and side markets.
Eventually, I would like to build my own trading system. So any help and hint would be greatfully welcomed.
Any advice for existing threads about money management and risk management would be great too.
Thanks a lot
sugoi1918
Sugoi-
2 ways you can do it, and they are not exclusive, they can also be combined...
Position Size by volatility (i.e determine the current risk in a position by way of standard deviation, ATR, or some other metric)
Position Size by the quality of the signal (come up with a method that gives you a sense of your current position in regards to the risk reward)
Other ways include measuring the strength of other Market signals to justify being in the trade - this usually works for equities...
Eventually, a good system will detect the exhaustion of a trend whether via a price breakdown or a slow death of a trend....
Other ways are purely statistical... if you are really good you could apply GARCH models to measure the volatility / risk.
2 ways you can do it, and they are not exclusive, they can also be combined...
Position Size by volatility (i.e determine the current risk in a position by way of standard deviation, ATR, or some other metric)
Position Size by the quality of the signal (come up with a method that gives you a sense of your current position in regards to the risk reward)
Other ways include measuring the strength of other Market signals to justify being in the trade - this usually works for equities...
Eventually, a good system will detect the exhaustion of a trend whether via a price breakdown or a slow death of a trend....
Other ways are purely statistical... if you are really good you could apply GARCH models to measure the volatility / risk.
Quote from Rodney King:
What instruments do you trade? The big trendfollowing CTAs are up a good bit in 2010.
Thanks for the info. Could you please point me to the stats? CTAs may employ multiple strategies - so if all trend-following-only CTAs are up then I am having problem with my system.
What strategies do they usually use?
Quote from Stoxtrader:
If your drawdown is more than your max drawdown in backtesting, stop trading. If not, keep trading. It's that simple.
On the other hand, the out-of-sample drawdown will most likely larger than the back-test drawdown.
Even in backtesting, if you split the data into two: in-sample and out-sample.
And take out-sample period to be 2007-2009,
still the out-sample max drawdown will be larger than in-sample max drawdown...
So is this comparing-drawdown method a good way to determine if a system is bad?
Quote from Stoxtrader:
If your drawdown is more than your max drawdown in backtesting, stop trading. If not, keep trading. It's that simple.
I don't think it is always this simple. Some of the strategies that I was monitoring (not trading) during 2008 set record drawdowns, well beyond anything seen since 2000. These same strategies have performed phenomenally since the end of 2008. The strategies were not broken, they just had high beta and were exposed to the market breakdown.
If the drawdown is unusually large for the conditions, then something is wrong. If trend following CTA's are making money and the OP's strategy is in a drawdown, then even if not a record drawdown it sounds to me like something's wrong.
There are statistics which show the market is trending/following momentum 30% of the time and Reverting to the mean about 70% of the time. So, if you try to follow momentum 100% of the time, the RTM algos/robots will chew you up and spit you out over time. What I've learned a little better the hard way is when to follow the momentum and when to sit out and not trade.
Quote from endsongs:
There are statistics which show the market is trending/following momentum 30% of the time and Reverting to the mean about 70% of the time.
Can you provide a link to anything supporting these statistics? I've heard this quote countless times and frankly I don't believe it based on the trends I see on long term charts. It may all be in how it's measured. Markets can be both trending and reverting to the mean at the same time in different time frames.
Quote from dwpeters:
Can you provide a link to anything supporting these statistics? I've heard this quote countless times and frankly I don't believe it based on the trends I see on long term charts. It may all be in how it's measured. Markets can be both trending and reverting to the mean at the same time in different time frames.
http://www.articlealley.com/article_1539132_64.html