Trend Following-Trend Commandments
- Thread starter Trend Following
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I agree with you here. It's a prediction that the move will continue after the entry.
Surf
Mike,
Just finished the book. It's quite entertaining, enjoyed the lines regarding Noble Prize nominee. However, about the guy who claimed to trade on his "stomach" and you asked for verification. Soros also trades like this--- see work by Flavia Cymbalista PhD on this phenomena--( she was hired to quantify this by soros) I was close friends with her but have lost touch since she was hired by a south American central bank---
Surf
Just finished the book. It's quite entertaining, enjoyed the lines regarding Noble Prize nominee. However, about the guy who claimed to trade on his "stomach" and you asked for verification. Soros also trades like this--- see work by Flavia Cymbalista PhD on this phenomena--( she was hired to quantify this by soros) I was close friends with her but have lost touch since she was hired by a south American central bank---
Surf
Trend Following
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Soros trades a multi-billion dollar fund, across numerous markets on multiple exchanges, and uses a certain risk management profile, all on gut feel? Not buying.
Trend Following
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Thx.
I get impression that Covel did some serious research and came to some "well accepted" wisdom. Unfortunately, I don't agree with his findings. But, it is not my job to point out the errors especially when they provide for lucrative advantage.
Also, they aren't necessarily false claims. Tricky because what holds true for the masses doesn't for the masters.
One legitimate question would be why bother to spend thousands when there are plenty of CTA's out there offering trend following systems. It begs the question that is if this is the answer then why not just let the people who focus on this do it for you. I would imagine that the type of audience that this would appeal too would probably be better served by going too a professional/automated trading, as well.
I mean we've already ascertained that the market is random and it can't be predicted. You have to have a system, discipline, etc. If all that is true then the answer seems rather straightforward.
Also, they aren't necessarily false claims. Tricky because what holds true for the masses doesn't for the masters.
One legitimate question would be why bother to spend thousands when there are plenty of CTA's out there offering trend following systems. It begs the question that is if this is the answer then why not just let the people who focus on this do it for you. I would imagine that the type of audience that this would appeal too would probably be better served by going too a professional/automated trading, as well.
I mean we've already ascertained that the market is random and it can't be predicted. You have to have a system, discipline, etc. If all that is true then the answer seems rather straightforward.
Yes, I can solve this paradox.
The lazy half-ass trend following that is pumped in the books must imply prediction. However, we would say that it is a probabilistic in nature, as well. In other words, the trend following system predictions are very poor. So, they have to run these things against tons of markets. It is similar to have a small 1% or 2% edge in poker: you gotta play a lot of hands to get the expected value. What a trend follower should say is, "we don't predict well".
Now, the next question is what is predicted? Where is the edge? It doesn't come from % correct which runs below 40% for many. So, it is predicting a larger winner then a loser. Basically, the market must misprice large movements for such a system to win. The other way to view this is that it takes time for consensus to build. So, in some ways, trend following systems are not too different then Taleb's black swan concept because both rely on very unlikely types of events, i.e both rely that the market is not pricing in future movement. Trend following of the sort also proposes that the market will take significant time to complete the move whereas buying puts don't have that requirement (i.e 1987). So, yes they must predict the market but they do a terribly poor job of it. Because most use stops to get out, they also inherently state something about volatility.
The real problem with trend following systems is evident in Dunn's record: 60% drawdowns, 10 year flat periods. I can't imagine any non professional would be able to weather either of those and then if they did, they are flat after 10 years. This is assuming one can trade a wide basket of markets.
I would say many traders fail at this sort of trend following because it is a very difficult method to trade or said in another way: it is not a good system for most. Tons of losers and not all are trivial, requires giving back nearly all profits, capital to trade a large basket of markets, and withstanding 10 year flat periods. There are many worthwhile concepts in such systematic strategies though. The ability to profit from any of many markets is one benefit.
It is impressive to see one execute a systematic strategy like this over time and generate a strong performance, as well. However, I think that the trader with a small account is probably best to work on his day trading, swing trading, and trend following but especially the day trading.
The lazy half-ass trend following that is pumped in the books must imply prediction. However, we would say that it is a probabilistic in nature, as well. In other words, the trend following system predictions are very poor. So, they have to run these things against tons of markets. It is similar to have a small 1% or 2% edge in poker: you gotta play a lot of hands to get the expected value. What a trend follower should say is, "we don't predict well".
Now, the next question is what is predicted? Where is the edge? It doesn't come from % correct which runs below 40% for many. So, it is predicting a larger winner then a loser. Basically, the market must misprice large movements for such a system to win. The other way to view this is that it takes time for consensus to build. So, in some ways, trend following systems are not too different then Taleb's black swan concept because both rely on very unlikely types of events, i.e both rely that the market is not pricing in future movement. Trend following of the sort also proposes that the market will take significant time to complete the move whereas buying puts don't have that requirement (i.e 1987). So, yes they must predict the market but they do a terribly poor job of it. Because most use stops to get out, they also inherently state something about volatility.
The real problem with trend following systems is evident in Dunn's record: 60% drawdowns, 10 year flat periods. I can't imagine any non professional would be able to weather either of those and then if they did, they are flat after 10 years. This is assuming one can trade a wide basket of markets.
I would say many traders fail at this sort of trend following because it is a very difficult method to trade or said in another way: it is not a good system for most. Tons of losers and not all are trivial, requires giving back nearly all profits, capital to trade a large basket of markets, and withstanding 10 year flat periods. There are many worthwhile concepts in such systematic strategies though. The ability to profit from any of many markets is one benefit.
It is impressive to see one execute a systematic strategy like this over time and generate a strong performance, as well. However, I think that the trader with a small account is probably best to work on his day trading, swing trading, and trend following but especially the day trading.
I'm hearing the big trendie firm mentioned several times in this thread is -13% for June, -15% YTD... Mike, you hearing differently?
I reflected on this last night and here is another perspective.
Trend followers presume they can predict the direction of the current trend if it exists. They assume that trends will exist in the future and that the profits from staying in a winning trend will offset all the losses from the losers.
For trend followers to win then 2 things must be true:
1. They must be able to correctly identify the direction of a current trend. This is prediction too. But, perhaps a weaker form. There are 2 types of error, i.e guessing a trend when one doesn't exist and not guessing trend when one exist (also guessing up when down). They can guess wrong more often because the cost of missing they presume is greater. It is reasonable to view this as a classification problem though that doesn't rely on future information. But, it does rely on statistics generated from past data. See part #2
2. They are predicting something about the future state of the market: i.e they predict there will be large enough trends in future to offset losses. In other words, they are stating a claim about the market similar to LTCM but years in advance. This is a pretty bold statement or a fairly significant assumption. It is reasonable to ask that as information travels faster if these trends will exist and if their methods of trend identification from the past will be applicable. Trend followers have a model that states the future market will behave a certain way.
It is also possible to contrast the Taleb's deep otm put methodology from trend following in that trend following a large part of the time agrees with the consensus whereas Taleb's method is always in disagreement with the consensus. In other words, trend followers are always expecting large standard deviations based on the current information, i.e in the direction of current trend. Trend followers would be buying deep otm calls versus puts. I think this is one benefit that trend following has because I don't think its reasonable to assume the consensus is always wrong. In essence, trend followers state that the market correctly identifies if information is bullish or bearish but it doesn't value "worth" of the information properly whereas Taleb states the market prices neither direction nor magnitude properly.
Trend followers presume they can predict the direction of the current trend if it exists. They assume that trends will exist in the future and that the profits from staying in a winning trend will offset all the losses from the losers.
For trend followers to win then 2 things must be true:
1. They must be able to correctly identify the direction of a current trend. This is prediction too. But, perhaps a weaker form. There are 2 types of error, i.e guessing a trend when one doesn't exist and not guessing trend when one exist (also guessing up when down). They can guess wrong more often because the cost of missing they presume is greater. It is reasonable to view this as a classification problem though that doesn't rely on future information. But, it does rely on statistics generated from past data. See part #2
2. They are predicting something about the future state of the market: i.e they predict there will be large enough trends in future to offset losses. In other words, they are stating a claim about the market similar to LTCM but years in advance. This is a pretty bold statement or a fairly significant assumption. It is reasonable to ask that as information travels faster if these trends will exist and if their methods of trend identification from the past will be applicable. Trend followers have a model that states the future market will behave a certain way.
It is also possible to contrast the Taleb's deep otm put methodology from trend following in that trend following a large part of the time agrees with the consensus whereas Taleb's method is always in disagreement with the consensus. In other words, trend followers are always expecting large standard deviations based on the current information, i.e in the direction of current trend. Trend followers would be buying deep otm calls versus puts. I think this is one benefit that trend following has because I don't think its reasonable to assume the consensus is always wrong. In essence, trend followers state that the market correctly identifies if information is bullish or bearish but it doesn't value "worth" of the information properly whereas Taleb states the market prices neither direction nor magnitude properly.