Is Trend Trading a "Bubble"

Discussions about the psychology of the markets and the masses as it relates to trading.
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Toosday
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Is Trend Trading a "Bubble"

Post by Toosday » Fri May 25, 2012 11:16 am

When we look at all of the characteristics of a bubble it is quite possible that trend following has all of the characteristics of a bubble right now. If you look at the IASG website and see the number of managed futures funds that employ trend following, it dwarfs most other categories of trading styles. Another tidbit is the "marketing" of the system on Covel's site. You have a vast number of stories of people making large sums of money that you saw a few years ago in the real estate market and in the late 90's in stocks.

In my opinion trend following has gone through a period of "bubble" type periods in the past, only to come back. Unfortunately the "whips" back are getting steeper and the drawdown periods are getting longer and larger as many HFs and investors understand the drawdown process a lot more than they did historically. I still believe in the philosophy but we may be in the middle of a large correction until the posers fall.

This is also supported by the exodus of retail money from the markets.

I am going to do some research on the commitment of traders to see the participation of hedgers over the past few years. This will give some insight on who is paying our salaries. I would rather get paid by hedgers and retail investors than HFs.

I would love to hear other's opinions on this as the math seems fairly evident.

Most of my observations are related to long term trend following.

Chris67
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Post by Chris67 » Fri May 25, 2012 12:38 pm

Toosday
I totally agree and have in my own inevitable way been saying it for ages (i.e. Winton is also indicative of the bubble)
When Winton raises about a billion per month every month for a year, when Covel's site is so brimming with over-confidence, when everyone is a supposed trend follower then maybe that tells us , retrospectively , what the problem has been
Im sure its not all about trend following but what you have to ask yourself here is "what will get rid of 50% of the players in the market" - my guess is we start to puke in markets here , get a massive upside surprise causing a huge reversal again, followed by another puke, causing another reversal , followed by another upside rally (this could go on for ever) - followed by 2 years of nothingness in financial markets like teh last 2-3 years
I think this would eradicate most trend followers - for sure it would eradicate most investors

C

Toosday
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Post by Toosday » Fri May 25, 2012 12:49 pm

Chris,

Thanks for the quick response. To anyone who reads my post, pls do not see it as an indictment of LTTF, I just think that the evidence, both anecdotal and numerical, points to the fact that speculators destroy trends. It is kind of ironic that the nature of trend following supports the fact that trend following itself may become a bubble. It is kind of like looking into a reflection of a reflection.

I am not trying to get myself turned inside out but in the end if you do not consider what your opponent is doing you will never be an expert poker player, no matter how sound your strategy is.

Macro
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Post by Macro » Sun May 27, 2012 4:33 pm

I was alluding to the same thing in one of my earlier thread (link below) and I still agree with Chris67.

viewtopic.php?t=9551

rajivm
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Re: Is Trend Trading a "Bubble"

Post by rajivm » Sun May 27, 2012 8:46 pm

Toosday wrote:When we look at all of the characteristics of a bubble it is quite possible that trend following has all of the characteristics of a bubble right now. If you look at the IASG website and see the number of managed futures funds that employ trend following, it dwarfs most other categories of trading styles. Another tidbit is the "marketing" of the system on Covel's site. You have a vast number of stories of people making large sums of money that you saw a few years ago in the real estate market and in the late 90's in stocks.

In my opinion trend following has gone through a period of "bubble" type periods in the past, only to come back. Unfortunately the "whips" back are getting steeper and the drawdown periods are getting longer and larger as many HFs and investors understand the drawdown process a lot more than they did historically. I still believe in the philosophy but we may be in the middle of a large correction until the posers fall.

This is also supported by the exodus of retail money from the markets.

I am going to do some research on the commitment of traders to see the participation of hedgers over the past few years. This will give some insight on who is paying our salaries. I would rather get paid by hedgers and retail investors than HFs.

I would love to hear other's opinions on this as the math seems fairly evident.

Most of my observations are related to long term trend following.
I Feel the biggest isssue with standard trendfollowing is that everyone knows where a trendfollower's entry and Exit points are. So maybe it is easy for other funds to manipulate price around those entry/exit point. Well thats my guess but I know very little :D

rhc
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Post by rhc » Mon May 28, 2012 3:56 am

The principle of 'ever-changing cycles' has been discussed previously on this forum.
Here it is again;
http://www.speculative-investor.com/new ... 70505.html

Excerpt;
“The principle of ever-changing cycles doesn't just apply to individual stocks or groups of stocks, it applies to investment and trading methods. If you want to know what is not going to work during the current cycle, look at what worked extremely well during the last cycleâ€

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Post by rabidric » Mon May 28, 2012 5:44 am

I don't personally buy into rajivm's idea of manipulation in this context. It may happen here and there, but it isn't the key driver.

I agree with rhc, adding:

IMHO "mechanical" trading, especially using daily data, is easy to access and implement in some form these days, both for players and capital. As alternative means of earning returns have not been very forthcoming since 2008 in the context of global deleveraging and what-not, so funds have flowed into "diversified" momentum based ideas like TF in it's various basic guises and it is simply becoming a very overcrowded trading philosophy, not just within futures, but in any asset class you care to name...

The widely correlated short/medium term whipsaws are a direct consequence of a lack of diversity in trading/investment approaches right now, and the majority of capital is competing within too small a niche to support it.[EDIT: in actual fact the majority of capital always does this somewhere sooner or later, just not necessarily in the particular niche of interest to TBBer's]

If LTTFers compete with each other and are also predated upon by much shorter term strategies which beat them into and out of the Risk-on/risk-off moves and monthly breaks and fades or whatever commonplace entry/exit areas trigger mass executions(!), then it will remain bleak until "LTTFers" decide to stop losing money in this fashion. Once that happens to a wide enough degree, then the ST predator strats will not have the required blood to suck and will themselves go through a poor phase. At about this point LTTF will suddenly become much more viable again.

Lotka-Volterra, Lotka-Volterra..... it's always about rabbit and fox populations when you break it down. (Look it up if you don't know it)

rhc
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Post by rhc » Mon May 28, 2012 10:33 pm

******
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rabidric
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Post by rabidric » Tue May 29, 2012 3:43 am

taking the specific output of the general equations doesn't exactly give a full representation: in the pure maths rabbits go extinct and so do foxes. nature is a little more complex and resilient than the raw simple equations make out...

would be interesting to live in a universe where i could meet this guy:
"atto-fox , an imaginary 1x10−18 of a fox." :lol:

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