add counter-trend part to a trend following system?

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sagev
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add counter-trend part to a trend following system?

Post by sagev » Sun Oct 17, 2004 11:13 am

Hi there,
Several days ago I lose a little bit when the HGZ4 copper futures crashed. The market gapped down, and when my stop order was executed, the price had already fallen about 10 percent from overnight close. That compelled me to consider adding a counter-trend part to my current trend following system, because it seems to possess the ability to smooth the system's equity curve especially when market is extremely volatile. And it seems to be a trend among famous trend-followers. If my memory doesn't goes wrong, I have heard before in somewhere that, according to Tom Shanks of Hawksbill, everyone from Bill Dunn to Campbell had introduced counter-trend elements except him in the past decade, and in the Market Wizards by Jack Schwager, Richard Dennis also recommended to add a "counter-trend-within-trend' approach to fine-tune the trend-following systems.
But I did not know where to start. My question is 'how' to integrate a counter trend element into a trend following strategy. Does it mean that I just need to combine two single different approaches into one system, for example simultaneously using both Turtle Trading System and Turtle-Soap system, or the counter-trend part should work like a profit target or something, and it should be triggered only when the system is holding a position? Any thought or recommendation on this? or are there on the web some more detailed introductions on this topic? Thanks in advance.

cnyub

vgs
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Post by vgs » Sun Oct 17, 2004 2:18 pm

In the iasg.com manager report, Mark Shipman (Cunningham Asset Management Plc (CAM)) stated that he combines his major trend following system with a 'counter trend overlay', "which utilises more sensitive input including pattern recognition and volatility, to generate shorter term signals that trade around an existing long-term position. The overlay is only activated when the system is holding a long term position. I think this is somewhat like a profit target.

The use of options in his counter trend overlay seems to be a good idea if the goal of the design is lowering the impact of gaps 'n unfavorably dramatic intra-day movements: "Whilst the longer term element of the system will generate outright long or short positions, the counter trend overlay is designed to also incorporate the use of options when market volatility indicates this to be favourable."

The whole questionaire could be downloaded here: http://iasg.pertrac2000.com/dilligence.asp?ID=492

Kiwi
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Post by Kiwi » Sun Oct 17, 2004 6:39 pm

My own belief is that your development questions might look like this:
- what moves does a countertrend system have
to catch to smooth your equity?
- having such a system will stand on its own two
feet (be profitable)?
- look at a non-curvefit combined equity curve.

Only if a system could do both things would you add it to your mix. If not you might be better combining shorter and longer term systems or systems taking money from different markets in different conditions.

shakyamuni
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Post by shakyamuni » Sun Oct 17, 2004 11:38 pm

test it and see if it works.
Last edited by shakyamuni on Sat Jan 08, 2005 5:07 pm, edited 2 times in total.

sagev
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Post by sagev » Mon Oct 18, 2004 3:34 pm

Hi vegas, kiwi, and shakyamuni,
thank you all for the information and suggestions mentioned in the posts, they are really helpful and inspiring. I guess that now I find the direction to start, and I'm going to spend some time to explore a little further on the subject. Will post my findings finally (if any).

cnyub

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