Long term trend following on equities a fool's game?

Discussions about the testing and simulation of mechanical trading systems using historical data and other methods. Trading Blox Customers should post Trading Blox specific questions in the Customer Support forum.
ecritt
Roundtable Knight
Roundtable Knight
Posts: 134
Joined: Sat Aug 28, 2004 3:44 am
Location: Phoenix, AZ
Contact:

Post by ecritt » Fri Jun 12, 2009 11:26 am

alp wrote:
ecritt wrote:Yes, we've tried everything from 10 day highs to 3 year highs to all time highs, in 5 day increments. Performance is nearly the same from 2 year highs to all time highs. It starts to deteriorate when you move to the left of 1.5 year highs. The deterioration is due to opportunity cost at first. When you buy a stock at a 1 year high the buying power has to come from somewhere…in this case it would be at the expense of the other stocks in the portfolio (stocks at all time highs). As you go faster and faster (6 month highs, 3 month highs, etc.) you get mired in the natural noise of the market, turnover skyrockets, transaction costs pile up, and profits come way down.
And what if you cannot buy all the stocks making all time new highs at the same time?
Unfortunately some problems, like not having enough money to do it right, can't be solved. A lot of stocks make new highs, but only a small minority go on to make huge gains. If I could figure out which stocks are going to be the big winners (in advance) I'd be the richest man in the world.

You could try using fundamental screens, but I don't see evidence of that working for anyone else. In fact, I think such is likely to diminish performance...

alp
Roundtable Knight
Roundtable Knight
Posts: 309
Joined: Mon Aug 27, 2007 8:09 pm

Post by alp » Fri Jun 12, 2009 2:19 pm

ecritt wrote:A lot of stocks make new highs, but only a small minority go on to make huge gains. If I could figure out which stocks are going to be the big winners (in advance) I'd be the richest man in the world.
Have you tried any technical filters such as volume, momentum/strength, etc.?

utrading
Contributing Member
Contributing Member
Posts: 5
Joined: Thu Jan 15, 2009 4:22 pm

Trendfollowing works on any asset class

Post by utrading » Fri Jun 12, 2009 3:53 pm

Imho trendfollowing works on any asset class. Whether you can build a unified system that works for all assets is another story.

One factor to consider between different asset classes is volatility. Stocks are most volatile, Forex the least, bond and commodities in the middle. That's why you can get 2:1 leverage on stocks, but 200:1 leverage on Forex.

Where there is volatility, there is opportunity. If implemented properly, stocks can be most profitable. That is if you are seeking outsized returns with reasonable risk.

But don't expect to achieve outstanding returns on a large portfolio (>100 stocks) using conventional lttf. The law of large number dictates that doing so will only lead to average returns. Unless you improve your entry/exit timing, and be willing to be in/out until your position is protected(by short term profit).

ecritt
Roundtable Knight
Roundtable Knight
Posts: 134
Joined: Sat Aug 28, 2004 3:44 am
Location: Phoenix, AZ
Contact:

Post by ecritt » Fri Jun 12, 2009 9:07 pm

alp wrote:
ecritt wrote:A lot of stocks make new highs, but only a small minority go on to make huge gains. If I could figure out which stocks are going to be the big winners (in advance) I'd be the richest man in the world.
Have you tried any technical filters such as volume, momentum/strength, etc.?
New all time highs is my filter. It's a lifetime measurement of momentum. I've never been able to see how volume is relevant other than to determine if a stock is liquid enough to warrant participation.

ecritt
Roundtable Knight
Roundtable Knight
Posts: 134
Joined: Sat Aug 28, 2004 3:44 am
Location: Phoenix, AZ
Contact:

Re: Trendfollowing works on any asset class

Post by ecritt » Fri Jun 12, 2009 9:13 pm

utrading wrote:But don't expect to achieve outstanding returns on a large portfolio (>100 stocks) using conventional lttf. The law of large number dictates that doing so will only lead to average returns. Unless you improve your entry/exit timing, and be willing to be in/out until your position is protected(by short term profit).
This is what most people believe. I disagree. The vast majority of the market's gains have come from a small minority of stocks. If you miss these you miss the gains. The only way to ensure participation in these stocks is to cast your net reasonably wide. Based on the number of tradable stocks in the U.S. I define reasonable as approx 700 or so.

alp
Roundtable Knight
Roundtable Knight
Posts: 309
Joined: Mon Aug 27, 2007 8:09 pm

Re: Trendfollowing works on any asset class

Post by alp » Sun Jun 14, 2009 4:58 pm

ecritt wrote:
utrading wrote:Unless you improve your entry/exit timing, and be willing to be in/out until your position is protected(by short term profit).
The vast majority of the market's gains have come from a small minority of stocks. If you miss these you miss the gains. The only way to ensure participation in these stocks is to cast your net reasonably wide. Based on the number of tradable stocks in the U.S. I define reasonable as approx 700 or so.
Thanks. It looks like nobody has been able to find a foolproof way of picking up the best performing stocks either. Hence the thread.

By the way, we often see CTAs touting their commodity/currency investment programs as an alternative or diversification to equity trading. The reverse is not so common. Moreover the word "speculator" is often associated to futures/commodity and currency trading. Which are the best performing equity only systematic funds out there, with published and audited track records?
Last edited by alp on Sun Jun 14, 2009 9:24 pm, edited 1 time in total.

ecritt
Roundtable Knight
Roundtable Knight
Posts: 134
Joined: Sat Aug 28, 2004 3:44 am
Location: Phoenix, AZ
Contact:

Re: Trendfollowing works on any asset class

Post by ecritt » Sun Jun 14, 2009 5:39 pm

alp wrote: Thanks. It looks like nobody has been able to find a foolproof way of picking up the best performing stocks either. Hence the thread.

By the way, we often see CTAs touting their commodity/currency investiment programs as an alternative or diversification to equity trading. The reverse is not so common. Moreover the word "speculator" is often associated to futures/commodity and currency trading. Which are the best performing equity only systematic funds out there, with published and audited track records?
I've been looking for a diversified, systematic, risk managed, long-volatility equities program for over a decade; there are none. That's why we started our own program in 2005.

There are a few "momentum" funds, like FUNDX, STOCX, SRFAX, RYISX, PYH, XRO, etc. The problem with them is no drawdown or risk controls. They are betting that the parameters they use to pick stocks never go out of favor enough to cause catastrophe. That's not a reasonable assumption long term, as seen in 2008. Be prepared for drawdowns of 40% to 80%.

The folks at Dorsey Wright seem smart. They have some ETF's that are based on relative strength. But again, no drawdown controls (that I can see) result in some very significant declines. Symbols: PDP, PIE, PIZ. They also have some mutual funds, which may have some form of risk management: DWAFX, DWATX, DWTFX.

alp
Roundtable Knight
Roundtable Knight
Posts: 309
Joined: Mon Aug 27, 2007 8:09 pm

Re: Trendfollowing works on any asset class

Post by alp » Sun Jun 14, 2009 9:22 pm

ecritt wrote:The problem with them is no drawdown or risk controls. They are betting that the parameters they use to pick stocks never go out of favor enough to cause catastrophe.
Could you elaborate on what you mean by "drawdown or risk controls"? Do you think guys out there like Eckhardt Trading or Transtrend have some kind of "drawdown control" other than diversification and what is rather mystically referred to as "robustness"?
From Transtrend.com: TRANSTREND considers a high degree of robustness to be essential. With regard to the design process of trading systems, this has led to three fundamental principles:

1. The same systems are used across all relevant markets.
2. The same parameter settings are used across all markets.
3. A small variation in any parameter should not have a large impact on the results of a system.

These principles limit the risk of curve fitting and over optimization; in other words, maximize the chance that historical results can be repeated.

ecritt
Roundtable Knight
Roundtable Knight
Posts: 134
Joined: Sat Aug 28, 2004 3:44 am
Location: Phoenix, AZ
Contact:

Post by ecritt » Sun Jun 14, 2009 10:00 pm

"Could you elaborate on what you mean by "drawdown or risk controls"? Do you think guys out there like Eckhardt Trading or Transtrend have some kind of "drawdown" control other than diversification and what is rather mystically referred to as "robustness"?"
I can't speak for Eckhardt or Transtrend but several CTA's I've corresponded with in the past have specific rules in place designed to exert some control over future drawdowns. Some CTA's de-lever into drawdowns. By this i mean they reduce their exposure when a drawdown starts and reduce further as the drawdown deepens. A simple example might be...we reduce all positions by 25% if our drawdown reaches -5% and by another 25% when drawdown reaches -10%...and they readily admit they pay a premium most of the time to trade this way (like fire insurance). This is distasteful to many who disdain "suboptimal trading". The question is...will they be able to avoid a fire over their whole career? It only takes one huge drawdown to achieve permanent ruin.

Alternatively, some CTA's do the same thing we do at Blackstar Funds, which is to keep track of total portfolio open risk (distance to stops for all open positions) and regulate that number to not exceed a certain level by using dynamic position sizing. The idea being that someday all hell is going to break loose and all of our positions are going to travel the full distance to their stops simultaneously. That essentially happened to us in 2008 and we lost almost exactly what we budgeted for. Many equities managers who didn't prepare for the worst have experienced fatal drawdowns over the last 2 years. Of course equities tend to be highly correlated with each other, especially during market declines, but a modified version of the concept can be implemented on a portfolio with a higher degree of independence between trading vehicles.

Transtrend has one of the most impressive track records of any CTA in the world, on a return/drawdown basis. I'd be shocked if they didn't have specific strategies in place to make it so. That being said, everything else held static, drawdown should be inversely related to diversification...and Transtrend trades a LOT of markets, including spreads.

sluggo
Roundtable Knight
Roundtable Knight
Posts: 2986
Joined: Fri Jun 11, 2004 2:50 pm

Post by sluggo » Sun Jun 14, 2009 11:16 pm

ecritt wrote: ... (some CTAs) reduce their exposure when a drawdown starts and reduce further as the drawdown deepens. A simple example might be...we reduce all positions by 25% if our drawdown reaches -5% and by another 25% when drawdown reaches -10%
According to WOTT, the Turtles did that back in 1984. It's on p. 258 of WOTT, but amplified a bit more in "The Original Turtle Trading Rules" pdf file. Blox software includes features called DRT and DRA to let people incorporate this concept into any trading system they wish; see the Blox User's Guide below. Finally, the same idea is included in Ryan Jones's book The Trading Game as Chapter 7. Mr. Jones calls it "Rate Of Decrease".

I think the author was dropping a pretty big hint when he wrote "... other, perhaps better ..." But since I'm not clairvoyant, I'm only speculating about what he may have meant to suggest. Mmmm hmmm.
ecritt wrote: ... keep track of total portfolio open risk (distance to stops for all open positions) and regulate that number to not exceed a certain level by using dynamic position sizing.
There's a downloadable system in the Blox Marketplace that contains one implementation of this. Not only does it regulate total portfolio open risk; it also regulates the total open risk of each individual "sector" of instruments. viewtopic.php?t=4389 Risk plot is attached.
Attachments
pic2.png
risk regulation plot; Blox Marketplace system
pic2.png (11.52 KiB) Viewed 8197 times
From_Blox_Users_Guide.png
Blox User's Guide: DRT, DRA
From_Blox_Users_Guide.png (78.01 KiB) Viewed 8301 times
From_The_Original_Turtle_Trading_Rules.png
from pdf file floating around the internet
From_The_Original_Turtle_Trading_Rules.png (24.74 KiB) Viewed 8298 times
Last edited by sluggo on Mon Jun 15, 2009 12:24 pm, edited 1 time in total.

AFJ Garner
Roundtable Knight
Roundtable Knight
Posts: 2040
Joined: Fri Apr 25, 2003 3:33 pm
Location: London
Contact:

Re: Trendfollowing works on any asset class

Post by AFJ Garner » Mon Jun 15, 2009 6:17 am

alp wrote: Moreover the word "speculator" is often associated to futures/commodity and currency trading.
The general public and the stock picking mutual fund managers appear to equate traditional stock investment with "safety" and "conservatism", particularly in relation to the mature, developed equity markets.

These same people often attach the words "high risk" to the world most of us on this forum inhabit. There is still a general feeling that those who generate returns out of non-traditional instruments (or operate a non traditional investment style to conventional assets) are in some indefinable way, "cowboys" or at least not quite respectable.

A traditional fund manager of my acquaintance literally spat with rage at me when I tried to point out the benefits of applying a system to equity investments. I suppose the old boy had read my article in the Spectator and took it as a personal insult.

You have only to look at the performance of the vast majority of these "conservative" traditionalists over the past 18 months to appreciate that their particular form of investment is every bit as speculative and risky as the application of a system with risk controls to any asset class, traditional or otherwise. More so.

Such traditionalists are not to be persuaded by the facts or track records. Once an opinion becomes entrenched, it is hard to change it.

ecritt
Roundtable Knight
Roundtable Knight
Posts: 134
Joined: Sat Aug 28, 2004 3:44 am
Location: Phoenix, AZ
Contact:

Re: Trendfollowing works on any asset class

Post by ecritt » Mon Jun 15, 2009 12:44 pm

AFJ Garner wrote:
alp wrote: Moreover the word "speculator" is often associated to futures/commodity and currency trading.
The general public and the stock picking mutual fund managers appear to equate traditional stock investment with "safety" and "conservatism", particularly in relation to the mature, developed equity markets.

These same people often attach the words "high risk" to the world most of us on this forum inhabit. There is still a general feeling that those who generate returns out of non-traditional instruments (or operate a non traditional investment style to conventional assets) are in some indefinable way, "cowboys" or at least not quite respectable.

A traditional fund manager of my acquaintance literally spat with rage at me when I tried to point out the benefits of applying a system to equity investments. I suppose the old boy had read my article in the Spectator and took it as a personal insult.

You have only to look at the performance of the vast majority of these "conservative" traditionalists over the past 18 months to appreciate that their particular form of investment is every bit as speculative and risky as the application of a system with risk controls to any asset class, traditional or otherwise. More so.

Such traditionalists are not to be persuaded by the facts or track records. Once an opinion becomes entrenched, it is hard to change it.
One thing I didn’t bargain for when entering this business is how divorced reality is from perception. Investors, allocators, fund of funds, family offices, etc. all communicate essentially the same requests. They want good risk adjusted returns, low beta and correlation to the stock market (especially during market declines), reasonable tax efficiency, good liquidity (no lockups or gates), a sustainable edge, etc. But, almost every time, there’s one more thing they demand; you have to deliver all the above without deviating from the investment strategies that nearly everyone else in world is using. For the most part this means picking 20 – 50 stocks based on some fundamentals-based factor model, staying close to 100% fully invested at all times, never using leverage, picking when and where to hedge, and having “convictionâ€

ecritt
Roundtable Knight
Roundtable Knight
Posts: 134
Joined: Sat Aug 28, 2004 3:44 am
Location: Phoenix, AZ
Contact:

Post by ecritt » Mon Jun 15, 2009 10:12 pm

Sluggo,

That's some good info. Thank you for posting it!

alp
Roundtable Knight
Roundtable Knight
Posts: 309
Joined: Mon Aug 27, 2007 8:09 pm

Re: Trendfollowing works on any asset class

Post by alp » Mon Jun 15, 2009 10:30 pm

ecritt wrote:They seem to only be interested in confirming their existing belief structure. It’s amazing, but true.
It's funny how irrational and emotional markets can be in our collective attempt to fundamentally justify any action or market move, as if we were that much rational in the first place. Perhaps that's why we can expect that (using Seykota's words) there's a big wave coming - closer every day.

Thank you all.

RedRock
Roundtable Knight
Roundtable Knight
Posts: 941
Joined: Fri Jan 30, 2004 3:54 pm
Location: Chicago

Re: Trendfollowing works on any asset class

Post by RedRock » Mon Jun 15, 2009 11:04 pm

AFJ Garner wrote: Such traditionalists are not to be persuaded by the facts or track records. Once an opinion becomes entrenched, it is hard to change it.
Oh.. Damn their eyes, I know,.. but would there be an edge without them?

DeanoT
Roundtable Fellow
Roundtable Fellow
Posts: 52
Joined: Sat Apr 15, 2006 7:37 am
Location: Melbourne, Australia

Post by DeanoT » Mon Jun 15, 2009 11:43 pm

Very similar analogy to poker. Losing players who willingly take the worst of the odds will occasionally bust you, and frustrate you with their illogical thinking, but over the long term, they are the source of your winnings.

AntiMatter
Roundtable Fellow
Roundtable Fellow
Posts: 86
Joined: Sun Jul 05, 2009 11:10 am

Post by AntiMatter » Mon Jul 06, 2009 12:46 pm

ecritt wrote:
levijean wrote:Hi Eric,

Have you discovered any good filters for stocks to improve returns?
If by "filters" you mean fundamental inputs the answer is no.
I'm surprised some sort of GARP-style filter doesn't help.

AntiMatter
Roundtable Fellow
Roundtable Fellow
Posts: 86
Joined: Sun Jul 05, 2009 11:10 am

Post by AntiMatter » Mon Jul 06, 2009 12:48 pm

DeanoT wrote:Very similar analogy to poker. Losing players who willingly take the worst of the odds will occasionally bust you, and frustrate you with their illogical thinking, but over the long term, they are the source of your winnings.
There's a phrase we poker players use..... "Don't tap the glass"

bobsyd
Roundtable Knight
Roundtable Knight
Posts: 376
Joined: Wed Nov 05, 2008 2:49 pm

Post by bobsyd » Mon Jul 06, 2009 4:46 pm

What do you mean by "GARP-style filter"? Perhaps an example?

Thanks.

AntiMatter
Roundtable Fellow
Roundtable Fellow
Posts: 86
Joined: Sun Jul 05, 2009 11:10 am

Post by AntiMatter » Tue Jul 07, 2009 8:44 am

bobsyd wrote:What do you mean by "GARP-style filter"? Perhaps an example?

Thanks.
e.g. decent eps growth with not-too demanding p/e. Or even just simply eps growth of perhaps >20%.

I'm too inexperienced to give you anything more precise than that, sorry. It's just from my limited knowlege and experience, these types of screens provide some sort of edge, and it seems intuitive that they would complement some measure of momentum

Lots of people must have looked into this....

Post Reply