Traders' Roundtable

I was not to sure where to put this post. Please move if necessary.

There are some enormous moves in nearly all markets. Really big moves that evolve over a period of 1 year, even 2 years. Sometimes they last for years. On a daily chart they are pretty choppy to very very choppy. A 'typical' long term daily compression system would either get stopped out during the move (or even whipsawed long and short), but the overall long move remains in place.

I like the idea of trading these very long term moves on a monthly (perhaps weekly) compression basis and at the same time, trading a daily long term system and a daily medium term system, sometimes against the direction of the overall very long term move. This way you have a core position over perhaps 18 months in a commodity that on its own is:

a) not frequently occurring
b) very up and down in terms of daily equity curve
c) has a large give up (and initial risk - in terms of % move. % $ risk remains the same).

On its own a very long term systems (VLT's) seem problematic. However with shorter time frames I have found with so far limited study that they can be a nice foundation to a strategy. I certainly want to do more study before I form firm conclusions.

Often people talk about a LT system that has shorter term and perhaps intra-day systems working with it. I am thinking of the same concept except the MT and LT trend systems become the short time frame systems. The idea is to keep the VLT in the market for as long as possible. You do not want to get stopped out and re-enter. You want to capture the whole move in one big bite. This requires a large initial stop and give-back at the end of the trend. I have found quite a few instances where the MT and sometimes even the LT system were making money as the VLT was being stopped out or the trend was coming to an end. From the perspective of the VLT system, the VLT trend was finishing, but the VLT system is still long. From the perspective of the LT system, the VLT trend had ended and you are now short on the LT system. The MT system would have been long and short all the way up in the VLT trend and was the first to go short when the VLT trend started to reverse. Eventually you exit the VLT trade with a profit... after some give back. But I have seen instances where the LT and MT systems had started to make money in the meantime. I have also seen instances where this did not work so well.

I am pretty sure the idea of chasing these VLT moves can easily be dismissed by someone with more experience. That is ok with me. But in the meantime (or until I can dismiss the theory myself) I can't ignore these enormous moves. I have been reasonably successful with making VLT systems. But they trade so infrequently that they concern me. Also, on its own a VLT system is not an efficient use of capital.

With a very big picture mindset, I can see great potential for strategic position accumulation over a very long period of time. There are whales to be ridden.

I suppose I should end this with a question. Has anyone had experience with riding these whales?

Damian,

I looked at weekly and monthly bars after reading an article on the futurestruth website and found that the trends are rather smooth. I then applied aberration and gsx to the data. GSX is a little shorter term than aberration and performed very well. I think you'd need to shorten the period and perhaps reduce the band width to make aberration work well.

The issue I faced was the one you imply in your third to last paragraph. Although the figures of merit were good the total dollar returns were considerably lower than when using these systems on daily bars and the stops were very wide.

It seems to me that the shorter the term of the system the more dollars can be extracted per unit bet size from a price curve. So an intraday system can extract 10xDoll/Bet of a daily system and so on as the term moves out. Correspondingly as the time moves from intraday to daily the requirement for diversification increases. Does it also increase as you go to weekly or monthly?

Just questions - not conclusions

John

Hi Damian,

I like your idea of combining MT, LT and VLT systems. My experience is limited to the Polish market but recently I was also thinking about the ways in which you can reduce large give-backs of long-term trend-following systems and avoid serious damage to your capital during long congestion periods.

I am trading a medium-term trend-following system on the Polish stock index futures with good trend-following characteristics. Recently, my areas of concern were large give-backs on open position profits at market turns and pretty large drawdowns during long congestion periods.

The options that I considered were the following:
a) tinkering with systems parameters, trying to come up with better entry/exit rules or new filters
b) keeping the existing system intact and adding a new, shorter-term system based on different concepts

Since I am suspicious of systems with difficult/complex entry/exit rules, I decided to go for the option b. I have tested (but not traded yet) a simple medium-term channel breakout system with a short-term Larry-Williams-like volatility breaokut system (buy tomorrow's open plus a fraction of ATR). The two systems turned out to be weakly correleted with each other and the addition of a shorter-term system resulted in (at least in tests) significant reduction of drawdowns and increase in profits. I am going to test the idea in the real world in real time, soon.

I also read about combining LT trend-following systems with ST trend-following or even counter-trend systems on the Fall River Capital website. You may want to check these two links:

http://www.fallrivercapital.com/corpora ... tures.html


http://www.fallrivercapital.com/corpora ... 01mar.html

Consider this excerpt from the links above: The short-term system can either double up with the long-term trend following system or put on a countertrend trade depending on what the volatility filter is telling us," says Friedl.

An important part of the system, though, is based on the interaction of the rules designed to limit losses, Wright adds.

"In choppy periods we saw our short-term systems doing their magic, making us profitable or at least mitigating our losses while we waited for the next trend," Wright says. However, he adds that what really makes them profitable are the times when all three work together. That is what happened in September when the program earned over 12% for the month.

Combining systems was also recently encouraged by one of the posters on TraderClub Forum:

http://traderclub.com/discus/messages/1 ... #POST12647

Best regards,
Tomasz

damian wrote:I like the idea of trading these very long term moves on a monthly (perhaps weekly) compression basis and at the same time, trading a daily long term system and a daily medium term system, sometimes against the direction of the overall very long term move.

Strange, why did the words by Sun Tzu "Lure them with greed..." come up to my mind?

Anyway, your way of combining systems makes great sense to me. It somehow reminds me of one system in the book by Tushar Chande for exploring "extraordinary opportunities". The author insisted on using his system as a tool to increase exposure during 'megatrends'.

'Sir, one more thing' (c) Columbo.
The so called 'weekly' bars don't account for gaps which happened between the weekdays. (Let alone slippage associated with the fast moves). For this reason, I wouldn't backtest a system on weekly data solely, without incorporating the corresponding daily data. Otherwise this looks like a fake to me.

There are some enormous moves in nearly all markets...With a very big picture mindset,
I can see great potential for strategic position accumulation over a very long period of time...
There are whales to be ridden.

I am pretty sure the idea of chasing these VLT moves can easily be dismissed by someone
with more experience.

Hi Damian,

You may be on the right track. I don’t necessarily have more experience, but I have spent time researching two passively managed
systems that are designed to serve as proxies for the returns available from trend following managed futures.

The first is the MLM Indexâ„¢ (formerly Barra). It is very long-term in nature. The basic rules for entry and exit are quite simple, although
the rules regarding which contracts to use for signals, and which to trade, add a layer of complexity. It has been tested back to 1961,
and has been traded live (with institutional money) since 1993.1 It had only its second loss history in 2002, with a return of -1.63%.
The other down year was 1992, with a return of -0.66%. All the rules, and its performance, are fully disclosed. 2,3

The second is the AssetSight Commercial Markets Index® (CMI), which is described as “an investment benchmark of the returns
available to a momentum strategy applied to a diversified portfolio of commercial market futures [that] captures returns from
both positive and negative price trends.â€

I think this is a very relevant topic and I would like to hear commenst from some more experienced here.

I have always been of the belief that being a professional trader one should not limit yourself to just one instrument. I feel too many people just wat to be an "S&P trader" or a "futures trader" or whatever. Why limit your capital to a single instrument and then why limit your capital to one timeframe.

I traded short term systems (1 - 3 days) with an intermediate term (2 - 4 weeks) breakout type system. The shorter term provided the "cash flow" style diversification whereas the intermediate term system provided the bigger w/l ratio's.

I then started moving toward a more simpler style. I adopted a much longer term trend following system ( out to 4 months) and simplified by daily work by a factor of 10. Life seems to be progressing again over the last 12-months. Whilst I like the exposure to the small intraday systems and the longer term systems I now find myself, like Damien, looking at the 2-year to 5-year macro trends. I feel the only real way to trade (invest?) these is to build a position over time but based on more fundamentals.

I dont wish to move to the dark side here but positions like long commodity based currencies (AUD, CAD), short USD, long Gold, short stocks/indices. I feel that these larger moves can be caught this way. Sorry if I moved off topic!

Hi Nick,

certainly there are fundamental considerations that one can bring into the play. for example: Inflation (proper, meaty inflation) will re-appear as a global constant again in the future. When it does and is persistent, many commodity, ccy and securities markets will be doing very different things to what they are today.

Howard,
pretty clean info there, thanks. Those links are keeping me busy with plenty of reading. It appears you put in some serious research time. I would never have thought to look in that direction, thanks again.

Thanks also for everyone elses comments. I am a bit busy to delve into all of them at the moment, sorry.



ps - I am lured by consistency, not greed. . In a nutshell, I really like the idea of having core positions of macro scale around which I trade various strategies often with respect to the core position (ie, perhaps ignore LT shorts if you are long in the VLT, ignore MT shorts if you are long LT, ignore ST shorts if you are long MT. That is, you can trade a ST short if you are VLT long, but not if you are MT long).