Is trend your friend?

[oxusmorouz]

eh, I don't believe so, atleast, not from my backtesting experiments. Posting the equity curve trend following system (blue) and equity curve for buy-hold (red). This is the best rule I had and it's gone for a sixer in the long run (with reasonable slippages, without brokerage!!). This process has made me question the foundations of technical analysis itself. Maybe I'm a lousy system developer and you guys can do better.

If someone can disprove the following deductions, it would be great.

Deductions:
1) Trend following works in the short run, trading dailies (from my understanding)
2) Trend following requires active management of portfolio leading to significant slippages, brokerage commissions, investment in data, software and hardware, taxes and time
3) Trend following goes for a sixer in the long run (trading daily charts) compared with buy and hold.
4) It is impossible to beat buy-hold returns on a basis adjusted for risk, money and time spent...eh, atleast not by trend following.

Well, with due respects, I have no intention of criticizing trend followers or the momentum traders and I am open to be disproved.

 

[oxusmorouz]

Since image uploading is restricted to 5 images, I'm posting more images in this post.
Metastock code for the rule and equity curve shall be posted if necessary.
Perhaps this explains why many technical traders struggle in the long run?

The reason I chose Dow Jones Industrial Average data is because the OHLC extends back upto 1970. Nifty data extends only 12 years back and most of it is manipulated by some scam or the other.

 

[oxusmorouz]

If a person who started to trade in 1970,having 100$, invested his money in DJIA futures (with leveraging 20%) and held onto it till 2005, his return would have been 7.8% an annum. Investing the other 80$ in some risk free asset which gives an after tax return of 6% would have given him a total return of: 7.8 + .8*6 = 12.6% p.a, profits not-compounded without incurring much expenditure in softwares, data and eh...spending their time learning to trade and effectively utilizing it by undertaking some other productive activity.

From the looks of it, over a significant period of time, the only people who seem to be gaining from active trading are brokers, government, data and software vendors, trading system retailers, paid tipsters, mutual fund managers (eh...not by trading but by management fee), portfolio managers (same case here), advisory services, hardware stores and occasionally...very occasionally, extremely talented or extremely lucky active traders.

 

[CreditViolet]

Deductions:
1) Trend following works in the short run, trading dailies (from my understanding)
2) Trend following requires active management of portfolio leading to significant slippages, brokerage commissions, investment in data, software and hardware, taxes and time
3) Trend following goes for a sixer in the long run (trading daily charts) compared with buy and hold.
4) It is impossible to beat buy-hold returns on a basis adjusted for risk, money and time spent...eh, atleast not by trend following.

Erudite Deductions.

Also it depends on the definition of trend-following.Trend following as in terms of buying highs and lows is not a great way to follow trends even though a lot of noise is made about it.There are more efficient statistical ways to follow a trend, ofcourse one doesnt hear much about it.

The whole purpose of the market is to screw someone who thinks he has figured out the trend.

Another thing Oxy, if trend is your friend, you need to get out more

 

[beginner_av]

The trend is your friend before it bends! Do you know what gave me a great result in backtest. A MA crossover in a 5 min timeframe. The "secret" was proper MM. As Boss says, its getting out in Trend Foll that counts. ANd whats the latest buzz these days everywhere, not just in India? "Ouch that close to open price shock! Help me pleasee!!!"

 

[Niranjanam]

Hi
I cant prove or disprove anything. But I believe momentum strategies work in markets.
I am trading momentum very profitably for the last one year.Here is what I do.

Daily make a list which have gone up 25% or more in the trailing one month
Select which have gained more than 4% on the day with high volume.
Check news/results/fundas etc to find the catalyst behind the move.
Check the charts (No Indicators) to find past behavior.
Short list and buy it the next day if it is going up(If funds are available).use trailing stops and a time stop.
apply some very basic MM and enjoy profits. so simple !

Probably some of you may scoff, but I don't mind.

Niranjanam

 

[amitt29]

Interesting.

 

[uasish]

Niranjanam,
Atleast i do not scuff ,rather respect all Traders who actually earn even Rs 10.00 based on his own understanding ,mostly are Paper Traders ,in Jesse's term Trolling.
Asish
Ajay,
Notional & Actual ,Investor & Trader are all very clearly known by you.Noise constitutes even Arbitraggers ,the Safest Return path ,yielding over 12% per annum minimum ,is even better than 7.8% ,as shown by you.This you know best than me.
Trend or Counter Trend is the Best,it all depends how we identify.My personal experience says it is not in Entry/Exit blah blah but sensing the Yellow light early before the Red is most Imp when on Trade.Everyday if one looks at the screen relaxedly ,putting actual money days , months & years together develops an uncanny sense of the forth coming tempest.
Ask any experienced 'Dealer' ,where though he may not have put his real money,but client's pally to him,you will get an input,which are very difficult to codify.
Asish

 

[oxusmorouz]

Erudite Deductions.

Thanks CV.

Also it depends on the definition of trend-following.Trend following as in terms of buying highs and lows is not a great way to follow trends even though a lot of noise is made about it.There are more efficient statistical ways to follow a trend, ofcourse one doesnt hear much about it.

Yes CV, I might as well define the trend following I speak about in my post properly.
Trend Following - The use of canned indicators, acting as approximation of price, or any other unscientific methods (by unscientific, I mean not capable of being tested and validated), not based on any logical concept, which tries to take advantage of price movements in both directions.

The whole purpose of the market is to screw someone who thinks he has figured out the trend.

Another thing Oxy, if trend is your friend, you need to get out more

LOL

 

[oxusmorouz]

Hi
I cant prove or disprove anything. But I believe momentum strategies work in markets.
I am trading momentum very profitably for the last one year.Here is what I do.

Daily make a list which have gone up 25% or more in the trailing one month
Select which have gained more than 4% on the day with high volume.
Check news/results/fundas etc to find the catalyst behind the move.
Check the charts (No Indicators) to find past behavior.
Short list and buy it the next day if it is going up(If funds are available).use trailing stops and a time stop.
apply some very basic MM and enjoy profits. so simple !

Probably some of you may scoff, but I don't mind.

Niranjanam

Dear Niranjanam,
Check news/results/fundas etc to find the catalyst behind the move.
Check the charts (No Indicators) to find past behavior.
Short list and buy it the next day if it is going up(If funds are available).use trailing stops and a time stop.
apply some very basic MM and enjoy profits. so simple !

These points described by you are, alas, beyond the scope of validation and are subjective in nature. I've used points test, not equity based test, so the question of money management does not arise. As CV once said in his post, "Money management can only reduce the bleeding of a poor performing system and does do much by itself". A question again would arise as to what type of "trailing stops" to use etc. Perhaps it is not as simple as it seems.