Long Term Trends

[jwsoane]

I realise that the vast majority of this forum's posts are concentrated on very short term strategies but I was wondering if anyone here has experimented (either backtesting or actually running) longer term trading strategies.

I have been experimenting with a strategy based on very simple measures of momentum in equity indices and major macro asset classes that chooses 1 single macro asset class or major equity index to invest 100% of available capital into and and have backtested returns since early 1999 of roughly 15% annualized taking into account transaction costs, with volatility of roughly 20% annualized and turning over the portfolio roughly 3 to 4 times a year.

I have also read this forum enough to see people shooting around Sharpe ratios of 5, 6, 10... I realise that this doesn't compare to those (not that I have much faith that they are real/implementable but whatever) but a. what I'm trying to do here is completely different and b. 15% a year for the last 11 years is really not that bad considering what the wider market has done. A Sharpe ratio that is double the market's is definitely something worth having over a long period of time especially given the easy implementability of this strategy.

I'm really just looking to see if anyone else has tried something similar/has any experience/ideas that they'd like to share.

 

[nikke]

Imo longer term is easier to make profitable but limits the compounding.
Also, cant buy food with Sharpe ratio.

 

[intradaybill]

longer term strategies are basically trend following schemes. Most do not have the discipline to follow such rules. They turn to be amazingly simple and robust but the drawdown is large quite often the the capitalization requirements high.

This blog is long but worth reading IMO. It offer some good quantitative insight as to why most people stay away from longer timeframes:

http://www.priceactionlab.com/Blog/2011/01/why-trend-following-is-hard-a-quantitative-answer/

 

[jwsoane]

Thanks for the link, just the kind of resource I'm looking for.
What would a rough $ estimate of 'high capitalization requirements' be in your mind....?

 

[horace]

I realise that the vast majority ....

Hi!

I am actually using a long term stretegy for equities. Currently "trading" con SP. The historicall hypoteticall results are roughly as follow (it's an only-long strategy):

Trading since 1950 that we have historicall data.
127 trades
53% accuracy
W/L: 2.4
Net Profit Per Trade: 2450$
Max DD: 31.200$
Net Profit: 311.000$
Largest Loser: 5.400$
Largest Winner: 14.500$

I don't care about the sharp ratio.

No money management. No compounding. Same amount of shares each trade.

No tricks. You win but you have no adrenaline rush.

Best regards,

Horacio

 

[Adamus]

Thanks for the link, just the kind of resource I'm looking for.
What would a rough $ estimate of 'high capitalization requirements' be in your mind....?

You need high capitalization if you are going to trade futures because you can't reduce your exposure below 1 lot, and the most robust strategies trade a basket of 50 or 100 instruments. So you need enough for the margin.

And then there's what's called 'initial drawdown' which is what happens if you're unlucky enough (read 50% of the time) to start when the strategy has just had an equity peak and goes into drawdown. You need to know what that is likely to be and have double that amount in your account to cover the uncertainty of the future.

If you reduce the number of instruments in your strategy, you increase the probability and % size of the initial drawdown.

You could stick to forex and spread-betting instruments like US30 and XAUUSD where you can trade small.

You should get the historical data and look at the backtest results showing portfolio equity. You have to do the work to convince yourself of the risk, or you will bottle it when the sheep hits the fan.

 

[jwsoane]

That makes perfect sense. Given those downsides, would you say it is significantly more advisable to be trading futures on indices rather than ETFs on indices to execute a strategy like this?

You need high capitalization if you are going to trade futures because you can't reduce your exposure below 1 lot, and the most robust strategies trade a basket of 50 or 100 instruments. So you need enough for the margin.

And then there's what's called 'initial drawdown' which is what happens if you're unlucky enough (read 50% of the time) to start when the strategy has just had an equity peak and goes into drawdown. You need to know what that is likely to be and have double that amount in your account to cover the uncertainty of the future.

If you reduce the number of instruments in your strategy, you increase the probability and % size of the initial drawdown.

You could stick to forex and spread-betting instruments like US30 and XAUUSD where you can trade small.

You should get the historical data and look at the backtest results showing portfolio equity. You have to do the work to convince yourself of the risk, or you will bottle it when the sheep hits the fan.

 

[jwsoane]

Hey,

Is that a value/trend/both/something else-based strategy? While I admire the consistency and low drawdowns of your equity curve, unless you plan to lever up and execute that strategy, is it worth using a system that has underperformed a simple buy and hold tactic?

Hi!

I am actually using a long term stretegy for equities. Currently "trading" con SP. The historicall hypoteticall results are roughly as follow (it's an only-long strategy):

Trading since 1950 that we have historicall data.
127 trades
53% accuracy
W/L: 2.4
Net Profit Per Trade: 2450$
Max DD: 31.200$
Net Profit: 311.000$
Largest Loser: 5.400$
Largest Winner: 14.500$

I don't care about the sharp ratio.

No money management. No compounding. Same amount of shares each trade.

No tricks. You win but you have no adrenaline rush.

Best regards,

Horacio

 

[horace]

Hi jwsoane,

It is a trend following strategy.

Of course the benefits of compounding and leveraging and blah, blah, blah are not factored in. That is an unfair game when you run into comparison street. So I prefer to be honest with myself.

On the other side, sure this strategy is better than the pure, simple (and stupid) B&H strategy. That's a losers game. Unless you want to wait 15 years (or whatever) to profit of course. Not taking into account the 60% time in market of this strategy which leaves you with a lot of time for other revenue sources.

B&H has been losing money for 12 years now, and who knows what the future has in it's pockets for us? There have been plenty of periods of 4-15 years of loosing streaks with B&H.

IMHO, B&H is the best way to leave your savings to your children. Apart from that I see no benefit in it.

H

Hey,

Is that a value/trend/both/something else-based strategy? While I admire the consistency and low drawdowns of your equity curve, unless you plan to lever up and execute that strategy, is it worth using a system that has underperformed a simple buy and hold tactic?

 

[jwsoane]

When you say the benefits of leverage are not factored in, I'm not sure how great those benefits are, more risk than benefit in my mind.

I would not say buy and hold is a losers game but I do also reject the idea that it can't be improved upon.

http://img101.imageshack.us/i/resultsv.png/

Here is a link to the performance (red line) of my strategy since 1999 vs. the components that go into it. As I mentioned it generated returns of roughly 15% with volatility of roughly 20% during a time when the S&P 500 went pretty much nowhere.

In terms of the trends you look at? Are we talking simple price return? If so what period(s)? Volume? RSI? I have played around with these but can't find that much that adds to 12 month simple return as a measure of a trend, or doesn't expose me to curvefitting/datasnooping/whatever you call it.

Hi jwsoane,

It is a trend following strategy.

Of course the benefits of compounding and leveraging and blah, blah, blah are not factored in. That is an unfair game when you run into comparison street. So I prefer to be honest with myself.

On the other side, sure this strategy is better than the pure, simple (and stupid) B&H strategy. That's a losers game. Unless you want to wait 15 years (or whatever) to profit of course. Not taking into account the 60% time in market of this strategy which leaves you with a lot of time for other revenue sources.

B&H has been losing money for 12 years now, and who knows what the future has in it's pockets for us? There have been plenty of periods of 4-15 years of loosing streaks with B&H.

IMHO, B&H is the best way to leave your savings to your children. Apart from that I see no benefit in it.

H

 

[Adamus]

That makes perfect sense. Given those downsides, would you say it is significantly more advisable to be trading futures on indices rather than ETFs on indices to execute a strategy like this?

In terms of advisability, there may be many other factors to look at too, but I would say it's all a question of transaction costs. Commission, broker slippage, bid/ask spread per round-turn, carry interest, platform cost/rent, price feed fees. Compare that to your average profit per trade.

If you just trade indices, your returns will be highly correlated. That means your drawdowns for different instruments will all happen at the same time. You want to cover widely different markets, e.g. a stock index, a STIR, a treasury, a currency, a metal, an energy, an agricultural.

 

[jwsoane]

Definitely all about transaction costs, can sometimes be hard to model. For instance modeling whether I get stopped out of a position in my spread betting account and have to put it back on would double the spread I'd be paying... but that makes sense as a way to look at it.

For the indices I was looking at
Equity indices (all MSCI) - N. America, Latin America, Europe, EMEA, South Africa, Asia ex Japan, Japan
Macro indices - corporate credit, developed market sovereign bonds, emerging market sovereign bonds, commodity index, real estate index
I agree they are relatively correlated but not to the extent that the strategy doesn't work - high quality bonds, in particular, are negatively correlated with most other asset classes over the short term

Thinking of trying to improve the model by incorporating a volatility allocation, option of investing directly in gold and would also liked also to find a way to gain exposure to MBS
I like the metal/energy/agricultural breakdown, will try that. The currency also makes sense but I've had little luck writing systems for those in the past, and which one to choose?

In terms of advisability, there may be many other factors to look at too, but I would say it's all a question of transaction costs. Commission, broker slippage, bid/ask spread per round-turn, carry interest, platform cost/rent, price feed fees. Compare that to your average profit per trade.

If you just trade indices, your returns will be highly correlated. That means your drawdowns for different instruments will all happen at the same time. You want to cover widely different markets, e.g. a stock index, a STIR, a treasury, a currency, a metal, an energy, an agricultural.

 

[Adamus]

Definitely all about transaction costs, can sometimes be hard to model. For instance modeling whether I get stopped out of a position in my spread betting account and have to put it back on would double the spread I'd be paying... but that makes sense as a way to look at it.

For the indices I was looking at
Equity indices (all MSCI) - N. America, Latin America, Europe, EMEA, South Africa, Asia ex Japan, Japan
Macro indices - corporate credit, developed market sovereign bonds, emerging market sovereign bonds, commodity index, real estate index
I agree they are relatively correlated but not to the extent that the strategy doesn't work - high quality bonds, in particular, are negatively correlated with most other asset classes over the short term

Thinking of trying to improve the model by incorporating a volatility allocation, option of investing directly in gold and would also liked also to find a way to gain exposure to MBS
I like the metal/energy/agricultural breakdown, will try that. The currency also makes sense but I've had little luck writing systems for those in the past, and which one to choose?

I can see you're not** aiming for the completely minimalist basket of instruments then.

As for currencies, choose one with the least transaction costs like USD.JPY or EUR.USD. Beware of correlation though if choosing more than one. e.g. EUR.USD & GBP.USD is the classic correlation.

** Sorry just corrected that after re-reading.

 

[jwsoane]

The reason I have shyed away from currencies is that there is no clear SUPER long-term trend (i.e. up) that characterizes other macro indices... which adds an additional layer of uncertainty and risk. I first backtested my strategy with a dollar index as an asset class but this has basically been in decline for the last 20 years so the strategy churned more and did worse with USD as part of it

I appreciate that they would be great as diversification but none of the simple price action strategies I have tried seemed to have much predictive power with FX

Have you tried any such strategies with success?

I can see you're not** aiming for the completely minimalist basket of instruments then.

As for currencies, choose one with the least transaction costs like USD.JPY or EUR.USD. Beware of correlation though if choosing more than one. e.g. EUR.USD & GBP.USD is the classic correlation.

** Sorry just corrected that after re-reading.

 

[Adamus]

I only trade currencies. I have several systems that I'm working on. At one point I realized that the system I was working on was massively profitable going long and only made losses going short or vice-versa depending on the currency pair I was looking at. This was because of clear super long term trends over the 10 year backtest period.

The system was only really profitable trading in the direction that the currency pair had moved relative to the start. There were a couple of pairs that ended up in 2009 pretty much where they had been in 1999 and the system ended just break-even on them.

I figured that such systems were simply taking a 50:50 bet that the super trend would continue. So I broke my testing down into long only and short only, effectively doing it all twice, to make sure I would see the long / short disparity straight away.

So yes there is an additional layer of complexity and risk, but my aim is to neutralize that risk rather than play on it.

My most successful system which I effectively live off makes swing trades off a simple MA cross-over trigger with swing-high / swing-low points as filters. Another is based on momentum, CCI and time of day. Another is based on the 3 Ducks (check out the Captain Currency thread).

I'm sorry to hear you say that your price action research isn't bearing fruit, because that's just what I'm studying right now - Al Brooks, Yourtradingcoach.com etc. It's all based on 5 min charts in the literature I'm looking at, but the authors all say it's just as applicable to longer time frames and different markets.

 

[SanMiguel]

I realise that the vast majority of this forum's posts are concentrated on very short term strategies but I was wondering if anyone here has experimented (either backtesting or actually running) longer term trading strategies.

I have been experimenting with a strategy based on very simple measures of momentum in equity indices and major macro asset classes that chooses 1 single macro asset class or major equity index to invest 100% of available capital into and and have backtested returns since early 1999 of roughly 15% annualized taking into account transaction costs, with volatility of roughly 20% annualized and turning over the portfolio roughly 3 to 4 times a year.

I have also read this forum enough to see people shooting around Sharpe ratios of 5, 6, 10... I realise that this doesn't compare to those (not that I have much faith that they are real/implementable but whatever) but a. what I'm trying to do here is completely different and b. 15% a year for the last 11 years is really not that bad considering what the wider market has done. A Sharpe ratio that is double the market's is definitely something worth having over a long period of time especially given the easy implementability of this strategy.

I'm really just looking to see if anyone else has tried something similar/has any experience/ideas that they'd like to share.

The vast majority of forums concentrate on short term trading. Does that tell you anything?

 

[jwsoane]

Could tell me many things...

People are greedy... want to compound faster

People have more time on their hands than me... can't sit there making trades all day

People haven't read academic financial literature... all the work on momentum indicates that it is a 0-12 month phenomenon

People know something I don't...

The last one is certainly true but I started out looking long term because the one thing that I know loses money every time is making a trade (i.e. paying out TCs) so I thought the best chance I had of making a successful system was one that trades infrequently

I'm also not well-versed in the million and one technical indicators that people on this forum talk about, all my systems use very simple indicators

I am interested in this but can I ask a few things...

Where do you get super high-frequency data? Or do you use backtesting software or a broker that provides it? In which case, which one? Also do you know any that offer a good product on macintosh?

Sorry to ask so many quetions...

The vast majority of forums concentrate on short term trading. Does that tell you anything?

 

[SanMiguel]

Could tell me many things...

People are greedy... want to compound faster

People have more time on their hands than me... can't sit there making trades all day

People haven't read academic financial literature... all the work on momentum indicates that it is a 0-12 month phenomenon

People know something I don't...

The last one is certainly true but I started out looking long term because the one thing that I know loses money every time is making a trade (i.e. paying out TCs) so I thought the best chance I had of making a successful system was one that trades infrequently

I'm also not well-versed in the million and one technical indicators that people on this forum talk about, all my systems use very simple indicators

I am interested in this but can I ask a few things...

Where do you get super high-frequency data? Or do you use backtesting software or a broker that provides it? In which case, which one? Also do you know any that offer a good product on macintosh?

Sorry to ask so many quetions...

It tells me that the large majority of people on forums are under leveraged (hence can only trade short term with small stops), think that trading has to be wheeling and dealing ion and out of trades scalping, and yes greedy. I too started on small timeframes but I'll admit now I shouldn't have and although I've learnt a lot from it I only trade based on the Daily timeframe now with perhaps a look to the 1hr charts for entry. SOmeone once said you have no buisness trading the small timeframes until you can trade a Daily chart successfully and I believe them, most of the big money is focused on Daily and weekly trends/prices. Perhaps I still trade more frequently than you might be thinking of but I get about 1 trade a week based on the EURUSD, now that's pretty boring waiting around but that's the way it is playing safe.

 

[Adamus]

It tells me that the large majority of people on forums are under leveraged (hence can only trade short term with small stops), think that trading has to be wheeling and dealing ion and out of trades scalping, and yes greedy. I too started on small timeframes but I'll admit now I shouldn't have and although I've learnt a lot from it I only trade based on the Daily timeframe now with perhaps a look to the 1hr charts for entry. SOmeone once said you have no buisness trading the small timeframes until you can trade a Daily chart successfully and I believe them, most of the big money is focused on Daily and weekly trends/prices. Perhaps I still trade more frequently than you might be thinking of but I get about 1 trade a week based on the EURUSD, now that's pretty boring waiting around but that's the way it is playing safe.

I think you mean over-leveraged and under-capitalized, surely?

I believe the opposite to the someone who once said you have no business trading the small timeframes until you can trade a daily chart.

Firstly there is no monopoly on who can trade - unfortunately for the 95% who are bound to lose at trading. It's everyone's business, but it should be a business and not a thrill trip, and I think that is the point the original protagonist was making. Stick to a daily timeframe and you're more likely to make it a business than a rollercoaster ride.

But more technically, with a daily timeframe, you will take 24 times longer to discover your mistakes than on an hourly timeframe and the losses are likely to be that much more.

At the end of the day though I believe you need to find the timeframe that suits you best.

Someone else once said, to be successful you have to find a trading strategy that suits your personality. If you're bored out of your head trading daily charts, you're unlikely to stick with it through the drawdowns.

 

[SanMiguel]

I think you mean over-leveraged and under-capitalized, surely?

Yes, sorry, I've had a few beers this afternoon

[/quote]
I believe the opposite to the someone who once said you have no business trading the small timeframes until you can trade a daily chart.

Firstly there is no monopoly on who can trade - unfortunately for the 95% who are bound to lose at trading. It's everyone's business, but it should be a business and not a thrill trip, and I think that is the point the original protagonist was making. Stick to a daily timeframe and you're more likely to make it a business than a rollercoaster ride.

But more technically, with a daily timeframe, you will take 24 times longer to discover your mistakes than on an hourly timeframe and the losses are likely to be that much more.
[/quote]
Not really, risk is risk if you treat is as a percentage/

At the end of the day though I believe you need to find the timeframe that suits you best.

Someone else once said, to be successful you have to find a trading strategy that suits your personality. If you're bored out of your head trading daily charts, you're unlikely to stick with it through the drawdowns.

yeah, maybe my point was simply that the lower down you go the more "noise" you are subject to but it's horses for courses everyone's temperament will differ but people who start out trading the small TFs are likely to get shafted just because of changing strategies, no risk control, noise, over reliance on indicators, etc. etc.