Trend following not working on my 7,000 backtests !
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EnlightenedJoe
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That's ok Q, I had to TRY you know
Why not buy market data from someone and resell on ebay for $9.98, cheaper than the other guy ? There must be money in it. With all the free marketing you get on the internet that systems work, you can't lose.
It's not a degree you need pip. It's the ability to see where value can be extracted.
piphoe
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Find value and exploit it. That's beautiful, poignant this is what Bezos did in mid 90's selling books online. A great article on him read over weekend, can't find it to share here but I think that's why your sentiment just resonated with me.
EnlightenedJoe
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Well, the real reason he succeeded was because he was a superb merchant. Ebay preceded amazon but failed to achieve a success anywhere on the same scale. People who started ebay were idiot merchants and remained little people.
Unfortunately to extract money from markets, you have to be a good merchant. It helps to be born as one. Your pizza shop friend is one for instance. I am unconvinced they can teach you to be more than a mediocre merchant in a course if the needed genes are not present.
piphoe
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I kind of agree with this..everyone has heard this question:
Are great traders born, or made? The great ones are born, then made better. imo
if you don't have the "risk genes" you at at a disadvantage right from the start.
Traderjohnsblog
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Take a look at your exits. My guess that you will find clusters of losing trades entered during weak trends that went profitable but gave the gains back as the ema crosses the 55 ema. Even if I am wrong about that the answer will probably be found failure patterns within the results.
You are testing a ma cross over system. Whether it is reflective of a trend following system is clearly debatable. You are equivocating the two and concluding that trend following is not profitable. You are using 2ATR as a form of stop loss/take profit but then again has the trend changed if that parameter is hit? In other words, you are taking a bunch of stuff and assume they are representative of trend behaviour and then make conclusions. IMO your starting point is flawed. You have an uptrend trend when you have higher highs and higher lows and that trend ends when two swing points are taken out. A trend doesn't begin when you have a ma cross over or ends when your 2ATR is hit.
wallstreetwarrior87
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Simple as that! In one sentence.
Take it further - one word -
CONTEXT
How can a cross over at resistance be compared to a cross over at ATHs etc. Thats why these strats BE at BEST. Has to be some logic applied, as to what we are testing.
We can all drive a car at 70mph, better being on a motorway than a cul-de-sac mind you
I trend-follow in forex, also indices and occasionally stocks and commodities.
I do take 20/50EMA cross-overs if price is on the right side of the 200EMA but these are speculative. My real trend-following trades come when the 20 is steadily and consistently on the leading side of the 50, and to be honest any entry signal that doesn't involve chasing price at an all-time high will do. Entry signals are unimportant TA, its finding the best the trend using TA that is important. I use less of an entry signal and more of an entry justification.
I also look at the length and consistency of trends to judge which ones would be best to enter. Once I've entered, if the trend continues, I look to pyramid repeatedly to build a bank of parallel trades of equal size. When I find an earlier post again I will re-post up more details here.
Keep at it though.
I do take 20/50EMA cross-overs if price is on the right side of the 200EMA but these are speculative. My real trend-following trades come when the 20 is steadily and consistently on the leading side of the 50, and to be honest any entry signal that doesn't involve chasing price at an all-time high will do. Entry signals are unimportant TA, its finding the best the trend using TA that is important. I use less of an entry signal and more of an entry justification.
I also look at the length and consistency of trends to judge which ones would be best to enter. Once I've entered, if the trend continues, I look to pyramid repeatedly to build a bank of parallel trades of equal size. When I find an earlier post again I will re-post up more details here.
Keep at it though.
I Trend Follow all markets. At the moment I am mainly long stocks, due to the current bull market. But I am just as happy in futures and FX.
I would say you have to live trend following as a way of life, eat it sleep it, live it and breath it.
I don't think its just a matter of back testing a system or two or twenty or more.
It's a dedication of years of experience. Something that needs to be honed.
Learning and adapting. For example, as I said I am mainly in stocks at the moment, so just one of my many adaptions is to open new trades on earnings reports to give a good boost to the beginning of the trade. But maybe next year the market will turn bear, then a new adaption will be necessary. No quick fix here I am afraid.
My best recommendation would be to read the following books. Really study them. Then work out a mash up of the systems in these books to work out your your own system.
And your system will only be the beginning point of learning, not the end point. You will then need to be able to keep your account alive long enough to learn (many people blow up and never get to really start learning.)
How to Trade in Stocks - Jesse Livermore
Reminiscences of a Stock Operator - Edwin Lefevre
How I Made $2,000,000 in the Stock Market -Nicolas Darvas
The Original Turtle Trading Rules - Curtis Faith
Forex Patterns and Probabilities - ED Ponsi
If you are not prepared to dedicate years to this then do yourself a favour, pack up, go home and spend your valuable time doing something more up your street.
Good luck to you.
Edit: I can't stress this enough, (as one example) there will be plenty of times when exiting (on your) ma cross will not be the right thing to do. Sometimes market conditions will require other exits. Trying to trade a completely mechanical system is like saying I have memorized my drive to work, so now I will drive to work blind folded. You need to take into account all road conditions, the weather, other road uses, diversions etc etc. These are the little subtle variations in your trading system that take years to pick up and make the differences between a profitable trader and the other 95% of traders.
I would say you have to live trend following as a way of life, eat it sleep it, live it and breath it.
I don't think its just a matter of back testing a system or two or twenty or more.
It's a dedication of years of experience. Something that needs to be honed.
Learning and adapting. For example, as I said I am mainly in stocks at the moment, so just one of my many adaptions is to open new trades on earnings reports to give a good boost to the beginning of the trade. But maybe next year the market will turn bear, then a new adaption will be necessary. No quick fix here I am afraid.
My best recommendation would be to read the following books. Really study them. Then work out a mash up of the systems in these books to work out your your own system.
And your system will only be the beginning point of learning, not the end point. You will then need to be able to keep your account alive long enough to learn (many people blow up and never get to really start learning.)
How to Trade in Stocks - Jesse Livermore
Reminiscences of a Stock Operator - Edwin Lefevre
How I Made $2,000,000 in the Stock Market -Nicolas Darvas
The Original Turtle Trading Rules - Curtis Faith
Forex Patterns and Probabilities - ED Ponsi
If you are not prepared to dedicate years to this then do yourself a favour, pack up, go home and spend your valuable time doing something more up your street.
Good luck to you.
Edit: I can't stress this enough, (as one example) there will be plenty of times when exiting (on your) ma cross will not be the right thing to do. Sometimes market conditions will require other exits. Trying to trade a completely mechanical system is like saying I have memorized my drive to work, so now I will drive to work blind folded. You need to take into account all road conditions, the weather, other road uses, diversions etc etc. These are the little subtle variations in your trading system that take years to pick up and make the differences between a profitable trader and the other 95% of traders.
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As mentioned earlier, please see below details of my trend-following trading.
I follow a very simple strategy with no off-chart indicators, no news input, no FA input. As far as possible, I want to use objective criteria only.
Primary requirements -
(example is for longs, reverse as appropriate for shorts)
All must be fulfilled.
1. 20EMA is above 50EMA
2. 50EMA is sloping upwards
3. 50EMA is above 200EMA
Secondary requirements =
As many as possible of these must be fulfilled: a higher score prioritises a trade in that pair.
4. Price is above 200EMA
5. At least 80% of last 16 weekly highs, lows and closes above 50EMA?
6. At least last 4 weekly bars not pierced by 50EMA?
7. At least last 8 weekly bars not pierced by 50EMA?
8. At least last 4 weekly closes above 50EMA?
9. At least last 8 weekly closes above 50EMA?
10. Does last complete weekly bar overlap fewer than 4 immediately preceding weekly bar ranges?
11. Does a clear majority of other pairs with same base currency also show 20EMA above 50EMA?
This gives a possible maximum score of 11 per chart. I will prioritise long entries into pairs with highest scores. Entry signals are not a key factor but will be typically -
a) just above a daily close that is above the 20EMA following a daily close below it on the previous day
b) just above a daily close on a bullish candle that has traded below the 20EMA but closes above it
But entry pattern is not really important as long as you're not chasing price.
I often take a long off a 20/50EMA cross-over as long as price is above the 200EMA.
Stop-loss on the initial position is TA-based, e.g. just below the low of the last swing low on the dailies. If that's too far away, use 1-2ATR below entry.
No TP's.
Pyramiding -
When initial trade opened, set a new entry order where initial trade will reach profit equivalent to initial risk in £. When this triggers, set trade 2's risk to the same in £, move Trade 1's SL to b/e. Keep setting new entry orders at each increment of the same gain in £, and moving each existing trade's SL up by the same £.
I follow a very simple strategy with no off-chart indicators, no news input, no FA input. As far as possible, I want to use objective criteria only.
Primary requirements -
(example is for longs, reverse as appropriate for shorts)
All must be fulfilled.
1. 20EMA is above 50EMA
2. 50EMA is sloping upwards
3. 50EMA is above 200EMA
Secondary requirements =
As many as possible of these must be fulfilled: a higher score prioritises a trade in that pair.
4. Price is above 200EMA
5. At least 80% of last 16 weekly highs, lows and closes above 50EMA?
6. At least last 4 weekly bars not pierced by 50EMA?
7. At least last 8 weekly bars not pierced by 50EMA?
8. At least last 4 weekly closes above 50EMA?
9. At least last 8 weekly closes above 50EMA?
10. Does last complete weekly bar overlap fewer than 4 immediately preceding weekly bar ranges?
11. Does a clear majority of other pairs with same base currency also show 20EMA above 50EMA?
This gives a possible maximum score of 11 per chart. I will prioritise long entries into pairs with highest scores. Entry signals are not a key factor but will be typically -
a) just above a daily close that is above the 20EMA following a daily close below it on the previous day
b) just above a daily close on a bullish candle that has traded below the 20EMA but closes above it
But entry pattern is not really important as long as you're not chasing price.
I often take a long off a 20/50EMA cross-over as long as price is above the 200EMA.
Stop-loss on the initial position is TA-based, e.g. just below the low of the last swing low on the dailies. If that's too far away, use 1-2ATR below entry.
No TP's.
Pyramiding -
When initial trade opened, set a new entry order where initial trade will reach profit equivalent to initial risk in £. When this triggers, set trade 2's risk to the same in £, move Trade 1's SL to b/e. Keep setting new entry orders at each increment of the same gain in £, and moving each existing trade's SL up by the same £.
qwertyuiop1
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Yes. Its interesting to get peoples feedback. Thank you for the feedback.
I guess the main point of my post was that if you read any book on trend-following, broadly speaking you get the impression that if you manage your risk, cut your losses, let profits run etc. that really it is a psychological challenge in handling drawdowns after that.
i.e. the system will certainly be profitable - but can you the trader actually trade it consistently?
And I guess my very comprehensive back test (if I may say so myself !) proves otherwise.
To be fair - the rules I used aren't bad and do adhere to all the basic principles of trend-following.
It used ATR for a SL placement (like the turtles), used moving average crossover instead of ATR trailing like the turtles did - but really...there's no reason why one should be better than the other over the long run.
Even this guy http://www.thetrendfollower.com/p/below-are-detailed-performance.html
His system is very similar to mine and he has a positive expectancy of 0.32R - (albeit he enters on a breakout rather than mine which entered on a moving average crossover)(
He then pushes his stop-loss to break even after 24 hours if trade in profit or else closes (Please note as per my original post I also back-tested this Stop loss adjustment but it didn't help my results)
May I also add (and this bit is very disconcerting) - I originally manually back tested my system over a 8-10 uncorrelated instruments (mainly commods rather than FX) over 300 trades over the last year only.
This had a positive expectancy of 0.22R per trade.
This gave me full confidence on the system - it was only by pure chance I decided to follow up with outsourcing a more thorough back test like I did on FX pairs.
(I think most people would have reasonably ascertained that 300 trades is enough of a sample size. I'm sure many have brought a system live on a smaller sample sized back test)
But in this instance it wasn't !
Now of course you could say maybe commods have a 'personality' more suited to my system. But I think my system should be more robust than that.
The main point of my thread is this. Sticking to the basic simple ideologies of trend following is not enough - unlike what the books may make you think.
Even in Curtis Faith book he emphasises simplicity. But i'm questioning that. Although in saying that the turtles rules were very simple and had a lot in common with my own rules. SO why did their rules work and mine didn't?
Yes - they entered on a breakout which I am not doing. But they also emphasis that the entry is of little relevance anyway and trade management and sticking with the system is the key!
In fact - if I remember correctly Richard Dennis himself said in market wizards book he thinks anyone could come up with rules that are at least 80% as effective as his but the problem is they wouldn't stick to the rules.
I believe mine would be in that 80% - but still doesn't work. Have I just proved Richard Dennis wrong ??
And also - in Michael Covells book he gives a number of different systems that are effectively moving average crossover systems - and he states in the book that his comprehensive back tests provide a positive expectancy.
SO I'm just really confused really. I feel I've done nearly everything right - or at the very least I haven't done anything obviously wrong. And it doesn't work !
I do note a couple of posters suggested my entry was not good enough - but if you buy into the theory that the entry is least important, (which is broadly considered conventional wisdom - logic that I too would agree with) then I cant put too much weight on the notion of changing my entry will be the difference of turning the entire system into a positive expectancy.
Definitely back to the drawing board it seems !
I guess the main point of my post was that if you read any book on trend-following, broadly speaking you get the impression that if you manage your risk, cut your losses, let profits run etc. that really it is a psychological challenge in handling drawdowns after that.
i.e. the system will certainly be profitable - but can you the trader actually trade it consistently?
And I guess my very comprehensive back test (if I may say so myself !) proves otherwise.
To be fair - the rules I used aren't bad and do adhere to all the basic principles of trend-following.
It used ATR for a SL placement (like the turtles), used moving average crossover instead of ATR trailing like the turtles did - but really...there's no reason why one should be better than the other over the long run.
Even this guy http://www.thetrendfollower.com/p/below-are-detailed-performance.html
His system is very similar to mine and he has a positive expectancy of 0.32R - (albeit he enters on a breakout rather than mine which entered on a moving average crossover)(
He then pushes his stop-loss to break even after 24 hours if trade in profit or else closes (Please note as per my original post I also back-tested this Stop loss adjustment but it didn't help my results)
May I also add (and this bit is very disconcerting) - I originally manually back tested my system over a 8-10 uncorrelated instruments (mainly commods rather than FX) over 300 trades over the last year only.
This had a positive expectancy of 0.22R per trade.
This gave me full confidence on the system - it was only by pure chance I decided to follow up with outsourcing a more thorough back test like I did on FX pairs.
(I think most people would have reasonably ascertained that 300 trades is enough of a sample size. I'm sure many have brought a system live on a smaller sample sized back test)
But in this instance it wasn't !
Now of course you could say maybe commods have a 'personality' more suited to my system. But I think my system should be more robust than that.
The main point of my thread is this. Sticking to the basic simple ideologies of trend following is not enough - unlike what the books may make you think.
Even in Curtis Faith book he emphasises simplicity. But i'm questioning that. Although in saying that the turtles rules were very simple and had a lot in common with my own rules. SO why did their rules work and mine didn't?
Yes - they entered on a breakout which I am not doing. But they also emphasis that the entry is of little relevance anyway and trade management and sticking with the system is the key!
In fact - if I remember correctly Richard Dennis himself said in market wizards book he thinks anyone could come up with rules that are at least 80% as effective as his but the problem is they wouldn't stick to the rules.
I believe mine would be in that 80% - but still doesn't work. Have I just proved Richard Dennis wrong ??
And also - in Michael Covells book he gives a number of different systems that are effectively moving average crossover systems - and he states in the book that his comprehensive back tests provide a positive expectancy.
SO I'm just really confused really. I feel I've done nearly everything right - or at the very least I haven't done anything obviously wrong. And it doesn't work !
I do note a couple of posters suggested my entry was not good enough - but if you buy into the theory that the entry is least important, (which is broadly considered conventional wisdom - logic that I too would agree with) then I cant put too much weight on the notion of changing my entry will be the difference of turning the entire system into a positive expectancy.
Definitely back to the drawing board it seems !
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qwertyuiop1
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dbphoenix
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What you've done is to "prove" that others' systems are ineffective, which is not the same thing as proving that trend-following is ineffective. You must first learn just what trend is and how it plays out. This is not difficult given that the market has only two states available to it: trending and ranging. If you don't understand the characteristics of each and how to distinguish between them, you're stuck at Go.
Can all these people be wrong? Yes.
As for trade entry being unimportant, the "conventional wisdom" can also be wrong. If after all you are immediately in a loss position, what does that do to you in terms of being able to manage the trade? Before taking someone's word for it that entry doesn't matter, I'd want to see a hell of a lot of verified trades that aren't anecdotal.
Giving up at this point is not wise. You're not required to learn how to trade both trends and ranges, but why not? They're not difficult. But first you have to forget about everything you "know" that isn't true.
I read through and don’t think I’ve seen any mention of different exit strategies. In my tests I found the exit can be more important than the entry with massive difference in outcomes. If you can, test what closing at 2r vs 3r vs moving stop at entry at 1r or 2r then close when candle closes through a 9 ema .... just some ideas to play with. Also, how do you plan not to get killed in ranging markets? Tomorton above had a condition that could help you a little. Only trade if the EMAs are stacked and add a 200. Alternatively, only enter a trade in the direction of the trend in the higher time frame to a multiple of 4. Again, just ideas for you to mess about with, best of luck.
Edit: Not sure how you do your tests but could you set it so you dont enter longs within a set distance of previous day’s high and wait for a break first and viceversa for the shorts? I dont use crossovers but use EMAs and I find that significant levels such as pivots, daily highs/lows play a big part and dont think you allow for that. You might find forward testing with little money or even a Demo more useful as you could add filters that make sense.
Btw, english is my second language, if all I did was confuse, I apologise.
Edit: Not sure how you do your tests but could you set it so you dont enter longs within a set distance of previous day’s high and wait for a break first and viceversa for the shorts? I dont use crossovers but use EMAs and I find that significant levels such as pivots, daily highs/lows play a big part and dont think you allow for that. You might find forward testing with little money or even a Demo more useful as you could add filters that make sense.
Btw, english is my second language, if all I did was confuse, I apologise.
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qwertyuiop1
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You've made some interesting points for me to think about. I guess I want to avoid tweaking parameters too much to avoid curve fitting. But if the tweaks make sense and if successful over a similar sample size then the tweaks may well be valid.
You may have missed it on my original post but I did try adjusting after 24 hours depending on whether trade in profit or not but it made no noticeable difference.
Out of curiosity do you trade a successful trend following strategy yourself?
If so what is your expectancy cy per tade do you have in terms of R? And over whstvsampke size?
EnlightenedJoe
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Why would a curve fitter avoid curve fitting ? This makes no sense. But I don't suppose it matters, the outcome is exactly same when real money is involved.
Same like when you try to take someone's money on the street and you do a curve fit before you try to take someone's money on the street, you will end up in exactly the same place: in a police cell or laying on the ground clutching your crotch from pain.
Making money isn't about curves, it's about why should someone willingly give your their money. Money in the market don't grow on trees that you can just pluck off at will.
qwertyuiop1
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But I'm not a curve fitter. Nor should anyone be a curve fitter.
All successful systems need to be robust.