Blog Profile: Automated Trading System, Trend Followers Dream Blog
June 8, 2010 1 Comment
This is a great place for all mechanical traders, especially those with an inclination for trend following methods. As with many traders Jez Liberty faced many challenges and a big drawdown early in is trading life.
My first priority now is to build a “simple” long-term end-of-day trend following system for futures while accumulating enough capital to trade it. And I intend to document that journey through this blog, hopefully connecting with or helping traders with similar interests.
Some of his noteworthy works include a monthly reporting of the state of trend following. This is where he gives a wrap up of all the common trend following techniques that is widely used and also constructs a composite index out from these strategies and reflects upon their performances. In addition, he also follows a list of trend following hedge funds and checks on their performances too.
Elsewhere he has made numerous articles on how to improve your trading system and areas to watch out for. They include:
- How to incorporate slippage in to back testing and how it affects performance, part 1, part 2, part 3
- How to use leverage/ position size in a mechanical trading system.
- The bliss function which is:
The bliss function should be your own “goodness measure” of a trading system, using your own formula and criteria. Choose a formula that will produce the best results/pick the best systems for you. And you get to be as original as you want!
- The importance of building a robust system to weather all conditions
- Use the moving median instead of moving averages in your system because its more robust!
- Use walk forward testing to improve your back testing!!!
- A way to reduce draw downs in your system? and another article to measure your worst draw down.
- Using a filter to trade different regimes and another similar article comparing whether should you have rigid system that is robust or a dynamic system that switches between different strategies in different regimes?
Elsewhere, he also states why trend following works!
He also makes a very good point about the markets when he brought in the adaptive market hypothesis by andrew lo
This is also in line with another Darwinian market theory, from Andy Lo: the Adaptive Market Theory (AMH), whose papers are an interesting read. The AMH theory tries to reconcile the Efficient Market Hypothesis (EMH) with its numerous flaws, as described by behavioral investing theory. The main premise of the AMH theory is that markets’ target and ideal model is the EMH model. However inefficiences (profit opportunities) arise from behavioral biases and as a result markets oscillate towards/away from the EMH model. The level of inefficiency in a market is related to that market’s “ecology” – with more competition bringing on more efficiency.
Could too much Trend Following kill Trend Following?…
In addition he also notes the great success of the turtle trend following system since the 1970s below
However in since the mid 1980s, the performance has been lack luster and he wonders whether the turtles were just lucky?. This as explained by the AMH theory means that too many people have been using similar trend following techniques such that the comparative advantage otherwise known as alpha has fizzled out. Interestingly in his subsequent article he shows how tweaks (using a longer time frame) to a system can turn a dead system back to LIFE!!!