Saturday, February 21, 2015

Performance update - trending upwards

Back in early December I talked about how trend followers can go through periods of non-performance, and suffer a drawdown, before there is a sudden reversal in their returns, often taking them to new highs. Here is an extract from that post:

"Trend follower Bill Dunn is a case in point – his fund suffered a drawdown of 40% over a twelve month period in 1999/2000. That was fully recovered in the next quarter. In late 1981 they had lost 42% over the preceding year. The very next month, they made 18%, and over the next 3 years they made more than 400%!

As a result of this, it is quite possible for a trend follower to suffer say 10 months in every year with little in the way of profits. Then, in the other two months, you can suddenly capture a major trend or two and easily end well up for the year. That is the nature of the beast.

Dunn was able to a ride out these periods as he had complete faith in the robustness of his approach. Remember, trend following in its purest form is an absolute returns approach. The downside is limited as far as possible, yet the potential upside is not limited in anyway. This is why, when major trends start to take hold, they can go through explosions of significant out-performance. Equally though, the drawdowns can be larger than most people can stomach."

Regular readers of the blog will know that I periodically update a list of my trades, and this did not make pleasant reading over the second half of last year.

What has led to this reversal? Well, the only thing I have really changed is my approach to general market direction, and the level importance I place on it - I discussed this in detail here.

This week saw a continuation of some profitable trends, while another signal taken quickly failed for another small loss. Current open profits now equate to +13R. In other words, 7 month's worth of losing trades and non-performance has been rapidly eroded in 7 weeks.

It is critical that you keep your discipline and let winning trades run. As Ed Seykota says "One good trend pays for them all!". This is what is happening here. Snatching small profits for fear of losing them, even after a run of losing trades, is absolutely the wrong way to go. Bailing out of winning trades which may develop into the big winners will destroy the positive expectancy. Who knows how much further these current trends will develop?

This upturn in performance can also be seen in the metrics that I keep track of. The win percentage is stabilising. The profit factor (average win size divided by average loss size) is growing. This means that the overall expectancy per trade is starting to increase. In short, things are starting to trend upwards.

No comments:

Post a comment