Monday, January 02, 2017

Some thoughts on differing trend following performance

Even if you adopt a trend following method, the nature of the price action in the markets traded will affect the performance that different trend following methods can achieve.

Thanks to Michael Covel's excellent book on the Turtles, we can review the performance achieved by those traders*. And we can see that, even though they were all looking at the same basket of instruments, the traders achieved wildly differing results.

As an example, in 1984 Jim Melnick achieved a return of +102.33%. Yet Jerry Parker lost -10.04%. Liz Cheval lost -20.98%.

The following year, Parker had a return of +128.87%, and Melnick 'only' got +42.18%. Cheval made +51.65%. Tom Shanks returned a comparatively measly +18.1%, yet Stig Ostgaard achieved an astounding +296.56%!

What would cause these discrepancies?

Two thoughts spring to mind:

Firstly, the Turtles were 'rules based discretionary' traders - while they used clearly defined rules, the trading was not automated. So, in the early days of the experiment at least, there is a possibility that psychology came into play. (Read more on the psychology involved in the famous Heating oil trade in early 1984).

Secondly, and probably more importantly, the Turtles traded two systems - 'S1' was a 20 day breakout system with 10 day exits, and 'S2' was a 55 day breakout system with 20 day exits. The traders were able to use solely one of the systems, or a combination of the two, but were encouraged to be consistent in their usage.

Therefore, it may be that, even though both systems were trend following in nature, it is possible the underlying conditions in the markets they were trading favoured one system more than the other at different times.

In 2016, I ended up with a small loss for the year, yet other trend followers (particularly those who traded using longer-term timeframes and/or parameters) did much better. 

Again, due to the underlying conditions in the markets or stocks traded, they were better able to deal with the volatility and any price retracements than a shorter-term method. 

Such is the unpredictability of the markets, and of price action itself.

However, the pendulum can swing the other way at any time.

As a trader, you can only follow the signals your method presents you. And that is what I will continue to do.

Going back to the Turtles for a moment, would anyone have said that Parker or Cheval were worse traders than Melnick? Given their performance in the subsequent years as a Turtle, followed by their long-term performance as fund managers after the Turtles disbanded in 1988, one would clearly say not. Yet simply taking a look at a single year's results for 1984 would have given a completely false picture.

Even in 2016, as Jez Liberty's site shows, the 'Trend Following Wizards' have achieved differing performance, which again may come down to simply trade selection, the markets covered or the timeframe or parameters used in the programs tracked.

Therefore, it is clear that, to base whether a trend following method is profitable or not on a single year's performance, is far too short-termist. 

That is why trend following funds typically show metrics such as annualised performance, calmar ratio or rolling performance over a multiple year time period.

Unfortunately, with the way the world is these days, and the demands of wanting instant results (seemingly without suffering any periods of losses!), people appear unwilling to take a longer-term view of their trading, and their expectations.

We shall see what 2017 brings...

*Obtained from "The Complete Turtle Trader" by Michael Covel - source performance data from Barclays Performance Reporting

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