Saturday, April 20, 2019

Stick or twist?

"We have a saying here: "It is incredible how rich you can get by not being perfect." We are not looking for the optimum method; we are looking for the hardiest method. Anyone can sit down and devise a perfect system for the past." - Larry Hite

A trader is always evolving, in terms of his ideas, beliefs and his method. As an example, you often read about how young 'fearless' traders learn to appreciate the importance of risk control - often after blowing up an account or two, or at the minimum having an emotionally demoralising experience associated with a major drawdown. Even some of the Market Wizards went through this.

Occasionally, a trader moves away from their original ideas and beliefs about how to make money. Again, some of the most successful traders have done this.

In the famous documentary film which occasionally pops up on YouTube, Paul Tudor Jones talked about how he used an overlay of market action from the 1920's which enabled him to profit from the 1987 market crash.

He also mentioned in his Market Wizards interview about how he tries to capture market turns and that he believed Elliot Wave theory "had its merits". In more recent years though, he has talked about trading around the use of the 200 day moving average.

Even die-hard trend followers, while not abandoning the core concept, have evolved different methods over time in order to profit from the markets.

As Ed Seykota said here, there is no such thing as the trend, so you therefore often see that trend following fund managers develop differing models and programs designed to capture these different trends on different timeframes, using different parameters.

Some fund managers also go further and modify their parameters depending on what markets or instruments they are trading. However, this possibly goes against what Richard Dennis said in his Market Wizards interview about his belief that a 'robust' method should be able to generate profits "whether you are trading bonds or beans".

It is good every so often to challenge your beliefs. Do you still have that unwavering confidence in what you are doing? If not, has something within you changed, or have your beliefs about how to achieve what you want to achieve changed?

One thing to acknowledge and accept in all this is that the individual stocks, forex pairs or commodities are in a constant state of change themselves, be it trending or non-trending state or vice versa, and all with fluctuating levels of volatility.

Then there is the dilemma over the value of backtesting, and whether you should amend your approach based on past performance, when it is a given that future market conditions will constantly be changing.

So, as a trader, there is always a potential issue lurking, of whether you can improve your methods and performance, but at the same time risk ruining what already works.

In other words, do you stick or twist?

From a trend following perspective, one thing I have found over the years is that simplicity beats complexity, which also assists with the overall robustness of your approach. Even with this though, you will still suffer periods of poor or non-performance, which is why you need strong risk control.

But providing there are no artificial controls or restrictions on the markets you are looking to trade, price 'trends' (in whatever form) will continue to appear and be available to profit from.

In that sense, a simple and robust trend following method will have the potential to capitalise from those moves.

The key performance differentiator will therefore be whether your chosen timeframe or parameters will enable you to embrace the current level of volatility, and capture the price movements the markets are offering.

And no-one knows what types of movements they will be.

1 comment:

  1. Thanks for sharing this post. I'm very interested in this topic...