One major thing I have come to realise over the last couple of years:
Those who promote a single asset-class or single instrument *fully* systematic trading are scamming you or misleading you into thinking it will work over the long term if you stick to the system.
Those who promote a single asset-class or single instrument *fully* systematic trading are scamming you or misleading you into thinking it will work over the long term if you stick to the system.
This is more applicable to those breakout style systems that intend to do trend following.
By nature, trend following is a way to capture the right tail.
If you look at trend following CTA portfolio over last few decades, you'd see that equity isn't a major part.
By nature, trend following is a way to capture the right tail.
If you look at trend following CTA portfolio over last few decades, you'd see that equity isn't a major part.
They allocate to equity/indices only as a form of diversification.
The reason single asset/instrument trend following doesn't work for very long is a factor of efficiency.
The reason single asset/instrument trend following doesn't work for very long is a factor of efficiency.
Indian market/indices are not very liquid and as a byproduct of lower liquidity, they are also highly inefficient.
As a result of this, trend following, especially breakout style has worked decently albeit with huge drawdowns.
As a result of this, trend following, especially breakout style has worked decently albeit with huge drawdowns.
My expectation: As Indian market and equity indices get more liquid as a result of institutional participation, the instruments will get more efficient, and capturing trends systematically with just one instrument in the portfolio won't yield a net +ve return over next 10-20y.
And if you still want to capture such trends with a single instrument portfolio fully systematically, it would involve you having to go through drawdowns significantly higher than historical drawdowns.
Anyone can say that these trend following breakout systems have a win rate less than 35% and that risk reward is more than 1:6 or whatever.
This risk reward along with win rate will reduce over the years resulting in the reduction in expectancy.
This risk reward along with win rate will reduce over the years resulting in the reduction in expectancy.
Unless you're a very good discretionary rule-based trader, who can apply discretion smartly but use the system to execute whenever you choose to, whenever the environment is right
it's advisable not to have a single instrument trend following system.
it's advisable not to have a single instrument trend following system.
If you want to do something in a single instrument systematically, diversify using different natured systems (trend following, mean reversion) and across different timeframes.
But no matter how much you think other timeframes and other systems would offer diversification,
in times of crisis, all correlations converge and so - doing it in the same instrument will tend to collide exactly when you don't want it to.
in times of crisis, all correlations converge and so - doing it in the same instrument will tend to collide exactly when you don't want it to.
So, if you want to be a fully systematic trader, allocate to multiple instruments, preferably ones that aren't much correlated, across different timeframes, across different system types.
There have been genuine traders who have made money doing trend following in only one or two instruments, claiming they have done it fully systematically.
If that's true, good for them.
But the major mistake one makes in trading is being too inspired by someone else.
If that's true, good for them.
But the major mistake one makes in trading is being too inspired by someone else.
That makes you a lot more optimistic than you should be, which results in making judgement errors, and ignoring logical fallacies.
This is one such fallacy.
This is one such fallacy.
Those who say "keep following your system through drawdowns, it will work eventually" may mean well.
But, neither are they having any clue about portfolio management or the nature of what they are trying to do
nor are they showing you the whole picture.
But, neither are they having any clue about portfolio management or the nature of what they are trying to do
nor are they showing you the whole picture.
Some famous indian fintwit accounts keep quoting Dunn Capital who went through 67% odd drawdowns and came back up positive.
But did they trade only one instrument? No.
But did they trade only one instrument? No.
They allocate to over 30-40 instruments in their portfolio, and they *SEEK* volatility.
Dunn Capital is also an outlier in the CTA industry in terms of drawdowns.
Most top CTAs have had a historical maximum drawdown less than 30%.
Dunn Capital is also an outlier in the CTA industry in terms of drawdowns.
Most top CTAs have had a historical maximum drawdown less than 30%.
So, you can either choose to believe cherry-picked bullshit fed to you by supposed system sellers or unqualified fund managers who take your money for trading their system.
Or, you can choose to actually study what successful trend followers do - and try to replicate that.
Or, you can choose to actually study what successful trend followers do - and try to replicate that.
That's another challenge.
Because to have proper diversification, you have to allocate to different asset classes.
Metals, Energy, Grains, Oils, Agri, Softs, Bonds, Stirs, Currencies, Crypto, whatever.
To have that kind of diversification also requires infrastructure.
Because to have proper diversification, you have to allocate to different asset classes.
Metals, Energy, Grains, Oils, Agri, Softs, Bonds, Stirs, Currencies, Crypto, whatever.
To have that kind of diversification also requires infrastructure.
So, unless you have capital at that level and can afford infrastructure that could get you access to such diversification,
do not attempt to trade systematically
with 100% of your capital
in one or two instruments.
do not attempt to trade systematically
with 100% of your capital
in one or two instruments.
And if you do,
be ready for significant drawdowns - sometimes drawdowns that you haven't even factored in.
be ready for significant drawdowns - sometimes drawdowns that you haven't even factored in.
Most of these system sellers and guys who manage money claiming to have systems that follow trends
whenever they teach you something, it's only the ENTRY technique, and maybe exit/stop loss technique.
whenever they teach you something, it's only the ENTRY technique, and maybe exit/stop loss technique.
But, what truly makes trend followers successful is their diversification and risk management.
Entry/exit signals are impt.
But even if you follow them with discipline, but you have very weak risk management,
best case - you face significant drawdowns
worst case you blow up.
Entry/exit signals are impt.
But even if you follow them with discipline, but you have very weak risk management,
best case - you face significant drawdowns
worst case you blow up.
Either become a rule-based trader whose discretion is in trade selection/issue selection with a set of rules around those.
Or if you want to trade fully systematically in one or two instruments, don't allocate more than 20-25% of your capital to that endeavor.
Or if you want to trade fully systematically in one or two instruments, don't allocate more than 20-25% of your capital to that endeavor.
And,
I used to think Michael Covel and his books were probably bullshit.
But if you truly want to gain knowledge about proper trend following, his books are probably the best ones to start with - to understand trend following at least theoretically.
I used to think Michael Covel and his books were probably bullshit.
But if you truly want to gain knowledge about proper trend following, his books are probably the best ones to start with - to understand trend following at least theoretically.
Study the trend followers who have been successful for over 3-4 decades.
Not the ones who have been successful in a single market regime, in a largely single consistent bull market, in a single instrument.
Not the ones who have been successful in a single market regime, in a largely single consistent bull market, in a single instrument.
There's a vast treasure trove of information on understanding trend following on the *TOP TRADERS UNPLUGGED* podcast on YouTube.
Listen to that in chronological order from the past episode to the present.
Take notes diligently.
Listen to that in chronological order from the past episode to the present.
Take notes diligently.
If you finish at least 25% of the entire podcast and have taken notes diligently,
your entire thought process behind trend following systems will shift in a major way.
Then - the actual work will start.
your entire thought process behind trend following systems will shift in a major way.
Then - the actual work will start.
One other way to follow trends systematically is to look into *RELATIVE MOMENTUM* portfolio rebalancing methodology.
People keep it long-only. It has its underperforming years. But it's a concept that's been around for few decades now.
People keep it long-only. It has its underperforming years. But it's a concept that's been around for few decades now.
Also try to go through why original turtle systems stopped working, why over period of time majority of trend following has become long-term trend following and why short term trend following doesn't work over time as effectively.
Asking the right questions is important.
Asking the right questions is important.
One very inconsistent and inaccurate thing that even those who have been trading systematically for a decade right now
either haven't taught their followers
or haven't shared in their experience
is volatility normalisation.
either haven't taught their followers
or haven't shared in their experience
is volatility normalisation.
If you trade on *LOT SIZE* basis and you scale up based on lot size basis - keeping x amount per lot as your basis for risk, you're ignoring volatility.
Like, if you're trading 10 lots when daily ATR is 100 points, and same 10 lots when daily ATR is 35 points, that's wrong.
Like, if you're trading 10 lots when daily ATR is 100 points, and same 10 lots when daily ATR is 35 points, that's wrong.
So, even those who *seem* experienced in systematic trading, advocating increasing lot size based on capital - I am not sure how that would work out over the long run.
You're lucky if there's higher volatility + cleaner trends.
But you're ignoring volatile-chop markets.
You're lucky if there's higher volatility + cleaner trends.
But you're ignoring volatile-chop markets.
In volatile and choppy markets, if you trade with the same lot size as less volatile trending or less volatile choppy markets, you're going to lose more money than you have factored in.
This is one of the things nobody tells you, and one you'll probably learn painfully.
This is one of the things nobody tells you, and one you'll probably learn painfully.
Whatever even the seemingly experienced traders are teaching you don't even scratch the surface of systematic trading, let alone trend following.
It may seem like the money is in entries and exits.
In a good market, it might seem like that.
It may seem like the money is in entries and exits.
In a good market, it might seem like that.
But it is when a bad market phase happens that you'll realise that despite holy grail entries and exits,
it's how you manage your portfolio through different volatility phases, and how you control risk - that makes money over time.
it's how you manage your portfolio through different volatility phases, and how you control risk - that makes money over time.
Loading suggestions...