My Hedged Fund - Another "Trend-Following" Post

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Old Mar 7, 2011, 12:54am   #120
Joined Jan 2009
Re: My Hedged Fund - Another "Trend-Following" Post

Take two systems, both with positive expectancy, and add them together. If the correlation is negative, then risk adjusted return for the portfolio will be superior to either of the two, provided

1. Correlation of returns doesn't change adversely (a big if) and
2. Markets behave in a vaguely Gaussian fashion

In other words, a trend system could/should be complemented by a mean reversion system, but the trick is to find a consistently profitable system of this nature.

(Another option would be to consistently sell low delta out-of-the-money option spreads on the S&P)
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Old Mar 7, 2011, 12:55am   #121
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Re: My Hedged Fund - Another "Trend-Following" Post

If you fancy being blinded by science -

http://www.activetradermag.com/index...tic_Strategies
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Old Mar 7, 2011, 1:20am   #122
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Re: My Hedged Fund - Another "Trend-Following" Post

Quote:
Originally Posted by meanreversion View Post
Take two systems, both with positive expectancy, and add them together. If the correlation is negative, then risk adjusted return for the portfolio will be superior to either of the two, provided

1. Correlation of returns doesn't change adversely (a big if) and
2. Markets behave in a vaguely Gaussian fashion

In other words, a trend system could/should be complemented by a mean reversion system, but the trick is to find a consistently profitable system of this nature.

(Another option would be to consistently sell low delta out-of-the-money option spreads on the S&P)
Yes, the option strategy is used by some CTAs like Kevin Bruce, it will help reduce volatility of portfolio. It all boils down to equity curve smoothness. There's a guy in blox forum that did a experiment with combining several systems. You can see the combination really improved MAR. (the guy was sluggo)

To be honest, I have absolutely no idea in terms of how to develop a mean reversion system. Using oscillators seems to bring me back to think whether it is possible to use them to initiate trades as when I was a day trader before, Implementing oscillators was a fail..... Any entry exit ideas?

Also not sure if a combined portfolio should have more then one TF system. Implementing 2 TF systems seems be like double betting.
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Old Mar 7, 2011, 12:25pm   #123
Joined Jan 2009
Re: My Hedged Fund - Another "Trend-Following" Post

Quote:
Originally Posted by michaelguan326 View Post
Yes, the option strategy is used by some CTAs like Kevin Bruce, it will help reduce volatility of portfolio. It all boils down to equity curve smoothness. There's a guy in blox forum that did a experiment with combining several systems. You can see the combination really improved MAR. (the guy was sluggo)

To be honest, I have absolutely no idea in terms of how to develop a mean reversion system. Using oscillators seems to bring me back to think whether it is possible to use them to initiate trades as when I was a day trader before, Implementing oscillators was a fail..... Any entry exit ideas?

Also not sure if a combined portfolio should have more then one TF system. Implementing 2 TF systems seems be like double betting.
You sound dangerously like you know what you're talking about, are you sure you're on the right website??

The conceptual issue with a mean reverting system working over time is that it relies on picking tops/bottoms to get in, then similarly you need to pick a nearby bottom/top to get out. Trend following recognises that picking turning points is hard to impossible (which it is), whereas mean reversion needs you to do it twice with each trade!

In addition, a trend system will have a handful of big winning trades which make up the bulk of returns, whereas pure mean reversion will have fixed profit:loss ratio, i.e. you can never have big winners by definition.

So whilst it's superficially true to say that "markets are range bound most of the time", this in itself doesn't lend itself to a robust, long term positive expectancy system.

Here are some options -

1. Wait for a failed breakout in order to go short, e.g. if the market breaches but then closes below the 10 day high, sell on the open. But where's the stop and profit target? You may have to go with a 1:2 win:loss ratio.

2. Incorporate some element of trend following, e.g. sell 2 units at the high channel, then buy 1 back at 1 ATR profit, move the stop to breakeven for the other unit, then operate a trailing stop loss. Very messy.

3. Systematically sell option spreads. Very tough to backtest.

The mean reversion system, if it's directional, needs to trade against the trend, otherwise it will correlate to the trend system. That's the tough part .... not only are you trading against the trend, but you need to pick local highs and lows.
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Old Mar 7, 2011, 2:58pm   #124
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Re: My Hedged Fund - Another "Trend-Following" Post

Quote:
Originally Posted by meanreversion View Post
You sound dangerously like you know what you're talking about, are you sure you're on the right website??

The conceptual issue with a mean reverting system working over time is that it relies on picking tops/bottoms to get in, then similarly you need to pick a nearby bottom/top to get out. Trend following recognises that picking turning points is hard to impossible (which it is), whereas mean reversion needs you to do it twice with each trade!

In addition, a trend system will have a handful of big winning trades which make up the bulk of returns, whereas pure mean reversion will have fixed profit:loss ratio, i.e. you can never have big winners by definition.

So whilst it's superficially true to say that "markets are range bound most of the time", this in itself doesn't lend itself to a robust, long term positive expectancy system.

Here are some options -

1. Wait for a failed breakout in order to go short, e.g. if the market breaches but then closes below the 10 day high, sell on the open. But where's the stop and profit target? You may have to go with a 1:2 win:loss ratio.

2. Incorporate some element of trend following, e.g. sell 2 units at the high channel, then buy 1 back at 1 ATR profit, move the stop to breakeven for the other unit, then operate a trailing stop loss. Very messy.

3. Systematically sell option spreads. Very tough to backtest.

The mean reversion system, if it's directional, needs to trade against the trend, otherwise it will correlate to the trend system. That's the tough part .... not only are you trading against the trend, but you need to pick local highs and lows.
Apologies for taking the thread discussion off topic! To be honest I don't know what I am talking about! it's just that I've reading here and there and found certain things to make sense but I actually haven't tested much ideas out! I just stumbled upon the threads about systematic trading here at T2W forum, I was before at forex factory. Here at college I don't get a tad bit interested individuals; the interested ones only dabble in stocks so I find discussions in threads to be great areas where I can learn from other experienced members like you and the others.

I'll go take a look at your ideas and try to test then. Thanks so much thou
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Old Mar 8, 2011, 4:24am   #125
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Re: My Hedged Fund - Another "Trend-Following" Post

myhedgedfund started this thread
Quote:
Originally Posted by michaelguan326 View Post
Apologies for taking the thread discussion off topic! To be honest I don't know what I am talking about! it's just that I've reading here and there and found certain things to make sense but I actually haven't tested much ideas out! I just stumbled upon the threads about systematic trading here at T2W forum, I was before at forex factory. Here at college I don't get a tad bit interested individuals; the interested ones only dabble in stocks so I find discussions in threads to be great areas where I can learn from other experienced members like you and the others.

I'll go take a look at your ideas and try to test then. Thanks so much thou
Well... go at it boys.

I am glad someone here knows that "The conceptual issue with a mean reverting system working over time is that it will have fixed profit:loss ratio. So whilst it's superficially true we should wait for a failed breakout in order to go short."

Please don't take this the wrong way... I feel like I'm learning a lot... or maybe I'm just oscillating here. I'll just take a deep breath and say "just go with the trend... it's simpler that way."

Boston
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Old Mar 8, 2011, 6:28am   #126
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Re: My Hedged Fund - Another "Trend-Following" Post

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Originally Posted by myhedgedfund View Post
Well... go at it boys.

I am glad someone here knows that "The conceptual issue with a mean reverting system working over time is that it will have fixed profit:loss ratio. So whilst it's superficially true we should wait for a failed breakout in order to go short."

Please don't take this the wrong way... I feel like I'm learning a lot... or maybe I'm just oscillating here. I'll just take a deep breath and say "just go with the trend... it's simpler that way."

Boston
I am 100% with you in Following the trend as its really dumb not to. The reason I am wary about TF is in the long run will the system I employ turn to be like obsolete just like the turtle system?

From reading your "my hedge fund" blog, you seem to be using a ATR band breakout with some MA filters. ( just a guess, you don't have to comment it it). I was also wondering which backtesting software you use and how extensively did u backtest your system?
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