My Hedged Fund - Another "Trend-Following" Post

Yet another trend-following post?

I've been trading ETF's using trend-following techniques for some time now, and have decided to make public my real-life trading activities starting with the new year.

Through this post (and my blog still under construction here) I will be making public my trades as they happen, which is likely to be not more than 1-2 times per week. In fact, based on current trends, it may be a few weeks before I trade again.

Current real capital on this account as of 1/3/11 will be ~$200,000, with another ~$100,000 or so added on top through margin. Current investments are below, a total of 31 ETF's (this is as it just happens the max umber of asset classes I can own as per my strategy), all with trends meeting my set technical criteria. I'll make allocations and balances public before 1/3/11.

The intent of the post is not educate, as I don't feel qualified to do so, but just to make public my "Trend-Following Trading Journal"... if you will. Follow this plan at your own risk! Looking forward to engaging some of you in productive dialogue throughout 2011 and beyond...

Boston



Ticker Asset Class
IBB Biotech
EWC Canada
KOL Coal
XLY Consumer Discretionary
XLP Consumer Staples
VIG Dividends
DDM DJIA 2X
ERX Energy 3X
JJG Grains
IAI Brkr-Dlrs
KRE Reg Banking
EWJ Japan
UYM Materials 2X
XME Metals & Mining
EWW Mexico
MWJ Midcap 3X
TQQQ Nasdaq 3X
DIG Oil & Gas 2X
XOP Oil & Gas Explor.
XRT Retail
TNA Russell 2000 3X
RSX Russia
UPRO S&P 500 3X
SOXL Semiconductors 3X
EZA South Africa
EWT Taiwan
IYZ Telecom
IYT Transportation
TBT Treasuries - 2XS
PHO Water
KCE Capital Mkts

Admirable, but you might struggle to keep interest up with such low trading frequency.

What type of criteria do you use to trade? (e.g. Donchian channel, Bollinger bands, etc)

In addition, what % return are you hoping to achieve for 2011, and what kind of drawdown would you anticipate?

Very fair point (re: boredom), and I do struggle at times due to inactivity, but I try to temper the desire to trade through administrative metrics, by setting low turnover goals. These are admittedly simple (no more than 100 trades per year assuming 2.5% of capital per trade), but do serve as a check on the normal human tendency to look for action.

The main criteria I use is the traditional moving average (of various lengths), no need to reinvent the wheel from my perspective. In order to make a final buying decision, I do look at asset betas (trying to achieve a neutral portfolio beta)and standard deviation adjusted for price (the lower the better); I also use ATR's to drive some selling decisions.

This conservative approach is unlikely to create massive returns, although I do use margin on 50% on half of the account, and leveraged Index ETF's (2 and 3X) on the other 50% to drive better returns. I will not predict returns, but backtesting shows max drawdowns of 30-35%.

Any recommendations for improvement? I'm always open to incremental changes...

Best for 2011...


Boston

Wow, you're the FIRST person ever on this website to mention drawdown without even alluding to a desired return!

Drawdown of 35% is quite chunky, and might deter potential investors down the line (if you proceed in that fashion).

I think the reason for this is the low number of trades - 100 a year is very few (especially when you trade all those markets). So you're combining very low trade frequency with high capital risk (I usually bet 0.75% per trade on my trend system, in 10 markets) which will necessarily lead to high drawdown. After all, those pesky moving averages take an age to catch up with the market!

My system trades about 15 times a month, admittedly not a lot more than yours, but as time has gone by I'm starting to realise the value in keeping drawdown limited. I had two instances this year of 30% drawdowns, and I don't particularly want to go through it again (although the drawdown was from giving money back to the market, there's nothing to say you can't set a drawdown limit as well).

What software do you use, out of interest? Also, is this your only income or do you also have a job?

Initial asset class here... investments made at the end of 12/31/10 trading day for a total of $107,639. An additional investment of $201,570 (including margin) will be made on January 4th.

Ok, very specific. Can I ask what you're looking to gain from keeping this public record, is this with a view to raising outside funds?

Do you also have a day job?

meanreversion - two 30% drawdowns in a year sounds quite hefty - what kind of annualized vol are you running at?

I am not looking to raise funds... and yes, I do have a day job. But, what is there to gain? It is a fair question...

One of the most significant challenges (in my opinion) system traders have is sticking to the strategy. It is tempting for some of us to deviate from our plan whenever significant drawdowns (or even minor losses) are experienced. Some of the mistakes include:

- Seeing lines where they don't exist,
- Touches where there aren't any,
- Trying to insert macro-economic events in statistical calculations,
- Questioning past decisions / data,
- Looking for alternate asset classes
- and... as you know... many, many more

In making my trading public I am trying to acquire yet an additional defense against strategy deviations. The mere possibility of a reader questioning one of my moves will help keep me straight... I must always be able to explain away my trades using my strategy...

"Losing face" in "public" should be a good deterrent. That said, please know that I consider myself to be a disciplined investor, and have not deviated from my strategy in a long time, but, it's yet another fail-safe.

Thanks for the good question...


Boston