Trend following not working on my 7,000 backtests !

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Old Oct 30, 2017, 2:39pm   #1
Joined Jan 2008
Trend following not working on my 7,000 backtests !

I have lost all confidence on trend following.

I back-tested the below system over 9 major FX pairs using 4 hour charts over 13 years which consisted of exactly 7,004 trades.

Plot 3 EMAS on chart: 5,21,55
Use a Stop loss od 2ATR(14)

Enter long/short when 5 EMA crosses above/below the 55 EMA
Exit when 5EMA crosses back over ANY of the 21 or 55 EMA (whichever comes first)

And that's it !

As you can see it adheres to all the fundamental rules of a good trading system:
- IT knows what instruments it trades
- Knows entry signal
- Knows exit signal before entering which facilitates both cutting losses and maximising profits
- cuts losses
- lets profits run
- knows risk in advance

It barely broke even before costs (It had an expectancy of 0.01R per trade). Since costs were about 0.02 R it had an expectancy of -0.01R per trade.

I then tweaked it slightly whereby I closed any trades that were not in profit after 24 hours. And for those that were in profit I moved the SL to breakeven.
Again- the overall results were very similar.

I'm not saying trend-following cant assist in trading. But based on my back tests - (which was a significant sample size in anyone's language) it definitely isn't a simple case of cut your losses and let your profits run and you are guaranteed profits in the long run like many sites lead you to believe.

It really needs to be fine tuned a bit better than that. I really don't know where to go from here to be honest.

Ya - you can tweak the parameters - but that should now make any difference in the long run.

Id be curious to get other peoples thoughts on it.

Last edited by qwertyuiop1; Oct 30, 2017 at 3:08pm.
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Old Oct 30, 2017, 3:02pm   #2
FXX
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My only suggestion which is off the back of fundamental analysis is to look for catalysts as a trade indicator instead of indicators. All trends are driven by fundamentals and there is always one or more catalysts at the start (a news event) that starts traders piling in. Taking the 4h chart as your base, derive your signals off candles that exhibit a large enough move that would signify something has happened. This would filter out the stuff that eats away at your account.

Brad
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Old Oct 30, 2017, 3:02pm   #3
 
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Sounds like you're testing oscillations, not trend. Try drawing a "trendline" underneath your swing lows. At the very least, this enables you to take back control of your trading instead of leaving it up to indicators.
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Old Oct 30, 2017, 3:07pm   #4
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Originally Posted by dbphoenix View Post
Sounds like you're testing oscillations, not trend. Try drawing a "trendline" underneath your swing lows. At the very least, this enables you to take back control of your trading instead of leaving it up to indicators.
Oscillations? Not sure what you mean?

And you mean drawing trend lines beneath swing lows for Stop-loss placement?

I appreciate the suggestion but I fail to see how logically that could be better than using 2ATR.

The fact is that in my backtests that most of the time I was stopped out from the EMAs crossing over anyway.
And a 2ATR placement still lets me assume large positions sizes in quiet times and vice verse. Effectively it should be no better or worse than using swing lows as stop -placement over a large sample size
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Old Oct 30, 2017, 3:08pm   #5
 
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How did you arrive at the values of the EMA's and ATR based stop loss, are they optimised for the data? (ie. curve fitted). Have you tried any other trend following strategies other than MA crosses? I say this because IMO they are far too simplistic. Please don't rule out trend following just because one very basic strategy doesn't work...
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Old Oct 30, 2017, 3:15pm   #6
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Quote:
Originally Posted by FXX View Post
My only suggestion which is off the back of fundamental analysis is to look for catalysts as a trade indicator instead of indicators. All trends are driven by fundamentals and there is always one or more catalysts at the start (a news event) that starts traders piling in. Taking the 4h chart as your base, derive your signals off candles that exhibit a large enough move that would signify something has happened. This would filter out the stuff that eats away at your account.

Brad
Hmm.. again I genuinely do appreciate the suggestion.

But trying to identify catalysts that aren't false catalysts for movements on major FX pairs is nigh on impossible for the lay man on the street.
And you'll still need a mechanism to cut losses. Which means your back to using indicators or price action.

I'm suddenly very sceptical on trend following as a concept. Im not going to be so arrogant and state that people aren't making money from trend following principles.

But if you read all the books the overwhelming message is that once you stick to the basic principles of trend-following (cut losses and let profits run), then its really just a psychological challenge after that.

That is seriously under question in my mind right now.

The fact is my system obeys all the principles. To turn it into a positive expectancy system we would be getting into the world of very specific tweaks a.k.a. curve fitting.
My understanding is that any successful trend following system should be robust. Making specific tweaks geos against this principle.
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Old Oct 30, 2017, 3:20pm   #7
 
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Quote:
Originally Posted by qwertyuiop1 View Post
Oscillations? Not sure what you mean?

And you mean drawing trend lines beneath swing lows for Stop-loss placement?

I appreciate the suggestion but I fail to see how logically that could be better than using 2ATR.

The fact is that in my backtests that most of the time I was stopped out from the EMAs crossing over anyway.
And a 2ATR placement still lets me assume large positions sizes in quiet times and vice verse. Effectively it should be no better or worse than using swing lows as stop -placement over a large sample size
If you're not wedded to indicators, this may be of interest. If you are wedded to indicators, then it won't be of any interest at all.
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Old Oct 30, 2017, 3:20pm   #8
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Originally Posted by cbrads View Post
How did you arrive at the values of the EMA's and ATR based stop loss, are they optimised for the data? (ie. curve fitted). Have you tried any other trend following strategies other than MA crosses? I say this because IMO they are far too simplistic. Please don't rule out trend following just because one very basic strategy doesn't work...
The 2 ATR stop loss was my own. But its as good as any. Its a popular stop loss placement used by many people. It gives the price plenty of room to move. And as I stated in another post, the overwhelming majority of trades were exited due to crossing of EMAS. So its not like the SL is way too close that it impacts the expectancy of the system.


The EMAs used were taken from some other guys course that I bought for £100. In saying that I could have used any EMAs. It really shouldn't matter over a sample size of 7,000 trades.

I haven't backtested as comprehensively any other system. But in saying that - no matter what variances you put on the system, all trend-following strategies are largely similar in the basic principles.

IS there anyone out there that uses a trend-following system successfully?
If so what is your expectancy per trade in terms of R? And over what ample size?
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