NuclearPhynance Archive

I much enjoy Michael Harris’ Price Action LabBlog. I have been working my way through Michael’s articles on trend following and in particular his article “Is There Any Future in Equity Index Trend-Following?” gave me pause for thought and prompted me to do a little research of my own.



Michael states:



“The problem of trend following is fundamentally simple: choppy markets reduce the effectiveness of trend-following algorithms and shorter trend durations reduce their profitability. There is no need for a more sophisticated analysis. “



“An example of a trend following system that shows how recent conditions have affected the robustness and efficiency of such methods is the 50-200 MA cross system. Basically, this is a long/short symmetric system that establishes long positions when the 50-day MA crosses above the 200-day MA and exits and reverses when the opposite happens. This system has worked very well in SPY since 1994 and even during 2008 with a return close to 34%. But after 2009 this system stopped performing well because, as will shall see via the help of a special indicator I have developed, the market dynamics changed drastically for a period of almost two year. During that period the system was subjected to a large drawdown of about -38%.”



One of the points raised and shown in the chart was as follows:



“The bottom pane shows the downtrend in the duration between two consecutive MA crosses of the system and the downtrend is clear.”



It sounds logical enough to me. If the markets have become “choppy” and have recently moved sideways more often than they have trended, then surely this would show up in shorter trade lengths over an entire portfolio and not just in the S&P?



In my “Trend Efficiency Index” I showed that trends are noisier now – there much retracement on the journey from point A to point B. Again, surely one result of this should be that trades in general have become shorter in length in recent years, not only in the S&P but also across the board?



I took Michael’s work a few stages further. I took back adjusted price series for a portfolio of 107 futures contracts: 14 bonds, 10 currencies, 8 energy contracts, 13 grain contracts, 8 short term interest rates, 13 metals, 4 “other”, 10 softs, 24 stock indices. No attempt therefore to balance the portfolio. I tested with single contracts rather than fixed fractional position sizing and no risk constraints – each trade was taken unless it was a locked limit day in the relevant market (in which case the trade was taken on the next available day). The system was a simple dual moving average identical to that Michael used, taking both long and short trades: a reversal system. I tested in the ratio of 1:4 SMA:LMA. Beginning at “5 and 20”and ending at “50 and 200”. For completeness sake a also tried a couple of other variations: “25 and 200”; “10 and 200”.



I tested for the period 1st January 1970 to date. I made no allowance for the fact that during that time, the number of contracts available increased dramatically – for these purposes it should not matter.



To my surprise, a visual examination of the charts showed little difference in trade length over the years.



But.............the addition of trend lines to the charts told a different and more complex story.

If your vision says so...

"the websites section here at Traders Place."



Copy and past from another site?

> Copy and past from another site?

Well, that's not forbidden...

I believe AFJG is referring to the website that he (co-)runs? So this post might be an advertisement. Regardless, if the current thread rating trend continues, I see this one ending in the trash can rather quickly.

TL;DR thread summary: Harris guy has zero market timing skill, therefore PnL deteriorates with holding period.

The reference to my website was a careless error and unintentional - I have now edited it out of my post.



I have listed trade lengths from 1970 to date for this simple DMA system over a wide range of system parameters. I have grouped trade lengths monthly by exit dates, averaged the monthly data and applied trend-lines to the results. In brief, the more frequent the trades (for instance sma 5: lma 20) the greater the deterioration in trade length over the last 40 years. Deterioration in trade length is far less evident at the 50: 200 level but there has been quite a fall off over the past two years.



If anyone is interested I am very happy to post some charts here.

I think Anthony's project sounds very interesting as far as studying market behavior and it is also important for trend followers. I would be interested in a tabulation of the mean trend length and its standard deviation for different MA crosses and markets.

Is this now officially the world record for the worst rated thread on NP?



Anthony, this kind of "toy" study can be performed by a skilled person in around 1 hour, myself included. I really can't imagine what you're trying to accomplish here, and you even didn't provide anything other than advertising text. Don't you even know how to create a heat-map, or even a regression, and post a simple PDF file with those results? I guess that's too academic for you, or perhaps you wouldn't know how to interpret results. At best, these kinds of studies are illustrative and you can only base some loose opinions of yours on them, state those opinions, and then everyone can continue ignoring them. Oh and "trend lines", seriously? In terms of advertising, judging by the thread rating, you're not accomplishing much at the moment I'm afraid. I don't mean to be an "internet brute" but I feel minimum effort is due on your part.



Bill, i might have a Matlab html report of something similar i did a year ago, i think i used EMA crossovers on 300 high-caps with most historical data (year 1995 minimum). It's not a very useful report though, just curiosity. If i dig it up i'll mail you, it's probably on my old hard disk somewhere.

I have though much in recent years about "awareness"; I have practiced it, although as any mere mortal, in a halting and imperfect fashion. I am increasingly interested in behaviour and motive, and how it affects those around us as well as society as a whole. Why do we behave in the way we do? Could we make life better for ourselves and others by acting and speaking differently?



If I give way to anger, or sarcasm or rudeness, how does it make me feel? Does it increase my sense of tranquillity and happiness or does it raise my blood pressure, increase the adrenalin in my body and trigger the fight or flight response?



If I direct anger and derision towards strangers on the internet, does it spill over to my private life, to my wife, brother, mother, lover? Does it improve my life? Theirs? That of strangers?



The world is full of anger, violence and aggression. It need not be. We can develop the self awareness and discipline to improve life for ourselves and those around us if we want to.



Pause – for a long time- between the thought and the action. Let the anger escape; bite the tongue that heedlessly and so casually lashes out.



You will feel a lot better for it. So will we all.