Thursday, October 9, 2014

Drawbacks of my trend systems

Although no system is perfect, I think it is a healthy exercise to consider what are some weaknesses inherent in my approach to trend trading.

Signals sometimes reveal that a trend has ended a little too early. Or in yesterday's trade, a little too late.

The problem of the Hard Right Edge
world trade center mall chaos on display



  • A signal to go long is actually a signal to go short in a much more important price trend. The problem is you never know when or where than much more powerful price trend will begin. This is what you might refer to as the illusion of control. No matter how many technical indicators you place on your chart or how thorough your backtest reveals an edge, making each and every trade is an act of random faith that price will behave in the accustomed fashion. As we observed yesterday, things can go wrong all at the same time and there is little one can do to protect the downside than to keep risk to a minimum via position sizing.



  • Profitable signals are usually pared by periods of random drawdowns which have no discernible beginning or end. These signals can be seen in non-traditional trading markets such as pre-construction real estate buying trends, a colleague of mine has catalogued popular condos that yield seeking traders are gravitating towards in Miami these days. Before reading on check them out here: http://www.miamirealestatetrends.com/luxury-condos-miami. Last week saw one of the best single day returns while this week saw all signals sucked into the false dollar bull run.


  • Profitable signals appear at random intervals and can continue for an indeterminate period.
A few golden rule lists I have found both counter-intuitive and true:

Gartman's 20 Rules of Trading

Tim Morge, Master Your Trading Master Yourself

8 Rules that Simplify Futures Trading

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