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

• 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 cataloged popular Miami condos that yield seeking traders are gravitating towards in Miami these days. Before reading on, check them out here: http://miami-real-estate-trends.blogspot.com . 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

Today's Signals 10/9/14

Current positions:
Short EUR/JPY 137.46 or higher
Short GBP/JPY 174.37
Buy USD/CHF .9508 or lower
Short GBP/USD 1.6161 or higher
Buy USD/JPY 107.99 or lower
Buy USD/CAD 1.1116 or lower

Closed Positions:
Buy EUR/AUD 1.4344 +42
Short EUR/USD 1.2613 -72
Short XAU/USD 1204.34 -86
Long USD/CHF .9614 -63
Long USD/CAD 1.1167 stopped breakeven
Short AUD/USD .8792 stopped breakeven
Short GBP/USD 1.6059 stopped breakeven


*Stops are based on the previous swing high or low prior to the signal and require an hourly close above or below this swing high or low; they are not based on a strict price.

Today's Signals 10/6/14

Current Positions:
Buy EUR/AUD 1.4400 or lower

Closed Positions:
Buy USD/CAD 1.1107 +131
Short AUD/USD .8772 +78
Buy EUR/AUD 1.4418 stopped breakeven
Short EUR/USD +111
Short XAU/USD 1215.08 +218

*Stops are based on the previous swing high or low prior to the signal and require an hourly close above or below this swing high or low; they are not based on a strict price.

Trade Signals 9/26/14

New Positions:
Buy GBP/JPY 177.79 or lower
Buy EUR/JPY 138.94 or lower
Short XAU/USD 1221.67 or higher

Closed Positions:
Buy EUR/AUD 1.4418 +94
Buy GBP/USD 1.6327 -31



*Stops are based on the previous swing high or low prior to the signal and require an hourly close above or below this swing high or low; they are not based on a strict price.

Keeping the switch on

Looking back at the previous post so many months ago I am pleasantly surprised at how much my attitude towards automation has changed. Since the end of June I have been on an automated version of my system and the results have been nothing if not impressive. Some takeaways over the past few months in my transition from mechanical manual trading to automation include:

• Accepting drawdowns with a more passive attitude. The roll-out of the EA conincided with a technically poor Forex market. There was no volatility or serious volume coming into the market this summer--which is to be expected with many large traders off for the summer months. However I kept the controls on and sat passively while the system took it's lumps. It was perhaps the first time ever in my trading career where I allowed my account equity to drop without any attempt at hedging or removing stops. Ironically I feel I have grown as a trader by becoming less involved in my actual trades.

• Having a healthy expectancy. By knowing how meantrades has performed in the past, keeping the switch on during drawdowns enables me to avoid missing the huge upswings in account equity. At the moment my expectancy is only around 1.3 for every dollar risked. Most long term systems tend to float around 1.5 to 2 for really huge returns. There are a few considerations on the lower expectancy such as trailing supertrend exits too closely during flattening volatility in the Asian session. Widening the supertrend stop as well as taking Friday afternoons off are two of the ideas I am toying with currently. Generally speaking though, 1.3 is enough for things to get very interesting in the long term. Currently meantrades is running at about 60% accuracy on the 3 markets I am trading everyday (those are EUR/USD, GBP/USD and the cfd for oil). I am thinking like a trend trader on this matter and would probably like to tighten the stops more, reduce the drawdown and get larger returns less frequently. All in due course. For now it's about keeping the switch on and maintaining a healthy expectancy.

Meantrades in a slump; What would Jesus do?

As is usually the case, a trading system goes through periods of immaculate fluidity where almost every signal follows the market precisely. Meantrades had several months last year where profits became so much the norm that I briefly began to think it could be automated due to its steady ability to produce consistent and robust profits. Well, the past two months have put a real damper on my confidence in that regard. Granted, meantrades has, historically, never been very good in December and January. This year however, it's just worthless. There have been periods of more than 3 trading days where not a single currency pair I trade has produced break even results. Normally meantrades is very good at capturing ranging markets and occasionally a few reversal trades which turn into huge winners. This is the secret sauce to meantrades. It needs a few huge winners each month to make it truly profitable. Without that expectation, there is no reason to "blindly" take its signals. Expectancy is the Jesus factor.

Without faith there can be no commitment to the system. Once this is the case we are back to speculation and playing with randomness. Not a happy place for an independent retail trader to be.

So, where to go from here? Scale back. Trade smaller size and wait for the markets to come to me. No reason to think that there has been some fundamental shift in the pricing behavior of intraday markets. Perhaps contraction of overnight volatility paired with anemic global trade has taken many of the pricing spikes out of the market. I'm not an economist and I don't work at a bank but there is no reason to toss a system which has performed so well in the past just because of a few unprofitable weeks (no matter how painful that experience can be).

I will however keep trading my intraday trend system running to keep some balance in the portfolio. The trend system has performed quite respectably. Most days it can take a quick 30 pips from the market. Not always, that's why I have not completely abandoned meantrades in the past. The polar opposite approach of reversion to the mean trading is probably not trend trading but the two strategies complement each other with delightful symmetry.

A rare profitable day for meantrades on Friday, +59 before the NY open.

Markets seem to be headed into choppy waters for the foreseeable future I am prepared for the inevitability of contracting equity curves. Wish you the best in your own mechanical system equity journey.