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Trend Following - ONE VIEWPOINT ...... Source: Internet
Jim Simons is Correct About Trend-Following
Posted on September 22, 2015
Claims about trading made by Jim Simons do not need support because his success guarantees their truth. In this blog I include evidence that was not explicitly presented in a recent TED interview of Jim Simons, where he said that trend-following stopped working long ago. In fact, short-term trend-following was arbitraged out in the 1980s.
Among many other interesting things, Jim Simons, who is a mathematician and a billionaire hedge fund manager, made the following statement in this interview (10:55 minutes from start):
“Trend-following would have been great in the ’60s, and it was sort of OK in the ’70s. By the ’80s, it wasn’t.”
Some trading forum members declared that Jim Simons does not understand trend-following. That was really curious to me. It’s like saying that Niels Bohr did not understand quantum mechanics for which he received the Nobel Prize. If there was a Nobel Prize for trading, Jim Simons would have probably received one.
What is trend-following?
Trend-following means different things to different people but it is important to understand that most trading and investment terms adapt to current market conditions and paradigms: they are as non-stationary as prices. A different kind of trend following was applicable in the 1960s and a different kind is applicable nowadays. Those who applied trend-following in the 1970s chose their models after analyzing the past and those who apply it nowadays choose their models based on different data.
Therefore, the only indubitable claim one can make about trend-following is that it is a trading method with gains that are much larger than losses. Anything else goes into the realms of particular market conditions. Notice that this definition applies even in intraday timeframes. There is no rationale for restricting trend-following in daily or weekly timeframes. However, in this blog we will look at daily data because this is what longer-term trend-followers use.
Definition
Trend-following is a trading method that produces an average gain much larger than the average loss
Short-term trend-following
In his TED interview, Jim Simons mentioned how in the past traders would look at the average of the past 20 days and use that as a predictor of the future. That was what trend-following meant to early quant traders.
Let us then consider the following system:
Buy if c – MA(20) > 0
Short if c – Ma(20) < 0
The equity performance of this system in S&P 500 is shown below:
The significant outperformance of this system until the early 1980s as compared to buy and hold (before dividends) is clear from the above chart. However, the system stopped working and experienced a large drawdown and by the mid 1980s it turned to a loser.
The second indicator pane shows my Momersion indicator, a measure of momentum and mean-reversion based on 250 daily bars. As expected, the above trend-following system became unprofitable when the equity markets switched from momentum-driven to momersion-driven (a mix of momentum and mean-reversion) in the early 1980s. When markets became mean-reverting in the late 1990s, short-term trend-following was already dead.
Medium-term trend-following
When trend-followers in the 1980s started experiencing large drawdown levels from their short-term models, they increased the moving average period. Next, we consider a 50-day moving average:
Buy if c – MA(50) > 0
Short if c – Ma(50) < 0
The equity performance of this system in S&P 500 is shown below:
The longer timeframe worked a little longer but by the mid 1990s any outperformance of buying and hold (before dividends) was also gone. Notice that the system has flat to negative performance after markets turned mean-reverting in the late 1990s.
Longer-term trend-following
By the early 1990s, some traders thought that the problem was the moving average period and they increased it even more to 200. Next we consider the following system:
Buy if c – MA(200) > 0
Short if c – Ma(200) < 0
The equity performance of this system in S&P 500 is shown below:
The system with the 200-day moving average provided a decent predictor of future price action until the late 1990s. Afterwards, the system performance is erratic with large drawdown levels of the kind that the early traders of the 1970s would not accept.
Curve-fitted/naive trend-following
When traders realized the moving average was no longer of predictor of price, they tried two moving averages, a system known as a moving average crossover. Please note that such systems are curve-fitted and poses no intelligence in pairing market returns with system returns. As a result, they can fail at any time. Examples are offered in my new book, Fooled by Technical Analysis and in this blog. Traders that use such systems to trade are basically gamblers.
Let us consider the following curve-fitted system:
Buy if MA(50) – MA(200) > 0
Short if MA(50) – Ma(200) < 0
The equity performance of this system in S&P 500 is shown below:
[Imgur](http://i.imgur.com/ZT9YEKY.png)[/img]
The significance underperformance of the buy and hold (without dividends) after the mid 1980s is a strong indication that this system is random but this can also be shown with statistical analysis. Basically, the fitted system represents a bet that the markets will continue to move up while any correction will not be followed by extended sideways action. If these conditions change, the losses will be large and even cause total ruin.
Therefore, it was shown that price series momentum was gradually arbitraged out starting in the early 1980s and continuing into the 1990s. The main reason for this is simple: too many traders were using these models and it was not possible for all of them to profit. Some had to lose and in the process the systems became unprofitable.
Examples from currencies
Short-term trend-following in GBPUSD
It may be seen that the 20-day average stopped being a good predictor of future prices in the early 1990s. Afterwards, the associated system is a loser. The 100-day moving average also stopped at the same time although it did not offer as smooth of an equity before that, as shown on the chart below
I started trading in the late 1980 after graduating from university. I already knew that short-term trend-following no longer works and I used a short-term crossover of the following type:
Buy if MA(5) – MA(25) > 0
Short if MA(5) – Ma(25) < 0
The equity performance of this system in GBPUSD is shown below:
I actually traded a variation of this system for less than a year in 1990 and my partner and I made good money. We started with 200K in March and we made 128K of profit by October of the same year, as shown on the broker accounting statement below:
The large drawdown levels in June and September made my skeptical about trend-following. We restarted the system in 1991 and stopped it after losing about 20K. I decide to abandon trend-following as a non-viable method. My partner continued and he also stopped after losing a large sum of money. It was evident to me then that trend-following was becoming a risky trading style.
After abandoning trend-following I concentrated on identifying short-term anomalies in price action and I developed a theory of price pattern formation and associated software. Price anomalies are continuously being arbitraged out but new ones appear. This is the only trading style according to my experience that is compatible with quant trading principles. Obviously, if equity markets continue to deliver premium with no extended whipsaw, the naive models that are used nowadays may stay profitable but that is gambling. Many traders and funds that are using trend-following that is not the pure, short-term type, Jim Simons talked about in his interview mentioned before, are risking losing a low of money or even getting ruined if there is no sufficient risk diversification and proper risk and money management.
Note that trading is getting harder, especially after many bright scientists joined after the collapse of the Soviet Union. This will get harder because of the traders from Asia that are also joining, as people in that region accumulate wealth from business activities. The rush for discovering anomalies in short-term price action will accelerate in the future and until the final destination, which is an efficient market that moves only occasionally due to unpredictable events. That may take some time though.
Conclusion
Jim Simons is right that trend-following is dead long time ago and the non-believers should only question their own experience and knowledge of the markets. As for those who promote curve-fitted systems as viable methods for people to invest their life savings, I can only remind this: historical performance is no guarantee of future returns, especially if it is curve-fitted to the data.
TR bhai there are 4 types of trends.. bullish,bearish,sideways, 4th is ullu banawing 
..where people are made PIGS :lol::lol:
..where people are made PIGS :lol::lol:
Jim Simons is Correct About Trend-Following
Posted on September 22, 2015
Claims about trading made by Jim Simons do not need support because his success guarantees their truth. In this blog I include evidence that was not explicitly presented in a recent TED interview of Jim Simons, where he said that trend-following stopped working long ago. In fact, short-term trend-following was arbitraged out in the 1980s.
Among many other interesting things, Jim Simons, who is a mathematician and a billionaire hedge fund manager, made the following statement in this interview (10:55 minutes from start):
“Trend-following would have been great in the ’60s, and it was sort of OK in the ’70s. By the ’80s, it wasn’t.”
Some trading forum members declared that Jim Simons does not understand trend-following. That was really curious to me. It’s like saying that Niels Bohr did not understand quantum mechanics for which he received the Nobel Prize. If there was a Nobel Prize for trading, Jim Simons would have probably received one.
What is trend-following?
Trend-following means different things to different people but it is important to understand that most trading and investment terms adapt to current market conditions and paradigms: they are as non-stationary as prices. A different kind of trend following was applicable in the 1960s and a different kind is applicable nowadays. Those who applied trend-following in the 1970s chose their models after analyzing the past and those who apply it nowadays choose their models based on different data.
Therefore, the only indubitable claim one can make about trend-following is that it is a trading method with gains that are much larger than losses. Anything else goes into the realms of particular market conditions. Notice that this definition applies even in intraday timeframes. There is no rationale for restricting trend-following in daily or weekly timeframes. However, in this blog we will look at daily data because this is what longer-term trend-followers use.
Definition
Trend-following is a trading method that produces an average gain much larger than the average loss
Short-term trend-following
In his TED interview, Jim Simons mentioned how in the past traders would look at the average of the past 20 days and use that as a predictor of the future. That was what trend-following meant to early quant traders.
Let us then consider the following system:
Buy if c – MA(20) > 0
Short if c – Ma(20) < 0
The equity performance of this system in S&P 500 is shown below:
The significant outperformance of this system until the early 1980s as compared to buy and hold (before dividends) is clear from the above chart. However, the system stopped working and experienced a large drawdown and by the mid 1980s it turned to a loser.
The second indicator pane shows my Momersion indicator, a measure of momentum and mean-reversion based on 250 daily bars. As expected, the above trend-following system became unprofitable when the equity markets switched from momentum-driven to momersion-driven (a mix of momentum and mean-reversion) in the early 1980s. When markets became mean-reverting in the late 1990s, short-term trend-following was already dead.
Medium-term trend-following
When trend-followers in the 1980s started experiencing large drawdown levels from their short-term models, they increased the moving average period. Next, we consider a 50-day moving average:
Buy if c – MA(50) > 0
Short if c – Ma(50) < 0
The equity performance of this system in S&P 500 is shown below:
The longer timeframe worked a little longer but by the mid 1990s any outperformance of buying and hold (before dividends) was also gone. Notice that the system has flat to negative performance after markets turned mean-reverting in the late 1990s.
Longer-term trend-following
By the early 1990s, some traders thought that the problem was the moving average period and they increased it even more to 200. Next we consider the following system:
Buy if c – MA(200) > 0
Short if c – Ma(200) < 0
The equity performance of this system in S&P 500 is shown below:
The system with the 200-day moving average provided a decent predictor of future price action until the late 1990s. Afterwards, the system performance is erratic with large drawdown levels of the kind that the early traders of the 1970s would not accept.
Curve-fitted/naive trend-following
When traders realized the moving average was no longer of predictor of price, they tried two moving averages, a system known as a moving average crossover. Please note that such systems are curve-fitted and poses no intelligence in pairing market returns with system returns. As a result, they can fail at any time. Examples are offered in my new book, Fooled by Technical Analysis and in this blog. Traders that use such systems to trade are basically gamblers.
Let us consider the following curve-fitted system:
Buy if MA(50) – MA(200) > 0
Short if MA(50) – Ma(200) < 0
The equity performance of this system in S&P 500 is shown below:
[Imgur](http://i.imgur.com/ZT9YEKY.png)[/img]
The significance underperformance of the buy and hold (without dividends) after the mid 1980s is a strong indication that this system is random but this can also be shown with statistical analysis. Basically, the fitted system represents a bet that the markets will continue to move up while any correction will not be followed by extended sideways action. If these conditions change, the losses will be large and even cause total ruin.
Therefore, it was shown that price series momentum was gradually arbitraged out starting in the early 1980s and continuing into the 1990s. The main reason for this is simple: too many traders were using these models and it was not possible for all of them to profit. Some had to lose and in the process the systems became unprofitable.
Examples from currencies
Short-term trend-following in GBPUSD
It may be seen that the 20-day average stopped being a good predictor of future prices in the early 1990s. Afterwards, the associated system is a loser. The 100-day moving average also stopped at the same time although it did not offer as smooth of an equity before that, as shown on the chart below
I started trading in the late 1980 after graduating from university. I already knew that short-term trend-following no longer works and I used a short-term crossover of the following type:
Buy if MA(5) – MA(25) > 0
Short if MA(5) – Ma(25) < 0
The equity performance of this system in GBPUSD is shown below:
I actually traded a variation of this system for less than a year in 1990 and my partner and I made good money. We started with 200K in March and we made 128K of profit by October of the same year, as shown on the broker accounting statement below:
The large drawdown levels in June and September made my skeptical about trend-following. We restarted the system in 1991 and stopped it after losing about 20K. I decide to abandon trend-following as a non-viable method. My partner continued and he also stopped after losing a large sum of money. It was evident to me then that trend-following was becoming a risky trading style.
After abandoning trend-following I concentrated on identifying short-term anomalies in price action and I developed a theory of price pattern formation and associated software. Price anomalies are continuously being arbitraged out but new ones appear. This is the only trading style according to my experience that is compatible with quant trading principles. Obviously, if equity markets continue to deliver premium with no extended whipsaw, the naive models that are used nowadays may stay profitable but that is gambling. Many traders and funds that are using trend-following that is not the pure, short-term type, Jim Simons talked about in his interview mentioned before, are risking losing a low of money or even getting ruined if there is no sufficient risk diversification and proper risk and money management.
Note that trading is getting harder, especially after many bright scientists joined after the collapse of the Soviet Union. This will get harder because of the traders from Asia that are also joining, as people in that region accumulate wealth from business activities. The rush for discovering anomalies in short-term price action will accelerate in the future and until the final destination, which is an efficient market that moves only occasionally due to unpredictable events. That may take some time though.
Conclusion
Jim Simons is right that trend-following is dead long time ago and the non-believers should only question their own experience and knowledge of the markets. As for those who promote curve-fitted systems as viable methods for people to invest their life savings, I can only remind this: historical performance is no guarantee of future returns, especially if it is curve-fitted to the data.
Last edited:
Traders with overnight short and long positions have to be careful in Oct series....they also need to be careful in Nov,Dec,Jan,Feb,March,April,May ,June,July,Aug,and Sept series too....if they take care of these months, no worries for them.
Just joking.... nothing serious...
Smart_trade
Just joking....
nothing serious...Smart_trade
:lol:
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