Professional Documents
Culture Documents
FOLLOWING
Applied to Equities and ETFs
Buffett or Harding?
Emotional = Irrational
Investors tend to make emotional decisions about their money, chasing performance...
Investors are everything but rational: Hope, Greed, Fear, Despair investing cycle
Trend ends
(back to fundamentals)
To fight irrational behaviour we need a PLAN: a system with clear rules, with an EDGE
TREND: sustained changes in prices in one direction
FOLLOWING: no forecast, focus on reaction, deal with probabilities and not certainties
We cannot control the OUTCOME of a trade: focus on SIZE and EXIT
Focus on ROBUSTNESS: simple algo, few degrees of freedom, KISS
Focus on Consistency Discipline Confidence Back testing
Focus on the PROCESS: doing the right thing rather than being right, flawless execution
Simple but not EASY: let profits run + cut losses goes against our natural instincts
Y = (1 X) / X hyperbola
Where:
Y = AW / AL (a.k.a. WIN/LOSS ratio)
X = %W
Profitable
WIN/LOSS RATIO
7
6
Breakeven Line
5
4
3
2
1
Unprofitable
0
10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95%
WIN %
Riccardo Ronco +44 20 7233 3245 rronco@aviateglobal.com
10
NR 1 TF problem: DRAWDOWNS
11
90
80
70
80-90
60
70-80
60-70
50
50-60
40
40-50
30
30-40
20
20-30
10
10
9500
9000
8500
8000
7500
7000
6500
99
0-10
% WIN
10000
TRADES
6000
70
5500
5000
4500
4000
3500
3000
2500
2000
40
1500
1000
500
10-20
12
% risk / loss
70
Avail. Cap.
60
50
40
4
5
30
20
10
Consecutive
Losses
1
4
7
10
13
16
19
22
25
28
31
34
37
40
43
46
49
52
55
58
61
64
67
70
73
76
79
82
85
88
91
94
97
100
If our %WIN is 40% then, in the long run, we will get 18 losses in a row
risk 4% on each trade and that will be enough to lose 50% of our equity with FF
Riccardo Ronco +44 20 7233 3245 rronco@aviateglobal.com
13
01/03/2011
01/06/2008
01/09/2005
01/12/2002
01/03/2000
01/06/1997
01/09/1994
01/12/1991
01/03/1989
01/06/1986
01/09/1983
01/12/1980
01/03/1978
01/06/1975
01/09/1972
01/12/1969
01/03/1967
01/06/1964
01/09/1961
01/12/1958
01/03/1956
01/06/1953
01/09/1950
01/12/1947
01/03/1945
01/06/1942
01/09/1939
01/12/1936
01/03/1934
01/06/1931
01/09/1928
100000
S&P 500 MA
B&H
10000
1000
100
10
From Sept 1928 to Feb 2015: CAGR Strategy +6.38% (no reinv.) vs B&H 5.47%
14
01/08/2014
01/10/2013
01/12/2012
01/02/2012
01/04/2011
01/06/2010
01/08/2009
01/10/2008
01/12/2007
01/02/2007
01/04/2006
01/06/2005
01/08/2004
01/10/2003
01/12/2002
01/02/2002
01/04/2001
01/06/2000
01/08/1999
01/10/1998
01/12/1997
01/02/1997
01/04/1996
01/06/1995
01/08/1994
01/10/1993
01/12/1992
01/02/1992
01/04/1991
01/06/1990
01/08/1989
01/10/1988
10000
SPX/BOND
S&P B&H
50/50
1000
100
15
16
17
18
SPX
EW Diversification
+ Monthly Rebal.
(2 free lunches)
S&P 500 TR
European Equities TR
US 10-year T-Note TR
US REITs TR
Commodities TR
01/08/2014
01/12/2013
01/04/2013
01/08/2012
01/12/2011
01/04/2011
01/08/2010
01/12/2009
01/04/2009
01/08/2008
01/12/2007
01/04/2007
01/08/2006
01/12/2005
01/04/2005
01/08/2004
01/12/2003
01/04/2003
01/08/2002
01/12/2001
01/04/2001
01/08/2000
01/12/1999
01/04/1999
01/08/1998
01/12/1997
01/04/1997
01/08/1996
01/12/1995
100
CAGR
Ann. St.dev
Mod Sharpe
Strategy (blue)
10.08%
6.53%
1.54
SPY (red)
8.52%
15.30%
0.56
19
1000
Multi LC US Sectors
Long Only
STRAT
SPY
800
EW + Monthly Rebal.
600
400
200
Dec-14
Dec-13
Dec-12
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
Dec-06
Dec-05
Dec-04
Dec-03
Dec-02
Dec-01
Dec-00
Dec-99
Dec-98
Dec-97
Dec-96
Dec-95
Dec-94
Dec-93
Dec-92
Dec-91
CAGR
Ann. St.dev
Mod Sharpe
Strategy (blue)
10.74%
8.46%
1.27
SPY TR (red)
7.75%
15.30%
0.51
20
21
22
Bibliography
Andreas Clenow - Following the Trend: Diversified Managed Futures
Gary Antonacci Dual Momentum Investing
Nick Radge Unholy Grails: A New Road to Wealth
Michael W. Covel - Trend Following: Learn to Make Millions in Up or Down Markets
Michael W. Covel - The Complete Turtle trader: The Legend, the Lessons, the Results
Nick Radge - Unholy Grails - A New Road to Wealth
Curtis Faith - Way of the Turtle: The Secret Methods that Turned Ordinary People into Legendary Traders
Mebane T. Faber - The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets
Anthony Garner - A Practical Guide to ETF Trading Systems: A Systematic Approach to Trading Exchange
Traded Funds
Van K. Tharp - Trade Your Way to Financial Freedom
Edwin Lefevre Reminiscences of a Stock Operator
18 March 2015
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Awards
Legenda
Every week, for several different countries and asset, classes a given set of technical indicators is calculated on specific Equity, Equity sector and Commodity indices. First, we
calculate our proprietary momentum indicator; we then rank the industry groups from best to worst, showing the results for the last six weeks (Fridays closing prices are used in
our calculations). We use the blue color for Overweight, the red color for Underweight, and no color for Neutral.
We prefer to find buy ideas in the top third results of our ranking model, while short ideas are better suited for those indices in the bottom third. This table provide a quick, yet
effective, way to see the dynamics of relative performances in these indices, showing investors preferences in the medium term. From an absolute performance point of view,
we need to calculate instead the weekly MACD (Moving Average Convergence/Divergence) indicator and its nine-week moving average (the signal line).
We technically define a bullish swing as one when the MACD is above its moving average and a bearish swing as one when the MACD is below its moving average. On
the Time column, we count the number of weeks from one swing to the next to gauge the maturity of the current move. When comparing the MACD with its moving average
and with the zero line, however, we can define four phases (Up, Advancing, Down, and Terminating).
The idea is to divide price oscillations into clearly identifiable phases (as inspired by the work of Ian S. Notley) and adjust our risk/reward expectations according to these
indications (see column Action, representing the number of weeks a particular index has spent in its bullish or bearish swing phase).
The bullish swing includes the Up and Advancing phases.
Up: The index has bottomed (possibly after showing positive divergences) and is breaking resistance levels. Investors should have a low-risk entry point here. The weekly
MACD is below the zero line but above its signal line. Size should be small at the beginning, and the investor should allow prices to prove themselves.
Advancing: Prices are trending nicely higher with moderate volatility. Approaching the top, we usually see volatility picking up and weekly (daily) ranges increasing. The
weekly MACD is above both the zero line and its signal line. Buying dips can be a rewarding strategy.
The bearish swing includes the Down and Terminating phases.
Down (Declining): The index has built a top (or a congestion phase), and the weekly MACD has crossed from above its signal line. The MACD itself is still above the zero
line here, and the implication is to lighten the position and to use each short-term pullback to reduce/sell the exposure (sell on rallies).
Terminating: Prices are accelerating to the downside, and the weekly MACD is now below both zero and its signal line. Sharp rallies could be confusing, but sticking to the
trend is the best strategy, and investors should generally avoid buying dips here. Volatility is sharply increasing.
EM: Emerging Market.
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