Below is a decent and short webinar (~45m) from John Jospeh of NextD systems who trades Trend-Following strategies on various equity indices.


I found some interesting conclusions:

  • Fixed % Risk is ideal over volatility based stops or fixed dollar stops. The fixed dollar stops is obvious, a $1 move on a $10 instrument is enormous compared to a $100 stock, this makes perfect sense. However his preference over volatility based stops was interesting, he argues that utilizing volatility increases our uncertainty since future vol is unknown, only historical vol. Consequently as volatility shifts, which it tends to do abruptly, by the time the information is reflected it can be too late to help the model. For example, after Oct 2008, volatility based stops would’ve widened significantly and hence risk per position. A failed breakout with wide stops could result in very large losses. He argues fixed % stops are more ‘stationary’.
  • He mentions briefly the benefits of diversification and especially SCALING as sub-optimal. In all my testing of mean-reversion systems I have striven for a methodology that outperforms static entry price and size and have failed to do so. For example if I set 3 different entries to scale into a position, I would have made more money then just purchasing the entire position at the first scale. This makes some sense as your entry should be somewhat ‘optimized’ based on your trading logic rather then completely random. Psychologically the idea of scaling is very attractive though. The argument is made that scaling is actually 3 different strategies that are highly correlated, a better approach is to use your existing system and utilize different parameters to find the most non-correlated strategy to combine with the optimal strategy. This is a more interesting approach since I’ve beaten scaling to death.
  • There’s mention of boot-strapping and tools to measure real-time performance which are interesting as well.

~ by largecaptrader on November 11, 2009.

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