New year, new decade, time for some hands on financial experiment. After reading Micheal Covel's "Trend Following" I decided to try it myself. I mean the results of trend followers seem rather impressive compared to traditional buy-and-hold, everyday mutual funds (obviously Warren Buffet should be regarded as an exception...). Therefore I played around a bit with Excel and some historic data and came up with a rather simple strategy. In a nutshell the goal is to place a number of small bets on different markets that show some technical promise. Naturally there is a clear exit strategy as well, so that (the many) small losses will be cut. The goal is to ride the big waves (dotcom bubble, subprime market bubble, the recent liquidity rally etc.) a good deal of the way and therefore make up for the small losses incurred from wrong buying signals. Back testing has shown that my strategy indeed does have a positive expactation for each trade. In theory this leaves the trade with a classic call pay-off profile, where losses are known beforehand and restricted to the premium (in my case the stopp-loss for the exit) but gains are unlimited. Another big part of trend following is conservatism (at least in terms of putting money on trades) and therefore money management is important. Without going into any further detail, my particuliar system would have generated a net return of 171% (10.49% p.a.) over the last 10 years (06.11.99-06.11.09), a time where the S&P 500 would have lost 22.5% of its value. It is noteworthy that only long trades were executed, each trade had 1% transaction cost, gains were taxed with 25% (thank you German government for that...) and investments were made in the following markets:
Dax 30, FTSE 100, CAC 40, DJA 30, NASDAQ 100, S&P 500, Nikkei 225
Hang Seng, BOVESPA, Tel Aviv 100, Mexico
Aluminum, Copper, Gold, Palladin, Uranium, Zinc
Corn, Thai Rice, Wheat, Crude Oil, Cotton
US 5 yr treasury, US 30 yr treasury
Unfortunately not all of those markets are accessible to the private investor like me at a decent cost but the investment universe is still huge and this selection still seems like a decent representation to me.
Alright, now it is time for some real life actions. I realize after last year's liquidity rally markets might be saturated and my strategy might leave me with a lot of wrong buying signals, but then again, it did work right after the dotcom bubble. So with the believe that the market is always right and price is the only indicator of its direction, I entered long positions in the following (as of 04.01.10):
Dax 30, FTSE 100, NASDAQ 100, S&P 500, DJA 30, CAC 40, Nikkei 225, DJ Euro Stoxx 50
S&P Nifty (India), MSCI Brazil, MSCI Turkey, MSCI Korea, MSCI Greece, MSCI Malaysia
Zinc, Copper, Lead, Nickel
Corn, Cotton, Sugar
With some of the trades I am rather sceptical but there should not be room for emotions in trading. That is why a technical trading system is so beautiful: Once it is running, you just act according to the rules set before hand...
With that being said, good trades and a succesful new decade to everyone!
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