Trend Following Systems

[Soultrader]

I heard this a while back from Oliver Verez in one of his DVD's. He mentioned that a holding period of a financial instrument is decreasing each year.

Sooner or later the average investor will become a swing trader. Holding periods of months will not be the best choice and a 1 week holding period may be considered too long.

The question I have in mind is how effective will trend following systems be? Trend following systems are based on a longer time frame. But with the decrease in holding time this should have an effect on the performance of these mechanical systems. Any thoughts on this?

[ant]

I believe trend following systems will always make money over the long-term. It takes a special type of trader to be able to withstand the drawdowns that comes with this strategy though. It takes deep pockets and trading a basket of markets to be successful. As I understand it, a lot of big trend followers, such as John Henry, are experiencing some big drawdowns now. But there are always good trends somewhere and a trader needs to find them. Look at metals and energy. Market conditions are cyclical and eventually it will be more favorable for trend followers. Opportunities always exist, but may be harder to find. Hey, volatility is not that great right now for us index futures daytraders, right? I do believe that the trendiness of markets is not what it used to be. Perhaps its because of crowding at these breakout points that everyone and their grandmother sees. Just my 2 cents...

[ezduzzit]

Hmm.. that's a pretty interesting question Soultrader. However, being a daytrader I don't really make trend plays unless you want to call them mini-trends. I suppose they would more appropriately be called Intraday volatility swings. That is probably not all that different from some of the momentum traders in our midst, so not sure I am qualified to voice an educated opinion on how the shrinkage in holding periods is going to impact us in the short term, if at all.

Perhaps if I was more of a multi-day swing trader or a position trader, I might have some concerns, even though I think Ant rightly points out that in those cases, you may just have to do some more shopping through the instruments or various stocks to find the better trading plays. Personally, I would not sleep well at night as a swing or position trader, so I will just stick to my knitting, while keeping an eye open for market changes that might affect us shorter term players. Undoubtedly things will change, but I think the marketplace will continue to come up with new instruments and things to be traded to keep us all busy enough for the foreseeable future. I mean there's always Forex if all else is lost heh, heh.

Those of you who have been around awhile may remember back when the e-mini S&P 500 used to swing 23 points high to low in a single day. While those days are clearly over, it doesn't seem to have stopped people from trading. Perhaps some have moved over to the Russell and others have simply turned up the number of contracts a bit. Either way, I am going to watch with keen interest to see how things change.

Happy Trading

[Soultrader]

Interesting comments guys Im stunned the emini S&P having a 23 pt range!! Must of seen pretty nice mini-trends each day.

I guess there will always be a trending market worthy enough to use a trend following systems. With additional derivatives introduced each year, its becoming hard to keep track of all the available products. Soon we should be able to trade the global markets under one platform.

[torero]

Yep. Most trend following system make their money on big trends and lose their money on ranges. The ratio of winners to loser is usually around 1:3 but the average win is 3x or greater than the losers. Daytraders have higher winners to losers but the avg win to avg loss is similar, big trend or not.

[Soultrader]

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[Reaver]

futuresblaster-
Non affiggere la carne suina in scatola su quest'asse.

It's from a free translation site online, but I can help out if you need explanation. This is a quality forum and it's going to stay that way.

[mvhanson]

I think you're right about this -- especially with a large percentage of NYSE volume being traded by hedge funds of one stripe or another. Having worked in that industry, I can say that hedge fund traders are not sentimental about their positions, or the financial instruments they hold.

I can see one trend which will be toward hedge funds as a kind of vehicle of choice. People are going to start to get mad about "buy and hold" mutual funds, or picking stocks and being able to profit only to the upside. That's going to mean more short/long strategies in the market, which means greater volatility, on the one hand, and on the other a trend toward greater market stability and efficiency. By that I mean that if people are perfectly free to trade any way they like, and the majority of the participants are doing so, chances are you're going to arrive at a market that is more reflective (if more volatile) of all particpants' actual thinking, exuberance, concerns & etc.

Mechanical systems will still continue to work, you're just going to have to put on the magnifying reading glasses instead of looking through a telescope. The time frames will be shorter, and the fluctuations wilder. The market a month from now is not going to be the market a year from now or two years from now, and the possibility of long-term trending that market is going to be difficult if not entirely impossible. The rules have changed, seems to me.

Best,
MH

Originally Posted by Soultrader I heard this a while back from Oliver Verez in one of his DVD's. He mentioned that a holding period of a financial instrument is decreasing each year. Sooner or later the average investor will become a swing trader. Holding periods of months will not be the best choice and a 1 week holding period may be considered too long. The question I have in mind is how effective will trend following systems be? Trend following systems are based on a longer time frame. But with the decrease in holding time this should have an effect on the performance of these mechanical systems. Any thoughts on this?