[Andre]

Originally Posted by robertm »

I'd imagine market size, correlation and liquidity has a lot to do with it?

That's an easy answer in my opinion:
1 - You need several uncorrelated instruments, so you need a lot of futures representing a lot of markets. Otherwise using for instance a trend following system to trade only equities ends up with much worse return/risk ratios;

2 - Lots of leverage. try with 100k of cash to buy 150k of Gold ETF, and short 100k of treasury etf, and a bunch of other markets at the same time. It's just impossible.

3 - Liquidity

4 - Very easy to manage currency risk: if you are a big manager trading futures all around the world, most of the fund is in USD, and for a foreign future, the only currency exposure is the margin+open P&L.

[robertm]

Originally Posted by DugDug »

Re the stocks I think you nailed it. I think the correlation is what ultimately kills you. The size and liquidity can be negated by having a larger universe of stocks (there are thousands of large liquid stocks in the world.) On saying that it would be an interesting test of the turtle style with a futures hedge - looking for outperformance for a long short strategy - not my bag but maybe one day that would be worth a look.

Isn't that sort of like pairs trading? (never really looked into it other than a passing webinar & general idea).

The correlation isn't so hard to deal with, it's not like stocks crash every 6 months like a cyclical commodity can. Sure they have corrections, that just runs over all the bunnies that were standing too close to the road

[robertm]

Originally Posted by Andre »

That's an easy answer in my opinion:
1 - You need several uncorrelated instruments, so you need a lot of futures representing a lot of markets. Otherwise using for instance a trend following system to trade only equities ends up with much worse return/risk ratios;

Correct, I don't only trade stocks, and I don't only trade futures, and I don't only trade FX, and I don't only trade Commodities. They are all just instruments to utilize. None of them are good to trade all of the time.

Originally Posted by Andre »

2 - Lots of leverage. try with 100k of cash to buy 150k of Gold ETF, and short 100k of treasury etf, and a bunch of other markets at the same time. It's just impossible.

So trade CFD's (if you can)

Originally Posted by Andre »

3 - Liquidity

Unless you are a mega fund though this isn't really an issue, there are plenty of stocks to choose from. For the rest of us there is no logical reason to not employ a low maintenance stock trading system given the rewards available. Again thanks to CFD's I tie up very little of my capital in margin.[/quote]

Originally Posted by Andre »

4 - Very easy to manage currency risk: if you are a big manager trading futures all around the world, most of the fund is in USD, and for a foreign future, the only currency exposure is the margin+open P&L.

My CFD broker lets me move currency risk at the click of a button. Why on earth would I hold profits in USD, HKD, GBP, JPY when I can have AUD? I might tolerate EUR ;-)

Of course not everybody can trade CFD's & have all those Stock markets sitting with one broker, one account, one margin facility. But if you can it's bloody handy!

[DugDug]

Offsetting risk - in remaining with the turtle system discussion.
Risk is largely offset via portfolio diversification, and dealt with in the original position sizing algorithms. It defeats the purpose to get on a winner and then either hedge it or try and offset the risk.
while substituting for options etc; will cost money.
Its always the trade off.

The point about stops and gaps/ crashes remains - 2008 shows this. People thought they had hedges and their risk was offset. But then everything became positively correlated, or the supposed hedge disappeared - Lehman, bear sterns. Also there have been plenty of people burnt by the idea of guaranteed stops. I think that a lot of people sometimes think only of what they think they are risking and forget about the actual exposure. eg; if risking $1000 on a trade with stop but if you own $150,000 of stock on a margin account, your total exposure is still $150,000 - if that goes to zero overnight, your $1000 risk means nothing. There is no wrong or right here its a matter of leverage, but its often forgotten by traders and investors and its that 1 time in 100 (or more like 1 in 10) that gets you.
I believe if you have a system that you have tested in a certain manner you should stick to it. If the turtle system does not have risk offsetting trades, stick to the system.
....................
The CFD market has certainly revolutionised trading and the ability to trade anything so I agree they are great for us. (I stick mainly to futures still and get leverage via the brokers for stocks if I trade them), and the way these accounts are kept mean that any account in any currency is easy - so long as you actually understand how they work - thats a whole other discussion for how brokers make money via loans and taking the interest clip.
.................
Re spread trading - yes and no - I would class spread trading as buying one bank, selling another. If you are buying a portfolio and selling the future then I reckon its different. I just thought it would be interesting to test.
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On that note one of the tests we did regarding the turtles was a long only test. The results we got over the long term was very similar to the long and short trades. Except with less PL volatility. There were no massive PL in the short years, and the losses were minimised, but it was interesting. - I guess markets really do trend up over the long term

[BlowFish]

Originally Posted by DugDug »

What we found was that the most palatable results were when we only pyramided 2 times, and reducing the risk per trade from 1% to 0.25% of equity per unit.

Andre actually found 'the most palatable results' where without pyramiding at all, that was all that prompted me to post to be honest. Without the pyramiding it is no longer the turtle system!! Incidentally I believe the turtle system used 4units rather than your 2, however I think they where 1/2 unit adds.The turtle system uses a volatility adjusted %risk per unit not a fixed percent. When you talk about reducing the risk is this after adjusting for volatility? This was another simple but elegant feature of the system.

Originally Posted by DugDug »

Now on saying that - there were years/tests where you could have made 600% on a very scalable amount of money.(we tested data from 1994) Problem is to do this you needed to really increase the risk per position, and this leads to massive intra month drawdowns.

No. The turtle system does not increase risk - it keeps risk constant however it does increase size on winning positions to bring in those 600%ers. There are also rules to prevent too much risk across the portfolio. That is the elegance of the system the money management, it will make decent ('big') profits whilst strictly controlling risk. Incidentally I am not sure 1 year testing is sufficient for a system that tends to hold its winners for months at a time to be honest? Don't some of the winners run over a year anyway?

Originally Posted by DugDug »

Regardless the concepts are good to understand and the ideas interesting. You do need a broad portfolio of instruments, lots of money and a stomach for drawdowns - ie; a very intensive belief/faith in the system.

Agree. Mind you that tends to be the case with most trend following systems. Actually not only are the drawdowns difficult so are the exits with the turtle system... price needs to make a 20 day low! (I think there was a 10 day version too). Sitting through a 20 day retracement must be hard!

Any way, just to re-iterate my point is that the very essence of the system is the position sizing and trade management (including the pyramiding), it is not the 'break out', messing with those may improve the system (or your appetite to trade it ) but it is no longer "the turtle system".

Edit: Maybe I am being pedantic about this but I also have grave reservations whether dinkering with the money management is likely to improve the system over the long run.

[BlowFish]

Originally Posted by DugDug »

Re spread trading - yes and no - I would class spread trading as buying one bank, selling another. If you are buying a portfolio and selling the future then I reckon its different. I just thought it would be interesting to test.
..............

Hi DD...just to clarify I meant spread betting not spread trading...not available in some countries. This is very like CFD's to be honest (though hold some tax benefits in the UK for example). The useful thing for someone pursuing a strategy that requires a diverse (and so potentially large) portfolio is that it allows smaller sizes to be traded (bet really, as similar to a CFD the broker/bookie is the counter party). So where you might need a 350k account to trade a system on actual markets you could implement the same strategy in say a 35k spread bet account.

Another (minor) advantage is that you have more flexibility in adjusting the size for the volatility of the instrument. you can bet anything from a quid on up per tick.

[robertm]

One advantage of futures is many give smooth trends without large gaps, which in itself is a form of risk management.

Anybody active investor long Equities going into 2008 deserved any hard lessons they learned. Takeovers while short can be nasty if you are exposed, but again instrument choice can get around this somewhat given your time horizon for equity shorts isn't multi year, and I don't have stats but I'd imagine not a lot of takeovers were announced during 2008 other than the extremely volatile banks that were forced into mergers (by which time you should have been well in profit). On the flipside being long a takeover target can be a great experience if a bidding war breaks out, nobody is going to takeover Oil, Copper or the AUD (not even Soros anymore).

I doubt many people in this forum would have trouble liquidating assets (as in trades) if the market told us it was time to do so anyway :-)

Agreed that the CFD providers certainly make their money from us, but so long as I can find an edge they can make all the money they want . What market maker worth his coat wouldn't operate that way?

[DugDug]

Hi Blowfish,
1...pyramiding - yes the turtles pyramided - but in testing we found that what seemed to give the best or most palatable results for use was if you limited the pyramids to only two units. It implies that the after that the losses became a bit big when reversals occurred. This was just shown in the results we tested.
2...% Risk - as we understood it the turtles risked a % of equity per trade/unit. Thats what we did. The volatility adjustment came about from where the stop is set based on an ATR move. These are two separate elements of the position sizing. One remains the same in our testing, although you can also alter the equity risk percentage if you like.
3....we tested data from 1994 up until Jan09 as the last test - not just for one year - sorry for the confusion.
4.....the 600% return example is reliant on running the test for the whole period whereby a parameter is changed. The major parameter to change is the amount of equity to risk per trade. eg; 1% or .5, or 0.25% This makes a massive difference to risk of ruin and return profiles. The risk changes between tests not during the test.

yep you are probably being a little pedantic but in discussing the turtle system then to fully understand what makes it work, how it changes etc; then it makes sense to test variations of the system. Thats what we did. If you wanted to keep a "pure" original system then fine - it works - but wow - there are times it hurts.