The Trend Following Experiment

trend following experiment

Hey guys and gals.

I’ve been wanting to run a trend following experiment for a while and this week I figured, let’s just do it. So i’ve put £1000 of my own money into a spreadbetting account and i’m going to trade it using solid rules. I began the experiment on 27/07/2015 and intend to run it for at least a year with 52 weekly update reports a year on the blog.

 

Why?

Purely as a bit of fun for me, but also because I think it’ll be a good way to show the power of trend following and could help other traders learn. I wanted to start with a £1000 account to show that it can be done on a small amount. I’ve achieved it before so hopefully I can do it again.

Strategy

Taking advantage of the fact i’m running this trend following experiment I decided that I wanted to run a brand new entry exit system, just out of curiosity and to make it a little more interesting so i’m not just duplicating my other trades. Due to running 3x businesses I simply do not have the time to look at running something on the intraday setups (10-15 min charts) and so I’m having to run it as an end of day (daily chart) system where I can check and adjust anything during downtime.

 

Risk

I’ll be tying to stick to a maximum of 5% risk per trade to start off. With only £1000 in the bank i’ll need to take bigger risks in order to afford many of the markets. I’ll offset this risk a little by using large moving averages, small bet sizes, and an entry/exit setup that has a better % of winning trades. This will result in a slower capital growth. (Generally the larger the timeframe the better win% but slower cap growth. To grow quickly you can reduce timeframe but win% will be reduced due to higher frequency of small losing trades). I will be trying to only have 25% of my capital at risk at any one time. This means only adding positions as and when existing positions close, or exposures are reduced (i.e. trailing stops moving).

Entry/Exits

I’ll be screening for signals at the end of every day using a simple trend following system i’ve developed which fits in with my time availability. I’ll enter those trades in the evenings after market close with buy orders for the open the next day. My time availability means that swingtrading and daytrading are not realistic options for me at this stage as I am unable to commit to the attention they would require. My exit rules are more important than my entries. I believe there is room for error or flexibility on entries but the exits are where you need to make sure you get it right.

Markets

I’ll be trading all markets to help with asset allocation. Primarily US stocks will be my main arena due to the low entry bet size available with my spreadbetting broker IG. However, I will be looking at ETF’s as a way of reaching indicies and commodities. Forex may not be as easy for me to get into as this stage but my scans will still incorporate these markets in case an opportunity comes along which I can afford. Effectively I am not ruling any markets out in my scans. I don’t see any benefit in focusing on one market.

Where I am trading US stocks I will look to diversify by industry sector as well as Longs and Short opportunities. For example, I will not look to go Long on two US Stocks within the Electricity sector. These positions have a higher chance of being correlated and a big move in that sector against my position will effectively compound my losses, which I want to obviously avoid.

Record

I’ll be recording my performance using my end of day tracking spreadsheet and publishing reports via the blog. I will be using Twitter
to announce my opens and closes, as well as the weekly blog reports. However, please note that as an End of Day Trend Following system my scans and orders to open/close will only be executed in the evenings after market close and I am likely to be getting 6-7 out of 10 trade picks wrong. So please don’t necessarily follow the trade picks by trading them blindly yourself. I will only be doing them for transparency.

Targets

I will not be using any profit targets. Nor will I be setting any overall targets. It seems pointless given the unpredictable nature of the markets. The results will be the same regardless of whether I set expectations or not, so why bother?

I will begin my reports tomorrow and following on every Thursday. Often there will be little in the way of excitement and there will not be super huge profits early on. The aim however is to make money and have a little fun whilst doing it. I expect my win/loss % to mirror that of my personal trading experience which tends to fall somewhere between 38-42%. Letting my winners run and cutting my losses to a 5% maximum per trade will hopefully result in a profitable outcome. Of course, a run of 10 losing trades could result in a 50% drawdown of my account, however I have to take that level of risk in order to access most markets with my small account. As my account grows during the experiment I hope to reduce the risk per trade. Like the birth of a child, the early days will be the most dangerous until I can build my account up.

Finally

Nothing is a given here. With my entry selection criteria the opportunities are vast and I will not be able to trade them all. Selection could therefore be the make or break of the experiment. If I pick all the wrong trades this whole thing could fall flat on its arse.

This is not meant to be a super serious money making investment. Just a bit of fun which I can share online but under the conditions of using real money. I do not want to, or intend to lose my money. I figured however that using real money would make it all a bit more real.

I’m taking the Thomas Edison approach here. He once famously said that it took him 10,000 experiments to achieve the patents that he did before he died. He didn’t refer to them as failures, he referred to them as experiments. If one didn’t work he didn’t dwell on it, he shrugged his shoulders, learned what he could from it and moved on. I expect to make more losses than winners but hopefully my winners will be bigger and pay off all the losers. I won’t dwell on the losers. I’ll only focus on keeping them as small as I can.

Wish me luck.

Subscribe to my Spreadbetting Newsletter

My FREE Newsletter goes out daily and contains high value ideas, tips and strategies to help improve your trading results. No fluff. Just great value.

I do not send SPAM.

3 Comments on “The Trend Following Experiment”

  1. Hi Chris, looking forward to seeing the results. I’ve a question regarding one of your comments above “Nothing is a given here. With my entry selection criteria the opportunities are vast and I will not be able to trade them all. Selection could therefore be the make or break of the experiment. If I pick all the wrong trades this whole thing could fall flat on its arse.”

    How are you going to make those selection of you are getting multiple entry signals? That criteria are you looking at on top of the entry signal itself to make you take one trade over another?

    I think this would be a great insight for new traders to a system like yours.

    1. Hi Mathew. Great question. A hard one to answer with any certainty at this stage but here’s what I have learned from traders like Jesse Livermore and Nick Darvas.

      – Trade with the trend
      So even if I get a buy signal, I’ll only trade markets with an obvious uptrend. Now this can be tricky as what looks like an uptrend to one person can look like a downtrend to another. For example, what if a stock has been rising for 3 years, but the last 3 months has been falling. Is that in an uptrend or a downtrend? I’m still trying to work that out for myself to be honest, but I’ve discovered that in those situations or uncertainty I’ll usually leave them alone for a better option.

      – What is the sectors performance like?
      If i’m looking at buying a stock in the Electricity sector for example I would take a look at what the Electricity sector is doing as a whole. You can find charts for sectors online usually for free. If the sector is trending SHORT then I may not go long on the stock. I used this approach when picking Alcoa in 2014. I noticed they were an Aluminium stock. I checked out the Aluminium sector and noticed it was soaring and reaching new highs. I bought the stock and made something like +650pts on that move with a 100pt risk or something close to that (dont have figures to hand).

      – Price level
      Price level will also dictate what I can and can’t get into. With a £1000 account if I get a buy signal on $APPL (Apple Inc) then it’s not going to happen. The stop loss required to account for daily swings will be too expensive for me. I’ll be looking for markets with a price around $5 – $70 or 500-7000 on Spreadbetting prices.

      – Capital
      I’ll also only trade higher cap stocks. Lower cap stocks tend to be subject to high volatility or poor liquidity. Volatility because someone buying a large number of shares can heavily move a small cap market and cause a stop to be hit. Poor liquidity is when not many people are trading the stock. It can lead to erratic price movement that doesn’t sit well with trending markets.

      So once all those have been taken into effect it should whittle down my options. If I am left with a small selection at that point I will consider any clashes with existing open positions. I do not want to trade correlated markets. If I still have a selection then it’ll probably come down to just having to pick one. Trend traders often have to just go with it and if that means watching the trade you didn’t pick soaring off into 300% returns then so be it. The downside to having a small account. If I was trading with millions I could potentially trade all signals with small experiment level bet sizes and then double up on the ones that perform. I don’t have that luxury here however.

  2. Hi Chris,

    Thank you for the insightful answer it helps a lot in understanding what one should be looking out for besides just an entry signal.

    For your market screening, are you still using ProRealTime now-a-days?

    Thanks,
    Mathew

Leave a Reply

Your email address will not be published. Required fields are marked *