Bloomberg 2013 December-tf Last

8/18/2019 Bloomberg 2013 December-tf Last

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TREND FOLLOWING

applied to equities and ETFs

18 December 2013 – Bloomberg London

Riccardo Ronco +44 20 7233 3245 [email protected]


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Riccardo RoncoBiography

218 December 2013

Riccardo Ronco is the head of technical analysis at Aviate Global in London.

Mr. Ronco follows large- and mid-cap European and U.S. equities, paying attention to domestic andforeign equity indices, currencies, commodities, and interest rates. As a medium-term trend follower,his approach is strongly quantitative in nature; particular attention, however, is devoted to identifyingreversal patterns characterized by excessive consensus among investors.

Mr. Ronco brings more than 15 years of experience in trading, quantitative analysis, and teachingtechnical analysis in the United Kingdom and Italy. Prior to joining Aviate Global in April 2010,Mr. Ronco worked for Credit Agricole Indosuez, Banca Intesa Group, and Banca AntonVeneta(Monte Paschi Group) and FBR Capital Markets.

He is a frequent guest on CNBC Europe and other European media outlets. A member of theSociety of Technical Analysts (STA) and the Market Technicians Association (MTA), Mr. Ronco was aspeaker at the International Federation of Technical Analysts (IFTA) 1998 conference in Rome andBeijing (2011).

His work is mentioned in the book Capital Market Revolution: The Future of Markets in an Online World by Patrick Young. Mr. Ronco received his degree (with honors) in economics from theUniversity of Turin.

He currently holds Chartered Market Technician (CMT) Level 1 and 2 diplomas.



3/31

Emotional = Irrational

318 December 2013

•Human emotions affects one’s decision making process

•

Investors are everything but rational: Hope, Greed, Fear, Despair “investing” cycle



4/31

Why Trend Following?

418 December 2013

•

Information: perceived in a different way by different actors (different needs andtime horizons for investing)

•Cognitive Biases: Loss Aversion, Disposition Effect, Outcome Bias, Anchoring,

Bandwagon Effect, Belief in the law of small numbers

•People are prone to making SYSTEMATIC ERRORS in circumstances of uncertainty

→ ALL this creates trends (evident ex post, obviously)

•Market movements are, therefore, the result of investors' irrationality that is

repeated systematically over and over

•How do we deal with this? By doing the opposite of what the majority does

LET YOUR PROFITS RUN

CUT YOUR LOSSES SHORT

THINK IN TERMS OF PROBABILITIES


5/31

What is Trend Following? It’s a Plan

518 December 2013

•TREND: sustained changes in prices in the same direction (usually after consolidations)

•FOLLOWING: detect these changes, jump on board and hold as long there is a change in the

opposite direction

•PRICE: MAIN VARIABLE (other variables can be used to filter price info however price is THE

objective point of reference)

•REACTION no PREDICTION (hardest part to accept due to Outcome Bias): we do not deal with

certainties on the result but only with probabilities. We do not know the result of the next

trade: possibly, it will be a (big) win but, probably, it will be a (small) loss.



6/31

Basis for All Successful Trading

618 December 2013

•Trade with an EDGE: use a model/s with POSITIVE Mathematical Expectancy over long term to

avoid the Outcome Bias, trade well

•RISK Management: portfolio/sector risk, initial stop loss, trailing stop, position sizing

f(volatility, correlation with other markets), target specific level of volatility that you are

comfortable with... to stay in the game!

•KISS: SIMPLE algorithms (not simpler) to make the system ROBUST

•CONSISTENT: discipline built on confidence, confidence built on robust approach and

understanding of the process (most important factor), follow the process

•

Hence our job is:

NOT to miss those trends!



7/31

the Most Important Thing About Losses

718 December 2013 Riccardo Ronco +44 20 7233 3245 [email protected]

"A loss never bothers me after I take it,I forget it overnight. But being wrong, not

taking the loss - that is what does damage to

the pocket book and to the soul.“

Jesse Livermore


8/31

Expectation (a.k.a. “the edge”) > 0


Expectation = (%W x AW) – (%L x AL)where

%W = Winning Percent

AW = Average Winner

%L = Losing Percent or (1 - %W)AL = Average Loser

for Expectation = 0 we have the “Breakeven Line” curve

Y = (1 – X) / X where

Y = AW / AL or WIN/LOSS ratio

X = %W


9/31

Expectancy Curve – Nick Radge


0

1

2

3

4

5

6

7

8

9

10

10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95%

WIN %

W I N / L O S S R

A T I O

Profitable

Unprofitable

Breakeven Line


10/31

Number One Problem: Drawdowns


•We have a system that cuts the big losses...

•Lots of small losses (false breakouts) will balance out lots of small gains...

•We are left with those LARGE WINNING TRADES when markets do trend (“fat tails”)

•However, the length of a losing streak WILL affect you, psychologically and emotionally

=ROUND(LN(Nr. Trades) / -LN((1 – (% WIN / 100))),0)

Example: 40% WIN and 10,000 trades 18

After 10,000 trades there is 1 chance to have 18 consecutive losers


11/31

Money Management: Length of a Losing Streak


10

40

70

99

0

10

20

30

40

50

60

70

80

90

5 0 0

1 0 0 0

1 5

0 0

2 0

0 0

2 5 0 0

3 0 0

0

3 5 0 0

4 0 0 0

4 5 0 0

5 0 0 0

5 5 0 0

6 0 0 0

6 5 0 0

7 0 0 0

7 5 0 0

8 0 0 0

8 5 0 0

9 0 0 0

9 5 0 0

1 0 0 0 0

80-90

70-80

60-70

50-60

40-50

30-40

20-30

10-20

0-10

TRADES

% WIN


12/31

Money Management : Fixed Fractional


•RISK on EACH TRADE can impact how we trade and think (100 starting capital)

0

10

20

30

40

50

60

70

80

90

100

1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97

1

2

3

4

5

Consec.

Losses

% risk / loss

•If our %WIN is 40% then, in the long run, we WILL get 18 losses in a row

•If we risk 4% on each trade, that will be enough to lose 50% of our equity even with FF


13/31

Putting All Together


•We need a system with a POSITIVE expectancy, think long term

•Secret of success? Follow the rules, consistently (otherwise what’s the point?)

•The more we trade, the higher the probability of a long sequence of losses

the biggest drawdown is always AHEAD of us

•Knowing your % WIN will help choosing a sustainable level of Fixed Fractional,

how much you want to RISK on each trade of your total equity

We cannot control the outcome of the trade

but we can control its SIZE before and during the trade

consider filters on volatility and market trends to target better levels of risk


14/31

Moving Averages vs Channel Breakouts (CBO)s


•Strategies that are LONG ONLY, Profits and Losses always reinvested

•No commissions, slippage, taxes (low trading frequency anyway)

•When in cash NO interest added (let’s see the system for what it is)

•Using SIMILAR lengths in these models, the SHAPE of equity lines is

SIMILAR so there is no real advantage in using one model or the other

•No need to over-fit on a SPECIFIC stock/sector: some models work great on

certain stocks and poorly on others hence

Focus at PORTFOLIO LEVEL


15/31

Moving Averages vs CBOs: Anheuser Busch ABI BB



16/31

Moving Averages vs CBOs: Inditex ITX SQ



17/31

EuroStoxx 50 TR: One Way to Avoid Overfitting


LONG ONLY No Comms, taxes, no reinv. cash Start 1/1/1993 Initial Capital 100K


18/31

S&P 500 vs 10-month SMA Long only


LONG ONLY USD 1,000,000 No Comms, taxes, no reinv. cash Start 1/1/1969


19/31

Profitability over different m.a. lengths




20/31

MSCI Japan TR USD vs 10-month MA




21/31

Eurostoxx 50 TR vs 10-month MA


LONG ONLY EUR 1,000,000 No Comms, taxes, no reinv. cash Start 1/1/2000


22/31

Eurostoxx 50 stocks vs 10-month MA


LONG ONLY EW EUR 1,000,000 No Comms, taxes, no reinv. cash Start 1/1/2000


23/31

STOXX Europe Large Cap 200 stocks vs 10-month MA


LONG ONLY EW EUR 1,000,000 No Comms, taxes, no reinv. cash Start 1/1/2000


24/31

DJ Stoxx 600 sectors TR vs SMA 10 - Long only


0

200

400

600

800

1000

1200

1400

1 / 9 / 9 2

1 / 5 / 9 3

1 / 1 / 9 4

1 / 9 / 9 4

1 / 5 / 9 5

1 / 1 / 9 6

1 / 9 / 9 6

1 / 5 / 9 7

1 / 1 / 9 8

1 / 9 / 9 8

1 / 5 / 9 9

1 / 1 / 0 0

1 / 9 / 0 0

1 / 5 / 0 1

1 / 1 / 0 2

1 / 9 / 0 2

1 / 5 / 0 3

1 / 1 / 0 4

1 / 9 / 0 4

1 / 5 / 0 5

1 / 1 / 0 6

1 / 9 / 0 6

1 / 5 / 0 7

1 / 1 / 0 8

1 / 9 / 0 8

1 / 5 / 0 9

1 / 1 / 1 0

1 / 9 / 1 0

1 / 5 / 1 1

1 / 1 / 1 2

1 / 9 / 1 2

1 / 5 / 1 3

PFOLIO MM10_SXXR b&h

LONG ONLY EW Monthly Rebalance No Comms, taxes, no reinv. cash Start 1/1/1992

CAGR: B&H 8.8% MM only SXXR 12.30% MM 10 on EW Sctr Pfolio 11.27%


25/31

TF on Different Asset Classes Using ETFs


•Buy when monthly CLOSE > 10-month SMA

•Sell (and move to cash) when monthly CLOSE < 10-month SMA

•Trade once a month, at the end of the month

•No commissions, taxes, slippage but NO interest when in cash

•Using total return series for:S&P 500

EAFE

U.S. 7-10 Year Gov

US REITs

Commodities


26/31

Mebane Faber Ivy Portfolio: EW, Monthly Rebalance


Strategy CAGR Ann. St.dev Mod Sharpe

IVY (blue) 7.47% 6.56% 1.14

SPY (red) 4.40% 15.40% 0.29

0

50

100

150

200

250

300

350

0 1 / 1 2 / 1 9 9 8

0 1 / 0 5 / 1 9 9 9

0 1 / 1 0 / 1 9 9 9

0 1 / 0 3 / 2 0 0 0

0 1 / 0 8 / 2 0 0 0

0 1 / 0 1 / 2 0 0 1

0 1 / 0 6 / 2 0 0 1

0 1 / 1 1 / 2 0 0 1

0 1 / 0 4 / 2 0 0 2

0 1 / 0 9 / 2 0 0 2

0 1 / 0 2 / 2 0 0 3

0 1 / 0 7 / 2 0 0 3

0 1 / 1 2 / 2 0 0 3

0 1 / 0 5 / 2 0 0 4

0 1 / 1 0 / 2 0 0 4

0 1 / 0 3 / 2 0 0 5

0 1 / 0 8 / 2 0 0 5

0 1 / 0 1 / 2 0 0 6

0 1 / 0 6 / 2 0 0 6

0 1 / 1 1 / 2 0 0 6

0 1 / 0 4 / 2 0 0 7

0 1 / 0 9 / 2 0 0 7

0 1 / 0 2 / 2 0 0 8

0 1 / 0 7 / 2 0 0 8

0 1 / 1 2 / 2 0 0 8

0 1 / 0 5 / 2 0 0 9

0 1 / 1 0 / 2 0 0 9

0 1 / 0 3 / 2 0 1 0

0 1 / 0 8 / 2 0 1 0

0 1 / 0 1 / 2 0 1 1

0 1 / 0 6 / 2 0 1 1

0 1 / 1 1 / 2 0 1 1

0 1 / 0 4 / 2 0 1 2

0 1 / 0 9 / 2 0 1 2

0 1 / 0 2 / 2 0 1 3

0 1 / 0 7 / 2 0 1 3


27/31

TF applied to ETFs: US Risk On - Off


LONG ONLY 2 etfs ROTATION No Comms, taxes, no reinv. cash Start Jan 2003 @ 100


28/31

TF applied to ETFs: EU Risk On - Off


LONG ONLY 2 etfs ROTATION No Comms, taxes, no reinv. cash Start June 1999 @ 100


29/31

TF for Equities/Bond Balanced TR Fund


LONG ONLY EQ/BND ROTATION No Comms, taxes, no reinv. cash Start June 1999 @ 100

% invested in bonds decided by trend of each stock (from 100% to 0%)


30/31

Best books on TF (a.k.a. Your Christmas List)


Andreas F. Clenow – Following the Trend: Diversified Managed Futures (Wiley Trading)

Nick Radge - Unholy Grails - A New Road to Wealth

Andrew Abraham – The Trend Following Bible: How Professional Traders Compound Wealth and Manage

Risk (Wiley Trading)

Curtis Faith - Way of the Turtle: The Secret Methods that Turned Ordinary People into Legendary Traders

Michael W. Covel - Trend Following: Learn to Make Millions in Up or Down Markets

Michael W. Covel - The Complete Turtle trader: The Legend, the Lessons, the Results

Mebane T. Faber - The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets

Anthony Garner - A Practical Guide to ETF Trading Systems: A Systematic Approach to Trading Exchange

Traded Funds

Van K. Tharp - Trade Your Way to Financial Freedom


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Aviate Global’s technical ratings use specific return targets; returns are not guaranteed and are used for illustrative purposes only.

Chart sources: Bloomberg and Aviate Global LLP.


Information

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