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A Counter Trend Indicator: Profit from Trend Followers’ Weakness

A good indicator is based on sound logic. It should try to quantify or visualize a concept that makes sense and is easily explainable. Mostly I use very simple indicators. The most basic of indicators can be very helpful if used rightly. The indicator I’m about to describe here is quite simple in concept but requires a few more steps ...

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Why technical analysis is shunned by professionals

The poor reputation of technical analysis is well deserved. It’s their own fault really. The way this field has expanded makes it very difficult to take it seriously. It’s been reduced to a slogan used by scam artists to sell nonsense books, trading systems, newsletters and ‘mentoring’ based on quasi religious numerology and mysticism. Professionals stay clear of the term ...

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Why I prefer RightEdge for strategy modeling

Choosing a good platform for strategy modeling, simulations and signal generation is critical. The bleak reality is that most back testing software is horribly bad. They are geared towards consumers with limited knowledge and experience and they cater to what your average get-rich-quick technical analysis guru claims that you need. I’m often asked for my views on simulation platforms, and in ...

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How to build a professional simulation environment – On the cheap

Do you want to learn how to build a professional environment for trading simulations without paying an arm and a leg? Building a proper environment for developing and testing trading strategies can be very expensive. It doesn’t have to be though, as long as you’re willing to put in some work. I work with both cheap and expensive tools and ...

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Trend following does not work on stocks

There’s a good reason why most professionals who apply models similar to trend following to stocks call them momentum models. It’s not just a clever rebranding, it’s really a very different game. To blindly cling to trend following as a religion, disregarding any real world evidence and attacking anyone presenting ideas that differ to the trend following mantra is not ...

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A study in diversification

Diversification can be a funny thing. It’s one of those things that sound so boring and mainstream that many people simply ignore them. Just something boring that the establishment wants us to do but really has no actual use. Kind of like taxes and seat belts. But diversification can actually be of use. It’s especially important for trend following strategies ...

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Beating the Index with Minimum Rules

Do you want to beat the index with just a few lines of code? You don’t even need to program it. It’s simple enough to do manually. Beating the index is probably not the right term though. Killing it might be a better word. Beating the index is supposed to be very difficult. After all, around 80-90 percent of all ...

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Twelve Months Momentum Trading Rules – Part 2

Earlier this week I published a simple 12 month momentum model which shows surprisingly good performance. The rules used are so simple that many of you are probably doubting the results. Perhaps you want a closer demonstration? Let’s take a look at the details of this model and see if it really works. First, let’s revisit the rules. Every Friday ...

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Free Trend Following Trading System Rules

Yes, I confess. I wrote that title to mess with search engines. As it turns out, the most popular page on this site, by far, is this one. It’s particularly curious for me, since I keep making the point that trading system rules are overrated. I’ve never come across anyone selling trading rules who actually knows anything about trading. And ...

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Term Structure – The forgotten piece of the puzzle

Last week I wrote about the dangers of analyzing the wrong time series. This is still a very common mistake made by traders and analysts and I cannot stress enough just how important it is to get your data right. It’s not a matter of opinion. Just math. Simple continuations without basis gap adjustments are just plain wrong and so ...

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Don’t analyze the wrong time series

Regardless of your trading style, it is important that you analyse the same thing that you trade. That might sound obvious, but it is a very common error even among professionals. There are two main mistakes in this regard. To analyze the cash markets while trading the futures and to analyze a non-adjusted futures continuation. Both usually have large error ...

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New: Trend following hedge fund rankings

The trend following hedge funds have done really well in the past few decades. But how did they do last month? And which one did better than the others lately? After I post about the industry, I usually get quite a lot of questions on the funds after. The requests are usually about table format data or better charts. So ...

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Why leverage is pointless

Traders and investors often use leverage as a crude risk measure. It’s an easy way to relate to how much you’re risking. If you have a portfolio worth $100,000 and you borrow to buy $150,000 worth of IBM, you’ve 1.5 times leverage. As simple and intuitive that this approach is, it’s also dangerous and can lead to flawed investment decisions. ...

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ETFs are not what you think they are

The idea of exchange traded funds (ETF) is great. It made perfect sense to create them and they did a great service to the general public. Yet, as financial products often do, they have mutated into veritable financial landmines. When you look to invest in ETFs, be careful. Be very careful. What’s good about ETFs Almost all mutual funds consistently ...

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Leverage Schmeverage!

Leverage Schmeverage!

Is it risky to be 150% leveraged? How about 1500%? It’s the wrong question to ask. Leverage and risk are not necessarily connected. A common argument against trend following hedge funds is that they are too leveraged. This is based on a lack of understanding of leverage. Most people who bring up this argument are just used to one asset ...

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How to Rob Commodity Investors

Gold Bars - How to rob from commodity investors

The Setup Equities live forever. It’s a close enough approximation at least. Futures on the other hand have a very short life span. This creates some unique problems. And some even more unique opportunities. Each futures contract has a predefined date of death. Expiry date as the industry euphemism goes. The 2012 September EuroStoxx contract expires on September 21 and ceases to ...

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How to Build Correlation Matrices

They key to trend following is to be very diversified, so that your return curve moves up in a reasonably smooth manner. What you need to ask yourself however is whether you are holding a real diversified portfolio or just a very expensive illusion of safety. Everyone talks of increasing correlations the new risk on/risk off world, but few topics ...

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Interactive Futures Chart

When you deal with futures trend following it is imperative that you have properly adjusted time series to analyze or you will not get any meaningful results. Our new interactive futures charts are of course fully adjusted and covering all asset classes and all major instruments. Did you ever want to analyze the long term performance of live cattle? How ...

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