This is the part of Following The Trend where author Andreas Clenow begins discussing actually trend following systems. This is the first book I have read where an author discusses actual trading systems. Clenow jumps right into describing the systems from the start of the chapter.
Moving Average Systems
The first system is a 10/100 moving average cross system. This makes it very clear why @systemstrader95 recommended I start following a 10/100 system. I wrote a piece about the 10/100 SPY system I had been following for One Step Removed a few weeks ago.
I originally wanted my system to have long and short components, however Woodshedder’s backtesting results showed that long only would be more successful the way I had the system set up. The other key difference between my system and the one Clenow is discussing is that my system only trades the SPY, while Clenow’s is diversified across multiple markets.
The system Clenow describes goes long when the shorter moving average crosses above the longer moving average and goes short when the shorter moving average crosses below the longer moving average. This system is always in the market
The second system that Clenow introduces is a 50/25 Breakout System. This system is very similar to the 83/13 breakout system that is profiled in one of the appendices of Michael Covel’s Trend Following. I recently wrote a piece about the 83/13 Breakout System for One Step Removed.
In my posts on each of these types of systems, I concluded that both could be an excellent starting point, however both had issues that would need to be fine tuned. I was excited to see the Clenow is going to spend the second half of this chapter discussing ways to improve the strategies. It appears that he will be discussing trend filters, stop losses, and risk control. I have written about each of these issues in posts recently published at One Step Removed, so I am excited to see what Clenow has to add to what I have already learned.
The system Clenow describes buys a market when it hits a new 50 day high and then exits the position when the market hits a 25 day low. It also sells a market that hits a 50 day low and covers the position when the market hits a 25 day high. This system will be out of the market at times.
“Simply looking at the compounded annual return number does not tell you much about whether the strategy is viable or not, or even whether it is better or worse than another strategy. To figure out which strategy is preferable over another, you need to look at various risk measurements but also study the equity curve of the strategy in detail to see whether it is something you can realistically live with or not.” – Clenow
It is also worth noting that Clenow spends a section of this chapter pointing out that compounded annual return is not enough by itself to determine a system’s value. There is no point looking at systems with triple digit annual returns if the risk of ruin is equally high. We need to get all of the numbers on a system before determining its value.
It is also becoming more and more clear that I need to purchase backtesting software and learn how to use it in a hurry, because I am very curious as to how the improvements Clenow is going to discuss later in this chapter would affect my systems.