We also publish a channel system, that is a standard “trend following” turtle-style system. This is a robust example of such a system, but a few caveats apply.
First, it is critical that traders understand the nature of returns that these systems produce. (This is not a limitation of this specific example; all trend-following systems are subject to these limitations.) Put very simply, drawdowns are extensive and vicious, and there is some evidence that trend following, as a strategy, may not be viable in modern markets.
Drawdowns can last many years, and be on the order of 40% or more of capital. Diversification and risk management are essential, but there is no way to mitigate the fact that trend following strategies have suffered greatly in recent years. (See published indexes such as the Eurekahedge Trend Following Index, which has been essentially flat since 2010.)
Our sense is that the popularity of these strategies in the technical analysis literature is a triumph of marketing, and that these strategies are not appropriate for most individual traders. We publish this system more for reference, as the existence of a position is one potential measure of trend. In addition, there may be activity around the levels indicated by the system, as they are consistent with trend following strategies run by CTAs and other firms. Last, we have had clients who have adapted the signals from this system in various contexts for their own trading.
Reading the system table:
The system essentially “permissions” an entry in the Condition column: LongOk means that long entries are allowed and ShortOk means a short entry is allowed. Long or Short alone in this column indicates the presence of an active position.
If a Long entry is permissioned, the system will give the entry point for the next day, and an “EstLStop” (estimated long stop). The actual stop might differ slightly due to volatility conditions, but this stop is a solid estimate for stop placement.
DateIn and PriceIn show entry prices on open positions. Stop shows the current stop level on the position, and P&L is given in R units (multiples of initial trade risk.)