Advent of Alpha Day 10: The Trend is your Friend

If you’ve ever read a book on day trading or technical analysis, you’ll be familiar with the idea of following trends.

Of course, finding the trends, and figuring out how much to put into it is the hard bit. In the context of a betting market which behaves more like an options market with a fixed time of expiry in the future, you might wander if trends are related to fundamentals - and they often might (a selection moving down through 1.01 as the event nears its finish may or may not be a good trend to follow).

(Sidenote: options pricing is something I want to come to in a lot more detail next year - it’s too hairy to deal with in these posts based on my current understanding).

What made me think about this some more was when I was reading about the Turtle Traders.

In the early 1980s, two well-known commodity traders called Richard Dennis and William Eckhardt had a bet on whether anybody could be trained to become a successful trader. Dennis was confident he could, and was reminded of Turtle farms he visited, hence the name.

The system they taught a group of complete amateurs was basically this:

1. Buy on a X-tick high
2. Exit when you go below a X/2-day low.
3. Use average true range to calculate volatility and use that to vary position size - larger positions in less volatile markets, smaller positions in more volatile markets.
4. Accept drawdowns happen.

The group Dennis trained - and let trade with his own money - earned more than $175m in five years.

Drawdowns with trend following are expected, but I’ve had some success with a couple of simple systems that watched for long steamers (think 20+ ticks), in pre-off markets and followed them in for a while before closing out. I expect with refinement and a more methodical approach than the one I took, trend following could easily work in some high-volatility long-running markets, such as high-profile soccer in the days before a game starts.