"Trend following is a popular investment technique…among systematic investors…based on moving averages where the current market price of an asset is compared with an average of historical prices of the same asset over some window, often 200 or so trading days: if the current price is above (below) the moving average…the rule gives a buy (sell) signal."
"The underlying economic justification for trend following rules lies in behavioural finance tenets such as those relating to herding, disposition, confirmation effects, and representativeness biases. At times information travels slowly, especially if assets are illiquid and/or if there is high information uncertainty; this leads to investor under-reaction. If investors are reluctant to realise small losses then momentum is enhanced via the disposition effect."
[Confirmation effects denote that an investor would be more likely to look for information that supports his or her original idea about an investment rather than seek out information that contradicts it, impairing information efficiency. The disposition effect suggests that investors are more willing to recognize (and monetize) gains than losses, which implies that they are ‘fighting’ market trends going against them. The representativeness bias means that, under uncertainty, investors are prone to believe that a history of a remarkable performance of an asset is ‘representative’ of a general performance that the asset will continue to generate into the future.]
"We consider 3 types of trend following rules…
Simple daily moving averages, where the buy signal occurs when the S&P 500’s index value moves above the average; we consider moving averages ranging from 10 to 450 days… The intuition behind the simple trend following approach is that while current market price is most certainly the most relevant data point it is less certain whether the most appropriate comparison is the price a week ago or a month or a year ago.
Moving average crossovers where the buy signal occurs when the shorter duration average of the S&P 500’s index value moves above the longer duration average, and which ranged from 25/50 days through 150/350 days;
Breakout rules, which indicate a buy signal when the S&P 500’s index value trades at a ‘x-day’ high, where ‘x’ ranges from 10 to 450 days… breakout signals emphasise even more the distinction between a recent/current price move and recent past."
How has S&P trend following performed historically?
"We utilise daily S&P 500 price and total return data from July 1988 to June 2011 and daily price and monthly return data from January 1952 to June 2011 in this study… Table 1 presents our results for the 3 classes of moving average rules based on daily signals and trading [for long S&P or cash positioning], while Table 2 uses end-of-month rules and trading." [Trend-following rules have not generally outperformed the simple buy-and-hold strategy. However, those trend-following rules that are based on longer moving averages, over 200 days, all posted higher Sharpe ratios] What has performed better, simple or complex rules?
"To this end we compare a variety of moving average, crossover, channel and breakout rules… there is no advantage in complicated trend following rules versus simple rules [as shown in the tables above]… ‘whipsawing’ [frequent shifting between long and cash positions, incurring excessive trading costs] is not a problem provided the technical signals are of reasonable length(not too short)."
Has there any advantage in trading frequently, e.g. daily versus monthly?
"In each case – moving average, moving average crossover and breakout – the best Sharpe ratios are generally higher for end-of-month investing rules than for those achieved by applying the rules on a daily basis. For example, the Sharpe ratio for the moving average rule using daily decision rules ranges from -0.79 to 0.54; the equivalent range for monthly decision making, is 0.06 to 0.59. Generally speaking, the monthly application of the rules produced higher average returns with lower return volatility."
Has it been useful to apply stop-loss rules?
"These rules, which seek to liquidate positions once a certain drawdown or calendar time loss has been experienced, are widely used in the fund management industry...We explore the empirical validity of various stop loss rules for the S&P500 index based on daily returns from July 1988 to June 2011. Table 4 shows two types of strategy…a conventional break out and re-entry stop loss rule… [and] trailing stop losses… In both cases stop-loss rules would seem to make performance worse." How have trend following rules performed versus fundamental metrics?
"The wide range of practical valuation metrics include dividend and earnings yields, together with the relative yields on bonds and equities...Table 6 shows the results using the long period of data from January 1952 to June 2011. The table clearly shows the superiority of the end of-month 10 month rule in terms of Sharpe ratio both relative to long only S&P and the various valuation metrics [albeit that superiority would not apply to all specifications of trend following strategies presented in the paper]." http://www.cass.city.ac.uk/__data/assets/pdf_file/0020/124355/Stop-Losses-v8.pdf HT: Systemic Risk and Systematic Value http://systemicriskandsystematicvalue.blogspot.com/2014/01/trend-following-in-us-equities.html#more
Down goes the Dow
Non-Running
Finance/Jobs
Report Thread
You are reporting this thread to the moderators for review and possible removal from the forum.
-
-
Hellooooooo? wrote:
But you said not to count potential gains. So you can only be referring to realized gains and losses.
Sorry to butt in to this fascinating discussion, but can you please explain what you mean by "potential gains"? -
Who thinks that if the value of your portfolio goes from $500k to $250k you have not lost any money until you sell your holdings.Answer: the IRS.
-
the horror wrote:
Hellooooooo? wrote:
But you said not to count potential gains. So you can only be referring to realized gains and losses.
Sorry to butt in to this fascinating discussion, but can you please explain what you mean by "potential gains"?
Sorry, but K5 has gone to bed. Second grade starts mighty early in the morning. Maybe he'll answer you then, but don't count on a straight answer. -
K5 wrote:
You devotees of the Flagpole school of "thinking" -- you know, where you don't take a 1 in 4 chance to get a 200 to 1 pay-off -- believe.
1. If someone is not in the equities market and begins a period with $500k and 6 months later has $502k, he has lost money if the equities market went up during that period. $2k more than when he began the period, but he has lost money.
2. ON the other hand, if someone begins with $500k and the market goes down so he has $450k at the end of the period, he hasn't lost anything until he sells his investments.
There is juts no reasoning with these people
How do you explain the fact that Flagpole is a multimillionaire? -
Hellooooo? wrote:
K5 wrote:
not this again wrote:
dumb wrote:
K5 wrote:
Agip.
Where is your update on how much money I have "lost" be not being in equities since I bailed with the Dow at 15,000 @ 7 months ago?
How much money have you lost in the past two weeks. You know, real money and real losses. Not potential gains missed out on.
Well, unless he sold something that he bought at a higher price than today's closing and booked a loss then he doesn't have any real losses of real money.
Surely you forgot the "ized" at the end of the first "real"?
Another fool who does not understand what money is. Who thinks that if the value of your portfolio goes from $500k to $250k you have not lost any money until you sell your holdings. The Flagpole school of economics
You can't talk about "real" gains/loses in one sentence, then discount "potential" gains in the next. Make up your mind.
POD -
Everyone, go to bogleheads.org and read up on how to invest properly for non-near-term goals.
-
Hellooooooo? wrote:
the horror wrote:
Hellooooooo? wrote:
But you said not to count potential gains. So you can only be referring to realized gains and losses.
Sorry to butt in to this fascinating discussion, but can you please explain what you mean by "potential gains"?
Sorry, but K5 has gone to bed. Second grade starts mighty early in the morning. Maybe he'll answer you then, but don't count on a straight answer.
I asked you, not him.
You mentioned it, and then drew conclusions about what he could only be referring to, so you should be able to answer. -
the horror wrote:
Hellooooooo? wrote:
the horror wrote:
Hellooooooo? wrote:
But you said not to count potential gains. So you can only be referring to realized gains and losses.
Sorry to butt in to this fascinating discussion, but can you please explain what you mean by "potential gains"?
Sorry, but K5 has gone to bed. Second grade starts mighty early in the morning. Maybe he'll answer you then, but don't count on a straight answer.
I asked you, not him.
You mentioned it, and then drew conclusions about what he could only be referring to, so you should be able to answer.
Those were his words, not mine. I was quoting him. -
Hellooooooo? wrote:
the horror wrote:
Hellooooooo? wrote:
the horror wrote:
Hellooooooo? wrote:
But you said not to count potential gains. So you can only be referring to realized gains and losses.
Sorry to butt in to this fascinating discussion, but can you please explain what you mean by "potential gains"?
Sorry, but K5 has gone to bed. Second grade starts mighty early in the morning. Maybe he'll answer you then, but don't count on a straight answer.
I asked you, not him.
You mentioned it, and then drew conclusions about what he could only be referring to, so you should be able to answer.
Those were his words, not mine. I was quoting him.
I understand that. But you used the phrase in your own statement and conclusion, so I'm asking you to explain what YOU meant.
How can you make the statement "But you said not to count potential gains. So you can only be referring to realized gains and losses." and not understand what YOU mean by the phrase? -
the horror wrote:
Hellooooooo? wrote:
the horror wrote:
Hellooooooo? wrote:
the horror wrote:
Hellooooooo? wrote:
But you said not to count potential gains. So you can only be referring to realized gains and losses.
Sorry to butt in to this fascinating discussion, but can you please explain what you mean by "potential gains"?
Sorry, but K5 has gone to bed. Second grade starts mighty early in the morning. Maybe he'll answer you then, but don't count on a straight answer.
I asked you, not him.
You mentioned it, and then drew conclusions about what he could only be referring to, so you should be able to answer.
Those were his words, not mine. I was quoting him.
I understand that. But you used the phrase in your own statement and conclusion, so I'm asking you to explain what YOU meant.
How can you make the statement "But you said not to count potential gains. So you can only be referring to realized gains and losses." and not understand what YOU mean by the phrase?
Of course I understand what I meant. It's the opposite of realized gains. Obviously. -
la gente está muy loca wrote:
Who thinks that if the value of your portfolio goes from $500k to $250k you have not lost any money until you sell your holdings. Answer: the IRS.
And me. -
la gente está muy loca wrote:
Who thinks that if the value of your portfolio goes from $500k to $250k you have not lost any money until you sell your holdings. Answer: the IRS.
And me. -
Helloooooooo? wrote:
Of course I understand what I meant. It's the opposite of realized gains. Obviously.
Great, I expected so.
Sorry, your explanation is unclear.
The "opposite of realized gains"...
(A realized gain is gain resulting from selling an asset at a price higher than the original purchase price)
Do you mean an unrealized gain or loss? Or, an opportunity cost? -
the horror wrote:
Helloooooooo? wrote:
Of course I understand what I meant. It's the opposite of realized gains. Obviously.
Great, I expected so.
Sorry, your explanation is unclear.
The "opposite of realized gains"...
(A realized gain is gain resulting from selling an asset at a price higher than the original purchase price)
Do you mean an unrealized gain or loss? Or, an opportunity cost?
K5 wrote:
How much money have you lost in the past two weeks. You know, real money and real losses. Not potential gains missed out on.
These are K5's words, so you really should be asking him. But it seems obvious that he is talking about realized gains/ losses vs unrealized/missed. -
Huh? Is there a wealth tax in this country now?
Actually there should be. But we only have the inheritance tax and that only kicks in at about $5 million I believe. At the Federal level that is.
la gente está muy loca wrote:
Who thinks that if the value of your portfolio goes from $500k to $250k you have not lost any money until you sell your holdings.Answer: the IRS. -
HoJoHo wrote:
Would love for the chartists to chime in here but my recollection is that we have had major sell offs in the second term of every presidency going back to at least Clinton . History about to repeat here or is there no pattern or correlation
You are correct about the pattern. Patterns aren't always based on anything real though. -
Flagpole wrote:
You are correct about the pattern. Patterns aren't always based on anything real though.
But often they are. -
Randy Oldman wrote:
la gente está muy loca wrote:
Who thinks that if the value of your portfolio goes from $500k to $250k you have not lost any money until you sell your holdings. Answer: the IRS.
And me.
So, Randy...
My father owned WorldComm stock. It dropped to pennies per share and never recovered (he bought at $50 per share).
Do you really believe that fundamentally, since he just held the shares at $0.01 for the next 3 years and never sold them that he hadn't lost any money? (not just for tax purposes... I'm speaking about the reality of making and losing money).
That's really what you believe?
Or, are you just referring to the natural ebs & flows of the stock market and stocks where the prices fluctuate, but the underlying value of the businesses don't so much. -
K5 wrote:
Well there is always this wrote:
K5 wrote:
Dumb is insufficient to describe you.
If the value of your holdings drops $50k, you have lost money. Period. Not when you "realize" the loss by selling your investment.
Effin third graders understand this.
Why can't you?
Joe and Frank each start with $100,000.
Joe is convinced that the market is going to tank so he stays out of the market.
Frank thinks that you should just ride out the ups and downs and stays in.
Market gains 25%. Joe is at $100,00 but is fine and thinks that he has not lost anything, just imaginary 'opportunity costs'.
Frank is at $125,000 and feels pretty good.
The market then tanks 20%. Joe is at $100,000 and is patting himself on the back for avoiding 'real' losses.
Frank is at $100,000 and has indeed experienced real losses.
Joe thinks that he is very smart for never having lost anything and that Frank is pretty dumb for having experienced 'real' losses.
Funny how those real losses and those imaginary losses have gotten Joe and Frank to exactly the same place from exactly the same place.
Both guys gained or lost nothing. And Joe and Frank, not being as dumb as you, know this. It's really quite simple
And, since Frank (Agip) continued to buy as the market went up, he in fact has lost money, unlike Joe
