Trend Following Update - Current Market Environment

By: Shane Wisdom | Wed, Jan 13, 2010
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The trend following environment in 2009 was pretty tough. Most trend following Funds and CTA's posted below average or negative returns as market activity was choppy across a broad group of market sectors.

As a trend follower, I'm typically not one to forecast market trends however, I do get a feel for market cycles and I believe we may be in a transitional period for trend followers at this time.

Over the weekend, I ran some simulation tests with a Test portfolio and the LTX and LTB systems and found some interesting similarities which suggest that 2010 could be a good year for trend followers.

The portfolio I used for analysis was a broad based portfolio of 119 global commodities, futures, and foreign exchange contracts. I've applied the LTX and LTB systems to the same Test portfolio over a 5 year period to give a us a broader view of the current environment.

LTX Trading Strategy

The equity curve for LTX peaked in early 2009 as the energy and equity markets started to put in a bottom. Most of the trading activity in early 2009 was on the liquidation side as markets traded counter trend. By mid 2009, new trends were starting to surface and were fairly persistent in currencies and equities however, choppy action across all other sectors have kept this portfolio in drawdown.

What is interesting to note about this chart is the potential head and shoulders bottom formation in the Drawdown Graph and the Equity Curve Graph, and the bull flag that appears to be breaking out at this time. (click on any chart to enlarge)

Linear Scale with Drawdown Analysis

LTB Trading Strategy

The next equity curve is from the LTB Strategy applied to the 119 market test portfolio. The LTB Strategy is a breakout/momentum based system which trades a little more actively than LTX. This equity curve also has a very similar Head and Shoulders bottom formation and a bull flag pennant however, LTB has yet to show signs of breaking out.

Linear Scale with Drawdown Analysis

It's also interesting to note that both Drawdown equity curves are at fairly extreme levels compared to the last 5 years. I ran a 20 year test as well to see how this compares and I must say, I'm pretty excited about what may be around the corner for trend followers.

If you have any questions about the markets, systems, or analysis, please don't hesitate to contact me at shane(@)wisdomfinancialinc.com or 800.854.6354. You can also find more information on our strategies at www.wisdomtradingsystems.com.

Futures Trading Involves Risk of Loss and Is Not Suitable For All Investors. Past Performance is Not Indicative of Future Results.

 


 

Shane Wisdom

Author: Shane Wisdom

Shane Wisdom
Wisdom Financial Inc.

Futures Trading Involves Risk of Loss and Is Not Suitable For All Investors. Past Performance is Not Indicative of Future Results.

Disclosure: Futures Trading Involves Risk of Loss and Is Not Suitable For All Investors. Past Performance is Not Indicative of Future Results.

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