Wednesday, January 21, 2015

Trend Model FAQ

Subsequent to my last Trend Model trading system report card (see An excellent Trend Model report card: (Dec +7.8%, 1 year +40.9%)), I have been getting an increasing number of questions about the Trend Model. Instead of responding to them one at a time, here is the Frequently Answered Questions (FAQ) about the Trend Model.

What is the Trend Model?
The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

The trading model component of the Trend Model seeks to answer the question, "Is the trend getting better (bullish) or worse (bearish)?" The history of actual (not backtested) signals of the trading model are shown by the arrows in the chart below and this chart. The chart is usually updated in a weekly on Sunday night:

Trading account management practices
The actual results of the account using the Trend Model trading system is a trading account. That account generally trades 3x leverage long or short ETFs on either the SPX, NDX or RUT. Total portfolio leverage normally doesn't exceed 2x. I have tried 3x total account leverage on a couple of occasions, but found that the volatility was beyond my comfort zone.

As the Trend Model uses trend following principles and trend following models suffer from a drawback that they do not perform well in choppy sideways markets, I supplement the Trend Model trading signals with some short-term sentiment and overbought/oversold indicators in order to judge the market's upside/downside risk and return. For example, if the Trend Model has a bullish signal but the market is overbought, I would either pull back from a 2x levered long position to either 1x long or go to cash entirely. I generally do not override the Trend Model signal and take the opposite view.

What would returns have been if...
As the actual returns of the trading account have been impressive, I have been asked variants of the question:
  • Can you tell me what the returns would have been if you had only used 1x leverage?
  • Can you tell me what the returns would have been if you did not short the market?
  • Can you tell me what the returns would have been in the year ____, when the market soared/tanked?
I always answer these questions the same way:
I present the results of my trading account for informational purposes only. I am not offering any advisory or management service using the signals of this model. If such an event were to occur, it would be accompanied by the proper legal and regulatory disclosures.

The purpose of the trading account is a proof of concept that the trading component of the Trend Model works. I have optimized the account in such a way that I believe maximizes the risk-reward ratio of this trading technique.

I have no plans to backtest the model based on different conditions or different forms of implementation. If I were to offer either an advisory or management service and the funds are managed with different risk preferences as my trading account, its actual mileage will vary.

Did the Trend Model turn bullish (or bearish) when...
When the markets get volatile, I often get asked question like the following: "You were bullish, now that the market has dropped ___, have you turned bearish?"
I endeavor to update Trend Model signals on a weekly basis on Sundays and during the week on my Twitter account. You can get those updates by following me at @humblestudent.

While I try to be prompt, I make no promises about the timeliness of updates. Remember that this is a free service. You get what you pay for.

Do you offer a subscription service?
There is no service offered. However, I am in discussions with a number of different parties on how to best monetize the signals of this model.

If an announcement is to be made, it will be done in due course.


Unknown said...

Hi Cam

Very interesting concept. It doesn't seem too risky as long as the market is in an uptrend. Though, It may be true that the short signals (down arrows) should be signals to go to cash and not short

Using primarily the long signals could mean that only the years like (2000 to 2003) & 2008 would be most worrisome. I wonder what a 'circuit breaker' constraint would do - such as trading the strategy only while the 14-day slope on the 200-day moving average remains positive. this would keep you away from those poor years. Otherwise, you would benefit from corrections and pullbacks in an otherwise up trending market.

Unknown said...

I also wonder whether it would help to trade only the up signals if the SPX price is under the 50-day MA, but not more than 5% under the 200-day MA....And the slope on the 200-day MA is positive. Then, going to cash only when the 14-day RSI on the SPX reaches a value of 80. This would reduce its susceptibility to choppy markets and would prevent you from trading in a year like 2008 or even right before the correction in 2011.