DOATFT: Adoption of parallel trading system allows profits to run

The adoption of a parallel trading system, which smoothes out market volatility, has allowed me to stay in my trades for longer. The moving average crossover system has therefore allowed my profits in wheat, palladium and gold to continue to run. This month’s Diary of a Trend Following Trader (DOATFT) has all the details.

Strategy update

As you may remember from my last piece, I am now trading using two parallel trend following systems: System 2, used by the original turtle traders, and a moving average crossover (MAC) system which uses the 20-day and 45-day moving averages.

Wheat trade

As the chart below shows, on 16 November 2012 I went short wheat at 834 as it made a new 55-day low. Although it rallied several times, wheat did not make a new 20-day high until yesterday. System 2 has therefore issued a signal to cover my short position, however the (MAC) system has not. I therefore remain short wheat on the MAC trading system.

A 6 month daily chart of wheat (Click on the chart for a larger version)

A 6 month daily chart of wheat (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Palladium trade

I went long palladium at $721.00 on 15 January as it broke to a new 55-day high. On 21 February, however palladium fell sharply making a new 20-day low. As a result System 2 issued a sell signal. However the MAC system, which smoothes out the price volatility, has not yet issued a sell signal. I am therefore still long palladium.

A 6 month daily chart of Palladium (Click on the chart for a larger version)

A 6 month daily chart of Palladium (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Gold trade

I went short gold at $1,671 on 18 December 2012 as it broke to a new 55-day low. Both System 2 and the MAC system remain on a sell signal.

A 6 month daily chart of Gold (Click on the chart for a larger version)

A 6 month daily chart of Gold (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Silver trade

I went short silver at $30.59 on 20 December 2012 as it broke to a new 55-day low. However the commodity rallied almost immediately, making a new 20-day high forcing me to cover.

At the present time, both System 2 and MAC are being violently whipsawed on silver, however both issued fresh sell signals late last month so I am short once again.

A 6 month daily chart of Silver(Click on the chart for a larger version)

A 6 month daily chart of Silver(Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Heating Oil trade

I went long heating oil at $3.12 on 30 January as it broke to a new 55-day high (not shown), however the commodity then fell sharply and I was forced to cover my short position on 26 February at a 2.6% loss.

Final thoughts

The trend following strategy was summed up by brilliantly by David Harding when he said, “We know that we know almost nothing. But the ‘almost nothing’ we know isn’t completely nothing, and we only bet on that.” In other words the only thing they know is price. The current price and the history of price. Price is the only reliable data they (or any of us) have, and that is why it is the only thing we rely on to make our trading decisions.

Trend following is a system that relies on hard data, not the discretion of a trader or market analyst. “The fact is, when we did our research twenty years ago into various types of [trading] systems, we found that they worked, or at least, back then we found that they had worked. It is not enough to say that becuse something has worked, that it will go on working, but it is a matter of record that it has gone on working for the past 22 years.” Harding said.

Harding has been ranked among the top 50 hedge fund managers in the world and is a legend in the world of trend following. As of February 2012, his firm, Winton Capital, held a total of $28.5 billion in assets. Harding’s approach is based on empirical scientific research. As a result he recruited scientists who use quantitative, statistical research of market trends to inform the firm’s trading decisions.

  1. Hello! I know this is kinda off topic however I’d figured I’d ask.
    Would you be interested in exchanging links or maybe guest authoring a
    blog post or vice-versa? My website covers a lot of
    the same topics as yours and I believe we could greatly benefit
    from each other. If you are interested feel free to send me an email.
    I look forward to hearing from you! Awesome blog by the way!

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