Trend following systems

Phanish Sathyamurthy ( phaneesh69@gmail.com)

Ph - 9920245447

Why Trend Following ????

Shorter boom & bust cycles in financial markets

Biased Technical & Fundamental views in uncertain
Global & Domestic markets
Money managementwhats the point of riding a
x% up/down move without being optimally invested
Once in a trend subsequent MTMs used to fund a
portion of the new position
Strong trends in any asset class seen only twice or
thrice a year important to be on the right side. Eg:
USD/INR move from 47 to 54 in less than 3 months

Agenda
Short term system
Other systems
Historical Analysis

Short term system

Backbone of the system Turtle Trend following

methodology combined with Donchian Rules which
have outperformed markets for over 50 years
Markets What to buy or sell : Any asset class Equities / Commodities / Currencies
Position Sizing How much to buy or sell :
Volatility based sizing technique with predefined
risk per trade based on available capital
Entries When to buy or sell : 20 day breakouts
whiles pyramiding positions based on available
capital and prevalent market volatility

Short term system

Stop Losses When to get out of a losing position :

Combination of n day low and prevalent market
volatility
Exits When to get out of a winning position :
Trailing stops for each pyramided position so as to
ride bigger trends while reducing capital erosion in
trendless markets
System is most effective on NIFTY and BANKNIFTY.

Short term system back testing

Net capital: INR 10 mn

Timeframe: 1 Apr10 : 31 Dec11
Underlying instrument Rolling NIFTY futures
No. of trades: 41

Assumptions

Buy side: 17
Sell side: 24
Brokerage: 0.03% each side (INR 0.9 mn)
Slippages (due to gap up / gap down): INR 1 mn

Net return: 98.4%

Annualized return: 47.94%
Most profitable trades occurred only 6 times in the period
No. of days per year with open position: 85

Other systems

Medium term system

Considers

3 month breakouts for entry (quarterly data

effective with small/midcaps) and monthly lows for
exit

Fewer number of trades per year

Comparison with short term model
n NIFTY

underlying: Lower returns (~32% CAGR)

n Stock futures underlying: Better returns (~45% CAGR)

Ultra short term system

Considers

30 and 60 minute prices

Inefficient in volatile markets

Historical analysis

System has never given negative annual returns

since 1993
Sharpe ratio over the last one year stood at 2.17
The biggest drawdown the system suffered in a day
in over 10 years was in Oct 2007 when Nifty
opened 10% gap down, but managed to end the
year with positive returns
Bank Nifty for the year 2011 outperformed Nifty
by yielding 97% as against 47% for Nifty
Trading based on this system for a portfolio of
stocks is advisable than on a single stock

Performance on Stocks
Performance from Jan 09 - Dec 11
40000000

Returns
Jan 09 - Dec 09 Jan 10 - Dec 10 Jan 11 - Dec 11

35000000
30000000
25000000

ICICIBANK
L&T

20000000

AXISBANK

ICICIBANK
L&T
AXISBANK
SBIN
TATAMOTORS

18%
3%
-7%
25%
73%

0%
39%
-3%
8%
38%

9%
33%
5%
17%
38%

SBIN

15000000

TATAMOTORS
10000000
5000000

1
7
13
19
25
31
37
43
49
55
61
67
73
79
85
91
97
103
109

10 mn individual positions considered

( ex Commisions and impact cost )

Performance on Indices
Nifty vs BankNifty ( Jan 11 - Dec 11)
25000000
23000000
21000000
19000000
NIFTY

17000000

BANKNIFTY
15000000
13000000
11000000
9000000
1

11 13 15 17 19 21 23 25 27 29 31 33 35 37

10 mn individual positions considered