Talking Trends

AQR updates their paper from a few years ago on Trend Following performance over the past 100+ years.

They highlight that performance since 2010 has been the worst stretch in the backtest. The main reason for this has been an increase in correlation between many different markets. When correlation increases, trend followers cannot follow and profit from many different trends.

Over the past eight years or so, correlation has increased severly. They notice that high correlation environments tend to hurt Trend Following performance and it thrives in low correlation environments.

AQR updates their paper from a few years ago on Trend Following performance over the past 100+ years.

They highlight that performance since 2010 has been the worst stretch in the backtest. The main reason for this has been an increase in correlation between many different markets. When correlation increases, trend followers cannot follow and profit from many different trends.

Over the past eight years or so, correlation has increased severly. They notice that high correlation environments tend to hurt Trend Following performance and it thrives in low correlation environments.

Across the globe, bond prices are declining. From Australia to Europe to the USA, prices are sitting and/or rolling over towards 52-week lows. 

Could this be the beginning of a major reversal in interest rates? Who knows, but investors have to prepare just in case. 

Investors who have profited and gotten used to the 30-year bull market, especially in the U.S., might be less inclined to adapt. They think a bull market in Treasuries and other government bonds is the norm, so they don't bother closing their long positions. 

Trend Followers know better. They respect the market. They know that old regimes and long-standing trends can break down at any time without mercy. They don't bother feeling nostalgic. Instead, they adapt as soon as possible within the rules of their own strategies.

On this episode, I walk through the charts of some of the major government bond markets and comment on their current trends and some possibilities for the future.

Across the globe, bond prices are declining. From Australia to Europe to the USA, prices are sitting and/or rolling over towards 52-week lows. 

Could this be the beginning of a major reversal in interest rates? Who knows, but investors have to prepare just in case. 

Investors who have profited and gotten used to the 30-year bull market, especially in the U.S., might be less inclined to adapt. They think a bull market in Treasuries and other government bonds is the norm, so they don't bother closing their long positions. 

Trend Followers know better. They respect the market. They know that old regimes and long-standing trends can break down at any time without mercy. They don't bother feeling nostalgic. Instead, they adapt as soon as possible within the rules of their own strategies.

On this episode, I walk through the charts of some of the major government bond markets and comment on their current trends and some possibilities for the future.

Great trends can exist despite low and declining volatility. People seem to have gotten the idea that trend following performance has been poor over the past couple of years because of low market volatility. Not true. Trend reversals and false breakouts are the culprits, not low volatility.

I don’t root for volatility. I root for trends. Sometimes markets trend despite low and declining volatility. They can exist with high and increasing volatility too, but positive trend following performance does not need high volatility.

Full article: http://www.michaelmelissinos.com/blog/positive-trend-following-performance-depends-on-persistent-trends-not-high-volatility/

Great trends can exist despite low and declining volatility. People seem to have gotten the idea that trend following performance has been poor over the past couple of years because of low market volatility. Not true. Trend reversals and false breakouts are the culprits, not low volatility.

I don’t root for volatility. I root for trends. Sometimes markets trend despite low and declining volatility. They can exist with high and increasing volatility too, but positive trend following performance does not need high volatility.

Full article: http://www.michaelmelissinos.com/blog/positive-trend-following-performance-depends-on-persistent-trends-not-high-volatility/

The soil matters most.

Without great soil, wineries cannot make great wine. Without big trends, traders cannot make big money. Wine-makers are at the mercy of their geographical location; traders, at the mercy of the markets. There’s a reason why wineries don’t exist in Nebraska and why trend traders don’t make money in stagnant markets.

Much of what contributes to making great wine lies outside of our control – location, soil and weather. If a guy in Iowa wants to open a winery, he knows he has to go to where grapes grow. He cannot force the issue in Iowa. He’s simply in the wrong place to make wine. This says nothing about his talent, will or hustle. He just has to adapt to the reality that running a successful winery cannot be done in Iowa. He’s gotta move.

In trading, we depend on trends to make money. Long-term traders, like myself, need months of price persistence to produce a profit. Outside of stocks, markets have been fairly stagnant for the last couple of years. Like a winery, a large part of what we need to succeed lies outside of our control. I have no control over what markets do and there’s nothing I can do to change them. I simply have to wait it out until the soil (markets) become more fertile.

Blog post: www.michaelmelissinos.com/blog/wine-and-trading/

The soil matters most.

Without great soil, wineries cannot make great wine. Without big trends, traders cannot make big money. Wine-makers are at the mercy of their geographical location; traders, at the mercy of the markets. There’s a reason why wineries don’t exist in Nebraska and why trend traders don’t make money in stagnant markets.

Much of what contributes to making great wine lies outside of our control – location, soil and weather. If a guy in Iowa wants to open a winery, he knows he has to go to where grapes grow. He cannot force the issue in Iowa. He’s simply in the wrong place to make wine. This says nothing about his talent, will or hustle. He just has to adapt to the reality that running a successful winery cannot be done in Iowa. He’s gotta move.

In trading, we depend on trends to make money. Long-term traders, like myself, need months of price persistence to produce a profit. Outside of stocks, markets have been fairly stagnant for the last couple of years. Like a winery, a large part of what we need to succeed lies outside of our control. I have no control over what markets do and there’s nothing I can do to change them. I simply have to wait it out until the soil (markets) become more fertile.

Blog post: www.michaelmelissinos.com/blog/wine-and-trading/

Trend Following, by design, leaves money on the table. It does not try to milk every trade for every penny.

It aims for profit, but not greed.

It accepts missing tops and bottoms in order to capture the middle of trends.

We humans love predicting, buying bottoms and selling tops. The cost of these behaviors outweigh the profits, though.

Many people choose not to buy stocks during this 7–8 year bull market because the perfect buying opportunity never occurs. The market never pulls back enough to justify getting in; no one wants to be the sucker who buys the top.

Being a human, myself, I understand this pain. However, waiting for a pullback to get in at “better prices” often times keeps you out of the market altogether and, as a result, you miss the trend. The pain of missing the long-term trend outweighs the pain of overpaying in the short-term.

Blog post: http://www.michaelmelissinos.com/blog/leaving-money-on-the-table/

Trend Following, by design, leaves money on the table. It does not try to milk every trade for every penny.

It aims for profit, but not greed.

It accepts missing tops and bottoms in order to capture the middle of trends.

We humans love predicting, buying bottoms and selling tops. The cost of these behaviors outweigh the profits, though.

Many people choose not to buy stocks during this 7–8 year bull market because the perfect buying opportunity never occurs. The market never pulls back enough to justify getting in; no one wants to be the sucker who buys the top.

Being a human, myself, I understand this pain. However, waiting for a pullback to get in at “better prices” often times keeps you out of the market altogether and, as a result, you miss the trend. The pain of missing the long-term trend outweighs the pain of overpaying in the short-term.

Blog post: http://www.michaelmelissinos.com/blog/leaving-money-on-the-table/