Trend Capture in Commodity TradingCommodities / Commodities Trading Dec 29, 2009 - 03:38 AM GMT
You do not hear that often the word trend capture in commodity trading. Most of the time it is called Trend following. The difference however depending on how the commodity trader or commodity trading advisor trades there are times big draw downs occur as well as big profits are given back in trend following. However this has to be a given in trend following. One makes his money only by capturing those rare big trends. Many times the commodity trader gets whipped around.
Trend capture is an idea that myself and my partners have been involved with our constant testing. The idea is we take pieces out of the trend. If the trend is very strong we get lucky and take bigger bites out of the trend. We are trend following however we are not willing to go through large draw downs ( as best as we can) as well as we look to lock in profits when available. We attempt to do this through groups of filters that we have tested over the years. We have learned there is no magic system and that only groups of systems with strong risk management can assist us in our goal of trend capture.
We look at the various measurements of risk and reward. We look at average winners, average losers, returns and draw-downs. We examine the numbers further to calculate Kelly Expectations (bet size), MAR Ratios and Monte Carlo distributions. These are the tools that help us understand the model ( not just one system). The fact is that no matter how many numbers we crunch we cannot replace randomness with systematic probability. We can not quantify the future. This is the reason we are so focused on risk. We look to mitigate some of the draw downs…but they are always out there.
When you trade commodities trade with a plan and the discipline and patience to follow it!
Andrew Abraham has been in the financial arena since 1990. He is a commodity trading advisor and co manager of a Commodity Pool. Since 1993 Andrew has been a proponent of quantitative mechanical trading programs. Andrew's major concern is not only total return on investment but rather the amount of risk that one would have to tolerate in order to achieve returns He focuses on developing quant models that encompass strict risk adherence and correlation. He has been a speaker at conferences as well as an author of numerous articles. Andrew has spent years researching ideas that have the potential to outperform indices as well as maintain fewer draw downs.
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