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identifying potential markets for trend following?
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identifying potential markets for trend following?

  #1 (permalink)
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identifying potential markets for trend following?

I've read a couple books now on trend following and it seems to be a good approach for me that fits me psychologically. I've installed NinjaTrader 7 so that I can begin building a simple strategy, which I plan to execute on OptionsHouse (paper trading for now), and I plan to focus on futures.

But I'm kinda stuck on the very first step, which is identifying which markets to trade. The Trend Following Bible by Andrew Abraham says this on the subject:

"The only way to approach it has to be quantitative.There has to be no guessing or interpreting.
The simple way I learned to do this was to look at a rate of change. Another word for rate of change is momentum."

So one question is... how to apply some kind of filter in NinjaTrader to identify the highest momentum markets?

Next, to handle risk, I have read that I also need to find markets that are not correlated. Can NinjaTrader do this too, and I'm just having a hard time figuring it out?

What I would like to end up with, is a quantitatively determined list of markets, which all have good momentum and are not highly correlated. Any thoughts appreciated!

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  #3 (permalink)
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payooli View Post
I've read a couple books now on trend following and it seems to be a good approach for me that fits me psychologically. I've installed NinjaTrader 7 so that I can begin building a simple strategy, which I plan to execute on OptionsHouse (paper trading for now), and I plan to focus on futures.

But I'm kinda stuck on the very first step, which is identifying which markets to trade. The Trend Following Bible by Andrew Abraham says this on the subject:

"The only way to approach it has to be quantitative.There has to be no guessing or interpreting.
The simple way I learned to do this was to look at a rate of change. Another word for rate of change is momentum."

So one question is... how to apply some kind of filter in NinjaTrader to identify the highest momentum markets?

Next, to handle risk, I have read that I also need to find markets that are not correlated. Can NinjaTrader do this too, and I'm just having a hard time figuring it out?

What I would like to end up with, is a quantitatively determined list of markets, which all have good momentum and are not highly correlated. Any thoughts appreciated!

hi payooli - I read that book too.

I think it's simpler that other users in the forum provide you with some ideas on where to look. First of all, do you have an idea as to what instrument you are thinking of trading (stocks, options, equities, futures, etc.) ?

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payooli View Post
I've read a couple books now on trend following and it seems to be a good approach for me that fits me psychologically. I've installed NinjaTrader 7 so that I can begin building a simple strategy, which I plan to execute on OptionsHouse (paper trading for now), and I plan to focus on futures.

But I'm kinda stuck on the very first step, which is identifying which markets to trade. The Trend Following Bible by Andrew Abraham says this on the subject:

"The only way to approach it has to be quantitative.There has to be no guessing or interpreting.
The simple way I learned to do this was to look at a rate of change. Another word for rate of change is momentum."

So one question is... how to apply some kind of filter in NinjaTrader to identify the highest momentum markets?

Next, to handle risk, I have read that I also need to find markets that are not correlated. Can NinjaTrader do this too, and I'm just having a hard time figuring it out?

What I would like to end up with, is a quantitatively determined list of markets, which all have good momentum and are not highly correlated. Any thoughts appreciated!

Hey! Welcome to the forum. You will find that there is a TON of information here. Make sure you take the time to explore and read as much as possible!

As far as which markets to trade; you are going to want to trade the most liquid contracts (the contracts that have the most volume traded). Then, you want markets that are not correlated. This part is tricky. The reason for this is that correlation goes both ways: negative and positive. This means that some futures move the same, and some move opposite of each other.

As far as momentum goes, all markets have momentum and trends. Unfortunately, all markets have chop and mean reversion.

So, that being said, I would look into the following markets:

Crude Oil (CL)
Nasdaq Futures (NQ)
Gold (GC)

These fit your criteria the best as well as being very liquid contracts. I wish you the best of luck in your endeavors.

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  #5 (permalink)
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xplorer View Post
I think it's simpler that other users in the forum provide you with some ideas on where to look. First of all, do you have an idea as to what instrument you are thinking of trading (stocks, options, equities, futures, etc.) ?

I would like to trade futures. From what I'm reading ("Following the Trend" by Clenow) equities exhibit high correlation despite the companies being in vastly different industries. So for my equity exposure, I would want to just trade equity index futures.

Here's the problem I'm seeing though. I only have about $50K to trade. Clenow recommends limiting your daily exposure per position to something like 15-25 basis points of your total portfolio. (For me, 25 basis points is $125) And then you can can calculate the exposure of an instrument by multiplying the Average True Range by a certain factor, such as 3.

By these calculations, I can't even afford to trade ONE mini contract such as the ES. With a tick value of $12.50 and a 21 day ATR of 23.67, my exposure per contract is nearly TEN TIMES my max, at $1,183.50

Despondent, I did a search in NinjaTrader for "micro" futures, and only turned up 6:

M6A E-micro AUD/USD Futures
M6B E-micro GBP/USD Futures
M6E E-micro EUR/USD Futures
M6J E-micro USD/JPY Futures
MNF E-mirco S&P CNX Nifty Futures (Nifty 50)
MGC E-micro Gold Futures

4 currencies, 1 equity, and 1 metals. These are the only ones I can afford to trade even a single contract while following good money management principles (unless I am missing something?! If so please let me know!). And even MGC is still a little outside my range due to its high ATR.

This is not the diversification I was hoping for! I was hoping for some agriculturals, energies and some interest rates as well.

Clenow's book mentions you really need to start with around $1M. Now I see why! Unfortunately I am not anywhere close to that at $50K. Are futures just out of reach for me?

Thanks for reading and any insights to someone dipping a toe into the idea of trend following futures are very much appreciated!

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payooli View Post
I would like to trade futures. From what I'm reading ("Following the Trend" by Clenow) equities exhibit high correlation despite the companies being in vastly different industries. So for my equity exposure, I would want to just trade equity index futures.

Here's the problem I'm seeing though. I only have about $50K to trade. Clenow recommends limiting your daily exposure per position to something like 15-25 basis points of your total portfolio. (For me, 25 basis points is $125) And then you can can calculate the exposure of an instrument by multiplying the Average True Range by a certain factor, such as 3.

By these calculations, I can't even afford to trade ONE mini contract such as the ES. With a tick value of $12.50 and a 21 day ATR of 23.67, my exposure per contract is nearly TEN TIMES my max, at $1,183.50


Thanks for reading and any insights to someone dipping a toe into the idea of trend following futures are very much appreciated!

I am not familiar with Clenow, however, that does not discredit what he is saying. I assume the book is referring to futures, since that is what you want to do.

So, my thought is this: Clenow may not be referencing the ATR of the daily chart, but rather a smaller time frame. If he is referring to the ATR that you think he is, then his methodology is meant for swing trading over multiple days if not longer.

Does this make sense? Find out what frame of time he is referring to as far as ATR and which time frame for trading.

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rocksolid68 View Post
I am not familiar with Clenow, however, that does not discredit what he is saying. I assume the book is referring to futures, since that is what you want to do.

So, my thought is this: Clenow may not be referencing the ATR of the daily chart, but rather a smaller time frame. If he is referring to the ATR that you think he is, then his methodology is meant for swing trading over multiple days if not longer.

Does this make sense? Find out what frame of time he is referring to as far as ATR and which time frame for trading.

FYI the book is https://www.amazon.com/Following-Trend-Diversified-Managed-Futures . Good read, he really breaks things down.

Yes, this is for following medium to long term trends, on the order of a couple weeks to a few months or longer in duration. I have a day job and a family, and really only want to have to deal with a few trades a week.

I must apologize about the numbers, I confused myself. The 3*ATR was for calculating the STOP LOSS (a different topic for another day), not for calculating exposure. Forget what I said about multiplying ATR by 3.

In the book he actually mentions using the 100 day ATR, but I wasn't sure if NinjaTrader was smart enough to piece the different monthly contracts together (I'm a newbie with that too) since over 100 days you'd have rolled over the contracts several times for a monthly contract. So I just went with a 21 day ATR.

Hopefully I did the ATR thing right... are you seeing a 21 day ATR of about 23.67 for ES? My understanding is that, ATR represents the average amount of movement per day, in ticks. And so 23.67 times a tick value of $12.50 means average daily (theoretical) exposure of $1,183.50 for a single ES contract.

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payooli View Post
FYI the book is https://www.amazon.com/Following-Trend-Diversified-Managed-Futures . Good read, he really breaks things down.

Yes, this is for following medium to long term trends, on the order of a couple weeks to a few months or longer in duration. I have a day job and a family, and really only want to have to deal with a few trades a week.

I must apologize about the numbers, I confused myself. The 3*ATR was for calculating the STOP LOSS (a different topic for another day), not for calculating exposure. Forget what I said about multiplying ATR by 3.

In the book he actually mentions using the 100 day ATR, but I wasn't sure if NinjaTrader was smart enough to piece the different monthly contracts together (I'm a newbie with that too) since over 100 days you'd have rolled over the contracts several times for a monthly contract. So I just went with a 21 day ATR.

Hopefully I did the ATR thing right... are you seeing a 21 day ATR of about 23.67 for ES? My understanding is that, ATR represents the average amount of movement per day, in ticks. And so 23.67 times a tick value of $12.50 means average daily (theoretical) exposure of $1,183.50 for a single ES contract.

I see. Well, swing trading futures is pretty risky. @Big Mike suggests swing trading ETF's successfully before you even start with futures. In this case, I would have to agree with him. If you really want to swing trade, you don't have the account size to do it in futures. I would look into options, FX, or stocks/ETF's.

If you desperately want to trade futures, you will need to lower your time frame because an account size of $50k won't last long in this market, especially for someone that hasn't one it before.

I hope this helps!

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  #9 (permalink)
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rocksolid68 View Post
I see. Well, swing trading futures is pretty risky. @Big Mike suggests swing trading ETF's successfully before you even start with futures. In this case, I would have to agree with him. If you really want to swing trade, you don't have the account size to do it in futures. I would look into options, FX, or stocks/ETF's.

If you desperately want to trade futures, you will need to lower your time frame because an account size of $50k won't last long in this market, especially for someone that hasn't one it before.

I hope this helps!

Thank you @rocksolid68, this is good food for thought! I will look into other instruments.

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payooli,

Clenow uses a 100-day ATR (please see page 77 of his book). He also uses point value ($50 for ES), not tick value ($12.50 for ES).

Nevertheless, rocksolid68's advice is indeed rock solid. If I were you, I'd use ETFs. Many instruments used by Clenow are available as ETFs. Their leverage is different - and so is the risk to your capital :-)


Last edited by Cyberjoe; July 7th, 2016 at 03:35 PM.
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