For the past few months, one of the key areas of my trading research has been counter-trend systems. All my trading past, I have been a "trend-follower" and am very used to the sort of system output that you get from this - a win percentage of perhaps 40%, but with average wins far exceeding average losses. Counter-trend systems tend to have much higher win percentages but with the occasional large loss. Psychologically, this has seemsed harder to me.
But this seems to have changed somewhat as a result of the very in depth study of intra-day systems. Looking at various trend following systems has suggested that intra-day, these can have multiple whipsaws and so, using them as a counter-trend system could be profitable. The secret is risk control - ensuring that the occasional big loss is not so big that it more than wipes out the gains from non-trending markets.
It took about 6 weeks to develop a loose family of counter-trend systems, which have been left alone in a blind test for the last few weeks. Today was results day and I was much impressed. Good clean answers came to the questions asked. Blending with the existing systems gave both a boost to profits and a material increase in the Sharpe ratio.
Overall, a very pleasing research result. Another two or three weeks of "paper trading" so I get used to the way the system trades are generated and then go live. I am really quite excited about these add ons and can really see how short-term traders focus on this type of system. Again all this has followed from just one quote from Patterson's book The Quants, where Jim Simons, founder of the extraordinary Renaissance Technologies hedge fund, said that generally his fund buys things that have been weak but are starting to strengthen and vice versa - intra-day, that is counter-trend. From such a small quote, so much has followed!
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