Questions on a couple of Van Tharp principals.

[RobGiles]

Hi Nick

I think I’ve mentioned that I’ve done a couple of Van Tharp courses.  Whilst I think he’s got some value to add, I’m certainly not one of the unquestioning fanatics that he seems to attract.  There’s a couple of things he mentioned at one of his courses that I’d really value your opinion on:
1) I asked him if the Turtle approach to trading works anymore and he said it doesn’t.  In his usual style he didn’t provide any explanation as to why.  Do you think what he’s referring to is the end of the bond bull market that we were talking about yesterday?

2) He’s firmly of the view that there’s no holy grail system, that you must have a method for describing the type of market that you’re in (i.e. bullish, neutral, bearish / volatile, normal, quiet) before you know which trading system you will deploy.   Do you agree?  I guess this is why we have an index filter in something like the ASX Growth Portfolio, as it essentially doesn’t trade (or add new posn’s ) when the index is in bearish mode?  

Where does a mean reversion strategy fit into all this….more suited to a sideways market?  Does one turn it off when the market is trending strongly (say trading above the 200 and 50 day MA)?

Rob

[JulianCohen]

I think one of the most telling things I have heard recently was in the Podcast I posted in the Trading Articles Depository. In part two of that podcast Richard Dennis said that if he was to run the Turtles program now, today, from scratch, he would have no idea what trading system he would use.

I took that to mean not that there were so many to choose from that he was stuck for choice, but that he was not sure of one that would work the way he wanted it to. Now you have to bear in mind that he came from a different era, where interest rates alone could give you 10-12% p.a return and his drawdowns were much greater than 60% in the Turtle system so you would have to have massive cajones to run the system. Also bear in mind that he stopped trading before the algos started, to the best of my knowledge, so he is probably unfamiliar with what we are doing today.

Still a very very interesting interview. For me it reinforced how important it is not to follow something like your Van Tharp fanatics would.

[LEONARDZIR]

Julian,
Couple of things. The turtle system was developed when there were strongly trending commodity markets.
Richard Dennis ultimately went broke.

[RobGiles]

Thanks Julian

OK so on that basis, how does a momentum or a trend following approach sit with you in today’s market? Are we not doing essentially the same thing (albeit from the long side only and probably with systems designed to have much less severe DD’s)?

[Nick Radge]

Van Tharp is a theorist. He admits he doesn’t trade and indeed has most of his funds invested on commercial property.

To the questions…

(1) Listen to the Jerry Parker interview on Better System Trader. He discusses this exact topic and considering Parker (a) was a Turtle, (b) manages money and (c) is still in business, I feel he’s a better point of reference than Tharp.

Parker states that the strategy still works but its now a much longer breakout window. I have found the same for my trend systems. Initially I used to use a 70-day index filter for the Growth Portfolio. That’s now out to 130 days.

(2) In theory switching a system into various market types sounds plausible and therefore most likely sells a lot. However, in reality it’s a very different matter. Market type can only be known after the fact so there is a natural lag. Depending on definition the switch from one style to another can create system chop. I have, yet to date, seen anybody use the market types Tharp suggests within the context of a systematic approach. I will also posit that no professional money manager does what he is suggesting – at least not to my knowledge.

Instead, professional money managers trade a selection of system types AT ALL TIMES.

In essence we are using market types to some degree – trending/non-trending. Certainly the risk/adjust returns for trend style systems are markedly improved using an index filter.

Mean reversion systems can work with or without. My US MOC system and ASX systems do not have index filters – they trade continuously. However, my HFT strategy does use a trend filter and will therefore cease trading and revert to cash.

This is all discussed later in the course…

[RobGiles]

Brilliant….thanks Nick

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