Countertrend Systems During Chaos

Apr. 22, 2020

Over the past decades, even centuries, data shows that a trend following system will do well in chaos.

Specifically, trend following will significantly outperform buy-and-hold during crises (hence the name “crisis alpha”).

As proof, maybe the most famous trend follower, Dunn Capital, is up 1.74% for the year. Not eye-popping buy way ahead of buy-and-hold.

And another famous trend following firm, Mulvaney Capital Management, is up over 15% in 2020:

I’m curious, though, on how countertrend systems do in times like these. It feels like they would do terribly. Trying to pick bottoms and tops, going against the grain, would seem to be a bad idea.

So let’s take a look.

As a representative of countertrend, we’ll examine my Weekly Pivot robot.

This system believes that Weekly Pivots are extremely magnetic and that, if price moves far away from Fair Value, the likelihood of price moving back against the trend toward the magnetic Weekly Pivot is quite high.

Of course, if a market is in a savage trend, it won’t stop and turn back toward the Weekly Pivot. It will just keep going in the same direction and stop out this countertrend methodology.

That’s why my guess is that the Weekly Pivot robot won’t do well in 2019 (a big one-way trend) and definitely won’t do well in the chaos of 2020.

Again, this robot waits for price to move over 100 points away from the Weekly Pivot, and then trades back toward the Weekly Pivot. It has a target placed just in front of the Pivot and a sizable stop to give it room.

Just FYI, I originally tested this robot many years ago. So many years ago, in fact, that I can’t remember exactly when. Maybe 5-6 years back? I haven’t touched it since.

First, here’s how the Weekly Pivot robot on the EURUSD on the 1-hour chart performed from 2003-2020 (trading 0.75 lots and no compounding):

Those numbers look pretty good overall. Profit over $35k and max drawdown under $6k.

How about 2020?

Whoa, it’s doing just fine. It’s killing the market no matter what trade size or account size we might use. Here’s a trade from April 2020:

Price in EURUSD moved far away from the Weekly Pivot and then roared back toward Fair Value for a win.

The good news: countertrend systems can make money during chaos.

(Maybe buy-and-hold is the only thing that suffers in crisis?)

The bad news: countertrend systems can go through dry periods. This makes sense, though. If the market is trending, there won’t be a lot of countertrend opportunities. And this system didn’t trade from October 2019 to February 2020. That’s a long time for some traders.

But would you accept a dry spell for this two-year period of returns?

That’s the discussion every trade must have: is action more important or is profit more important?

This could be an anomaly, though. In our next newsletters we’ll look at other countertrend systems to see how they’ve done in 2020.

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.