nizar,
The Reefcap fund ran a mechanical system but we did have a discretionary over ride.
Snake,
Most inspiration comes from looking at the long term trading records of various managers and analysing their journey and knowing full well that its to be expected. A site such as
www.iasg.com shows hundreds of old and new managers (agreeably trading futures) but the concepts ring true nonetheless. Someone like Eckhardt has his 25-year record on display. We know he's a great trader, but taking a look at his results you can see his journey. By accepting this as "the norm" for a great trader, then we should also accept it as ours as well. I think this was a defining moment for me. Too many people take a money making machine such as a trend following system and attempt to tweak it to the market conditions. Instead, they should simply stick with it. I ran a trend following system for clients into the 2002 bear market. Many clients closed their accounts because their equity curves stopped moving higher. Along comes 2003 and it becomes downright frightening how much money it has cost them. People accept that their property valuations may stagnate and even decline in certain years. Why do they think differently when trading?
ASG,
I think survivorship bias is an overstated risk when looking at stock systems, especially trend following systems. There are simply too many trends and too many opportunities that exist to say that a couple would have be the defining "make or break" trade for any particular system. Even using a system and taking Davnet trades in the historic testing is acceptable for a trend following method. Why? Because those same situations still appear today, just in other forms. We're not relient on a "single" event or "minimal sample" of those events that it will corrupt the system logic into the future. Afterall, trends must occur. They can't
NOT occur. Having a system that finds those trends, stays with them if they continue and removes a position if they don't will always do well over the longer term. It also takes a small glimpse at the XAO back to 1875 to understand the concept of trends.
If however you have a "stock" specific system or a small sample universe that yoru system will only work on, then yes, survivorship bias will be a major threat. It doesn't mean that you shouldn't trade it, but you should be constantly researching other candidates. As an example, I have a system that trades ADR based stocks quite well. Problem is there are only a few of them. Such as system is prone to survivorship bias. Same with a system that only seems to work on one stock. There used to be some very good futures systems that worked well on NWS. When NWS switched identites that system imploded.
This is why I continue to harp on about understanding why the system will make money. Is it making money because some short term anomaly or is making money from a fundamental foundation within the market itself. My EOD trend following systems also work on 1-minute data because the simple reason is that trends can be found in EOD timeframes all the way down to 1-minute timeframes. Trends are a fundamental foundation of the market. They will always exist.
Another foundation is volatility. The market will travel through periods of low volatility followed by high volatility. This is a fundamental foundation that can be relied upon into the future.