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Ep. 581: Collin Seow Interview with Michael Covel on Trend Following Radio

Collin Seow
Collin Seow

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My guest today Collin Seow is author of “The Systematic Trader: How I turned a $250,000 debt into profits through stock trading.” He also is a qualified Chartered Portfolio Manager with a Certified Financial Technician qualification, and a member of MENSA Singapore and Technical Analysts Society Singapore.

The topic is his book The Systematic Trader: How I turned a $250,000 debt into profits through stock trading.

In this episode of Trend Following Radio we discuss:

  • Different types of momentum trading
  • Singaporean perspective
  • Risk management
  • Position trading vs. swing trading
  • A sense of entitlement in today’s society

“At the end of the day it isn’t about having the right strategy, it’s about having the right mindset.” – Collin Seow

“If you don’t have an edge, how the hell are you suppose to play the game?” – Michael Covel

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Trend Following Trading v. Momentum Trading

Trend following trading and momentum trading are not the same style. Consider two papers from AQR: 1 (PDF) and 2 (PDF). The terms might imply something similar, but the strategies are wholly different.


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Momentum is Everywhere…

Recent article on momentum:

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There is a vast body of evidence demonstrating that stock returns exhibit momentum — that is, stocks that have done well over the past year tend to continue to do well. And there’s evidence that the momentum premium exists almost everywhere we look, in both U.S. and international stocks (with the notable exception of Japan). There’s also academic research demonstrating that momentum exists in commodity and foreign exchange markets as well. The authors of the 2012 paper, “Momentum in Government-Bond Markets,” studied the period 1987-2011 to determine if momentum existed in these assets. For six countries — Australia, Canada, Germany, Japan, the U.K., and the U.S — they formed long-short portfolios, going long a particular bond maturity if the excess return of the bonds over cash was positive for the previous month and shorting otherwise. For each country they considered three maturity buckets: 1-3 years, 5-7 years and 7-10 years. They subtracted the LIBOR cash return to arrive at the “excess” return. Rebalancing was done monthly. The strategy is easily implementable using highly liquid futures markets. The benchmark is the currency-hedged Citigroup World Government Bond Index. The following is a summary of their findings:

  • Momentum strategies are profitable, generating annual excess returns over LIBOR of between 0.70 and 2.6 percent, and they do so with low volatility (1 percent to 3.6 percent).
  • Australia, with the least liquid of the six markets studied, exhibited the lowest returns to momentum strategies. The three most liquid markets — U.S., Japan and Germany –are the best for momentum strategies. Thus, greater liquidity doesn’t seem detrimental to momentum strategies (and trading costs are the lowest in the most liquid markets).
  • The strategy doesn’t rely on falling interest rates. However, “choppy” markets without direction are detrimental to performance, and returns can be episodic.
  • The excess profits generated are more than sufficient to cover transactions costs as the government bond markets are very liquid.
  • Momentum returns are particularly strong during periods of poor performance for credit markets. Thus, momentum strategies provide some diversification benefit against bond strategies that seek exposure to credit (default) risk.

The authors tested the diversification benefits by combining a 20 percent momentum strategy with an 80 percent Barclays Capital U.S. Aggregate Bond Index allocation, with monthly rebalancing. The simulated portfolio generated excess returns of 0.35 percent a year while reducing volatility — the standard deviation fell 0.40 percent. Investors who take credit risk in their bond allocations should consider adding a momentum strategy. This diversification benefited provided by momentum strategies also applies to investors in value stocks. Because momentum is negatively correlated with the value premium, adding momentum to a value-tilted portfolio improves risk-adjusted returns. While there is a logical risk-based explanation for the existence of the stock, small-cap and value-stock premiums, there is none for momentum — only a behavioral story. Yet, despite the fact that there is no risk-based explanation and that the existence of momentum has been known for decades (thus it would seem that it should have been arbitraged away), momentum persists virtually everywhere we look.

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Otherwise known as trend following.


How can you move forward immediately to Trend Following profits? My books and my Flagship Course and Systems are trusted options by clients in 70+ countries.

Also jump in:

Trend Following Podcast Guests
Frequently Asked Questions
Performance
Research
Markets to Trade
Crisis Times
Trading Technology
About Us

Trend Following is for beginners, students and pros in all countries. This is not day trading 5-minute bars, prediction or analyzing fundamentals–it’s Trend Following.

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