The Sideways Problem

Some Trading Strategies show a particular behaviour: their equity curve tends - after increasing initially - to move sideways. Small profits which might have been made in the previous month are compensated by similar losses in the current month etc. Often such phenomena are indicating even heavier losses in the following months and therefore have to be taken very seriously.

The reason for such problems is usually to be found in changing market conditions: markets did enter a different "market phase". The problem is, that a particular trading strategy usually is not equally successful in all market phases. A trivial example: applying a Trend Following system requires that there are trends in the market. Is this the case, a trend following approach might deliver a good performance. If there is no trend the market, however, a Trend Following Strategy will inevitably create losses.

For such reasons we apply for the Mini-Future Portfolios different trading strategies, which are adapted to different market phases and - depending on a given market phase for a particular financial instrument - weighted differently within the portfolio. Examples of such strategies are oscillator systems using a Trading Band approach, Breakout systems, Trend Following systems as well as strategies combining different indicators.

Moreover, we perform stability tests of all systems periodically, making sure that we do take into account different requirements created potentially by instruments entering a new market phase. This means: our systems are checked periodically and - if necessary - modified, for example by changing the exit strategies applied. This procedure does not only avoid the Sideways problem, moreover, it ensures a stable and continuously growing equity curve.

How did the strategies react in crash and crisis situations?