Riccardo Ronco MTA 2015 Symposium

TREND
FOLLOWING
Applied to Equities and ETFs
March 2015 – New York
Riccardo Ronco +44 20 7233 3245 rronco@aviateglobal.com

Riccardo Ronco, CFTe
Biography
Riccardo Ronco +44 20 7233 3245 rronco@aviateglobal.com 2
Riccardo Ronco is the head of technical analysis at Aviate Global in London.
Mr. Ronco follows large- and mid-cap European and U.S. equities, paying attention to domestic and
foreign equity indices, currencies, commodities, and interest rates. As a medium-term trend follower,
his approach is strongly quantitative in nature; particular attention, however, is devoted to identifying
reversal patterns characterized by excessive consensus among investors.
Mr. Ronco brings more than 15 years of experience in trading, quantitative analysis, and teaching
technical analysis in the United Kingdom and Italy. Prior to joining Aviate Global in April 2010,
Mr. Ronco worked for Credit Agricole Indosuez, Banca Intesa Group, and Banca AntonVeneta
(MontePaschi Group) and FBR Capital Markets.
He is a frequent guest on CNBC Europe and other European media outlets. A member of the
Society of Technical Analysts (STA) and the Market Technicians Association (MTA), Mr. Ronco was a
speaker at the International Federation of Technical Analysts (IFTA) 1998 conference in Rome and
Beijing (2011).
His work is mentioned in the book Capital Market Revolution: The Future of Markets in an Online
World by Patrick Young. Mr. Ronco received his degree (with honors) in economics from the
University of Turin.
He currently holds Chartered Market Technician (CMT) Level 1 and 2 diplomas.

Buffett or Harding?

Emotional = Irrational
•Investors tend to make emotional decisions about their money, chasing performance...
•Investors are everything but rational: Hope, Greed, Fear, Despair  “investing” cycle

Behavioral Basis for Trends
“Demystifying Managed Futures”, Hurst Ooi Pedersen
Fundamental Value
Trend starts (anchoring
+ under-reaction)
Trend continues (herding +
over-reaction)
Trend ends
(back to fundamentals)
People are prone to making SYSTEMATIC ERRORS in circumstances of uncertainty

Why Trend Following?
•To fight irrational behaviour we need a PLAN: a system with clear rules, with an EDGE
•TREND: sustained changes in prices in one direction
•FOLLOWING: no forecast, focus on reaction, deal with probabilities and not certainties
•We cannot control the OUTCOME of a trade: focus on SIZE and EXIT
•Focus on ROBUSTNESS: simple algo, few degrees of freedom, KISS
•Focus on Consistency  Discipline Confidence  Back testing
•Focus on the PROCESS: doing the right thing rather than being right, “flawless execution”
•Simple but not EASY: “let profits run + cut losses” goes against our natural instincts

From David Ricardo (1772-1823) to Ed Seykota
“The Great Metropolis”, Vol II, 1838, James Grant

Trend Following Wisdom
818 March 2015 Riccardo Ronco +44 20 7233 3245 rronco@aviateglobal.com
"A loss never bothers me after I take it, I forget if overnight.
But being wrong, not taking the loss - that is what does
damage to the pocket book and to the soul.“
Jesse Livermore
“After spending many years in Wall Street
and after making and losing millions of
dollars I want to tell you this: it never was
my thinking that made the big money for
me. It was always my sitting.”
Jesse Livermore

An Edge to avoid Outcome Bias
9Riccardo Ronco +44 20 7233 3245 rronco@aviateglobal.com
Expectation = (%W x AW) – (%L x AL)
Where:
%W = Winning Percent
AW = Average Winner
%L = Losing Percent or (1 - %W)
AL = Average Loser
For Expectation = 0 we have the “Breakeven Line” curve
Y = (1 – X) / X  hyperbola
Where:
Y = AW / AL (a.k.a. WIN/LOSS ratio) X = %W

Expectancy Curve – Nick Radge
0
1
2
3
4
5
6
7
8
9
10
10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95%
WIN %
WIN/LOSSRATIO
Profitable
Unprofitable
Breakeven Line

NR 1 TF problem: DRAWDOWNS
•TF is about taking NUMEROUS SMALL LOSSES (false breakouts) for...
•... those RARE LARGE WINNING TRADES when markets do trend (“fat tails”)
•Length and Size of a LOSING streak affects you psychologically and emotionally
=ROUND(LN(Nr. Trades) / -LN((1 – (% WIN / 100))),0)
Example:
40% WIN and 10,000 trades  18
There is a chance that we can have 18 consecutive losers

Psychology: Length of a Losing Streak
10
40
70
99
0
10
20
30
40
50
60
70
80
90
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
5500
6000
6500
7000
7500
8000
8500
9000
9500
10000
80-90
70-80
60-70
50-60
40-50
30-40
20-30
10-20
0-10
TRADES
% WIN

Psychology: Fixed Fractional
•the RISK on EACH TRADE does impact how we trade / think (100 starting capital)
0
10
20
30
40
50
60
70
80
90
100
1
4
7
10
13
16
19
22
25
28
31
34
37
40
43
46
49
52
55
58
61
64
67
70
73
76
79
82
85
88
91
94
97
100
1
2
3
4
5
Consecutive
Losses
% risk / loss
•If our %WIN is 40% then, in the long run, we will get 18 losses in a row
•risk 4% on each trade and that will be enough to lose 50% of our equity with FF
Avail. Cap.

S&P 500 vs 10-month SMA Long only
From Sept 1928 to Feb 2015: CAGR Strategy +6.38% (no reinv.) vs B&H 5.47%
10
100
1000
10000
100000
01/09/1928
01/06/1931
01/03/1934
01/12/1936
01/09/1939
01/06/1942
01/03/1945
01/12/1947
01/09/1950
01/06/1953
01/03/1956
01/12/1958
01/09/1961
01/06/1964
01/03/1967
01/12/1969
01/09/1972
01/06/1975
01/03/1978
01/12/1980
01/09/1983
01/06/1986
01/03/1989
01/12/1991
01/09/1994
01/06/1997
01/03/2000
01/12/2002
01/09/2005
01/06/2008
01/03/2011
01/12/2013
S&P 500 MA
B&H

Reinvesting in US 10-year T-Note
100
1000
10000
01/10/1988
01/08/1989
01/06/1990
01/04/1991
01/02/1992
01/12/1992
01/10/1993
01/08/1994
01/06/1995
01/04/1996
01/02/1997
01/12/1997
01/10/1998
01/08/1999
01/06/2000
01/04/2001
01/02/2002
01/12/2002
01/10/2003
01/08/2004
01/06/2005
01/04/2006
01/02/2007
01/12/2007
01/10/2008
01/08/2009
01/06/2010
01/04/2011
01/02/2012
01/12/2012
01/10/2013
01/08/2014
SPX/BOND
S&P B&H
50/50
Oct 1988 – Feb 2015 CAGR Max DD
SPY/Bond 10-sma (blue) 13.31% -15.87%
SPY Buy & Hold (red) 10.37 -50.95%
SPY/Bond 50/50 (green) 9.46% -22.00%

So what is the “best” moving average?
No commissions, no taxes, no reinvestment when in cash

Trade them all! (and play with weights)

From Bullish/Bearish to How MUCH Bullish...

Mebane Faber: CTA-like using 10-month m.a.
No commissions, no taxes, YES reinvestment when in cash (SHY)
100
1000
01/12/1995
01/08/1996
01/04/1997
01/12/1997
01/08/1998
01/04/1999
01/12/1999
01/08/2000
01/04/2001
01/12/2001
01/08/2002
01/04/2003
01/12/2003
01/08/2004
01/04/2005
01/12/2005
01/08/2006
01/04/2007
01/12/2007
01/08/2008
01/04/2009
01/12/2009
01/08/2010
01/04/2011
01/12/2011
01/08/2012
01/04/2013
01/12/2013
01/08/2014
STRAT
SPX Multi Asset Classes
Long Only
EW Diversification
+ Monthly Rebal.
(2 “free lunches”)
S&P 500 TR
European Equities TR
US 10-year T-Note TR
US REITs TR
Commodities TR
Jan 1995 – Feb 2015 CAGR Ann. St.dev Mod Sharpe
Strategy (blue) 10.08% 6.53% 1.54
SPY (red) 8.52% 15.30% 0.56

S&P 500 GICS TR using 10-month m.a.
No commissions, no taxes, YES reinvestment when in cash (SHY)
Multi LC US Sectors
Long Only
EW + Monthly Rebal.
All 10 S&P 500 sectors TR
Invest if above 10-ma
In SHY if below 10-ma
Jan 1992 – Feb 2015 CAGR Ann. St.dev Mod Sharpe
Strategy (blue) 10.74% 8.46% 1.27
SPY TR (red) 7.75% 15.30% 0.51
0
200
400
600
800
1000
1200
Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
STRAT
SPY

Going Global with Large Cap: Index

Going Global with Large Cap: 100 stocks
10 MIO USD portfolio: 0.5% commissions, no taxes, no reinv. when in cash

Bibliography
18 March 2015 Riccardo Ronco +44 20 7233 3245 rronco@aviateglobal.com 23
Andreas Clenow - Following the Trend: Diversified Managed Futures
Gary Antonacci – Dual Momentum Investing
Nick Radge – Unholy Grails: A New Road to Wealth
Michael W. Covel - Trend Following: Learn to Make Millions in Up or Down Markets
Michael W. Covel - The Complete Turtle trader: The Legend, the Lessons, the Results
Nick Radge - Unholy Grails - A New Road to Wealth
Curtis Faith - Way of the Turtle: The Secret Methods that Turned Ordinary People into Legendary Traders
Mebane T. Faber - The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets
Anthony Garner - A Practical Guide to ETF Trading Systems: A Systematic Approach to Trading Exchange
Traded Funds
Van K. Tharp - Trade Your Way to Financial Freedom
Edwin Lefevre – Reminiscences of a Stock Operator

Awards
Riccardo Ronco +44 20 7233 3245 rronco@aviateglobal.com

Legenda
Every week, for several different countries and asset, classes a given set of technical indicators is calculated on specific Equity, Equity sector and Commodity indices. First, we
calculate our proprietary momentum indicator; we then rank the industry groups from best to worst, showing the results for the last six weeks (Friday’s closing prices are used in
our calculations). We use the blue color for “Overweight,” the red color for “Underweight,” and no color for “Neutral.”
We prefer to find buy ideas in the top third results of our ranking model, while short ideas are better suited for those indices in the bottom third. This table provide a quick, yet
effective, way to see the dynamics of relative performances in these indices, showing investors’ preferences in the medium term. From an absolute performance point of view,
we need to calculate instead the weekly MACD (Moving Average Convergence/Divergence) indicator and its nine-week moving average (the “signal line”).
We technically define a bullish swing as one when the MACD is above its moving average and a bearish swing as one when the MACD is below its moving average. On
the “Time” column, we count the number of weeks from one swing to the next to gauge the maturity of the current move. When comparing the MACD with its moving average
and with the zero line, however, we can define four phases (Up, Advancing, Down, and Terminating).
The idea is to divide price oscillations into clearly identifiable phases (as inspired by the work of Ian S. Notley) and adjust our risk/reward expectations according to these
indications (see column “Action”, representing the number of weeks a particular index has spent in its bullish or bearish swing phase).
The bullish swing includes the Up and Advancing phases.
Up: The index has bottomed (possibly after showing positive divergences) and is breaking resistance levels. Investors should have a low-risk entry point here. The weekly
MACD is below the zero line but above its signal line. Size should be small at the beginning, and the investor should allow prices to prove themselves.
Advancing: Prices are trending nicely higher with moderate volatility. Approaching the top, we usually see volatility picking up and weekly (daily) ranges increasing. The
weekly MACD is above both the zero line and its signal line. Buying dips can be a rewarding strategy.
The bearish swing includes the Down and Terminating phases.
Down (Declining): The index has built a top (or a congestion phase), and the weekly MACD has crossed from above its signal line. The MACD itself is still above the zero
line here, and the implication is to lighten the position and to use each short-term pullback to reduce/sell the exposure (sell on rallies).
Terminating: Prices are accelerating to the downside, and the weekly MACD is now below both zero and its signal line. Sharp rallies could be confusing, but sticking to the
trend is the best strategy, and investors should generally avoid buying dips here. Volatility is sharply increasing.
EM: Emerging Market.

Information about technical analysis
This trading idea is based upon technical analysis, which involves the study of historical price and volume trading patterns and the potential direction of future trading based
upon such information. There is no direct or implied guarantee of any particular outcome. This analysis is different from fundamental analysis and the conclusions reached may
differ. Technical research does not represent a rating or coverage of any discussed issuer(s).
Our daily charts for European and U.S. equities try to highlight in a quick and easy way information about the trend, the relative performance against its benchmark, price
momentum and accumulation/distribution using volume. Our conviction is clearly a function of these elements and of the time frame used.
To determine the trend we use the classic combination of two moving averages based on a 50 and 200 day length. The trend of the stock will move above and below these
moving averages and we will look for buy (sell) ideas when price will be above (below) both of them or during mild pullbacks affecting only the 50-day moving averages.
Given two or more signals on stocks in uptrend we use the relative strength versus its benchmark (usually the Eurostoxx 600 for European names and the S&P 500 for U.S.
names) to discriminate which one offers the best opportunity for a given signal. Again we like stocks in uptrend with a bullish relative strength as buy candidates.
Momentum (we use the classic MACD Moving Average Convergence Divergence Indicator) tells us where we are in the current phase of the trend. The MACD indicator
represents the difference between two moving averages of 12 and 26 days. If this indicator is widening, it confirms the trend in prices is healthy and accelerating. A possible
indication to reduce exposure in a stock that is in uptrend and outperforming is provided either by a short-term trend reversal toward the zero line of this indicator or by a
negative divergence between prices and the MACD indicator. New highs in price that are not confirmed by new highs in the MACD, are leading indications that the pace of the
trend is slowing down and a possible reversal is in the offing.
Finally we consider volume in our work in two forms: raw volume represented by a vertical histogram (red for negative trading sessions, blue for positive ones) and the OBV
indicator. Raw volume can indicate the underlying structure of buying and selling in the short-term: we like higher price on higher volume and lower prices on lower volume,
indicating a positive feedback in investors’ mentality. Spikes in volume are usually associated with climaxes and a short-term reversal is usually the norm. The OBV indicator tries
to help to answer the question whether the stock is under accumulation or distribution. The OBV indicator follows prices 95% of the time: we add (subtract) the volume of the day
if the close is positive (or negative) to a running total. A stock that has been for 2-3 months in a tight trading range with an OBV indicator that is breaking higher (lower)
provides a leading indication of accumulation (distribution) and helps the investor/trader to be prepare ahead of the breakout in prices.
Aviate Global’s technical rating system has seven categories to differentiate short-, medium-, and long-term time horizons. If there is no rating listed for a stock, Aviate Global is
neutral and has no opinion on the stock.
Speculative Buy: A short-term buying opportunity lasting up to one month with projected upside of 10% or more.
Buy: A medium-term buying opportunity lasting up to six months with projected upside of 25% or more.
Strong Buy: A long-term buying opportunity lasting more than one year with return potential of 50% or more.
Sell Short: A short-term selling opportunity lasting up to one month with projected downside of 10% or more.
Take Profit: Immediate closing out of existing position at a profit.
Sell/Reduce: Used for a stock with a deteriorating long-term technical outlook that is expected to have a very limited or negative return over the medium to long term.
Stop Loss: Immediate closing out of existing position at a loss.
Aviate Global’s technical ratings use specific return targets; returns are not guaranteed and are used for illustrative purposes only.
Chart sources: Bloomberg and Aviate Global LLP.

Global Disclaimer
Aviate Global LLP is authorised and regulated by the Financial Conduct Authority and is a member of the London Stock Exchange. Aviate Global LLP is registered in England and Wales No.
OC324323. Aviate Global (US) LLP is a broker dealer registered with the U.S. Securities and Exchange Commission, is a member of the Financial Industry Regulatory Authority (FINRA), and the
Securities Investor Protection Corporation (SIPC). Aviate Global (Asia) Limited (CE no. 1950254and BBY489) is licensed by the Securities and Futures Commission (SFC) of Hong Kong.
This note is circulated to you as a client of Aviate Global LLP. Please note that the views contained within may have been disclosed earlier today to some clients via Bloomberg. If you would like
to receive our earlier Bloomberg message, please contact Paul Moran on +44 20 7233 3218. Aviate Global LLP generates high conviction trading and investment ideas for its clients. It does not
carry out any proprietary trading or corporate advisory activities. Aviate Global’s publications are for the sole benefit of its clients. Unauthorised copying or distribution is prohibited.
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objectives of persons who receive it.
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This report has been prepared by Aviate Global LLP solely for the purpose of supplying information to the clients of Aviate Global LLP and/or its affiliate(s) to whom it is distributed. This report is
not, and should not be construed as, a recommendation, solicitation or offer to buy or sell any securities or related financial products. This report does not constitute investment advice, does not
constitute a personal recommendation and has been prepared without regard to the individual financial circumstances, needs or objectives of persons who receive it.

Riccardo Ronco MTA 2015 Symposium

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