Trend following - cautionary tale

[Silverston]

It seems to me trend following gets a bad press, I came across this article https://www.bloomberg.com/news/articles/2019-04-25/aqr-sees-reprieve-coming-for-beleaguered-trend-following-funds

Interesting trend followers have had a difficult few years, while stock market buy and holders looks like to have been the best bet, in hindsight. I just wonder if this phase might be drawing to a close and we get some good moves in other asset classes like commodities. I like trend following because although the win rate is sometimes pitifully low, it is predictable and you can bank on large moves coming along every so often. Remember the commodities super-cycle? that fizzled out after a few years in 2011 and remember when Oil was probably, 'never going to trade under $100' again? Now the Saudis are busy building wind farms...

Has anyone had any luck in recent years with a trend following approach?

 

[malaguti]

It seems to me trend following gets a bad press, I came across this article https://www.bloomberg.com/news/articles/2019-04-25/aqr-sees-reprieve-coming-for-beleaguered-trend-following-funds

Interesting trend followers have had a difficult few years, while stock market buy and holders looks like to have been the best bet, in hindsight. I just wonder if this phase might be drawing to a close and we get some good moves in other asset classes like commodities. I like trend following because although the win rate is sometimes pitifully low, it is predictable and you can bank on large moves coming along every so often. Remember the commodities super-cycle? that fizzled out after a few years in 2011 and remember when Oil was probably, 'never going to trade under $100' again? Now the Saudis are busy building wind farms...

Has anyone had any luck in recent years with a trend following approach?

If you're having trouble with a trend following approach, or the win rate results as you say are pitifully low, I'd argue the basis for your definition of the trend is incorrect
How anyone in the last 10 years could have issues trend following must look at their strategy

 

[tomorton]

What markets have you been trend-following?
I'll admit, the forex charts have been more rangey than trendy for months now. But previously the US indices were in superb multi-year uptrend. My best-yet trend-following performance.

 

[Silverston]

Great, I've been more looking to start again with several markets, daily forex, gold, silver, oil but as far as gold and silver go you could say they've been ranging for years now, while some forex pairs look good to trade off 4 hour charts rather than dailies for now. Its just that the daily trends would suit from the point of view of not needing much time to monitor and adjust positions.

 

[tomorton]

Daily trends are definitely the most productive field for trend-following, though trend-following only really pays well if you also pyramid the winning positions.

Brexit seems to have had the effect of dampening much movement in the major forex pairs until we see a clear resolution. Whatever the cause, these markets have been reluctant to form long-lasting trends. For a clear contrast, compare the Dow with weekly bars and a 50EMA for the last 3 months against GBP/USD. Right now, no major forex pair looks like its trending the Dow.

 

[Silverston]

Agree, the stock indices are really making headway versus forex which is choppy and compressed but once it resolves or begins to then it'll be good on the dailies, waiting to see.

Pyramiding, yes do you have a preferred method?, I worry that I will build the position and then it'll reverse to chop me out completely but again realise its the only way to really win in trend following is to add once its going your way - but I do like to add on pullback to the moving average while its still trending. Lets hope we get some more 'strong and stable' markets post B-day whenever that may be.

 

[Silverston]

If you're having trouble with a trend following approach, or the win rate results as you say are pitifully low, I'd argue the basis for your definition of the trend is incorrect
How anyone in the last 10 years could have issues trend following must look at their strategy

It just struck me that the article shows trend following funds have been struggling recently, maybe its just a good headline.

 

[tomorton]

"Trend-following is dead" is a headline that appears about as often as you see "Markets about to crash" or "The end of the world is nigh"......

As long as the trend continues, I continue to pyramid (continually). The basic framework is add another equal-sized trade with an equal capital risk as soon as unrealised profit = initial risk and move the first trade's SL to b/e. This means you now have a position of twice the size as the original but for the same risk as the initial trade. Then add another trade every time unrealised profit in the original trade reaches another multiple of its original risk. Don't wait for entry signals. I was very happy to once get up to 7 overlain trades on the Dow (long).

 

[Silverston]

"Trend-following is dead" is a headline that appears about as often as you see "Markets about to crash" or "The end of the world is nigh"......

As long as the trend continues, I continue to pyramid (continually). The basic framework is add another equal-sized trade with an equal capital risk as soon as unrealised profit = initial risk and move the first trade's SL to b/e. This means you now have a position of twice the size as the original but for the same risk as the initial trade. Then add another trade every time unrealised profit in the original trade reaches another multiple of its original risk. Don't wait for entry signals. I was very happy to once get up to 7 overlain trades on the Dow (long).

So you have effectively a ratcheting up/step up stop loss as you go along - only ever risking the open profits, all the while carrying more position size?

 

[tomorton]

Exactly.

There are draw-backs of course. Say the initial risk on Trade 1 is £100. When T1 reaches +£100, you move its SL to -£0 and add Trade 2 with a SL at -£100. Then Trade 3 and Trade 4 and so on, always moving all SL's forward by £100 each time a new trade is opened. It will be obvious that all the SL's will be hit by a pull-back so the loss of unrealised profits is quite an emotional knock. Also, that if you do let price hit the SL's to close all positions, if you only have 3 parallel trades, you don't make any profit, and this is galling to watch. If you have 4 parallel trades and the SL's are hit, you only make £200. Five trades with SL's hit brings back £500, which is fine but no better than just taking 5 consecutive trades with a £100 TP each. Its only when you get to 6 trades that SL closes give you a nice excess of profits. After that, the returns just go ballistic but by that time so many trends have collapsed.

No easy answers I'm afraid.