Wednesday, October 06, 2010

Trend following is dead - apparently...

If you look around the internet, you will find plenty of articles and discussion in forums stating that trend following no longer works, trends aren't as good as they used to be etc, etc.

A lot of these articles say this has been the case for a while, probably as a result of the popularity of the Turtles experiment in the 1980's, meaning that the strategy has lost its edge. Even some of the traders interviewed in the Market Wizards books in the late 80's/early 90's thought that trend following was losing its effectiveness. 

Does this stack up?

Well, trend following would have also ensured that you grabbed monumental gains in the internet bubble in 1999/early 2000 (AND would have kept most of your profits), the bull market in 2003 to 2007, the market slump in 2008 and the subsequent rally in 2009.

In the December 2008 edition of Traders' Magazine, the noted trader Thomas Stridsman (author of Trading Systems That Work) constructed a simple trend following system and put it to work on a basket of 20 instruments. The system achieved returns of 180% per year, risking 0.5% of equity per trade, despite only having a winning trade percentage of 37.13%.

In my own trading, (which had been recorded on the MarketGuru website before its demise earlier this year) I was achieving returns over rolling 12 month period in excess of 100%, and at one point this was over 200%. (Refer to my post here).

Bearing these results in mind, I'm glad that there are lots of traders out believing that trend following no longer works...

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