Trend Following Trading-investing Concerns
The mainstream trend following advertised hype, expanded off the phrase “the trend is your friend…” does not provide optimal results. Mutual funds and investment advisors often use past market rallies to engage potential investors. The astute investor however questions the effectiveness of the theme.
Low Winning Rate
Revealed in “Trend Following” by Michael Covel, historical performance statistics of numerous trend-following schemes present winning rates of roughly 40% at best. Less than half of the trades became winners. The numbers suggest that the markets normally do not experience emotionally waves of charged buying or selling, where prices move in a smoothed unidirectional “trend”.
Losing Streaks
Volatility fluctuates, and when it lowers (as some newbie traders term a “ranging market period”), trend followers experience large strings of losing trades. The “draw downs”, or simply “devastating losses” from the typically uninformed public, occur frequently in trend-following investment strategies.
Forced Minuscule Position Sizing
Losing streaks lead to account blow ups unless meticulous risk management is enforced. 15-20 consecutive losing trades often occur with trend followers. Those with some experience in position sizing then must allocate minimal amounts of capital toward each trade to avoid high risk of ruin; it often sways in the range of 1% to 5% per position.
Uncertain Potential Sizes of Winning Trades
The cliché, “cut your losers and let your winners run” does not work well in practical finance. It presents many uninformed public with an illusion of unnecessary exit plan, where it all just becomes a blur. Without definite designs for profit maximization, winning often results from luck rather than skill.
Required Improvements for Profitable Trend Following
With low winning rates, diminutive position size allowance, and uncertainty of exit schemes, this trading/investment theme could use a whole lot of refining. With a few tweaks in volatility exploitations and definite exit strategies, mentioned at Optimizing Trend Following Strategies, higher winning rates and improved, positive expected net profits become possible.
The Mathematical Think-Tank
http://matdays.blogspot.com
Tags: intelligent investor, risk management, stock investing, stock trading, trading strategy, trend following
