Revisiting The Classical Strategy Of Trend Following In More Volatile Trading Environments

Authors

  • Pi Rey Low Raffles Institution (2015-2020)

DOI:

https://doi.org/10.47611/jsrhs.v11i3.3288

Keywords:

Financial Technology, Trend Following, Volatile Trading Envrionments, Time Series Data, Technical Analysis

Abstract

Trend-following strategies (TFS) have been well-established for their effectiveness in analysing stock prices for decades. However, there remains a pressing need to revisit and analyse their performance in today’s increasingly volatile financial environment. First, this study investigated their profitabilities with respect to the S&P500 fund over the past 10 years. The fund’s consistent and strong uptrend over the 10-year period resulted in TFS being unable to outperform the passive buy-and-hold strategy. Longer moving averages and breakout lengths were more profitable given the fund’s bullish nature. Additionally, it was found that exponential moving averages were more effective than simple moving averages. The study also established that trading more frequently, such as daily, had no advantage over trading weekly or monthly. TFS incorporated with stop losses were largely ineffective and were only profitable when market prices displayed strong and consistent trends. Second, this study examined the relevance of TFS in varying economic climates by using data across various market sectors and time periods. It was found that TFS performed better when prices display both bullish and bearish trends as opposed to when prices only trend in one direction or experience frequent fluctuations. Given the steady uptrend in the S&P500 fund in recent times, the effectiveness of these strategies have deteriorated compared to the past where price patterns were less consistent. Thus, it can be said that the relevance of TFS have diminished for funds displaying consistent one-directional trends, like the S&P500 fund, or extremely volatile price patterns.

Downloads

Download data is not yet available.

References or Bibliography

Fong, S., & Tai, J. (2009). The application of trend following strategies in stock market trading. 2009 Fifth International Joint Conference on INC, IMS and IDC. https://doi.org/10.1109/ncm.2009.402

Fong, S., Si, Y.-W., & Tai, J. (2012). Trend following algorithms in automated derivatives market trading. Expert Systems with Applications, 39(13), 11378–11390. https://doi.org/10.1016/j.eswa.2012.03.048

Ostgaard, S. (2008). On the Nature and Origins of Trend-Following

Covel, M. W. (2005). Trend following: How great traders make millions in up or down markets. Financial Times Prentice Hall.

Szakmary, A. C., Shen, Q., & Sharma, S. C. (2010). Trend-following trading strategies in Commodity Futures: A re-examination. Journal of Banking & Finance, 34(2), 409–426. https://doi.org/10.1016/j.jbankfin.2009.08.004

Hurst, B., Ooi, Y. H., & Pedersen, L. H. (2010). Understanding managed futures. AQR Capital Management, 3.

Wilcox, C., & Crittenden, E. (2005). Does Trend Following Work on Stocks?. The Technical Analyst, 14, 1-19

ap Gwilym, O., Clare, A., Seaton, J., & Thomas, S. (2010). Price and momentum as robust tactical approaches to global equity investing. The Journal of Investing, 19(3), 80–91. https://doi.org/10.3905/joi.2010.19.3.080

James, J. (2003). Simple trend-following strategies in currency trading. Quantitative Finance, 3(4). https://doi.org/10.1088/1469-7688/3/4/604

Ilmanen, A. (2011). Expected returns. https://doi.org/10.1002/9781118467190

Friesen, G. C., Weller, P. A., & Dunham, L. M. (2009). Price trends and patterns in technical analysis: A theoretical and empirical examination. Journal of Banking & Finance, 33(6), 1089–1100. https://doi.org/10.1016/j.jbankfin.2008.12.010

Clare, A., Seaton, J., Smith, P. N., & Thomas, S. (2016). The trend is our friend: Risk parity, momentum and trend following in global asset allocation. Journal of Behavioral and Experimental Finance, 9, 63–80. https://doi.org/10.1016/j.jbef.2016.01.002

Faber, M. T. (2010). Relative strength strategies for investing. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1585517

Moss, A., Clare, A., Thomas, S., & Seaton, J. (2015). Trend following and Momentum Strategies for Global reits. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2615686

Fong, S., Tai, J., & Si, Y. W. (2011). Trend following algorithms for technical trading in stock market. Journal of Emerging Technologies in Web Intelligence, 3(2). https://doi.org/10.4304/jetwi.3.2.136-145

Shynkevich, A. (2012). Performance of technical analysis in growth and small cap segments of the US equity market. Journal of Banking & Finance, 36(1), 193–208. https://doi.org/10.1016/j.jbankfin.2011.07.001

Clare, A., Seaton, J., Smith, P. N., & Thomas, S. (2013). Breaking into the Blackbox: Trend following, stop losses and the frequency of trading – the case of the S&P500. Journal of Asset Management, 14(3), 182–194. https://doi.org/10.1057/jam.2013.11

da Costa, T. R., Nazário, R. T., Bergo, G. S., Sobreiro, V. A., & Kimura, H. (2015). Trading system based on the use of technical analysis: A computational experiment. Journal of Behavioral and Experimental Finance, 6, 42–55. https://doi.org/10.1016/j.jbef.2015.03.003

Grebenkov, D. S., & Serror, J. (2014). Following a trend with an exponential moving average: Analytical results for a Gaussian model. Physica A: Statistical Mechanics and Its Applications, 394, 288–303. https://doi.org/10.1016/j.physa.2013.10.007

Papailias, F., & Thomakos, D. D. (2015). An improved moving average technical trading rule. Physica A: Statistical Mechanics and Its Applications, 428, 458–469. https://doi.org/10.1016/j.physa.2015.01.088

Annaert, J., Osselaer, S. V., & Verstraete, B. (2009). Performance evaluation of portfolio insurance strategies using stochastic dominance criteria. Journal of Banking & Finance, 33(2), 272–280. https://doi.org/10.1016/j.jbankfin.2008.08.002

Lei, A. Y. C., & Li, H. (2009). The value of stop loss strategies. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1214737

Klement, J. (2013). Assessing stop-loss and re-entry strategies. The Journal of Trading, 8(4), 44–53. https://doi.org/10.3905/jot.2013.8.4.044

Kaminski, K., & Lo, A. W. (2008). When do stop-loss rules stop losses? SSRN Electronic Journal. https://doi.org/10.2139/ssrn.968338

Han, Y., Zhou, G., & Zhu, Y. (2016). Taming momentum crashes: A simple stop-loss strategy. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2407199

Yang, C., & Zhang, Z. (2021). Realization utility with stop-loss strategy. The Quarterly Review of Economics and Finance, 81, 261–275. https://doi.org/10.1016/j.qref.2021.06.017

Hurst, B., Ooi, Y. H., & Pedersen, L. H. (2017). A century of evidence on trend-following investing. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2993026

Published

08-31-2022

How to Cite

Low, P. R. (2022). Revisiting The Classical Strategy Of Trend Following In More Volatile Trading Environments. Journal of Student Research, 11(3). https://doi.org/10.47611/jsrhs.v11i3.3288

Issue

Section

HS Research Projects