Trend following is an investment strategy based on the technical analysis of market prices, rather than on the fundamental strengths of the companies. Wikipedia
My own view is that trend following is not necessarily based on technical analysis, which can sometimes have a bad name. I believe trend following is more about the philosophy that long term trends are a natural phenomenon of market cycles. It works because it is able to capture the ‘long tail’ of market returns. In that regard, it is a unique and effective strategy. But like any good strategy, the rules need to be followed in order to capture the returns.
If you’re still not convinced have a look through Google Scholar and see what you can find. This journal for example looks into the performance of trend following for hedge funds, while this classic white paper ‘strongly suggests‘ that trend following on stocks has a ‘positive mathematical expectancy‘.
As well, the quantitative encyclopedia, Quantpedia lists a number of attractive trend following strategies.
For what it’s worth, I have done hundreds of back-tests myself and have found that trend following works very well on stocks. (I will be posting some of these up at a later date). So here are 29 rules, for trend following stocks:
29 Rules for trend following stocks
1. Price is everything.
2. Ignore the news.
3. Buy a stock when it breaks out of a range.
4. Sell a stock when the trend changes.
5. Buy a stock when it makes a new high.
6. Short a stock when it makes a new low.
7. It’s harder to short stocks than it is to buy stocks.
8. Some stocks trend more than others.
9. Diversify when you can.
10. Ignore the whipsaws.
11. Don’t chase the market.
12. Let your winners run.
13. Cut your losses short.
14. A stock can always go higher and always go lower.
15. Don’t get out before the trend changes direction – look to catch the middle.
16. Trend followers have more losers than winners.
17. 40% is a good percentage of winners for trend following stocks.
18. Put your stops far enough away to allow the trend to develop.
19. Don’t fall in love with a stock.
20. Don’t pick bottoms.
21. Don’t pick tops.
22. Don’t try and predict the market – go with the flow.
23. Follow your signals.
24. Trade small enough you won’t go broke and large enough to make it worthwhile.
25. Compound your returns.
26. Trend following stocks works best with a system.
27. Back-test your system.
28. Don’t forget delisted stocks.
29. Stick to the system.
Thank You For Reading
Joe Marwood is an independent trader and the founder of Decoding Markets. He worked as a professional futures trader and has a passion for investing and building mechanical trading strategies. If you are interested in more quantitative trading strategies, investing ideas and tutorials make sure to check out our program Marwood Research.
This post expresses the opinions of the writer and is for information, entertainment purposes only. Joe Marwood is not a registered financial advisor or certified analyst. The reader agrees to assume all risk resulting from the application of any of the information provided. Past performance is not a reliable indicator of future returns and financial trading is full of risk. Margin trading can lead to losses more than in your account. Mistakes in backtesting and presenting of analysis regularly occur. Please read the Full disclaimer.