After a strong period for trend following — coinciding with volatile market jitters — we look back at the strategy performance over the last year and further. Does trend following have an equally strong 2015 in stock? And how can you best apply the strategy to your trading?
Swiss Franc spike, Crude Oil drop, Ruble jitters, the Euro registering a decade low… Volatile moves made the headlines in financial markets over the last few months.
At the same time — and maybe not so coincidentally — trend following has been posting, month after month, very strong performance.
New Market Conditions Beneficial to Trend Following?
In what is the best year since the exceptional 2008, our trend following index* returned 41.1% in 2014. It also just recently made new all-time highs — climbing out of a prolonged drawdown (Max DD: 34.31%) — and is back tracking its long-term average performance.
If January is any indication (+11.2%), it seems the strong performance is back.
Considering recent macro events, and how trend following was able to capitalize on them, it appears we are witnessing a change of “market regime”, more beneficial to trend following than the last few years’ environment.
The Eurozone problems, Greece, OPEC or the end of Quantitative Easing are all themes that could be sources of future trend following opportunities, in addition to the more classic supply/demand imbalances in individual markets.
Excellent Performance for Trend Following in 2014
Taking a look at the performance of our trend following index in 2014, we can see a “story of two halves”, with the returns all but coming from the end of the year, after a flat start.
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Trend Following in Historical Context: Solid Performance
If we take a “virtual step back”, and look at a longer timeframe, we can see that trend following seems to be reverting back to its long-term average (as shown by the blue trend line). The green line shows the index breaking to new all-time highs last month.
Best Markets and Trends of 2014
As you probably know, trend following does not predict market moves but reacts to them, with the aim of capturing returns from large, outsized moves.
Reviewing a few of the best trends posted by our index last year shows how the strategy capitalized on some of these unpredictable volatile moves.
Crude Oil Drop
Most market traders or commentators would never have predicted oil below the $50-a-barrel mark at the start of 2014. Yet, it did happen, and part of the energy complex is now in a strong downtrend since the Summer (generating large moves for trend following).
The chart shows a WTI Light Sweet Crude Oil trade example, entering a short position in July but similar trends could be found in Kerosene or Brent Crude.
Another big surprise for the markets was the move by the Swiss National Bank to suddenly drop the peg of their currency to the Euro. The resulting spike in CHF was seen by some traders as a real Black Swan event. The Swiss Franc is not part of our index portfolio but trend following still
benefited from that situation via the Swiss Bond.
The recent spike added to the profits from the long trend, held for most of 2014.
Along with the slide in the Ruble, the Euro made the biggest headlines in forex markets. Neither currency was included in our index portfolio, but on the other side of these down moves could be found the US Dollar Index, in a strong uptrend since the Summer.
Strong uptrend in the US Dollar Index since August.
“Under the Radar” Markets: Milk, Rice, Maize or Cattle
Another aspect of diversified/global trend following is its capacity to participate in smaller, less publicized markets, where trends can develop because of various imbalances.
Below are four charts illustrating some of the best trends in these individual markets.
Long Feeder Cattle
Short Rough Rice
Long Yellow Maize
Trend Following in 2015
Quantitative Easing (QE) has been designated as a possible “culprit” for creating a negative environment for trend following, artificially suppressing normal market behaviors and trends since 2008.
The end of QE and the apparition of volatile moves, coinciding with a trend following come-back, can be seen as good signals for trend following to keep performing in 2015.
Trend Following and System Trading
As a strategy, trend following naturally lends itself to system trading. The mechanical rules remove trading emotions and enable traders to monitor and take signals from dozens or hundreds of markets.
But running and executing a trading system still requires time commitment and knowledge of the markets. This is why, at Wisdom Trading, we have decided to offer our clients a simple solution for accessing system trading and trend following.
With our outstanding system execution service, you can free yourself from the day-to-day execution of your trading system. Leverage our expertise, robust infrastructure and extensive market access — and let us handle the workload. With more time, less stress, you will still reap the same trading
We can execute your system (in full confidentiality) or provide you with our proprietary systems — available exclusively to our clients. These systems can be customized to your preferences (trading capital, portfolio, risk levels) and are ready to be deployed in the markets, working for you.
And of course, you always get access to our excellent level of service and one of the widest market coverage in the industry, for increased trading opportunities.
Please find below the 2014 performance for 4 different versions of LTX — our trend following system accessible to smaller accounts — which averaged +52.4% last year:
LTX-6: +82.9% (Max DD: 13.0%)
LTX-8: +45.0% (Max DD: 10.6%)
LTX-12: +46.0% (Max DD: 7.6%)
LTX-16: +35.8% (Max DD: 8.9%)
Start Trend Trading with Wisdom
Whether you’re new to trend following or a seasoned veteran, whether you want to use your own system or leverage our LTX system, we can help with your trading.
Additionally, if you’re looking for complementary strategies to diversify, we also offer a range of other proprietary trading systems.
If you’d like to discuss how to get started with our trading system execution service, simply give us a call or send us an email. We will be happy to discuss your requirement and build custom simulation
reports to get you started on the path to systematic trading.
* Click here for our trend following index methodology and to subscribe
Commodity Trading involves high risks and you can lose a significant amount of money. Commodity trading is not suitable for many investors. Any performance results listed in all marketing materials represents simulated computer results over past historical data, and not the results of an actual account. All opinions expressed
anywhere on this website are only opinions of the author. The information contained here was gathered from sources deemed reliable, however, no claim is made as to its accuracy or content. Different testing platforms can produce slightly different results. Our systems are only recommended for well capitalized and experienced futures traders.
CFTC-required risk disclosure for hypothetical results
Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. in fact, there are frequently sharp differences between hypothetical performance results and the actual
results subsequently achieved by any particular trading program.
One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability
to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.