March 13, 2019

Trend Following Strategy

Trend following strategies have been popularized over the years through various success stories, long term track records of decent performance, and the ability to capture explosive moves without being an expert in every market. In the 90’s trend following systems were sold as packaged products for thousands of dollars to investors looking for an edge in the futures markets, and CTA managed accounts were starting to gain traction.

Over the years, better trading software packages evolved and platforms like Trading Blox, TradeStation, and TradersStudio came along to help traders build and test all kinds of trend following systems and ideas. This gave individual traders the power to build hedge fund style portfolios without paying excessive manager fees, and allowed more control over the trading in their account.
Today, trend following strategies are more popular than ever and perhaps the most deployed strategy in commodity futures and currency trading. Trend Following strategies provide a disciplined approach to getting in and out of the market, and take fear and greed out of the equation, which can destroy a traders account. Trend following strategies typically have a predetermined amount of risk on every trade, and an unlimited profit potential. The old saying “cut your losses short, and let your profits run” is what trend following strategies are all about. This type of approach can provide for some exciting opportunities to profit from supply/demand imbalances that tend to surprise market participants.

Trend following strategies by design will not pick a market top or a market bottom. Trend Following strategies are designed to buy a market that is rising with the expectation that it will continue to rise. Conversely, a trend following strategy will sell short in a market that it expects to continue moving lower. The ability to trade long and short provide trend followers with the opportunity to profit from supply/demand imbalances in commodity trends that can persist for months or years. Here’s an example of a Trend Following trade in Cotton:

The win/loss ratio for trend following strategies is fairly low, however the profit/loss ratio tends to be quite high. For this reason, trend following strategies require a lot of patience and discipline to take every trade and may be hard for some traders to follow. Taking consecutive losses in a sideways market, waiting for the next big trend can be frustrating. Here’s an example of a trend following strategy in Sugar with a failed breakout on a short trade, then another failure on a long entry.

For the patient investor trend following strategies can offer out sized returns and the ability to participate in some big trends that may be overlooked. With a simple trend following strategy and a diversified basket of markets traders can pick up on moves in markets they typically wouldn’t follow, like this trade in Palladium for example.

If you’re a savvy investor with an appetite for risk, and a good amount of patience, trend following strategies might be worth exploring. You can learn more about creating your own strategy or view available trading strategies. If you are considering building your own strategy there are several data packages and data providers that we recommend here . Feel free to contact us anytime with any questions.

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