09 Oct The Death of Trend Following?
The Death of Trend Following?
Oct. 9, 2023
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There’s been a lot of whining this year about how bad the markets have been, from Stocks to Futures to Forex.
You’ve heard some of that in this Newsletter.
The thing is: the whiners aren’t wrong.
Here’s an update from 40in20out.com. They use pure trend following on a basket of Futures contracts, and they’ve been beating the market by exponential amounts for the past few years. Until, 2023, that is.
In 2023, they’re negative:
They’ve made over 100% with this hypothetical portfolio in recent years. But not this year.
And how about my favorite firm, Purple Valley? It’s posted massive returns in the past and is 100% trend following.
What’s it done in 2023?
It’s down quite a bit.
And I’ve seen several of my Forex trend following robots underperform in 2023 (unlike the Hornet or the Heron).
So, is trend following dead?
Let’s dig deeper.
First, what are the big rules of trend following?
One is that you never have price targets. This rule, though, is not exactly true. The evidence shows that having targets is actually quite profitable. Many times more profitable.
Another big trend following rule is to use tight stops. That one makes sense and holds up.
Three, never use break-even. That also makes sense. If we’re looking to ride a big trend for a big win, we have to let the trade wiggle back-and-forth. Trying to psychologically get a “free ride” on the trade is enticing, but trend followers say that’s a big no-no.
I didn’t totally believe that one, though. I’ve seen testing over decades with break-even systems that looks good.
But then 2023 came along.
And 2023 has gobbled up break-even methodologies like a hungry alligator.
Of all the things that have hurt trend following this year, moving to break-even is number one.
Here’s an example.
This is a simple trend following Bollinger Band™ on a 1-hour chart using the GBPJPY in 2023. It has a big profit target (check), a much-smaller stop (check), and no break-even (check). Here’s the Report for this year using 1 lot each time:
Not bad. It hasn’t traded a lot but it’s hypothetically decently profitable. The markets this year haven’t overwhelmed it.
And here’s the exact same strategy with a move to break-even at 180 pips:
Yikes. It loses money. The twisty, psychotic markets of ’23 pummeled the psychological crutch of break-even into the dirt.
In our upcoming Newsletters, we’ll go over the details of this no break-even strategy and we’ll even talk about a few more. (In the meantime, you can watch this video on a different Bollinger Band strategy.)
Talk to you soon.
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.
HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.