The Trend Follower Trading Strategy
By: Y. Black
In order to work with the millions of pieces of information our brains are bombarded with every day, people subdivide and categorize data. There is no such thing as a ‘general’ band; it is either a jazz band, a string quartet, or one of the many kinds of rock such as ‘oldies,’ hard rock, a pop cover band, and so on. The same thing is true with stock mutual funds. Every fund is labeled based on its focus: it’s an emerging markets fund, a technology fund, a small cap fund, large cap fund, etc.
Although some people try to avoid categorizing, Attain Capital attempts to categorize different CTA programs by various styles of trading, and highlights a specific, promising futures trading system every so often in their Strategy Focus newsletters. For their publication, they have invented their own category named Systematic Multi-Market Commodity Traders / Managed Futures Programs.
It’s a mouthful, and don’t feel bad if you’re not clear what it means. As with other crossover categories such as ‘country rock’ or a highly-diversified mutual fund, you may not always find a perfect, existing category to place a new entity into.
Trend Followers - On the Way Out?
Most of the managed futures programs discussed here were once popularly known as trend followers. However, this categorization does not fit them aptly because the strategies have changed and expanded whereas they now move contrary to trends, trade within very short time periods, and so on.
For these reasons the category called ‘trend follower’ is slowly going extinct, even though a recent Wall Street Journal news story specifically referred to ‘Trend Following Funds,’ which could refresh the vitality of the name for a while longer.
The names that were dropped in the WSJ article are well-known staples within the managed futures community, including Campbell & Co, John W. Henry, and Winton Capital; names that manage billions and billions utilizing strategies that can - in general at least - be called ‘trend following.’
Basically, the ‘trend follower’ strategy brackets the market with a technique such as moving averages that include 90 on the way up to memorable, record high prices.
Can we blame the hedge funds for ‘profit taking,’ which would otherwise have kept the trend line above the moving average?
No matter what the complicated set of factors were, it definitely negatively affected the ‘trend following’ strategists. Since the major players were hurting - or at least not profiting as much as had been anticipated - the quantity of CTAs subscribing to the trend-follower strategies shrank, and more and more investors moved over to alternative strategies - such as options trading - which were performing much better during that period.
However, rather than giving up on the trend following techniques, many managers evolved and adapted. By shortening the trading timeframe, they applied the strategies to periods as short as a few days in duration. They added filters to their analyses to eliminate losing trades during periods of low volatility. Traders also moved into new, sometimes more exotic, commodities, such as Japanese rubber or Malaysian palm oil. Mostly though, they simply became more patient and analytical, and waited for the desired levels of volatility to come back.
Article Source: http://www.ezarticles.info
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