Assessing Whether Trend Following Has Lost Its Effectiveness

Summary

The article considers two common concerns about trend following: that the strategy has become crowded and that unpredictable events make it unreliable. It argues that trend followers may reinforce existing trends, unlike some relative-value strategies whose opportunities can be competed away. However, crowded positioning may increase pressure when trends reverse, particularly when other investors behave similarly. The author also notes that unpredictable events have always existed and that human traders face them too.

For statistical evidence, the article refers to backtests of three equally weighted EWMAC rules across 37 futures and to a version restricted to data since 2000. It describes calculating rolling ten-year t-statistics on monthly returns as one way to assess whether performance has weakened. The supplied text includes no plotted results or final conclusion, so it does not establish whether trend following is dead. The backtests also represent a particular rule set and futures universe, and cannot alone settle how the strategy will perform under future market conditions.

Key ideas

• The article weighs crowding and unpredictable events as possible challenges to trend following.
• Trend-following positions may reinforce trends, while crowded exits could intensify reversals.
• The statistical discussion uses three equally weighted EWMAC rules across a futures universe.
• Rolling ten-year t-statistics on monthly returns are proposed to examine changes in performance.
• The supplied text provides no plotted findings or final verdict on the strategy.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.