Mechanical Moving Average Trend Following and Its Behavioral Demands
Summary
This essay argues that trend following can exploit the tendency of traders to seek high win rates, take profits early, and let losses run. It recommends simple, rule-based systems that avoid future information and do not depend on extensive parameter tuning. It also acknowledges that markets require judgment in choosing instruments, parameters, and entry signals, and that a trader must tolerate uncertainty and repeated losses to follow a system consistently.
The author compares three moving-average signal types: price crossing one average, a crossover between two averages, and a moving average turning direction. These approaches trade off responsiveness, exit clarity, and false signals. The discussion uses hypothetical and personal experience rather than systematic performance statistics, and it emphasizes that losses may cluster before a large trend gain arrives. Its claims about trader behavior and persistence are reflections, not validated evidence that a particular rule or market will be profitable.
Key ideas
- Trend following seeks favorable payoff asymmetry rather than a high proportion of winning trades.
- The author favors simple rules that can be applied without future knowledge of market regimes.
- Moving-average signals can use price crossings, two-average crossovers, or changes in an average's direction.
- Faster signals tend to produce more false triggers, while slower signals can react late and leave exit prices less precise.
- A trend-following approach may involve long losing streaks, so consistency and tolerance for uncertainty matter.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.