Trend-Following Trade Outcomes Depend on Volatility and Asymmetry

Summary

The document presents an exact solution for a simple trend-following strategy and describes the resulting distribution of profit per trade. Rather than treating outcomes as symmetric, the model produces an asymmetric, option-like distribution whose shape varies continuously with strategy parameters and the volatility of the traded asset.

The model’s average profit per trade is always zero, while the share of winning trades falls as volatility rises: it ranges from one half at low volatility to zero at high volatility. The authors argue that win rate alone therefore does not measure strategy reliability; in this model, it reflects the strategy’s trading style. These are analytical results for a simple model, not evidence of profitability after costs or a guarantee about real trend-following systems. The short description does not provide the model’s assumptions or further risk measures, which limits direct application to trading decisions.

Key ideas

• An exactly solved simple trend-following model yields an asymmetric profit-per-trade distribution.
• The distribution’s shape depends on strategy parameters and asset volatility.
• The model has zero average profit per trade across the described conditions.
• The winning-trade fraction declines with volatility, so win rate alone does not indicate reliability.
• The conclusions concern a simple analytical model and do not establish net performance in live trading.

Tags

# Trend followers lose more often than they gain


# Trend followers lose more often than they gain









We solve exactly a simple model of trend following strategy, and obtain the analytical shape of the profit per trade distribution. This distribution is non trivial and has an option like, asymmetric structure. The degree of asymmetry depends continuously on the parameters of the strategy and on the volatility of the traded asset. While the average gain per trade is always exactly zero, the fraction f of winning trades decreases from f=1/2 for small volatility to f=0 for high volatility, showing that this winning probability does not give any information on the reliability of the strategy but is indicative of the trading style.

Shown in full with attribution under the source's licence. Licence: abstract CC0

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