Ending a Myth : Are All Trend-Following Systems Long Term Strategies With Many Losses and Few Profitable Trades ?

When you talk to retail traders about the different types of trading systems available there seem to be some general misconceptions about the different kinds of trading strategies. It seems that many new traders view scalping techniques as the “way to go” if you want to make “a lot of money” and trend following as a Jurassic approach to trading that “doesn’t work as well anymore” and was used successfully in the 80s, 90s, etc. On top of this many traders prefer not to use trend following systems because they believe that these systems take a long time to close open trades – leaving them open for days or months – and that just a few trades through a few years bring home the overall profitability of the systems. It seems that traders perceive trend following as an out-dated trading technique that aims for very long term profits in which most trades come out as losers but just the few that profit make the systems worth while.

It is quite straightforward to see where all these errors come from since the most well known trending systems people new to forex trading come into contact with are systems with the above mentioned characteristics. For example the turtle trading system takes about 100-200 positions every ten years and from those the overall profitability depends on about 10% which reach very profitable outcomes. These positions generally last for a few months and most other positions tend to come out either as slightly profitable trades or as trades that hit the stop loss. These are the trending systems people think about when they picture them in their mind, a turtle like system which is robust but loses most of the time, takes ages to see results and holds trades for weeks or even months.

It is important now to talk about the various misconceptions around this and why “trend following” is a much wider area of system development that does not only cover the above systems but many other sets of trading strategies that behave quite differently. First of all we must understand that a trend is merely a directional movement on a given instrument which is evident to the naked eye. When you open up a currency pair chart on a given time frame and plot a straight line from where price started on the left side of your screen to where it ends and the line points clearly upwards or downwards the market is said to be “trending”. Trends develop differently across many different time frames and directionality can be caught under many different circumstances and criteria.

Not all successful trend following systems behave as the turtle trading system – which sells low and buys high, attempting to catch further progression – but many other systems behave in a “sell high, buy low” manner in which they attempt to follow trends by entering trades within price retracements. Also not all systems attempt to catch “month long trends” but many – and most in fact- attempt to catch much smaller trend which develop on the 4 or 1 hours charts. Trend following systems happen on a wide variety of “shapes and colors” and there are different systems to fit almost all kinds of investors (all except perhaps the exceedingly greedy, rich by tomorrow type).

Trending systems that attempt to capture hourly trends behave very differently than their bigger cousin – like the turtle trading systems – that aim for the daily, weekly or monthly trends. Systems that attempt to capture trends within the one hour charts tend to trade much more frequently and they tend to have higher winning percentages with higher risk to reward ratios. This means that although an hourly trend following system may capture trends more frequently the magnitude and profitability of these captures is not as high as the profit per trade relative to the average loss obtained by systems which are geared to capture trends in higher time frames. Systems that attempt to capture trends in the 1 and 4 hour charts also need to adapt much faster to market conditions – to adequately measure the extent of market movements – and for this reason usually volatility indicators with lower periods are used to adapt the systems against faster changes in overall market volatility.

However it should be clear that it is an overall mistake to picture all trend following systems as having equal characteristics. Although all trend following systems attempt to profit from the development of directionality within a given instrument, the fact is that the many ways in which this directionality develops and the many ways in which trading systems can enter and exit trades makes any assumptions about their overall profit to loss ratios, winning percentages or trading frequency inaccurate. There are many trend following systems that trade at 1:1 or even slightly higher risk to reward ratios while others trades at 1:5 risk to reward ratios, there are some that trade twice a week and others that trade twice a month, some win 30% of trades within a ten year period while others win 60%, etc. The overall characteristics of the systems are very variable and for this reason it is not correct to picture all trend following systems as copies of very long term strategies such as the turtle trading system.  In the end the only thing they all have in common is that they attempt to follow a given trend developing on a given time frame, nothing less, nothing more.

If you would like to learn more about the development of trend-following strategies that fit your trading personality with sound trading tactics and realistic profit and risk targets please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)

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2 Responses to “Ending a Myth : Are All Trend-Following Systems Long Term Strategies With Many Losses and Few Profitable Trades ?”

  1. Chris says:

    Daniel-

    Based on the way Atinalla #1 has been trading lately, I think you might be onto something here. On a good week, my best scalper makes 2.5%, while Atinally #1 is up 5% this week already and its only Wednesday!

    Keep it up and we’ll be watching..

    Chris

  2. admin says:

    Hello Chris,

    Thank you very much for your comment :o) Well, if you analyze the 10 year backtests of Atinalla you will see that the system has a wide weekly distribution of returns which can go from losses of 7-10% to exceedingly profitable weeks of 20-40%. The key here is that the systems most of the time do not tend to agree with each other -therefore hedging their profits/losses to some extent – but when trends are clear they eventually agree and give accounts a lot of profit. The systems follow trends but do not do so like the turtle trading system :o) Thank you very much again for your comment !

    Best Regards,

    Daniel

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