Systematic trend-following strategies represent a subset of technical analysis as applied to futures contracts. Substantial academic and practitioner research on the profitability of technical analysis has been published. Though some may place technical analysis in the same category as astrology, there are sound theoretical explanations for the profitability of trend-following systems.

As previously discussed, arbitrageurs help move prices toward their fundamental values but are unable to fully move the market due to risk aversion, capital constraints, or position limits. The result is that the price may display trends that can be detected through technical analysis. The common argument for trend-following prices is based on a delayed movement toward equilibrium after new information enters the marketplace.

Before discussing the available empirical evidence, we summarize the three basic building blocks of technical analysis.19

1. Moving average–based systems. Moving average–based systems are the most simple and popular trend-following trading systems among practitioners.20 In a simple moving average–based system, long or short positions are taken depending on whether the current price is above or below a given moving average of past prices of the same asset. In a dual crossover moving average–based system, trading signals are generated by comparing the current value of a short-term moving average to the current value of a long-term ...

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