Trading Systems and Methods, + Website, 5th Edition

CHAPTER 8

Trend Systems

The previous chapters developed the tools for calculating trends—a traditional moving average, various weighted averages, exponential smoothing, and regression. To profit from identifying the trend requires the use of trading rules and the selection of specific parameters that define the trend speed and an acceptable level of risk, among other factors. This chapter first discusses those rules that are necessary to all trading strategies and then gives examples of actual systems. The selection of trend speed is handled only briefly here but is continued with a detailed analysis of these and other systems throughout the book, and especially in Chapter 21. It is most important to find trends that are robust, that is, that work across many markets and under varied economic conditions. At the same time they must satisfy an investor’s risk tolerance. It is a difficult balance.

Trend systems are the preferred choice of Commodity Trading Advisors (CTAs). Some advisors are reported to be using the same systems devised in 1980. Barclay Hedge (BarclayHedge.com) reports that hedge funds had a total of $1,762.9 billion under management as of the first quarter of 2012, and managed futures totaling $328.9 billion. Investments from both institutions and individuals have been flowing into the industry at an increasing rate, up almost 500% since 2002.

WHY TREND SYSTEMS WORK

Trend analysis is the basis for many successful trading programs, some with audited performance published ...