Trading Systems and Methods, 6th Edition

CHAPTER 8Trend 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 trading rules and specific parameters that define the trend speed and an acceptable level of risk, among other factors. This chapter first discusses the rules that are necessary for all trading strategies and 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, ones 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) and many hedge funds. Some advisors are reported to be using the same trend systems devised in 1980. CTA total assets under management reached a record $343 billion in 2017, but a small part of the $3.37 trillion managed by all hedge funds. It attests to the long-term success of trend following.

WHY TREND SYSTEMS WORK

Trend analysis is the basis for many successful trading programs, some with audited performance spanning nearly 40 years. Being able to identify the trend is also important if you are a discretionary trader looking to ...