What is making 2022 special for trend-followers? Many have suggested that the higher inflation environment is the answer. Others have suggested that market uncertainty which has slowed decision-making is the key, and finally there are those that say we are in a crisis from geopolitical risks. I have suggested that these are good reasons, but the answer often can be even simpler as we have discussed in our post, Turning points kill trend-following performance.
If there are fewer turning points in each asset, there will be higher Sharpe ratios for a trend-following strategy. If trends last longer than expected with fewer reversals, the strategy will be a winner. The trends can be shallow, or they can be steep, but if they continue, profits will be made. Count the turning points and you will have a good idea of whether there it will be a good for trends.
From the referenced paper, "Breaking Bad Trends", there is a clear linear relationship between turning points and return. A good trend environment has four or less major turning points in a given market for a 12-month period.
Look at some of the major markets for 2022 guidance on why this is a good year especially for long-term trend-followers. For this year, equities have had 4 major switches between 20-day and 80-day moving averages. The 10-year bond, dollar index, and corn have had one switch and oil has had three switches. This does not account for the size of the move but gives an indication of switching costs. The low switch markets have been major winners.
The one thing that is certain for trend-following, the less trading you must do the better will be your performance. If I am working hard at trading, I am not making money. If I am bored with my activity, it is the best of times.
No comments:
Post a Comment