Thursday, October 12, 2023

Speediness with trend-followers - choose medium term

 


All trend following is not the same, specifically with the look-back for finding the trend. You can be a fast (short-term) trend-follower or a slow (long-term) trend-follower and get very different return patterns; consequently, the speed of the trend-following will serve different roles within the portfolio. 

The long-term trend-follower will be able to capture the longer-term grinds lower or higher in prices and serve as an effect diversifier against long-term equity declines. The short-term trend-follower will capture any quick spikes in price and will have more positive skew. Hence, during the March 2020 market debacle from the pandemic, there was wide dispersion in performance. 

These issues are clearly described in "The Need of Speed in Trend-Following Investing". What has been found in this paper and has been often discussed before is that the medium to slow trends which have look-backs between 12 and 20 weeks are still the best trend length and will produce a Sharpe before costs of around 1. You may not do as well during the worst quantiles of equity performance with a longer trend model but overall, the return benefits will be stronger. A significant advantage of using longer-term models is that the transaction cost slippage is less. 

These return priors should help any trader or investor find the best trend strategy.  






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