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Trend-Following Without the Whiplash?

June 30, 2011

A lot of research has been written on combining mean-reversion with trend filters, but surprisingly little if no recent research has focused on the opposite approach:  attempting to follow the trend with less whiplash. What does that mean? Well anyone who has had the experience of trying to follow a trend typically has to endure the pain of buying their position and having to soon after exit the position at a lower price. Trend followers also experience being profitable for long periods of time, only to have the position suddenly and violently reverse and hand them a tidy loss.  Ironically one of the funny things that happens after such an event is that the market often bounces considerably higher in the short-term. The obvious solution to these problems is to create a counter-trend  delayed entry and exit using short-term mean-reversion indicators. However what is missing from this proposed solution is a generalized framework for determining how and when to use such methods. More on this to follow……….

3 Comments leave one →
  1. Alex permalink
    July 1, 2011 8:50 am

    Great points. I’ve been trading GLD lately with a simple strategy. Using 200MA as my long term trend indicator, I enter when RSI(2)50. It’s a bit more frequent trading but I maintain the same long term return as holding GLD (>200MA) but with half the volatility. I’m interested in potential improvements.

    Another option is to use options. Call spreads are inexpensive and capture most of the upside exposure. Rolling positions of call spreads is one idea. Buying puts (calls) when the short term is overbought (oversold) is another risk management solution.

  2. Dave E permalink
    July 7, 2011 3:25 pm

    Hi Alex

    Very nice yet simple strategy. Thanks for sharing I’ve used it to solve a puzzle on commodity & FX markets I’ve had for some time.

    Many thanks

    Dave

  3. jack permalink
    July 29, 2011 7:36 pm

    so… will something follow ?

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