Does trend Following Work on Stocks....

This is a discussion on Does trend Following Work on Stocks.... within the First Steps forums, part of the Reception category; Greetings. This is an area of interest to me and I thought I would add to the T2W collective knowledge ...

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Old Sep 25, 2007, 11:48am   #1
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Does trend Following Work on Stocks....

Greetings. This is an area of interest to me and I thought I would add to the T2W collective knowledge by posting this study here.
Aptly Named... "Does Trend Following Work on Stocks"

http://www.trendfollowing.com/whitep..._on_stocks.pdf
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Old Sep 25, 2007, 2:30pm   #2
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What a great read, thanks.

1000+ signals a year is a bit much though. What filters could be used to bring that down to a more reasonable amount? p/e ratio?

Also the effect of dividens is stressed in the article, how do dividens work with respect to derivatives like options and spread betting?
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Old Sep 25, 2007, 3:52pm   #3
 
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Interesting paper. One way to cut the numbers down would be to do the scan on UK stocks rather than US. I can't see why the outcome would be hugely different. Alternatively, focus on a particular market cap range.

I'm not surprised by the conclusion: I can see the reasons why stocks trend at least as strongly as forex, commodities, etc, particularly the small- or mid-caps where it takes a while for a 'story' to gather momentum as more and more fund managers jump on board and the whole thing starts rolling, while at the fundamental level it starts delivering the growth which ratchets down the p/e each year.
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Old Sep 25, 2007, 4:00pm   #4
 
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Originally Posted by maxwe789 View Post
What a great read, thanks.

1000+ signals a year is a bit much though. What filters could be used to bring that down to a more reasonable amount? p/e ratio?

Also the effect of dividens is stressed in the article, how do dividens work with respect to derivatives like options and spread betting?

max,

dividends are priced into the spreadbet quote, so you'll still get the benefit.

You could filter down the list by screening for those with earnings growth, for a starter.

Cheers,
UTB
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Old Sep 25, 2007, 4:18pm   #5
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*JDR* started this thread With regards to filters, personally if I were using this strategy I would "attempt" to reduce my risk a little by filtering out shares with very high ATR's. Understandably this may affect the profitability of the system, but without backtesting I couldn't be sure.
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Old Sep 25, 2007, 4:28pm   #6
 
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As with most (all?) academic studies of this sort, it leaves out some of the more important -- some would say essential -- points, such as where is the stock in its ongoing trend of ever-higher highs. If it's over-extended, you have a problem. If it's just made a new high after having emerged from an accumulative base, then the odds on your side are much better.

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Old Sep 25, 2007, 4:39pm   #7
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*JDR* started this thread
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Originally Posted by dbphoenix View Post
As with most (all?) academic studies of this sort, it leaves out some of the more important -- some would say essential -- points, such as where is the stock in its ongoing trend of ever-higher highs. If it's over-extended, you have a problem. If it's just made a new high after having emerged from an accumulative base, then the odds on your side are much better.

Db
Have to agree. Their entry criteria is somewhat simplistic. I wonder what the results of this study would have been if they identified a trend and then entered only when it retraced to an important support area such as the 20/50sma ?

Done any work in this area DB ?
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Last edited by *JDR*; Sep 25, 2007 at 4:39pm. Reason: typo
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Old Sep 25, 2007, 4:49pm   #8
 
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Have to agree. Their entry criteria is somewhat simplistic. I wonder what the results of this study would have been if they identified a trend and then entered only when it retraced to an important support area such as the 20/50sma ?

Done any work in this area DB ?
As far as a statistical study, no. Never felt any need to once I understood the nature of accumulation and distribution and support and resistance (and demand/supply, etc, etc).

The problem with studies of this sort as applied to the markets is that criteria have to be so narrowly defined that the results, even if positive, are next to impossible to apply to one's trading. For instance, "buy new highs" makes some sense, but unless one is going to buy the entire universe of stocks that made new highs yesterday, he is going to have to pick and choose, and that's where the stick gets thrust into the spokes.

As for moving averages, they don't provide support in and of themselves, but that's another subject. Your point about trading off support -- i.e., real honest-to-god support -- is sound.

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Old Sep 25, 2007, 5:07pm   #9
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As for moving averages, they don't provide support in and of themselves, but that's another subject.
I've never been able to get my head around the idea of using moving averages as meaningful trade signals or support/resistance. They are simple statistical constructs with no real meaning whatsoever. Of course, the fact that so many traders focus on them produces makes them meaningful at times.
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Old Sep 25, 2007, 5:16pm   #10
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With regards to filters, personally if I were using this strategy I would "attempt" to reduce my risk a little by filtering out shares with very high ATR's
Why do you feel the need to do this ? If you position size correctly it should not make too much difference.


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Old Sep 25, 2007, 5:25pm   #11
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Why do you feel the need to do this ? If you position size correctly it should not make too much difference.


Paul
I agree. ATR is just a measure of price movement. You can easily adjust your position sizes to equalize the tick value of trades on stocks with different ATRs.

Furthermore, the base ATR calculation doesn't really provide a good idea of comparative price risk since higher priced stocks are generally going to have higher ATRs, even if their price moves are somewhat smaller in % terms.
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Old Sep 25, 2007, 10:34pm   #12
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As far as a statistical study, no. Never felt any need to once I understood the nature of accumulation and distribution and support and resistance (and demand/supply, etc, etc).

Db
For signs of accumulation would you just be looking for a level chart? Does volume give anything away?

Cheers

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Old Sep 26, 2007, 6:19am   #13
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For signs of accumulation would you just be looking for a level chart? Does volume give anything away?
Yes. Accumulation does require building a stack without raising the price against your buying campaign and that will show itself ideally as consolidation with low and level volume.

Any occasional rise in price is brought back down by sufficient selling to normalise the price level, but on balance , they’ll be buying more than they’re selling.
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Old Sep 26, 2007, 8:25am   #14
 
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Any occasional rise in price is brought back down by sufficient selling to normalise the price level, but on balance , they’ll be buying more than they’re selling.
Tony,

why couldn't the same be said for distribution - ie why would hat scenario not apply in the opposite direction? Silly question no doubt.......?

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Old Sep 26, 2007, 8:30am   #15
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Trend following works on anything as long as you can recognise who's trend you are following .
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