Just a quick question... Suppose you are intending on following a trend for approximately 1 week, how long would you want the trend to have been established for prior to this? 1 month, 3 months, 6 months? I know there is no clear cut answer to this but just wanted you opinions. Thanks,
Sam.
I got into long-term trend-following after reading Mark Shipman's book "The Next Big Investment Boom". His specific comments on commodities are looking a little outdated in the current market, but long-term, he's probably not far wrong.
By definition, if a market is not long-term trending, then you can't use this method, and your only choice is to remain out of the market until it is. This is perhaps no bad thing.
Anyway he offers two specific methods, which he does not claim are particularly original which I attempt to paraphrase:-
1) Using a 40-week MA:
Only invest in, or stay invested in a market where the current weekly closing price is above the current 40-week MA and the trend of the 40 week MA is upwards.
(Looked at another way: you should never invest or stay invested in a market where the current weekly closing price is below the current 40 week MA -
And you should never invest or stay invested in a market where the trend of the 40-week MA is down.
[The above is clearly for long positions - if going short, then the reverse directions obviously apply].
He cautions against closing profitable positions too soon, advice you will see on this forum also. He notes that really long trends of this nature don't occur that often, but when they do, you want to capture as much of them as possible.
2) - Based on a strategy developed by Richard Donchian - the price channel breakout.
Donchian's weekly rule was: buy whenever the market moves above the highest price of the last 4 weeks. Hold until the price moves below the lowest low of the last 4 weeks, when the position was reversed. (Thus you capture uptrends and downtrends).
To avoid "whipsaws", a longer period is used and he suggests 12 weeks, thus his 2nd method is summarised as:
Establish a position when the current week's closing price is the highest price of the last 12 weeks. (This is known as an "upside breakout"). It is guaranteed to get you into every long-term trend.
You can of course combine methods 1 and 2: Buy when the current weekly close is the highest price of the last 12 weeks and it is above the current 40 week MA, and the trend of the 40-week MA is upwards.
Hold as long as the current weekly close is above the current 40-week MA and the trend of the 40-week MA is upwards.
Almost by definition, there is no way you are going to capture
all of the trend - the aim is simply to get as much as you can.
His exit strategy is slightly more complicated (but not that much), and he includes a lot more about establishing what condition the market is in to begin with ("Stage Analysis"). The smart money gets in on trends before everyone else has noticed, and by the time everyone and his postman has noticed it, it is time to get out. Property was a good case in point.