Some people argue trend following is not for stocks. Jerry Parker offers insight (excerpts from Managed Account Reports):

I think another mistake we made was defining ourselves as managed futures, where we immediately limit our universe. Is our expertise in that, or is our expertise in systematic trend following, or model development. So maybe we trend follow with Chinese porcelain. Maybe we trend follow with gold and silver, or stock futures, or whatever the client needs. It’s called managed futures because that was the profit center at the FCMs. We’re trading these great systems, and testing, and making sure what we do has worked in the past. And being disciplined, and unemotional, and applying our methods to the futures markets. But limiting our trading to this one group of markets. We need to look at the investment world globally and communicate our expertise of systematic trading. You have Big Blue beating the world chess champion, and everybody saying yeah, that makes sense, I can understand that. We’ve not been able to maximize our opportunities with systematic trading. People look at systematic and computerized trading with too much skepticism. But a day will come when people will see that systematic trend following is one of the best ways to limit risk, and create a portfolio that has some reasonable expectation of making money. We’ve got to be there and ready to take advantage of the opportunity. I think we’ve miscommunicated to our clients what our expertise really is. Systematic trading is going to be better for everyone in the long run. Our methods will work on lots of different markets. The ones that are hot today, the ones that are not hot today. We don’t want to pigeon-hole ourselves as managed futures or commodities.

Some people argue trend following is dead. Burt Kozloff refutes the notion (excerpt from Managed Account Reports):

Are we now to believe that we have reached a state of equilibrium, in which supply and demand are more or less fitted, and markets will no longer trend? Will the economic expansion of the past years continue uninterrupted into the new millennium, ushering in a paradise of plenty? In February 1985, on a tour of Germany sponsored by the Deutsche Terminborse, several advisors and pool operators were making a presentation to a group of German institutional investors. Among them were two trend-based traders, Campbell & Co and John W. Henry & Co. During the question-and-answer period, one man stood and proclaimed: But isn’t it true that trend-following is dead? And that these methodologies have been completely discredited? And that a new breed of trader — one who does not need trends to profit — has arisen? And I am one of these new breeds… At this point, the moderator asked that slides displaying the performance histories for Campbell and Henry be displayed again. The moderator marched through the declines, saying: Here’s the first obituary for trend-based trading. Here’s the next one…and the next…but these traders today are at new highs, and they consistently decline to honor the tombstones that skeptics keep erecting every time there’s a losing period. Today, the new breed of trader character has long since vanished from the scene — now, perhaps, selling hedge funds — and Campbell and JWH have made their investors hundreds of millions of dollars since that time. It might, therefore, be a mistake to write yet another series of obituaries.

The Same Two Objections, Answered the Same Two Ways

The “not for stocks” objection and the “trend following is dead” objection appear in every era of market commentary. The 1985 German institutional investor encounter Kozloff describes is essentially identical to conversations trend following practitioners have in every subsequent decade. The moderator’s slide-by-slide walk through the obituaries is the definitive answer: the approach has produced returns through every period when it was declared obsolete.

Parker’s Chinese porcelain example is the “not for stocks” answer in its most extreme form. The systematic rules do not care what they are applied to. They respond to price. Price exists wherever there is a liquid market with observable quotations. Stocks have liquid markets with observable quotations. The same 20-week breakout entry, the same N-based stop, and the same volatility-adjusted position sizing that captures a trend in crude oil futures captures a trend in an individual equity or an equity index with equal effectiveness. The argument that trend following is “not for stocks” confuses the instrument with the methodology.

The “trend following is dead” objection requires the belief that human behavior has changed, that markets have somehow reached a state where prices no longer trend for extended periods. The Kozloff passage identifies this belief precisely and punctures it: are we to believe that supply and demand are now in permanent equilibrium? As long as markets are driven by human participants whose decisions are governed by the behavioral patterns that produce trends, as long as policy cycles produce the persistent directional pressure that Henry observed in interest rates, and as long as geopolitical events produce the sustained dislocations that trend following captures, the obituary for trend following will remain premature.

The “new breed of trader who does not need trends to profit” character who appeared at the 1985 Deutsche Terminborse presentation and then “vanished from the scene, perhaps selling hedge funds” is the historical personification of every subsequent trend following obituary writer. The approach outlasts the critics. The evidence is in the performance histories that the moderator showed on the slides.

Frequently Asked Questions

Why is trend following not limited to futures and commodities?

Because the approach responds to price, and price exists wherever there is a liquid market with observable quotations. The systematic rules work on any instrument where price data is available and positions can be entered and exited without prohibitive transaction costs. Stocks, equity indices, currencies, commodities, and bonds all qualify. The “managed futures” label describes a regulatory category, not a boundary of the methodology.

Why does “trend following is dead” keep appearing as a claim?

Because trend following goes through extended flat and losing periods during ranging, non-trending market conditions, and those periods generate commentary about the approach’s obsolescence. Each time the approach is declared dead, it has subsequently recovered as new trends develop in new markets and conditions. The 1985 German institutional investor who declared trend following dead had no way to know that Campbell and JWH would make their investors hundreds of millions of dollars over the subsequent decades.

What would need to be true for trend following to actually stop working?

Human behavioral patterns would need to change such that markets no longer produce sustained directional price movements. Loss aversion would need to stop producing premature exits from winning positions. Herding would need to stop amplifying price movements beyond their fundamental justification. Policy cycles would need to stop producing multi-month directional pressure in interest rate and currency markets. None of these things have happened or are likely to happen, because they reflect structural features of human cognition rather than market-specific phenomena that can be arbitraged away.

Trend Following Systems
Want to learn more and start trading trend following systems? Start here.