I came across this article and wanted to share here:

The Rise and Fall of Trend Following | Off-Road Finance

Very interesting article, shzhning, thanks for posting! What implications does this have on your trading style? What changes will you make (if any) now that you have this information?

Brad

This article resonates with the way my trading style has evolved over the years. I started as a “buy and hold investor” in stocks, then swing trader trying to catch an intermediate trend. Around 2010 I switched to intraday futures trading. Again, I first focused on riding the intraday trend, and the gradually moved to what I call semi-scalping right now.

The problem with attempting to catch the big move, in my mind, is 1) big trend days do not happen very often and 2) when they do happen, it’s hard to trade. In fact, many of my largest losing days are those super trend days. If I did catch the train, I constantly worry the trend is going to reverse, and exit prematurely (of course this is all after-the-fact). If I missed the beginning of the trend, I feel nervous about jumping in at the turning point of the trend. Too often I ended up betting against the trend, and suffered badly to my account.

Not long ago, I tried to resolve this problem by trading 2 targets. Once the first small target is hit, I would just let the second one run. Unfortunately it did not perform well enough as I was hoping. Of course there’re some reality issues such as runners do not happen that often; second lot may come back and eat into your profit; not every platform support this functionality; etc. But the main issue with this strategy I would say is the mental drain it put on my mind when I’m day trading and would like limit my risk exposure.

So why is trend following so hard? One might say we never know how strong is the trend, how long it’s going to last. But one could ask the same questions back when trend following was still profitable in the past. The author of this article came up with a theory in another article Naive Markets, Hostile Markets, and Random (Efficient) Markets | Off-Road Finance . I’m not sure if it’s his original work, but he offers a valuable insight: the profitability of trend following kills itself, as the market has developed some sort of immunization against it. Or the market has lost its naïveté as he calls it.

One last word, though I no longer consider myself a trend follower, I do believe trading with the trend is best for most traders. Counter trend trading is only suitable for those who have truly mastered it.