Video

John J Hardy
Saxo Bank’s head of FX strategy John Hardy takes a closer look at trends and moves in today’s forex charts, including EURUSD, USDJPY, AUDUSD, and EURSEK.
Article / 08 June 2015 at 9:12 GMT

Did trend following just die again?

Chief Investment Officer / ACIES Asset Management
Switzerland
  • Many trend following futures funds took a beating on the sudden bonds' reversal
  • Recurrent rumors of trend following's demise are greatly exaggerated
  • It is important to remember some trading rules when trend following 
By Andreas Clenow

In the past couple of months, many trend following futures funds took a beating on the sudden reversal in bonds. This has lead to the predictable speculations that trend following is dead as a strategy. Again. 

Trend following has been declared dead more times than Mark Twain. And much like in his case, the rumors of trend following's demise are greatly exaggerated. Let's take a look at some classic trend following models and see how they have performed lately.

A great trend following benchmark is the good old 12 months momentum model. The trading rules for this approach couldn't be much simpler:

  • Check signals once a week.
  • If yesterday's price is higher than the price was a year ago, be long.
  • If lower, be short.
  • Simple vola parity position sizing.
  • Run on broad set of cross asset class futures markets.

12 Months Momentum vs S&P 500 Total Return
12M

Source: Original research, ThomsonReuters

While this model has a little blip by the end, it hardly shows a disaster. The period from 2011 to 2014 was a little concerning of course, but trend following came back in a big way after that.

So what about the simple trend model in my 2013 book? The trading rules were:

  • Only buy in bull market, only short in bear market. Measure trend with a dual 50/100 EMA.
  • Buy 50 day highs in bull market, short 50 day lows in bear markets.
  • Trailing stop of 3 times normal daily move (3xATR).
  • Run on broad set of cross asset futures markets.

Following the Trend Model vs S&P 500 Total Return
tf

Source: Original research, ThomsonReuters

Here we see a very similar return pattern. No surprises of course. Trend following can't be done that many different ways. The return curve should look very similar. 

Neither of these approaches show any real setback for trend followers. So why did we see so many trend following funds taking large losses in the past two months? 

The only asset class that had sizable losses for trend followers was bonds. This leads to the obvious conclusion that the funds that took the largest losses in the past couple of months were overly exposed to this sector. Of course, bonds did extremely well in the past year and the same funds may have seen significant gains during that period, so it swings both ways.

The learning lesson however should be very clear. Diversification is the key to long term trend following. Any single asset class can suddenly turn on a dime and go from high profitability to loss leader. Only by properly diversifying and trading all asset class, equities, bonds, agriculture, metals, energies, rates, forex, etc, can you achieve steady long term portfolio growth.

Trend following is very much alive, just as it has been for the past 40 years.

– Edited by Clemens Bomsdorf
Andreas F. Clenow is a hedge fund manager and principal at ACIES Asset Management. He is also the author of the best-selling book Following the Trend (Wiley 2012). Follow Andreas or post your comment below to engage with Saxo Bank's social trading platform.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Tradingfloor.com permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Tradingfloor.com and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Tradingfloor.com is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Tradingfloor.com or as a result of the use of the Tradingfloor.com. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through Tradingfloor.com your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. Tradingfloor.com does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail