Rho research trend-following is dead long live trend-following
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Trend-following strategies have been unprofitable in recent years due to a lack of strong trends in most markets. Prices have remained trapped within narrow ranges for prolonged periods, making it difficult for trend-following to be successful. The last 3 years have been the most challenging for trend-following since 1995, with fewer than 45% of markets exhibiting trends. However, trend-following is not dead - strong trends often follow long periods of consolidation, and will likely emerge again when market conditions change to allow for smooth price moves between levels.
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Rho research trend-following is dead long live trend-following
- 3. levelfortrend‐followingprofitabilityisapproximately45%,whichmeansiffewerthan45%ofmarket aretrending,thentrend‐followersasagrouparelikelytobeunprofitable. 70% >60%==>Period ofstrong,sustainedtrendsformanymonths %of36‐monthintervalswith%T>45% 60% 50% 40% <50%==>Prolongedperiod withfewtrends:trend‐following strategiesareunsuccessful 30% 20% Extremelydifficultfortrend‐followingstrategies: only33%ofrolling36‐ monthintervalshadmeanigfultrends 10% 1/1/1998 8/1/1998 3/1/1999 10/1/1999 5/1/2000 12/1/2000 7/1/2001 2/1/2002 9/1/2002 4/1/2003 11/1/2003 6/1/2004 1/1/2005 8/1/2005 3/1/2006 10/1/2006 5/1/2007 12/1/2007 7/1/2008 2/1/2009 9/1/2009 4/1/2010 11/1/2010 6/1/2011 1/1/2012 8/1/2012 3/1/2013 0% Figure 2: We show the long‐term evolution of the number of months with sustainable trends over rolling 36‐month intervals starting in 1995 (so first interval ends Dec, 1997). Between 1995 and 2009, there were very few 36‐month intervals in which fewer than half the months were below break‐even. Since 2011, this number has declined sharply, to about 33%, i.e., only 12 of 36 months had trends above break‐level of 45 percent. Trend‐followers have not faced such tough trading conditions since 1995. OntheverticalaxisofFigure2weshowthepercentageofmonths(overrolling36‐monthintervals)with trendsabovethe45%break‐evenlevel.Naturally,thegreaterthenumberofmonthswithabove‐ averagetrends,themoreprofitabletrend‐followerswillbe.Notehowthenumberofmonthswith sustainedtrendshasdroppedtoanall‐timelowofonly33%during2013. Pastperformanceisnotnecessarilyindicativeoffutureresults.Thereissignificantriskoflossintradingderivativeproducts. ©2013RhoAssetManagementAGBaarerstrasse78CH‐6300ZugSwitzerland www.rhoam.ch