Several ET threads over the past year or so have discussed the use of technical analysis (TA) by retail traders versus its use by hedge funds and other large institutional traders. Some posters have said that hedge funds frequently do use chart-based TA methods including indicators, especially indicators like moving averages. Others expressed skepticism that TA and charts are used at all; instead, the focus is on market- and company-specific data, economic numbers, etc. to evaluate potential new trades via fundamental analysis. My reading over the years has suggested that many hedge funds used to employ some version of the method referred to as “Trend Following”. Historically this approach involved using defined rules for buying breakouts when prices go up and then exiting later when prices begin going against the position. Entry and exit rules were based on things like breaks of N day highs with or without indicator channel lines (e.g., Donchian channels) or moving averages, etc. that can be seen on charts. Win rates were low, often only 20-30% or so, but the systems make money because a few trades catch big trends and ride them for long periods of time. Several books have been written about this type of classical trend following, including books by Andreas Clenow, Michael Covel, Greyserman & Kaminski and others. My question for all those who may have knowledge in this area is: Do many hedge funds and other large volume traders still use Trend Following-based technical analysis methods like this? i.e., is classical Trend Following dead?
Does a trend following practitioner have to use indicators and those rules you mentioned to be considered a trend following practitioner?
The idea that any trading strategy is dead is a little too black and white. And Trend Following is more typical for a CTA or CPO than a hedge fund. Some hedge funds are multi-strategy but in my experience most are not. The investors rely on the investment in one strategy for that allocation. With futures, those that Trend follow, believe that many Commodities have cycles and move in one direction over years. They are not concerned with daily or weekly movement as long as the Trend is in place. Sometimes it works and sometimes it does not for years.For a trader with a short term outlook, Trend Following may not work for you.
Sometimes it is just numbers and specific rules for entries and exits, I think. Something like buying when prices break out to 52 week highs...
. Robert, thanks, the method is definitely not for me and probably not for most traders. 30% win rates would be tough to sit through...
Billion of dollars is run with trend following in London. https://www.man.com/maninstitute/keep-calm-carry-on-trend-following Man group who own AHL are a ftse 250 company. I think they were in the ftse 100 at one point.
I can't verify the 30%-win rate or tell you if that is acceptable or not. A 10%-win rate is fantastic if those wins are so good it overwhelms the losing trades and gives you your risk return metrics. You have to understand that many investors have a different mentality than traders looking to make a living or supplements their full/part time business or job. They are looking to invest in a strategy , sector or manager that has expertise they either do not have or do not want to take their time to implement. They are looking for after tax risk adjusted returns. This is why real estate is so popular. You are playing the long game. It is likely the most popular trend strategy of the past 7-8 years has been long Crypto. Wealthy investors wanted to invest in that space but wanted someone else to do it. I know this was popular because almost every service provider (Lawyers, admins, CPA) events were around that. Those investors were not looking to get cash payments each year and pay taxes. They want to hold assets that do well overtime. That said, I think most Trend Following over the last 30 years has been in commodities. The economics are easier to understand. I would not invest in a CPO or CTA that follows a Trend Following plan. It is not for me, and I do invest in CPOs, have used CTAs and do invest in hedge funds.
I don't track what big funds are doing but there is no doubt that trend-following is a viable technique for private retail traders. A thing which needs attention however is calculating win rate so as not to be misleading. Trend-following trades should be pyramided for maximum gains. Pyramiding can be done without a new entry signal, a new position simply being added when unrealised profit reaches a certain level. So if an initial long position on e.g. USD/JPY trade has been pyramided 5 times, and all are winners except the last one, how many wins is that? Would some people count it as 1 or 6? Is it 1 win or 5 wins, 1 loser or no losers?
It seems to me that trend following is more amenable to large size, so that could include hedge funds but I don't know what they typically do. My own experience with trend following is a win rate more like 44%. You can't miss any signals because you never know when the big moves come to make up for the majority of losses. In my journal, here, I'm currently weathering 11 losses out of the last 12 calls. We will find out if trend following still works. Meanwhile drawdown and losses are within statistical expectations. I'm pretty sure the Turtles proved that trend following works with commodities. Before that Darvas proved it works on stocks.