For trend following strategies to do well enough to be a worthy investment, the mere existence of trends is not enough. For a medium to long term trend following strategy, you need strong trends that can last. And they need to occur often enough for trend followers to do well. Similarly, for short term strategies, you still need trends that fit what the strategy is trying to catch. Theorhetically, there is no reason why trend following will never fail. As a trend follower myself, I am aware of the possibility that markets can and do change structurally. If markets are constantly choppy, trend followers will still suffer even there is an occasional trend that is a big winner.
Have you thought about what signal to look out for when trend following cease to work? Series of losses?
I think this is a great question, but I am afraid I do not have the perfect answer for it. Firstly, I don't think it is possible to predict how trend following strategies will perform in the next 12 months or the next 10 years. The only information we have is how they have performed in the past. I know some of the more successful CTAs and a few of the original turtles have made adjustments to their systems over time since the 1980s. Those that have adjusted towards a longer time frame have done much better than those who stick to trading short term trends. Nonetheless, trend following hasnt done well in the last 2 years. So maybe the answer lies in how they were able to, and why they decided to tweak their systems. Maybe they were tracking multiples systems of different time frames and systematically allocated more to the long term systems which started to perform better along the way. Secondly, although trading a few systems will help you diversify away strategy-specific risk, it is still a tradeoff. Investing in multiple systems means you will never be a great outperformer. Because ideally you would allocate 100% to the best trend following system you have. Lastly, since there is no perfect system, I think we shouldn't focus on building a perfect all weather system. I think we should find comfort in how trend following has remained valid and relevant for decades, settle with a system that is current (mid-to-long term), and just focus on risk management. Trade small so that you have the best chance to stay in the game, and aim to reduce drawdowns as much as realistically possible without hurting your expected CAGR.
Perhaps because I am just a small mom and pop retail trader, I just do not understand high finance: With all their collective trillions in AUM, with hundreds of PhD in math, physics, biology, economics... instead of trend following, they could do trend leading? Then maybe I can follow their trends and make a few dollars off them professionals?
You make a good point. Trend following is not a scalable strategy. This may be why the professionals have problems making money off it today because they are managing too much money.
Trend following is already dead. Markets are always different, however, the current market is fundamentally different to what anyone has seen before.
I think scalability is a major issue - there are very few markets where you can deploy the kind of cash that trend followers now have, so they all end up chasing the same markets. One, the correlation between funds increases. Two, you get a higher chance that none of the markets they trade trends for a significant period of time. Still - it is well researched that trend following strategies can have significant drawdowns, and indeed this is part of the reason why they work. Nothing comes for free, and suckers will get out at the bottom!