Trend Following on Stocks

Discussion in 'Technical Analysis' started by Trend Following, Jun 2, 2009.

  1. Trend Following

    Trend Following ET Sponsor

    Eric Crittenden, Research Director for Blackstar Funds, LLC, has authored a piece titled <a href="">"Trending Stocks are Responsible for Virtually All of the Market's Gains" (PDF)</a>. Food for thought.
  2. Michael?.....that should be "confirmation of the obvious" to most people. :cool:
  3. Well...

    The problem is whether you can consider a +300% stock as a "trending" stock. But there's no point of going into a semantical debate about what a trend is. The dude's definition of a trend is a +% stock, and based his studies on it. Regardless of that definition agree-able...

    That written... good stuff.
  4. ecritt


    Well, sort of. The actual definition of "trending" in the context of this paper has to do with hitting new all time highs. The point is that all of the market's returns came from a small minority of stocks. All those stocks had one thing in common; the ability to keep hitting new all time highs. The below average and failed stocks also all had one thing in common; the inability to keep hitting new all time highs.

    The performance difference between the two camps is very large. The significance of these observations is that an investor can maintain a portfolio of stocks that keep hitting new all time highs and short sell all other stocks in the market...with the goal of collecting a significant risk premium in a way that isn't particularly redundant with the stock market overall.

    This assumes, of course, that capitalism continues to yield a minority of big winners and a majority of underperformers in the future. Page 4 of the paper attempts to explain how this phenomenon is almost inevitable, even under random conditions.

  5. A study in survivorship bias (with a twist)?
  6. ecritt


    It's definitely a study of survivorship, but not a biased one.

    "Survivorship bias" is a specific error where one is evaluating a data-set that isn't representative of reality. Its most relevant form goes something like this: John downloads the historical data for all the stocks in the S&P 500 to test his "buy the dip + strong balance sheet" strategy. It makes 30% per year so he decides to manage the savings of his friends and family. What John failed to realize is that all the CURRENT members of the S&P 500 weren't necessarily members during the years of his backtest. The fact that they are in the S&P 500 today means that they appreciated greatly in the past (during the backtest years). And, there were likely many stocks that used to be members of the S&P 500 (during the backtest years) but he's not including them in the backtest results, since he's using current index members. The fact that they used to be in the index but were kicked out means that they probably depreciated significantly. It's like compiling a list of all the winning horses after the races are over and then only selecting from these horses to validate your system.

    This is survivorship bias; and it tends to produce hypothetical results that are very far away from reality.

    Somewhere in the fineprint of the paper it notes that delisted stocks were accounted for in the analysis.

  7. Trend Following

    Trend Following ET Sponsor

    I don't think there is much about trend trading, trend following, etc....however one wants to call it ...that is obvious to most!
  8. Books, blogs, videos, seminars, courses, documentaries...

    Do tell us, Michael, about your own trend trading performance.