Revisiting The Classical Strategy Of Trend Following In More Volatile Trading Environments
DOI:
https://doi.org/10.47611/jsrhs.v11i3.3288Keywords:
Financial Technology, Trend Following, Volatile Trading Envrionments, Time Series Data, Technical AnalysisAbstract
Trend-following strategies (TFS) have been well-established for their effectiveness in analysing stock prices for decades. However, there remains a pressing need to revisit and analyse their performance in today’s increasingly volatile financial environment. First, this study investigated their profitabilities with respect to the S&P500 fund over the past 10 years. The fund’s consistent and strong uptrend over the 10-year period resulted in TFS being unable to outperform the passive buy-and-hold strategy. Longer moving averages and breakout lengths were more profitable given the fund’s bullish nature. Additionally, it was found that exponential moving averages were more effective than simple moving averages. The study also established that trading more frequently, such as daily, had no advantage over trading weekly or monthly. TFS incorporated with stop losses were largely ineffective and were only profitable when market prices displayed strong and consistent trends. Second, this study examined the relevance of TFS in varying economic climates by using data across various market sectors and time periods. It was found that TFS performed better when prices display both bullish and bearish trends as opposed to when prices only trend in one direction or experience frequent fluctuations. Given the steady uptrend in the S&P500 fund in recent times, the effectiveness of these strategies have deteriorated compared to the past where price patterns were less consistent. Thus, it can be said that the relevance of TFS have diminished for funds displaying consistent one-directional trends, like the S&P500 fund, or extremely volatile price patterns.
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