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Trend Breaks in Trend-Following Strategies

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Excerpt

Trend-following strategies are very effective when markets are cleanly trending, but they suffer when trends end too soon. How markets behaved during the last few years, were they prone to last-longing trends? Are we able to immunize trend-following to endure the negative impact of trend breaks better? A research paper written by Garg, Goulding, Harvey, and Mazzoleni finds a negative relationship between the number of turning points (a month in which slow 12-month and faster 2-month momentum signals differ in their indications to buy or sell) and risk-adjusted performance of a 12-month trend-following strategy. The average number of turning points experienced across assets has increased in recent years. But we can implement a “dynamic” trend-following strategy that adjusts the weight it assigns to slow and fast time-series momentum signals after observing market breaks to recover much of the losses experienced by static-window trend following…

Authors: Garg, Goulding, Harvey, Mazzoleni

Title: Breaking Bad Trends

Linkhttps://papers.ssrn.com/sol3/papers.cfm?abstract_id=3594888

Abstract:

We document and quantify the negative impact of trend breaks (i.e., turning points in the trajectory of asset prices) on the performance of standard trend-following strategies across several assets and asset classes. The frequency of trend breaks has increased in recent years, which can help explain the lower performance of monthly trend following in the last decade. We illustrate how to repair trend-following strategies by exploiting the return forecasting properties of the different types of trend breaks: market corrections and rebounds. We construct dynamic multi-asset trend-following portfolios, which harvest more than double the average returns of standard trend-following investing strategies over the last decade.

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