Trend followers lose more often than they gain
AbstractWe solve exactly a simple model of trend following strategy, and obtain the analytical shape of the profit per trade distribution. This distribution is non trivial and has an option like, asymmetric structure. The degree of asymmetry depends continuously on the parameters of the strategy and on the volatility of the traded asset. While the average gain per trade is always exactly zero, the fraction f of winning trades decreases from f = 1/2 for small volatility to f = 0 for high volatility, showing that this winning probability does not give any information on the reliability of the strategy but is indicative of the trading style.
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Bibliographic InfoPaper provided by Science & Finance, Capital Fund Management in its series Science & Finance (CFM) working paper archive with number 500065.
Date of creation: Aug 2005
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- NEP-ALL-2006-04-02 (All new papers)
- NEP-INT-2006-04-05 (International Trade)
- NEP-LAB-2006-04-04 (Labour Economics)
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- Chiarella, C. & Iori, G. & Perello, J., 2008.
"The Impact of Heterogeneous Trading Rules on the Limit Order Book and Order Flows,"
08/04, Department of Economics, City University London.
- Carl Chiarella & Giulia Iori & Josep Perello, 2007. "The Impact of Heterogeneous Trading Rules on the Limit Order Book and Order Flows," Papers 0711.3581, arXiv.org.
- Carl Chiarella & Giulia Iori, 2005. "The Impact of Heterogeneous Trading Rules on the Limit Order Book and Order Flows," Research Paper Series 152, Quantitative Finance Research Centre, University of Technology, Sydney.
- Scholz, Peter, 2012. "Size matters! How position sizing determines risk and return of technical timing strategies," CPQF Working Paper Series 31, Frankfurt School of Finance and Management, Centre for Practical Quantitative Finance (CPQF).
- Ted Theodosopoulos & Alex Trifunovic, 2006. "Hybrid dynamics for currency modeling," Papers math/0605457, arXiv.org.
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