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Trend followers lose more often than they gain

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  • Marc Potters
  • Jean-Philippe Bouchaud

Abstract

We 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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  • Marc Potters & Jean-Philippe Bouchaud, 2005. "Trend followers lose more often than they gain," Papers physics/0508104, arXiv.org.
  • Handle: RePEc:arx:papers:physics/0508104
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    Cited by:

    1. Chiarella, Carl & Iori, Giulia, 2009. "The impact of heterogeneous trading rules on the limit order book and order flows," Journal of Economic Dynamics and Control, Elsevier, vol. 33(3), pages 525-537.
    2. Ted Theodosopoulos & Alex Trifunovic, 2006. "Hybrid dynamics for currency modeling," Papers math/0605457, arXiv.org.
    3. 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).

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