Does Trend Following Work on Stocks?
November, 2005
Abstract
Over the years many commodity trading advisors, proprietary traders, and global macro hedge funds have
successfully applied various trend following methods to profitably trade in global futures markets. Very little
research, however, has been published regarding trend following strategies applied to stocks. Is it reasonable
to assume that trend following works on futures but not stocks? We decided to put a long only trend following
strategy to the test by running it against a comprehensive database of U.S. stocks that have been adjusted for
corporate actions1. Delisted2 companies were included to account for survivorship bias3. Realistic transaction
cost estimates (slippage & commission) were applied. Liquidity filters were used to limit hypothetical trading to
only stocks that would have been liquid enough to trade, at the time of the trade. Coverage included 24,000+
securities spanning 22 years. The empirical results strongly suggest that trend following on stocks does offer a
positive mathematical expectancy4, an essential building block of an effective investing or trading system.