The Advantages of Trend Following in Systematic Trading Strategies

Trend following is a proven systematic trading strategy that focus on capturing significant returns during long-term price uptrends, rather than attempting to time the market.

The Advantages of Trend Following in Systematic Trading Strategies
The Advantages of Trend Following in Systematic Trading Strategies

Trend following is one of the most robust and time-tested approaches in systematic trading. Rather than trying to predict market tops and bottoms, trend following strategies aim to capture the bulk of sustained price moves. By aligning with the prevailing market direction, these strategies can generate impressive returns over time.

The Alpha Signals trading strategy employs trend following principles to great effect. It does not rely on subjective market timing, which is notoriously difficult. Instead, it uses objective rules to determine when an established trend is underway and triggers long or short signals accordingly. This systematic approach removes emotion and bias from the decision making process.

Trend following offers several key advantages:

  1. Downside protection - The strategy will exit positions and move to cash during extended market downtrends, helping to preserve capital.
  2. Asymmetric payoff - Winning positions are left to run, while loss of upside momentum is cut short. This allows the strategy to capture outsized gains when strong trends emerge.
  3. Diversification - Trend following has a low correlation to traditional asset classes, providing valuable diversification benefits.
  4. Adaptability - The strategy can perform well in a variety of market environments and adjust to changing conditions.

Of course, trend following is not perfect. There will be periods of underperformance, especially during choppy and range-bound markets. Drawdowns are inevitable. But historically, the strong positive returns during favorable trending periods have more than compensated for the periods of weaker performance.

The Alpha Signals strategy enhances basic trend following in several ways - by focusing on a high-beta instrument (TQQQ), incorporating volatility filters, and optimizing parameters. But at its core, it harnesses the same key principles that have powered many of the most successful systematic strategies over the decades.

Investors would be wise to consider allocating a portion of their portfolio to a robust trend following strategy like Alpha Signals. Over the long run, it has the potential to boost risk-adjusted returns and smooth the equity curve. No strategy works all the time, but the track record of trend following speaks for itself.