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29 Simple Rules For Profitable Trend Following In Stocks

trend following stocks gifTrend following is an investment strategy based on the technical analysis of market prices, rather than on the fundamental strengths of the companies. Wikipedia

My own view is that trend following is not necessarily based on technical analysis, which can sometimes have a bad name. I believe trend following is more about the philosophy that long term trends are a natural phenomenon of market cycles. It works because it is able to capture the ‘long tail’ of market returns. In that regard, it is a unique and effective strategy. But like any good strategy, the rules need to be followed in order to capture the returns.

If you’re still not convinced have a look through Google Scholar and see what you can find. This journal for example looks into the performance of trend following for hedge funds, while this classic white paper ‘strongly suggests‘ that trend following on stocks has a ‘positive mathematical expectancy‘.

As well, the quantitative encyclopedia, Quantpedia lists a number of attractive trend following strategies.

For what it’s worth, I have done hundreds of back-tests myself and have found that trend following works very well on stocks. (I will be posting some of these up at a later date). So here are 29 rules, for trend following stocks:

29 Rules For Trend Following Stocks

1. Price is everything.

2. Ignore the news.

3. Buy a stock when it breaks out of a range.

4. Sell a stock when the trend changes.

5. Buy a stock when it makes a new high.

6. Short a stock when it makes a new low.

7. It’s harder to short stocks than it is to buy stocks.

8. Some stocks trend more than others.

9. Diversify when you can.

10. Ignore the whipsaws.

11. Don’t chase the market.

12. Let your winners run.

13. Cut your losses short.

14. A stock can always go higher and always go lower.

15. Don’t get out before the trend changes direction – look to catch the middle.

16. Trend followers have more losers than winners.

17. 40% is a good percentage of winners for trend following stocks.

18. Put your stops far enough away to allow the trend to develop.

19. Don’t fall in love with a stock.

20. Don’t pick bottoms.

21. Don’t pick tops.

22. Don’t try and predict the market – go with the flow.

23. Follow your signals.

24. Trade small enough you won’t go broke and large enough to make it worthwhile.

25. Compound your returns.

26. Trend following stocks works best with a system.

27. Back-test your system.

28. Don’t forget delisted stocks.

29. Stick to the system.


Comments (6)

Thank you for this list.

You say “It’s harder to short stocks than it is to buy stocks.”

But why is this? Why doesn’t it work to just apply the same rules for short (during a secular bear market of entire stock market) as you do for long (during a secular bull market for the entire market)?

What explains this short/long asymmetry in stocks – as opposed to the futures markets?

What tricks can one use to correctly do trend following shorts in stocks?

Well a number of reasons. Profit from a short is capped at 100% but there is no cap on potential loss. Conversely, loss of a long is capped at 100% but there is no cap on potential profit. That is asymmetry right there. Another reason is that equities have long-term upward bias. We are talking about businesses that generally grow and get bigger over time. Also, monetary policy in recent years helps push asset prices up and not down. Shorting stocks in the last few years has been very difficult. So yes, need to only short in the right conditions.

Appreciate how you took the time to answer this. Thank you.

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