Principles of Trend Following | Futures Trading | Quantra Course

Part of the course on Futures Trading: Concepts & Strategies: https://quantra.quantinsti.com/course...

Welcome to this video on principles of trend following. The idea behind trend following is really quite simple and you will find that this is the case with most robust trading methods. It’s always desirable to have a simple and easily defined concept that you are aiming to trade and to know what market phenomenon you’re planning to exploit.
What you would like is for the strategy you employ to be easily explainable. If you struggle to explain it odds are that something is not right. The opposite which you should try to avoid is to combine indicators and methods until your backtest shows positive results.
If you don’t know what you’re trading and why it’s highly likely that any backtest result is simply the result of chance or over-optimization and that it lacks predictive value. You may have overfitted the variables or simply thrown indicators at the wall until something stuck. This is not how you develop robust trading models.
The fact that the idea behind trend following is simple does not of course mean that implementation is easy or that it’s easy to make money. You will still have to work for your money.
The basis of trend following is based on the empirical observation that prices often continue to move in the same direction for a sustained period of time. The goal of the strategy is to capture the bulk of these moves but never to buy at the bottom or sell at the top.
What we want to do is to wait for the market to start moving in one direction up or down
and then jump on the bandwagon and stay with the price move for as long as it lasts.
An important part to understand about trend following is that you will never enter
or exit at the best prices. You will always get in too late and get out too late. That’s just how the strategy works.
You have to wait until the price takes off and enter after it’s already moved enough to qualify as a trend. Once the trend is over we will not know that until the price starts moving against us. That means that we will always give up part of our profits as we wait for the price to move against us before exiting.
Another interesting thing to keep in mind is that most trend following trades end up losing money. Even for successful and profitable trend following models usually between 60% and 70% of all trades entered will fail. That is just the cost of doing business in the trend following space and as long as you end up making money over all it shouldn’t matter how many trades fail.
When done right the failed trades should have quite small losses and there should be some outsized winning trades that make up for them, and more.
The point of trend following is to guarantee participation in all trends. The only way to have such a guarantee is to enter every possible trend breakout never missing a single one.
A few of them, a small percentage will be the big winners. Those will continue to trend for a long time and create a high return and they are absolutely necessary to pay for all the small failed trades. The only way we can be sure that we’ll participate in these big winning trends
is to never miss a trade and always enter into every single trend breakout.
A good trend following model has a slight statistical advantage with a slight net expected value.
Imagine, as an example if you could play a casino game costing one dollar where you have a 70% probability of losing ten dollars 20% probability of plus/minus zero and a ten percent chance of gaining 100 dollars.
How many times would you play the game?
The answer should be as many times as they would let you. If you play such a game once
anything could happen. Ten times, anything could happen. But if you play it a thousand times you’re likely to have net gains of 2,000 dollars.
That is all for this video.

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