This is a trend-following strategy for trading futures contracts in the daily timeframe, with a brief discussion of the risks and limitations
For all backtests in this article, we used Norgate data. We highly recommend this data service (we do not have a referral arrangement with the company). Updated: November 14, 2024
The rules of the strategy are available for sale. Contact us for details. Click here for a list of strategies.
Backtest settings
Timeframe: Daily (continuous back-adjusted contracts).
Markets: 23 futures contracts (Brent Crude oil, Crude oil, Cocoa, E-Mini S&P 500, Euro-BTP Long-term, Dax, Euro STOXX 50, Euro-Bund, Gold, Feeder Cattle, Lean Hogs, Copper, Coffee, Live Cattle, Frozen Concentrated Orange Juice Grade A, Palladium, Platinum, Silver, Corn, 10-Year U.S. T-Note, Chicago SWR Wheat, Euro-Buxl, US Dollar Index).
Strategy type: Trend-following based on breakouts, stop and reverse.
Maximum positions: 23, long/short.
Position size: based on stop-loss and maximum risk per position.
Trade entry: All trades are executed at the open of the next bar. Stops are executed intraday.
Backtest range: 01/3/2000 –11/14/2024
The strategy is not optimized for the highest annualized return. The entries and exits are based on price breakouts. The breakout lookback period is not optimized, but it is based on the popular lookback used by trend-following CTAs.
Equity Curve, Drawdown Profile, and Yearly Returns
The annualized return is 12.1%, and the maximum drawdown is 33.8%. S
Performance Summary
| STRATEGY | |
| CAGR | 12.3% |
| MDD | -33.8% |
| VOLATILITY | 17.8% |
| SHARPE | 0.68 |
| BETA (S&P 500) | -0.08 |
Monte Carlo Simulation
According to the Monte Carlo simulation results, there is a 5% chance the maximum drawdown will be larger than 57% and a 1% chance it will be larger than 66%. (Caveat emptor: Monte Carlo analysis has limitations.)
Rules of the strategy
The rules included below are sufficient for implementing the strategy in a backtesting or trading platform.
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The Risks of Trend-Following Strategies
Trend-following strategies attempt to capture long-term market trends, also known as outlier trades. The implementation of stop-losses results in a low win rate as the strategies exit with a loss until the onset of a trend. This style of trading can be extremely rewarding over the long term, but it is hard and could lead to a loss of discipline in the short term.
Trends and trend following are not the same thing, and many confuse the two. A trend-following strategy will not identify trends where there are none. From 2004 to 2016, or 13 years, the annualized return of the top 20 CTAs was 2.4%. However, the dispersion in CTA returns is high, and it is not reflected in the averages. There is a high specific risk in choosing a CTA or a trend-following strategy.
Furthermore, proper execution of trend-following strategies with many futures contracts requires sufficient capitalization. For about 20 contracts, the approximate initial capital is probably around a million dollars. Otherwise, due to insufficient capital, a strategy could miss a few profitable trends, negatively impacting the Sharpe and MAR ratios.
Trend following is a volatile style of trading with large equity swings. This style of trading is not for everyone.
Disclaimer: No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.
The rules of the strategy are available for sale. Contact us for details. Click here for a list of strategies.
Charting and backtesting program: Amibroker. Data provider: Norgate Data
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