One of the most famous trending system is the turtles trading system. Trending system usually use more advanced entries techniques like averaging up or averaging down. Using averaging up technique allows trend-followers to add in positions whenever the market trends proof stronger.
It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you are wrong.
– George Soros
As a big position is built up when the trend proof itself, you will win big when the market is trending.
When using averaging up/down technique, care must be taken so that your total positions should not overextend your risk. I will use money management such that all entries will amount to no more than 2% of my account equity per trade and a maximum of 3 opened trades at any one time. (More will be discussed)
1. Low winning rate ( Can be less then 40% ) 2. Very high average profit/ average loss ratio 3. Draw-down can be high during ranging period 4. Usually have trailing stop loss and no fixed take profit 5. Trade’s duration can last from few hours to days
Limitations
1. System will register many losing trades during ranging conditions
2. At least US $10,000 of initial starting capital if you choose to employ this strategies. A big account like this will be able to withstand any draw-down
3. Must be discipline and stick to the rules because the next winning trade may be just around the corner after a string of losses
4. A string of loses is normal for trending systems
Summary
Trend following has been around since 1980 s and it has a very long history. When use with a long time horizon like at least 12 months, it has a good performance. However, trend followers’ draw-down tolerance must be high as most of the time system is in draw-down.
However, just 1 winning trade can recover all the loss and get the profits for the whole year. Being a trend follower is not an easy task but if you have the discipline to stick to the trending rules, the trending system will be a good choice.