Academic Papers

Trend followers lose more often than they gain

We solve exactly a simple model of trend following strategy, and obtain the analytical shape of the profit per trade distribution. This distribution is non trivial and has an option like, asymmetric structure. The degree of asymmetry depends continuously on the parameters of the strategy and on the volatility of the traded asset. While the average gain per trade is always exactly zero, the fraction f of winning trades decreases from f = 1/2 for small volatility to f = 0 for high volatility, showing that this winning probability does not give any information on the reliability of the strategy but is indicative of the trading style.