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Market Statistics, Trend following

Expect More High-Tech Competition

Due to a crowding effect in HFT domain and a continuous decrease in profitability a lot of those firms are now moving to momentum, swing and trend-following domains in an effort to recoup their initial investment. Thus, retail traders and fund managers should expect more competition from highly competent and well-capitalized firms with excellent infrastructure and talent. Competition is about to rise significantly.

High frequency trading is almost dead from the angle of profitability because the media has scared the retail crowd away from the markets and professional traders and funds are now left to fight in the arena of zero-sum game. Many high-tech firms are turning to swing and position trading, a looked down timeframe in the past. The switch is made because there is now no other choice. Some have even decided to go all the way and become trend-followers in order to avoid dealing with the intricacies of low frequency trading. The trend-following domain is extremely crowded by funds with high AUM utilizing very simple trading systems that worked in the past but are now facing difficulties due to a reduction in both trend magnitudes and durations. The new trading firms that are entering the trend-following arena aim at utilizing advanced systems that will basically affect a redistribution of wealth from naive trend-follower to high-tech sophisticated ones. We will see if that effort succeeds.

Below is a chart from another post (updated) that shows how the trends in S&P 500 have decreased in magnitude after the bull run of the 1990s. The trend magnitude and durations are calculated using signals from the popular 50-200 golden cross trading system. Only the last trend that started in early 2012 is now extended for 339 days beyond the average of about 242 days. It is hard to make money in trend following with trends that last less than a year because the profits do not suffice to cover losses from subsequent choppy markets lasting for several years. The mathematical proof of this fact was already given in this blog.


The decline in trend magnitudes in S&P 500 since the 1990s is clear and no sophisticated analysis is required to prove this fact. The same behavior is evident in most equity indices, rendering equity index trend-following an extremely difficult arena which will become even more difficult with the entry of high-tech firms utilizing adaptive trading systems.

Thus, expect more competition in traditional timeframes soon but from high-tech participants. The days of the chart trader and the golden cross fund manager are over.

Disclosure: no relevant position at the time of this post and no plans to initiate any positions within the next 72 hours.. 

Charting program: Amibroker


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