Preprint Article Version 1 This version is not peer-reviewed

Analysis of a Global Futures Trend-Following Strategy

Version 1 : Received: 9 June 2019 / Approved: 11 June 2019 / Online: 11 June 2019 (03:53:07 CEST)

A peer-reviewed article of this Preprint also exists.

Nokes, D.; Fulton, L. Analysis of a Global Futures Trend-Following Strategy. J. Risk Financial Manag. 2019, 12, 111. Nokes, D.; Fulton, L. Analysis of a Global Futures Trend-Following Strategy. J. Risk Financial Manag. 2019, 12, 111.

Journal reference: J. Risk Financial Manag. 2019, 12, 111
DOI: 10.3390/jrfm12030111

Abstract

Systematic traders employ algorithmic strategies to manage their investments. As a result of the deterministic nature of such strategies, it is possible to determine their exact responses to any conceivable set of market conditions. Consequently, sensitivity analysis can be conducted to systematically uncover undesirable strategy behavior and enhance strategy robustness by adding controls to reduce exposure during periods of poor performance / unfavorable market conditions or increase exposure during periods of strong performance / favorable market conditions. In this study, we formulate both a simple systematic trend-following strategy (i.e., trading model) to simulate investment decisions, and a market model to simulate the evolution of instrument prices. We then map the relationship between market model parameters under various conditions and strategy performance. We focus, in particular, on identifying the performance impact of changes in both serial dependence in price variability and changes in the trend. The long-range serial dependence of the true range worsens performance of the simple classic trend-following strategy. During periods of strong performance, the dispersion of trading outcomes increases significantly as long-range serial dependence increases.

Subject Areas

trend-following; Monte Carlo; sensitivity analysis

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