Learning From 1741's "CTAs – Which Trend Is Your Friend?"

No single approach of trend measurement method can systematically deliver better results across all dimensions. To determine which method is appropriate, various aspects need to be considered. These include length of measured trend, the way signal is compared and conversion of signal into position.

In this article, Absolute Momentum will be used interchangeably with trend following or time series momentum. Relative Momentum will be used interchangeably with cross-sectional momentum or relative strength.

There is a trade-off between precision and delay of trend measurement. The more observations used to measure a trend the more delay in the measure. However the more observations used, the more information can be extracted from the time-series. On the flipside, using fewer observations in trend measurement reduces delay but also reduces precision.

In terms of measuring strength of a trend, comparison can be done with its own history and comparable time-series.

The paper describes the characteristics of two trend signals following trend measurements. The “Binary” signal only makes use of the direction of the trend measurement while the “Steady” signal follows closely the trend measurement. The stronger the measurement, the larger the position will be.

A sub-category of “Steady” signal, “Response function”, is described as increasing the position when the trend strength increases but in prolonged strength, the position is reduced to take profits.

Comparing information ratio, empirical comparison shows that the “Binary” signal and “Response function” produce comparable results while “Steady” signal underperforms.

A slow increase on the inception of a trend together with a continuous reduction as excessive trends emerge can evidently make a substantial contribution towards the stability of the trend-following process.

Research Paper: CTAs – Which trend is your friend?

Authors: Fabian Dori, Manuel Krieger, Urs Schubiger, Daniel Torgler

Company: 1741 Asset Management


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