01 Jan Learning From Longboard's "Does Trend Following Work On Stocks?"

Trend following can work well on stocks. Buying stocks at new all time highs and exiting them after they’ve fallen below an ATR trailing stop would have yielded a significant return on average.

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.

The paper tested a trend following approach on individual stocks. They used all time highest close as the entry method to determine trend. For exit, they used 10x 45 day Average True Range trailing stops because they are universally applicable and commonly used by trend following programs. The evidence suggests that trend following can work well on stocks. Buying stocks at new all time highs and exiting them after they’ve fallen below an ATR trailing stop would have yielded a significant return on average. This is shown in the table from the paper (reproduced below).

Source: Longboard Asset Management

Research Paper: Does Trend Following Work on Stocks?

Authors: Cole Wilcox, Eric Crittenden

Company: Longboard Asset Management