01 Jan Learning From Modus Quantitative Advisors' "The Significance of Trading Frequency and Stop Loss in Trend Following Strategies"
Trading higher frequency shows no significant benefits. Stop loss rules improve maximum drawdowns.
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 explores the impact of trading frequency on trend following strategies. The paper finds:
Contrary to the general expectation that a higher frequency of trading is more beneficial, we find that when applied to the same strategies, daily trading of portfolios does not significantly improve risk and return characteristics of the strategies.
For both daily and weekly portfolios, the strategy with the best risk-adjusted returns are generally the ones with shorter fast moving averages; i.e. 20 and 40 days and their weekly equivalents.
No matter the frequency of trading, the characteristics of the various strategies are not stationary over time and we notice a large degree of variability during the simulation period.
It should be noted that the average correlation between the return streams of daily strategies and their weekly equivalent is over 0.97. As you would expect, the least performing strategies have a slightly lower correlation coefficient though still higher than 0.60 across the board.
The paper also analysed the impact of implementing simple stop loss rules on a daily and weekly trend following portfolio. Stop loss rules are most effective in improving maximum drawdowns. Improvements are more effective for the longer term strategies which are naturally prone to severe drawdowns. However average drawdown and the time for recovery from the drawdown do not benefit much from the stop loss rules.
Research Paper: The Significance of Trading Frequency and Stop Loss in Trend Following Strategies
Authors: Farzine Hachemian, Sébastien Tavernier, CFA, Dr. Anne-Sophie Van Royen
Company: Modus Quantitative Advisors