ALGORITHMIC TREND FOLLOWING
Overview
Use a rule-based mechanical system to trade trends across a diversified portfolio of futures markets. The CTA (Commodity Trading Advisor) approach: pre-define every entry, exit, and position size rule so emotions never influence decisions. Systems trade energy, metals, rates, currencies, and grains simultaneously.
Setup
- 1.Define your trend signal: moving average crossover, Donchian channel breakout, or time-series momentum (12-month return).
- 2.Apply the signal to 10-20 diverse futures markets across asset classes (equity index, bonds, currencies, commodities).
- 3.Calculate position size using a volatility-normalized approach: target equal risk contribution from each market.
- 4.Use ATR-based stops — typically 2-3x the 20-day ATR to avoid being stopped out by noise.
- 5.Backtest across 20+ years of data; expect Sharpe ratios of 0.5-1.0 and max drawdowns of 20-35%.
Max profit
Systematic trend following has delivered 10-20% annualized returns over multi-decade periods, with its best performance during macro crises (2008, 2022).
Max loss
Long periods of choppy markets produce losing years. Trend following's worst environments are 2010-2019 era low-volatility range-bound markets.
Breakeven
Total commissions and data costs. Systems must generate enough signal to cover friction costs.
When to use
As a portfolio diversifier alongside equity-heavy portfolios — trend following is crisis alpha: it often gains when stocks crash.
When to avoid
As a standalone strategy if you can't tolerate 2-3 year drawdowns. Without proper capital allocation — systems require sufficient capital to trade all instruments and withstand drawdowns.