A trend following system has got rules.
Simple does work. It really does work. People tend to look for complexity.
People tend go for a strategy that has a higher winning percentage. But that’s wrong. Simplicity works best because simplicity is robust and it works exceptionally well. In my book ‘Unholy Grails’, towards the end I disclose a strategy called the 20% flipper. It’s remarkably simple.
Basically, if you buy (and it’s a long only trend following strategy) a stock that moves 20% from a low point buying with the momentum and buying with the trend, and you exit that position when it falls 20% from any specific high point, then on a portfolio of twenty individual stocks you’ve got an annualized return over the last fifteen years in excess of 20%. That’s a very simple yet robust strategy that works particularly well and it doesn’t matter what universe of stocks you trade it on.
The simple premise is, if a stock is going to double in price i.e. if it’s going to go up a 100%, it has to go up 20% first. It’s simple, it’s robust, and one of the things I try to get through to my clients is you need to intimately understand why your strategy will work. For trends to occur in the hundreds of percent, they must start by rising 20%.