How to improve the simple but popular Trend Following strategy?
Updated: May 30
Let’s talk about a commonly known trading strategy – trend following!
The trade setup:
Fast Moving Signal – 30 Day EMA Slow Moving Signal - 90 Day EMA
Go Long – When 30D EMA rises above 90D EMA Exit Long – When 30D EMA falls below 90D EMA
Do you think it’d be a good idea to trade this system?
Here’s the Equity Curve from the above trade setup
If you thought that back-testing your strategy is a waste of time, think again. If you thought that plain old trend following was a good strategy, think again!
Still, do you reckon we can improve it in some way?
Here’s the Drawdown from the trade setup
Thanks to back-testing reports, we know that the trend following strategy needs improvement. Let’s add a stop loss and look at the results, shall we?
We’ve added an ATR based stop loss to the trend following strategy. The results from our back-testing report show a better picture than the previous curves.
Do you think we can better optimize this? Drop your two cents in the comments section.
After adding a percentage-based stop loss to our basic strategy, we’ve been able to reduce the drawdown by more than 45%!
Let’s try adding a target profit and see what back-testing results that generates! Regardless of what happens , we will be back-testing another strategy next week. Got any ideas?
A quick glance at the Portfolio Equity Curve & Drawdown Curve from the strategy tells you that we’ve improved by a lot. Adding a stop loss and a target profit mechanism to the basic trend following strategy has helped.
Having seen the optimized results of this basic a strategy, we know that back-testing has made us come out of the better end of the tunnel.
Do you want us to back-test and improve your strategy next? Write to us at email@example.com with your query or call/Whatsapp on +91-9321136466
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