Why do trend-followers do well during high volatility? Don't they get whipsawed?

helpme_please said:
High volatility means prices go zig-zag

Wouldn't trend followers get whipsawed during zig-zags?
Why do they do well during high volatility?
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It's a simple, and complex, answer at the same time -- could depend on a number of variables,

I wouldn't necessarily pinpoint an exact cause to a trader's success/failure at any given moment, o_O regardless of what any study might indicate,

I don't know, but the bottom line: it's all about your crystal ball, or 6'th sense market intuition, -- it kind of pays to be a slow slug and high bird...to kind of grasp different perspectives of things happening and unfolding,

I hope that small bit of wisdom kind of opens your eyeball a bit, -- only you can fully open it,

Watch these two 1999 movies... Rogue Trader and The Matrix over and over again,
 
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lawrence-lugar said:
It's a simple, and complex, answer at the same time -- could depend on a number of variables,

I wouldn't necessarily pinpoint an exact cause to a trader's success/failure at any given moment, o_O regardless of what any study might indicate,
More...

Would you mind sharing your insight on what is the simple answer?
 
CTAs do well on really big moves. Think Crude Oil 2014. That kind of volatility. Not a bit of whippy action in the spooz.
 
There is nothing "complex" about it, as some claim above. If the ranges expand or rotations get big enough, then the market becomes more "trade-able" (as speedo said) simply because you can take smaller risk for bigger pay-off. You can take multiple smaller losses before you catch the bigger move that pays off for losses and then some.

Imagine dead market, let's say ES trading in 5 point range throughout the entire day, for days or weeks. If you were to put 2.5pt stop and looking for 2:1 RR that would mean you would need to be able to catch top/bottom ticks. Might happen occasionally but you would lose over longer time.

Now, let's say that you have 20-30pt days (trend or range, doesn't matter), you may get hit a few times on your S/L, but now you would be looking for multiples on your R:R instead.

Of course you don't know what the day will be, so if your trading style is geared for volatility then you would do poorly in tight ranges. But in very tight ranges I guess most everyone does poorly. Think about that as it means trades are constantly trading between themselves for very small payoffs with relatively big risk. The end result would be BE at best, probably losses over time.

Dead markets (low volatility) could be compared to constant chop and traders should always stay away from chop as it is deadly for their accounts.
 
helpme_please said:
High volatility means prices go zig-zag. Wouldn't trend followers get whipsawed during zig-zags? Why do they do well during high volatility?

https://www.bloomberg.com/news/arti...t-chase-trends-are-this-year-s-biggest-losers
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I was once asked this question by Rob Engle (sorry for the econometrician name dropping) a few years ago. My short and pithy answer was "It's the wrong kind of volatility". True story.

More seriously: 'it depends what you mean by volatility'. Markets can zig zag or trend, and they can have high or low volatility. These aren't mutually exclusive: all these combinations are possible (zig/zag low vol, zig/zag high vol, trend low vol, trend high vol). It's the zig-zag rather than the vol level which kills trend following. All the vol does is determine position sizes, because of risk scaling.

When people talk about a high vol environment they are mostly talking about an environment when stocks are also falling - because stocks are the asset class that most people think of as 'the market'. And vol levels and stock prices are strongly inversely correlated (the market 'goes up the stairs and down the elevator') to a degree that doesn't occur in other asset classes [so it's a trend - with high vol].

In such an environment trend following looks good on a relative basis (since stocks are doing badly) but can also make money: (1) bonds go up, and most trend followers are structurally long bonds because of the carry, (2) they can make money on the short side for stocks once the downtrend is established, (3) other asset classes may also play along with the general risk off-ness of these enviroments eg crude oil rally in 2007/8.

Of course trend following will also make money in a long slow up trend with relatively low vol - i.e. any stock bull market.

People generally aren't talking about an environment when a wide variety of asset classes are exhibiting sharp volatility [zig zag, high vol]. Such behaviour is relatively rare, and wouldn't be so bad for trend followers since they would keep their positions relatively small because of the high vol. Trend following tends to lose money when vol is low but markets are rangebound, since they have larger positions (vol scaling). [zig zag, low vol].

GAT
Used to work in a trend following fund.
Still trend follows...
 
helpme_please said:
High volatility means prices go zig-zag. Wouldn't trend followers get whipsawed during zig-zags? Why do they do well during high volatility?

https://www.bloomberg.com/news/arti...t-chase-trends-are-this-year-s-biggest-losers
More...

Helpme_please, you seem to be curious about trend following as a trading method, so I'll inject my 2 cents into the conversation.

Getting whipsawed is a problem that everyone faces, not just a trend follower. How many times has your automatic stop been triggered, only to watch price rally to new highs? Doesn't matter what trading strategy you're using if your stops are not properly placed. And in the end, even if your stop price is optimal, you will still get randomly whipsawed on occasion. (Like Ed Seykota says: if you want to stop getting whipsawed, quit trading.)

There are 2 solutions to a trend trader who complains about getting whipped out of a highly volatile, non-trending stock. Solution #1 is simply to quit putting money into non-trending securities. If the trader insists that the security is indeed in a trend, or historically tends to trend, then he needs to implement Solution #2, which is to optimize the placement of stop loss orders.

I am a trend trader and there are plenty of securities that I simply avoid. Not because they are volatile, but because they, historically, do not trend well. There are plenty of highly volatile securities that do trend well (I personally trade as a trend-trader 3x ETFs on a regular basis, along with very active stocks), and have been rewarded handsomely along the way.
 
Nutnbutnoise said:
Helpme_please, you seem to be curious about trend following as a trading method, so I'll inject my 2 cents into the conversation.

Getting whipsawed is a problem that everyone faces, not just a trend follower. How many times has your automatic stop been triggered, only to watch price rally to new highs? Doesn't matter what trading strategy you're using if your stops are not properly placed. And in the end, even if your stop price is optimal, you will still get randomly whipsawed on occasion. (Like Ed Seykota says: if you want to stop getting whipsawed, quit trading.)

There are 2 solutions to a trend trader who complains about getting whipped out of a highly volatile, non-trending stock. Solution #1 is simply to quit putting money into non-trending securities. If the trader insists that the security is indeed in a trend, or historically tends to trend, then he needs to implement Solution #2, which is to optimize the placement of stop loss orders.

I am a trend trader and there are plenty of securities that I simply avoid. Not because they are volatile, but because they, historically, do not trend well. There are plenty of highly volatile securities that do trend well (I personally trade as a trend-trader 3x ETFs on a regular basis, along with very active stocks), and have been rewarded handsomely along the way.
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What's your site? Pm me details.
 
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