Trend-following: A Time Tested Trading Methodology Gets Better!

Trend-following is a well-known, successful futures trading methodology that has and will stand the test of time. It doesn’t, however, guarantee you’ll make a fortune or even profit. It’s a difficult methodology to implement, especially over long periods of time.

It is a technical type of trading that is simply what the name implies… following trends. Although, it is technical, the trader is in no way trying to predict price movements in the market. The trader simply listens to the market and follows it along, like a river that flows from north to south. The river sometimes flows east or west or even from south to north, but in the end continues in a southerly direction.

Below are examples of a good trade, followed by one that gave back most of its profits (this chart clearly shows the fortitude needed to trade this type of strategy).

Following the Trend: Good Trade in Crude Oil Futures.

Trend-following: Trade gave back all the profits (Wheat futures).

Three main obstacles to successful trend-following are: 1) large and long drawdowns 2) trendless markets (70 – 80% of the time trend-followers get whipped around and take several, small, consecutive losing trades) 3) a disciplined risk and money management component is essential or failure is almost certain.

In 2002, Nick Pingitore (founder of Commodity Trading Solutions, LLC) discovered a means to overcome these limitations. Trend-capturing was born.

Trend-capturing, like its predecessor, exploits moves in the market based on the underlying trend. However, it limits the amount of time spent in the market during the trend-less times (70-80% of the time) with highly advanced filters. It also uses an array of exits that are adaptive to the markets’ movements, open interest, volatility and volume to protect open equity profits by managing exits.

Below are examples of a good trend-capturing trade followed by a bad one – missing the move (no-trade).

Tend-capturing: Carving out or capturing the trend in wheat futures.

Tend-capturing: Missing the trade in crude oil futures (entry filters kept us on the sidelines).

The charts readily portray the differences between the two methods in futures trading.

These advanced concepts resulted in Commodity Trading Solutions’ Trading Strategy. This is a very robust, engineered trading strategy. You can learn more about it here.

Below are a couple more trend-capturing trading examples.

Tend-capturing: Capturing the trend in crude oil futures.

Tend-capturing: Capturing the trend and exiting on the top, corn futures - "perfect trade". Notice the previous losing trade - keeping our losses small!

Return from the the trend-following page back to the Commodity System Trading page.

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