Trend Following System Output: An Example

This week, as food for thought, I am presenting trading system output for an example trend following system. The first box shows the start date of the "test", the markets traded and percent risked on each trade:

The Overview box gives you an idea of return, drawdown and winning percent examples inherent in a trend following approach. The next chart shows what you could have expected yearly in terms of drawdown. In stark terms you can that you will have up and down periods when trading as a trend follower.

Returns can be as volatile as drawdowns:

Example Entry

The following trade was taken from the sample report above. A long trade in the December 1996 British Pound (CME: BP96Z) was signaled by a breakout on October 11, 1996. The long position was held until December 3, 1996.

You can see graphically where the entry was made:

This kind of research and investigation is the life of a trend follower, but please don't take this example for discussion as gospel. This was meant as an education article, not a system for you to run out and throw your money into. You have to do your homework!

Volatility v. Risk:
Trend Followers Understand the Differences

In presenting this sample trading system, with mentions of risk and volatility, I thought it was wise to paint the differences.

Volatility is the tendency for prices to change unexpectedly. Volatility and risk are not the same thing. Volatility is the up and down nature of markets. If your trading strategy expects the markets to move up and down, as markets often do, then you must be ready to deal with volatility specifically each and every day. Risk on the other hand is something different. If you risk 2% of your original capital on a particular trade, that is a real risk of capital. All traders should always be cognizant of how volatile a market is and what risk they are taking in that market.

Michael W. Covel is the founder and President of Trend Following. A researcher of the most successful Trend Following investment managers, he has been in the alternative investments industry consulting on Trend Following to individual traders, hedge funds and banks for ten years. His best selling book, Trend Following: How Great Traders Make Millions in Up or Down Markets, New Expanded Edition (Prentice Hall, November 2005) is a complete and concise guide to trend following. It includes interviews with great trend followers who have won millions if not billions in the market. The trading world has embraced the book with endorsements from Van K. Tharp, John Mauldin, Ed Seykota and many more. Trend Following is now in its fifth printing, and is currently available in a Japanese translation with Chinese, German, French, Korean and Russian translations soon to follow. Teaching and sharing unique insights about Trend Following trading and alternative investments has earned Mr. Covel respect as a rational and logical voice in uncertain times. Mr. Covel also writes for numerous industry publications including Your Trading Edge, Stocks, Futures and Options Magazine and International Petroleum Finance and is consistently quoted and interviewed by a variety of financial publications.

Mr. Covel is also Managing Editor at TurtleTrader.com, the leading Trend Following news and commentary resource since 1996. Thousands of visitors from more than 70 countries as well as hundreds of trading professionals engaged in years of debate and interchange making the site the rich archive of trading information, data and opinion that it continues to be today. TurtleTrader, one of the largest & strongest trading community on the web with over 7.5 million unique visitors since its inception, also functions as a resource center for the Trend Following Educational Course.

Justin Vandergrift is with Chadwick Investments. He can be reached at www.chdwk.com.