Trend following as one testable procedure

Entry tools were not shown as an edge

A 2013 systems critique stated that common entry tools had not been shown as a unique edge. The tools in view were indicators, historical price patterns, wave labels, and point-and-figure. Once those entries are quantified, the critique asked whether they beat a random entry.

After applying many named techniques, the author reported that each worked in some periods and failed in others. None reliably located huge moves before they began. None warned that a market had become untradable.

One joint procedure

The same critique treated trend following as a joint procedure rather than a search for a special entry. The design brief was to keep the rules simple, put more design weight on the exit than the entry, and search enough markets to catch a trend wherever it appears.

Market state over method selection

The dominant condition was market state. When price is already trending, most procedures look useful. When it is not, the work is drawdown control rather than method selection.

A low volatility-index reading sometimes coincided with later highs. Treating that reading as a stand-aside signal would have excluded the 1991-2000 and 2004-07 advances.

Visible one-directional strength

Two checkable observations were used to justify buying visible one-way strength. A 50% move has not occurred without a prior 10% move. The largest moves tend to remain one-directional. In this procedure, one-directional strength means price already moving persistently in one direction. It is a visible market-state input, not a forecast of a turn.

As of 16 February 2013, a ranking of the strongest moves among 26 widely traded ETFs listed natural gas down 72% with a 16% largest pullback and consumer discretionary up 58% with a 10% largest pullback.

A natural-gas chart was offered as a visible downtrend from about 50 to about 15 in 11 months after the 2011 high. It was presented as readable without an oscillator or an optimized moving-average envelope.

Exit, size, and abstention

The exit rule was to leave when one-way motion ends, regardless of whether the trade is already profitable. Sizing was set so a meaningful stop risks about 2% of equity.

Abstention was the explicit rule not to enter when no one-way trend is apparent. The procedure required scanning many markets. The author tracked 26 widely traded ETFs, standing aside when no trend is apparent, and rotating toward already-established trends if a home market stalls.