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Trend followers lose more often than they gain
__Marc Potters and Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management) write:__
~~purple:A question often asked by investors to fund managers, besides the average return of their strategies, is: ?What is your fraction of winning trades?? Implicitly, they expect the answer to be larger than 50% , as this would indicate that the fund manager is more frequently right than wrong, and therefore trustworthy. We want to show in this paper that this fraction is in fact meaningless. It depends entirely on the trading style of the manager, and tells very little about the consistency of his returns...~~
__Abstract__
We solve exactly a simple model of trend following strategy, and obtain the analytical shape of the profit per trade distribution. This distribution is non trivial and has an option like, asymmetric structure. The degree of asymmetry depends continuously on the parameters of the strategy and on the volatility of the traded asset. While the average gain per trade is always exactly zero, the fraction f of winning trades decreases from f=1/2 for small volatility to f=0 for high volatility, showing that this winning probability does not give any information on the reliability of the strategy but is indicative of the trading style.
You can get the paper from arXiv as a PDF [http://xxx.lanl.gov/PS_cache/physics/pdf/0508/0508104.pdf|here] or in other formats [http://www.unifr.ch/econophysics/PHP/formulaire/redirect.php?year=2006&code=physics/0508104&version=abs|via Econophysics Forum] who have just produced their latest [http://moneyscience.org/tiki/tiki-view_forum_thread.php?forumId=16&comments_parentId=1912|selection of papers].
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