Breaking into the Blackbox: Trend Following, Stop Losses, and the Frequency of Trading: The Case of the S&P500

19 Pages Posted: 8 Aug 2012

See all articles by Steve Thomas

Steve Thomas

City University London - Sir John Cass Business School

James Seaton

City University London - Sir John Cass Business School

Andrew Clare

City University London - Sir John Cass Business School

Peter N. Smith

University of York - Department of Economics and Related Studies; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Date Written: March 10, 2012

Abstract

In this paper we compare a variety of technical trading rules in the context of investing in the S&P500 index. These rules are increasingly popular both among retail investors and CTAs and similar investment funds. We find that a range of fairly simple rules, including the popular 200-day moving average trading rule, dominate the long only, passive investment in the index. In particular, using the latter rule we find that popular stop loss rules do not add value and that monthly end of month investment decision rules are superior to those which trade more frequently: this adds to the growing view that trading can damage your wealth. Finally we compare the MA rule with a variety of simple fundamental metrics and find the latter far inferior to the technical rules over the last 60 years of investing.

Keywords: trend following, S&P500, stop losses, trading frequency, fundamental investment metrics

JEL Classification: G10, G11, G12

Suggested Citation

Thomas, Stephen H. and Seaton, James and Clare, Andrew D. and Smith, Peter N., Breaking into the Blackbox: Trend Following, Stop Losses, and the Frequency of Trading: The Case of the S&P500 (March 10, 2012). Available at SSRN: https://ssrn.com/abstract=2126476 or http://dx.doi.org/10.2139/ssrn.2126476

Stephen H. Thomas (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 (0) 20 7040 5271 (Phone)
+44 (0) 20 7040 8881 (Fax)

James Seaton

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Andrew D. Clare

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Peter N. Smith

University of York - Department of Economics and Related Studies ( email )

Heslington
York 010 5DD
United Kingdom
+44 1904 433 765 (Phone)
+44 1904 433 759 (Fax)

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

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