The Significance of Trading Frequency and Stop Loss in Trend Following Strategies
17 Pages Posted: 4 Nov 2013
Date Written: October 14, 2013
We investigate the impact of two practices generally leading to increased trading on a generic trend following model; the frequency of trading and stop loss rules. For generality, we use one of the most widely used indicators the moving average cross over and simulate portfolios comprised of liquid global futures markets. Firstly, we examine the return streams of daily vs. weekly traded portfolios. Contrary to the general expectation that a higher frequency of trading is more beneficial, we find that when applied to the same strategies, daily trading of portfolios does not significantly improve risk and return characteristics of the strategies. Secondly, we analyze the impact of implementing simple stop loss rules to both sets of portfolios. We find that these rules are the most effective in preventing severe losses but results are more ambiguous when the losses are within expected limits.
Keywords: Trading Frequency, Stop Loss, Trend Following, Futures
JEL Classification: G10, G11, G12
Suggested Citation: Suggested Citation