Some Observations on Trend Following: A Binomial Perspective

16 Pages Posted: 20 Jun 2019

Date Written: June 1, 2019


This paper uses a simple binomial framework to explore trend following. It shows (by counter example) that the existence of positive profits from trend-following strategies, on its own, provides no prima facie evidence on the efficiency or inefficiency of markets. In addition, it explores the most important feature of time series momentum investment strategies: the return shaping impact of trend following through its dynamic positioning. In a stylized efficient market setting (with no transaction costs), the paper shows that the dynamic nature of trend following shapes when profits and losses occur compared to a buy-and-hold strategy. There is, however, a conservation of “mass” in that gains and losses are shuffled across periods such that the unconditional distribution of profits is unaffected. In this sense, trend following, by construction, generates crisis alpha --- for crises where large losses occur over extended periods of time. Due to its ability to shape when profit and losses occur, trend following can provide significant portfolio diversification and hedging potential for those investors with strategic risk-on exposures.

Keywords: Trend Following, Time Series Momentum, Managed Futures, Commodity Trading Advisors, CTAs

JEL Classification: G1, G13, G14

Suggested Citation

Modest, David, Some Observations on Trend Following: A Binomial Perspective (June 1, 2019). Available at SSRN: or

David Modest (Contact Author)

QLS Partners LP ( email )

New York, NY NY
United States

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