Does Trend-Following Still Work on Stocks?

Abstract

This paper revisits and extends the results presented in 2005 by Wilcox and Crittenden in a white paper titled Does Trend Following Work on Stocks? Leveraging a survivorship-bias-free dataset of all liquid U.S. stocks from 1950 through November 2024, we examine more than 66,000 simulated long-only trend trades. Our results confirm a highly skewed profit distribution, with less than 7% of trades driving the cumulative profitability. These core statistics hold up out-of-sample (2005–2024), maintaining strong returns despite a modest decline in average trade profitability following the original publication. In the second part of this study, we backtest a long-only trend-following portfolio specifically aimed at capturing outlier returns in individual stocks. While the theoretical portfolio exhibits exceptional gross-of-fees performance from 1991 until 2024 (e.g., a CAGR of 15.19% and an annualized alpha of 6.18%), its extensive daily turnover poses a significant challenge once transaction costs are considered. Examining net-of-fee performance across various asset under management (AUM) levels, we find that the base trend-following approach is not viable for smaller portfolios (AUM less than $1M) due to the dampening effect of trading costs. However, by incorporating a Turnover Control algorithm, we substantially mitigate these transaction cost burdens, rendering the strategy attractive across all tested portfolio sizes even after fees.

Keywords: Trend-Following, Momentum, Algo-Trading, Trading Systems, Stock Investing