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Re Balancing your Portfolio When Trend Following

To often traders when they encounter markets that are not favorable they drop them to find the proverbial Holy Grail trending market. Stock traders as well as algorithmic traders seem to want to re balance once they get into a drawdown.These stock traders and algorithmic traders are trying to avoid the inevitable whipsaws and drawdowns. The reality is that past results in trend following have nothing to do with future results. I remember many algorithmic traders would trade the British pound and Japanese Yen because they trended. These trends subsided and those trend trades stopped. In order to give yourself the greatest potential to succeed overtime is let the markets tell you where they want to go and which markets are the strongest and the weakest. The only way you can do this is to nominally rank them. You need to have an open mind without any preconceived notions. When one trades in a systematic trend following method this is possible.

The urge to re balance or add or subtract markets leads to failure. Who ever said a portfolio of a trend follower is out of balance. It all boils down to those seeking certainty when in trend following there is no certainty. Those trying to re balance are not accepting the risks in their investment strategies.

The only re balancing one should ever consider is Buy the Strongest Markets and Sell the Weakest Markets. Knowing what to buy is one of the key ingredients of successful trend following.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts, commodity options or forex can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results. You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources.

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2 comments to Re Balancing your Portfolio When Trend Following

  • Timothy Phillips

    How would or does this apply to a short-term systematic, contrarian, market neutral approach to the markets.

    I always wonder how investors feel when traders (CTAs) pick and choose (adding and dropping) the markets they trade…vs staying with the original line-up of contracts in a portfolio?

    • andrabr9

      I personally have seen more success with mid to longer term trend following. As per your question about picking and choosing markets…I suggest looking at a large basket of markets and buying the strong ones…selling the weak ones if you can put on a low risk trade.
      Best
      Andrew

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