Trend Following (Futures)
Capture sustained moves across commodities, rates, FX, and equity indices using normalized price breakout signals.
Thesis (edge)
Markets trend; breakouts from consolidation often continue. By trading a basket of liquid futures with volatility-scaled positions, we capture a portion of large moves while limiting risk per market.
Where it works (regimes)
Strong in sustained bull or bear trends (e.g. 2020–2021, 2022). Weak in choppy, range-bound regimes. Long volatility of returns; benefits from diversification across asset classes.
Signals
- Donchian channel: long when price > high(55), short when price < low(55).
- Entry filter: only enter if ATR(20) confirms expansion (optional).
- Exit: trailing stop or time-based (e.g. 20-day hold).
Portfolio construction
Equal risk contribution across markets (e.g. target 1% vol per market). Max 2–3% total vol. No intraday; daily bars only.
Risk model
Tail: correlated drawdowns across markets in regime shift. Stress: 2020 March: many breakouts reverse. Use vol targeting and position limits.
Costs & implementation
Moderate turnover. Slippage on futures; use limit orders. Roll costs for continuous series.
Failure modes
Whipsaws in sideways markets; lag after trend reversal; overfitting to lookback lengths.
Our Notes & Suggestions
Walk-forward test lookback and exit rules. Prefer liquid, exchange-traded futures. Consider trend strength filter (e.g. ADX) to reduce false breakouts.
Our Notes & Suggestions
See the "Our Notes" subsection in the body above for practical guidance, gotchas, and best practices. Always validate regime assumptions and transaction cost assumptions before scaling.
Implementation Checklist
- Define Donchian lookback (e.g. 20/55)
- Scale position by ATR inverse
- Set max drawdown / vol target
- Implement daily roll and execution logic