In a paper published in 2005, Wilcox et al. [1] showed that trend following worked on single-name stocks. Twenty years later, they retested the methodology using new, survivorship bias-free data [2].
Basically, the trading system works as follows:
- Entry: If, at the close of day t, a stock meets the price and liquidity filters, and its closing price equals or exceeds the highest adjusted close in its history, a buy order is placed at the open on day t + 1.
- Exit: At the close of day t, a trailing stop level is calculated using the Average True Range (ATR). This trailing stop is updated daily but never lowered. If, at the close of day t, the stock’s price falls below the trailing stop level, a sell order is executed at the open on day t + 1.
The authors pointed out,
This study highlights the sustained potential of long-only trend-following strategies applied to U.S. equities, building on and extending the foundational research of Wilcox and Crittenden [1]. By analyzing over 75 years of data and more than 66,000 trades, the paper confirms the profitability of trend-following systems, driven by a small number of outsized winners that compensate for more frequent, smaller losses. The strategy’s ability to thrive in various market conditions underscores its robustness, even in the face of evolving market dynamics.
In summary, even after 20 years, the original method remains profitable. However, under realistic conditions, transaction costs made it impractical, particularly for small accounts. To address this issue, the authors implemented a cost-saving mechanism to manage transaction costs. As a result, after accounting for transaction costs, small accounts became more profitable.
…While the theoretical model demonstrates exceptional performance, with a compound annual growth rate (CAGR) of 15.02%, an annualized alpha of 6.19%, and a maximum drawdown of 31.75%, the practical implementation of this strategy is challenged by high turnover and transaction costs. These obstacles, particularly impactful for smaller portfolios, were addressed by introducing a Turnover Control mechanism, which significantly enhances cost-efficiency and ensures alignment with theoretical results.
We believe the results are commendable, but we note a highly skewed profit distribution, with less than 7% of trades driving cumulative profitability. This makes it challenging for a small account to select the right stocks to trade profitably.
Let us know what you think in the comments below or in the discussion forum.
References
[1] C. Wilcox, & E. Crittenden, Does Trend-Following Work on Stocks? The Technical Analyst, 14, 1-19, 2005
[2] Zarattini, Carlo and Pagani, Alberto and Wilcox, Cole, Does Trend-Following Still Work on Stocks? 2025. https://ssrn.com/abstract=5084316
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