Is there a way of measuring the potential returns from trend following?
In my view, time frame, position sizing and diversification mechanism. My research says unequivocally that trend-followers should go long term. We have to hold positions beyond a certain horizon to beat transaction costs. Long-term trading is a way to avoid short-term randomness in the market; the level of trend versus short-term volatility is quite low, so long-term trading means not trading on noise. Also, the volatility of volatility is much lower at the long end than the short, so a long-term portfolio ought to be much more stable. In practice most trading is intra-day, followed by intra working week, and so on. Our round trip rate is quite low compared with other people, which suggests we are indeed relatively long term and chasing opportunities not many other people are chasing. Position sizing is influenced by market volatility estimates and the amount of trading capital on hand. Both of these fluctuate, so we have to decide if, how and when to rebalance. To give an example, if
