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Why do CTAs mostly use trend-following systems?

Discussion in 'Trading Strategies/Systems' started by helpme, Aug 21, 2016.

  1. helpme

    helpme

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    Why the preference for trend-following and the neglect for mean-reversion strategies?
     
  2. Triathlete

    Triathlete Keep it Simple..!

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    Here is my view:

    With trend following you are buying into a stock which has already started moving in the direction you want it to go whether up or down so you could say you are getting instant growth to a certain point until the trend stops and you get out if you believe there is no more move in the stock.

    With a mean reversion strategy you may have found a stock that is undervalued to its mean price but we do not know when the market see the value in this and starts to correct itself, so in other words you may not get any growth out of the stock for weeks or months.....so this could be classed as opportunity cost lost.

    That is my understanding.....
     
  3. CanOz

    CanOz Home runs feel good, but base hits pay bills!

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    First of all is this really FACT?
     
  4. RowanC

    RowanC

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    My opinion is that futures show more of a tendency to follow momentum and are therefore are more suitable for CTA's who use trend following models.

    I also think that futures don't inherently show high levels of co-integration which is important for mean reversion strategies, compared to say equities.

    That said there are CTA's that use mean reversion and there is plenty of research to support momentum in stocks.
     
  5. Trendnomics

    Trendnomics

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    Liquidity is a big problem when you have a large fund - hence, the avoidance of trading individual equities by CTA's - this creates an obvious opportunity for retail traders.

    Most of the CTA's with long successful track records, are adhering to trend-following models.
     
  6. Beej

    Beej

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    I reckon it's because with Commodities, how do you determine fundamental value? It's very difficult - the value of a commodity is driven almost purely based on global supply/demand - price can easily be driven below production cost for many producers, and can also be driven by excessive demand to prices many multiples of production cost for long periods of time. You don't have things like earnings ratios, earnings / revenue growth forecasts, capital reserves / debt, book value, management quality etc etc to look at and build a valuation around like you do with say a cash equity stock.

    Also the commodity markets tend to have "big" uni-directional moves over medium / long and extra long periods of time frames, and with an ultimate change in long term direction being quite sudden and severe (thing the oil price over the past 5 and 10 years for example).

    Re mean reversion - what would mean-reversion mean in the context of trying to value a single commodity? What's the mean value of copper? Gold? Wheat? Pork Bellies? Cattle? I don't think there is such a thing?

    As a result, any speculative and especially systematic commodities / futures trading (which is what a lot of the CTAs engage in) will tend towards trend-following to some extent, in order to capitalise on the price directional moves. In a way, the only true read you can get on the underlying supply / demand balance is from the price action in the commodities markets - so you could argue following the trend is also following the fundamentals.
     
  7. minwa

    minwa

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    Lol, NO.

    CTAs are only authorized to trade futures/future options/FX, not equities - nothing to do with liquidity of stocks. If they want to trade equities they need other licenses.

    Also the largest of funds (way bigger than CTAs) trades mostly individual equities - again liquidity has nothing to do with it. Have a look at Soros's fund holdings. Does his fund avoid individual equities ? http://www.insidermonkey.com/hedge-fund/soros+fund+management/2/
     
  8. Trendnomics

    Trendnomics

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    Please read my response in relation to the thread's title: "Why do CTAs mostly use trend-following systems?".

    Last time I checked George Soros was not a trend-follower.

    A predominant number of trend-following hedge funds are CTA's - due to the excellent liquidity and availability of additional trading hours.

    http://dunncapital.com/index.php

    DUNN.png

    http://www.dunncapital.com/pdfs/DUNN-Wall-Street-Transcript.pdf
     

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  9. minwa

    minwa

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    You said CTA don't consider individual equities for trend following because of no liquidity. A pure CTA don't even trade equities - why would they even consider and disregard it because of lack of liquidity ?

    Anyone that is profitable trading/investing is a trend follower in their time frame, no exceptions.

    It's just a term thrown around in the retail world to sound sophisticated.
     
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