Trend-following strategies use past price performance in an attempt to predict future price performance. While widely applied in currency markets with a good track record for major currency pairs, the strategies do not apply universally. This paper1 investigates the conditions under which trend-following works, or fails to work.
A new model created from simulations and later verified on G10 currency pairs assesses trend model profitability from the statistical features of the return distribution of the asset under consideration. The results and examples facilitate the selection of appropriate currencies or assets for inclusion in trend models going forward.1 Henrik H. Pedersen and Gerben J. de Zwart, 2004, ‘Uncovering the trend-following strategy’, The Journal of Portfolio Management.
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