Note the confusing use of the term futures funds. The article should be speaking of trend following traders, not futures funds. We commonly see trend following called commodity trading advisors or CTAs or commodity funds. Trend following is a style. It’s not restricted to one market in particular. Stocks, bonds, currencies (FX), meats, energy, etc. can all be traded as a trend follower.

If you believe for a minute that trend following is only futures or commodities ponder again Jerry Parker’s wisdom (excerpts from Managed Account Reports):

I think another mistake we made was defining ourselves as managed futures, where we immediately limit our universe. Is our expertise in that, or is our expertise in systematic trend following, or model development. So maybe we trend follow with Chinese porcelain. Maybe we trend follow with gold and silver, or stock futures, or whatever the client needs. It’s called managed futures because that was the profit center at the FCMs. We’re trading these great systems, and testing, and making sure what we do has worked in the past. And being disciplined, and unemotional, and applying our methods to the futures markets. But limiting our trading to this one group of markets. We need to look at the investment world globally and communicate our expertise of systematic trading. You have Big Blue beating the world chess champion, and everybody saying yeah, that makes sense, I can understand that. We’ve not been able to maximize our opportunities with systematic trading. People look at systematic and computerized trading with too much skepticism. But a day will come when people will see that systematic trend following is one of the best ways to limit risk, and create a portfolio that has some reasonable expectation of making money. We’ve got to be there and ready to take advantage of the opportunity. I think we’ve miscommunicated to our clients what our expertise really is. Systematic trading is going to be better for everyone in the long run. Our methods will work on lots of different markets. The ones that are hot today, the ones that are not hot today. We don’t want to pigeon-hole ourselves as managed futures or commodities.

Trend Following with Stocks

Leon Cooperman comment on stocks.

Many of our clients trend follow on stocks alone, nothing else. You can trade stocks in many ways:

• Regular Stocks.
• LEAPS Options
• Single-Stock Futures

Why the “Managed Futures” Label Costs Practitioners Money

Parker’s Chinese porcelain example is not a joke. It is the clearest possible statement of what systematic trend following actually is: a methodology for identifying and following price trends in any liquid market where price is observable, regardless of the underlying asset. If Chinese porcelain prices were quoted in a liquid, transparent market, a systematic trend following approach would work there exactly as it works in crude oil futures or Japanese yen futures. The rules respond to price. The asset class is irrelevant.

The “managed futures” label stuck because the first practitioners used futures markets, and the regulatory category for their business was commodity pool operator or commodity trading advisor. These are legal and regulatory categories, not descriptions of the approach. Calling trend following “managed futures” is like calling surgery “scalpel work.” The scalpel is the instrument. The surgery is the practice. The futures contract is the instrument. The systematic trend following approach is the practice.

Parker’s Big Blue observation is acute. When IBM’s Deep Blue defeated Garry Kasparov in chess, the public immediately grasped the significance: systematic computational analysis can outperform human judgment in a complex domain. The parallel to systematic trading is direct. In trading as in chess, the rules-based systematic approach outperforms human judgment over a sufficient sample, not because the human lacks intelligence but because the system maintains consistency and objectivity under conditions where human judgment is distorted by emotion and noise. Parker’s frustration is that the trading public accepted this immediately for chess but applied excessive skepticism to trading.

The practical implication of Parker’s framework for individual traders is that the question “should I trade stocks or futures or forex?” is the wrong question. The right question is “what liquid markets produce price trends that my systematic rules can capture?” The answer is all of them, appropriately sized and managed. Regular stocks, LEAPS options, and single-stock futures each provide different risk/leverage profiles for the same systematic approach applied to equity price trends. The instrument is a choice. The approach is the expertise.

Frequently Asked Questions

Why is calling trend following “managed futures” a mistake?

Because it defines the expertise by the instrument rather than by the methodology. Managed futures is a regulatory category for funds that trade futures contracts. Systematic trend following is an approach that identifies and follows price trends using defined rules. The approach works on stocks, bonds, currencies, commodities, and futures. Defining it as managed futures limits the perceived universe to futures markets and excludes the vast majority of liquid global markets where the same methodology works equally well.

What did Jerry Parker mean by “maybe we trend follow with Chinese porcelain”?

He meant that the systematic trend following methodology is market-agnostic. Any liquid market with observable price data is a candidate for systematic trend following. Chinese porcelain is an extreme example chosen to make the point as vividly as possible: the approach is not about commodities or futures or any specific asset class. It is about following price trends using defined rules, which is applicable wherever transparent price data exists.

Can trend following work on individual stocks without using futures?

Yes. Many practitioners apply systematic trend following rules directly to equity prices using regular shares, LEAPS options for longer time horizons with defined maximum loss, or single-stock futures for capital efficiency and bidirectional capability. The same entry criteria, exit rules, and position sizing principles that apply to futures markets apply to equity instruments. The instrument changes the mechanics slightly. The methodology is identical.

Trend Following Systems
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