Yes, it's simple. The hard part has to do with the human using it.
Are you prepared to risk your financial independence on this ?
One will get 'washed around' using stocks. Stocks, as you say, go up and down so no matter what one gets 'washed around'. If one think being 'washed around' is a problem one shouldn't invest in stocks (or anything) to begin with. The trend is our friend, the noise our enemy.
Personally I disagree with this premise. How do you handle being washed around ? Why have that problem ? Your point about the trend being your friend and the noise the enemy is true but how do you know this at that point in time. Are you prepared to risk your financial independence on squiggly lines on a chart ?
The beauty of the trend is the same sort of beauty found with the GB style portfolio. The smoothing out of the curve. It's the same basic fundamentals that the old school 60/40 portfolio is based on and tries to achieve. It's all about smoothing since a smoother curve is a great hedge against irrational human behaviour and emotion. We don't just fight with the index (the averages), we also fight with ourselves and our emotions. It's a war on two fronts. I don't like to fight wars in my spare time so any sort of smoothing that can be done and turn the war from a two front one to a single front one is great in my book.
I think you are stating that trend following is easier. I don't believe this. I think it's easier to buy and just sit there.
Please don't make this a thread about taxes, yes they're important but ... it's a huge topic. :-)
I think it's important to recognise this and I'll give an example why. I made something like $25k on one big trade years ago. I had an account of about $10K. Sounds great right ? I was a genius. I traded that thing with balls of steel and a great feel. I saw the trend, I waited for a pull back and I went in and in and in and held that until close to the end. I also got taxed half of that because I pay capital gains taxes on profits. The next year I lost something like $10k. Was I up $15k ? No - I was up $5k.
That you're down only 2% for something you refer to as pure gambling really doesn't seem too bad.
It's okay but my point is that I'm not betting my financial independence assets on some trend following theory. There are thousands of these theories out there. It's easier to see them with hindsight than it is to trade them consistently.
You seem to be one of the few to argue against having an exit strategy based on something tangible. If that works for you -- great.
I tell you how I learned that. I read all the books on trading. They all said have a stop loss. I know a guy who was a big trader. We are talking forex positions of $20 million of his own money. That is leveraged but every cent movement on that position is about $200k. He said if you have a stop loss you just get washed out and that you need to have balls to hold a position for a long time if you want to make money.
What professionals do and what you read are two different things.
You also seem to read my post as if one should apply a trending strategy on short term gains and high frequence trading. This thread is about a GB style portfolio and not about high frequency trading. The example i provided is definately more high frequency due to the 2 month MA, but it was just an example of optimizing for historical data not as a template for using trends (i would never use a short 2 month MA).
It's the same thing. It's just a mechanical set of trading rules based on squiggly lines on a chart.
I've highlighted the key point here though. It's an optimised solution that worked great in the past.
I'll tell another story. When I was trading I said okay I know how to use MS Access and I know trading. I'll come up with a system. It looked good but it didn't work. The same guy I'm talking about was bankrolled to do the same thing. They had a trader, some computer programmer and probably a tonne of money. It didn't work.
The guy I'm talking about is a multi-millionaire and he got there via trading. He has also done I think pretty well on his own account. At the same time he knows he loses money all the time and it's basically a gamble. I think most of his money was made trading other peoples money and getting paid a fortune to do it and then investing in a housing boom in which he simply bought low and held on for years.
I know another guy from school. He decided to get into trading. He got a job in it. He told one of my friends I've got a system. You bankroll me and we'll split the profits. He had all the data to state this is going to work. He lost all the money.
Another one to wrap up the longest post ever. The same guy I know who has a lot of money did the same thing. He took money off people and said I'm starting my own hedge fund. It failed. He was wealthy enough and had enough integrity to pay everyone back the lost money but the point is professional successful traders still lose money hand over foot.
Do you really think your edge is following a simple trend following system ? My edge is really simple - I realise that I can't predict the future and I use low cost index funds in a real simple asset allocation because I know that although I won't win the game I also won't lose it.