Market Pulse: We evaluate a trend-following stock strategy

On Fridays, the focus is on systematic stock strategies, strategies with clear rules for when we buy and sell, and how we manage positions and risk.

Those of you who are interested in systematic trading have probably come across the book Automated Stock Trading Systems. Sounds advanced, but it's not. The strategies are based on simple, classic concepts like trend following and equilibrium swings, and it doesn't require automated trading, you can just as easily check the signals and place the orders yourself with your broker.

This week we take one of the strategies from the book and put it to the test. The book was written in 2020, giving us a full six years of data the strategy had never seen when it was constructed, a true out-of-sample test, not just a pretty curve from the book.

We run it unchanged on US stocks first, exactly as in the book. Then we move the same exact rules to Swedish stocks, and this is where it gets interesting: the results suddenly look completely different. We dig into why, and it's about something more general than this particular strategy, something everyone who builds systematic strategies should understand.

In today's episode I'll go over:

1. The concept and rules behind the strategy
2. Backtest on the strategy from the book, USA
3. Backtesting on the Swedish market, and why the results look different
4. What we're doing about it, and a number that might look too good to be true

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