The investment universe consists of 125 US stocks. This universe is screened to form a portfolio of 20 stocks that are trading above their 200 day moving average. If a stock falls below its 200 day moving average, it is replaced with another stock that is above its 200 day moving average.
Why does it work?
People tend to ridicule trend followers who "buy things that are going up, and sell things that are going down" thinking that it is foolish to buy stocks that are "expensive". However, doing things that are comfortable in the market rarely works. Most people are comfortable buying a deal when stocks are cheap and find it uncomfortable buying stocks that are getting more expensive.
Trend following works because trends tend to persist. Stocks that are going down tend to continue going down while stocks that are going up tend to continue going up. It is not about buying high and selling low but rather buying when the price starts rising and selling when the price starts falling. The advantage of trend following is that the strategy sells early in a bear market and then buys when prices start to recover. When there are big trends in the market, trend following can produce outstanding returns.
Source: Behaviorgap via Econonpicdata.
What is the performance?
A verified adjusted-price backtest is not currently available for this example. Annualized return, volatility and maximum drawdown cannot currently be confirmed. Current positions are also unavailable.
What are the current positions?
Verified current positions are unavailable for this example. The former holdings discussion described the 2020 COVID-19 period and should not be treated as current holdings.
Research paper
Cole Wilcox, Eric Crittenden: Does Trend Following Work on Stocks?
https://www.cis.upenn.edu/~mkearns/finread/trend.pdf