Profitability of Suboptimal Trend-Following Rules

Valeriy Zakamulin () and Javier Giner ()
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Valeriy Zakamulin: University of Agder, Norway
Javier Giner: University of La Laguna

Chapter Chapter 13 in The Ultimate Moving Average Handbook, 2025, pp 473-502 from Springer

Abstract: Abstract Traders typically rely on backtesting to identify the best trading rule, believing it to be a reliable and thorough method. However, this chapter challenges that assumption by evaluating the precision of backtesting and finding it to be highly inaccurate. The analysis demonstrates that even with extensive historical data, the probability of correctly identifying the optimal trend-following rule remains low, leading traders to use suboptimal strategies. The chapter then quantifies the loss in profitability from employing non-optimal rules and examines whether these rules still provide an advantage over passive investment strategies. Surprisingly, the results show that while suboptimal rules do not maximize the performance of the trend-following strategy, they often perform comparably to optimal rules due to the high correlation in trading signals across different trend-following strategies. Moreover, even imperfect trend-following rules frequently outperform passive investing, highlighting the robustness of trend-following as a strategy. These findings suggest that while the search for the perfect trading rule may be futile, traders can still achieve strong results with a well-structured, albeit non-optimal, trend-following approach.

Keywords: Backtest limitations; Optimal versus suboptimal rules; Trading rule performance; Robustness of trend-following rules (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/978-3-031-90907-8_13

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