For those stumbling across this strategy for the first time, I have provided some words of caution below.
1) Philosophical Economics points out
that backtests of many/most (all?) trend following strategies assume no bid-ask spreads, or other commissions. Why? Because this isn't much of an issue any longer. However, "the average spread from 1928 to 1999 was north of .60%, a number that would have completely destroyed any strategy that traded daily–and that would have significantly impaired strategies that traded monthly or even quarterly." Factor this into the backtests and the results are much less optimistic.
2) Rekenthaler’s Rule
: "If the bozos know about it, it doesn’t work anymore."
3) As ERN notes
, "the momentum signal also creates a lot of false signals! For short-term market fluctuations, this signal sucks!" So, you need to be committed to this strategy for the long-term.
4) "Timing luck"
looms large in many trend following strategies. For example, executing trades on the last day of the month versus the first day of the month may lead to significantly different outcomes. Executing trades intra-day (i.e., using ETFs) versus at the end of the day (i.e., using mutual funds) can also lead to different outcomes. Not executing trades because you are on vacation, ill, or timid can also lead to different outcomes. It would be ideal to automate this, but that's likely not possible without additional fees that would erode much (if any) of the value of the strategy.
All this said, I acknowledge that there is plenty of evidence that momentum / trend following strategies have worked in the past and there are viable behavioral theories why it may persist in the future. Each investor needs to develop a strategy and stick with it. For many of the reasons above, I have concluded that this strategy is not right for me at this time.
@willthrill81 - please do not consider any of the above comments a critique of your personal choice. It sounds like you have thought through this in detail and are prepared to stick with it. I provide the comments above for the consideration of those who stumble across this topic for the first time. The basic message here is don't try it unless you have done your research, established a system, and are prepared to stick with it.