Backtesting the Trend Following Strategy

Let’s talk about a commonly known trading strategy – trend following!

The trade setup:

Fast Moving Signal – 30 Day EMA Slow Moving Signal – 90 Day EMA

Go Long – When 30D EMA rises above 90D EMA Exit Long – When 30D EMA falls below 90D EMA

Backtesting the Trend Following Strategy

Lets look at the backtested result: Here’s the Equity Curve from the above trade setup

And here’s the Drawdown from the trade setup

Thanks to back-testing reports, we know that the trend following strategy needs improvement.  In order to further optimize the strategy, let’s add a stop loss and look at the results, shall we?

We’ve added an ATR based stop loss to the trend following strategy. As a result, the strategy is further improved.

Do you think we can better optimize this? Drop your two cents in the comments section.

After adding a percentage-based stop loss to our basic strategy, we’ve been able to reduce the drawdown by more than 45%!

Let’s try adding a target profit and see what back-testing results that generates!

A quick glance at the Portfolio Equity Curve & Drawdown Curve from the strategy tells you that we’ve improved by a lot. Adding a stop loss and a target profit mechanism to the basic trend following strategy has helped.

Having seen the optimized results of this basic a strategy, we know that back-testing has made us come out of the better end of the tunnel. Hence, remember that backtesting is an important feature while developing a profitable strategy.

Do you want us to back-test your strategy next? Contact us via [email protected] or visit our website: for more information.

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