Appendix B. Trend Following Models
Man can learn nothing unless he proceeds from the known to the unknown. | ||
| --Claude Bernard | ||
Paul Mulvaney, CIO of Mulvaney Capital Management Ltd., provided the following visual models of Trend Following:
According to Mulvaney, the “hockey stick’” diagram (A2.1) depicts how classic Trend Following models generate payouts analogous to long options positions. We know from options theory that the value of an option is dominated by the low probability/large magnitude events. The diagonal line slopes upward to infinity. Trend followers do not predict the extent of price changes but seek to capture large outsize moves over significant periods of time. The horizontal line represents the truncation of risk by stop placement, ...
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