Trading Market Bubbles

The huge recent rally in global equity markets has sparked plenty of commentary about whether the apparent disconnect between financial markets and the state of the economy represents a “bubble”. Even if you believe equity valuations are overdone, trying to predict markets is challenging and potentially costly if you stay out of markets that look expensive as they continue to rally.

Trend following can be a very useful approach to trading rather than trying to make market predictions. Of course, these strategies will not switch at the absolute peak or trough of any market, but trend following systems can allow investors to benefit from rising asset prices whilst also providing clear exit signals as prices begin to turn down. For example, trend following strategies benefited strongly from the most recent equity bull markets, but exited early enough to miss most of the losses of the 1999 tech crash and the 2008 global financial crisis.

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