How to Choose a Trend-Following System

Look Back

It may sound obvious, but one of the most important considerations in choosing a system is its track record. Is it backtested? Does it have a live track record as well?

Backtesting is key; it reconstructs trades within certain parameters using historical data. A strategy that worked well in the past over long periods and varied market conditions is likely to work well in the future. What's important to understand is that there are many approaches to backtesting -- some that are very credible and some that are dubious. So you want to double-check any history with a live track record.

Look for Advice

Any company can tell you how great their system is and can slice and dice the way it presents its results. Check out the credibility of the service and people who run it. Who are the people behind the system? Are they known and respected in the investment community? There are some systems on the Internet that don't include even basic information like who runs them and where they're based. If you are going to trust somebody's investment advice, you need to be fully able to trust the individuals making the recommendation.

But you don't have to rely on your own gut instinct. That's where the value of independent verification comes in. Both Hulbert and TimerTrac are independent investor subscription services that monitor and evaluate investment newsletters and market-timing systems in the marketplace.