What drives trend-following profits in stocks? The role of the trading signals' volatility

We document the influence of stock volatility on trend-following profits for a global sample of 1618 blue-chip stocks, across 43911 evaluation subperiods (2004-2018). We use the price sensitivity of trend signals (i.e. signal volatility) to isolate the detrimental impact of high stock volatility manifested through excessive/inefficient trading. Despite its almost null correlation with the stocks' mean-variance characteristics, the signal volatility greatly complements them in explaining the time series variation in trend-following excess returns. The results hold for both the buy and sell excess returns, are robust across stock markets, and conserve after considering explicit and implicit trading costs. Investors can use ex postsignal volatility estimates as a valid criterion to choose across potential trading rules, according to their specific levels of risk aversion and transaction costs.