What is Trend Following?

Trend following is a systematic investment strategy that seeks to profit from long and short trends in markets across multiple horizons and multiple asset classes. It is a strategy based on the view that price trends tend to endure, and by systematically taking positions once trends are established, and by systematically taking small losing trades when stop loss rules are triggered, in the long term the strategy will deliver positively skewed, positive returns.

The strategy does not attempt to predict the price of an asset, but instead aims to buy an asset when its price is rising and sell when its price is falling. As well as investing in trends across different timeframes (or "look-back periods"), trend followers also use many different methodologies to calculate trends.

The following extract from author Michael Covel neatly sums up what we (and other trend following traders and hedge funds) believe, and use as a intellectual basis for pursuing this approach.


"Most investors attempt to study economic realities–supply and demand factors–that they believe underlie market values. They rely on government policy, economic projections, price-earnings ratios, and balance sheet analysis (and so on) to make buy and sell decisions... [they] crave “cause and effect” explanations and feel security in the illusion that there is a deeper understanding...

Trend following trading is different. It does not predict market direction.

Trend traders use an initial risk rule to determine their trading size at entry. That means you know exactly how much to buy or sell based on how much money you have. Changes in price may lead to a gradual reduction or increase of your initial trade. On the other hand, adverse price movements will lead to an exit. A trend trader’s average profit per trade is significantly higher than the average loss per trade....

Trend following aims to capture the middle, or the meat, of a market trend, up or down, for profit. You will never get in at the absolute bottom or get out at the absolute top. Stocks, ETFs, LEAPS options, bonds, currencies, futures, and commodities are all ripe to trade."