WHAT IS TREND FOLLOWING?
By definition, trend following is a strategy that makes investment decisions through the use of mathematics and models which determine the general direction of the market. Most of these models are predicated on momentum.
We’ve provided below summary bullet points as to why we are strong advocates for utilizing trend-following as the cornerstone to our investment process.
• Profit In Up and Down Markets: Trend following doesn't swear an allegiance to a bull or bear market. It follows trends to the end. No matter how ridiculous trends might appear early and no matter how insanely extended they might appear at the end, follow trends. Why? They typically go farther than anyone expects. Ignore momentum at your own peril.
• No More Buy and Hold, Analysts, or Media: Trend following decision-making doesn't involve discretion, guesses, gut feelings, or hunches. It's not day trading or “Buy and Hope”. It doesn't involve passive indexing, in-and-out trading, or fundamental analysis. No more 24-hour news cycles, daily turbulence, or sensational hype. No black boxes or magic formulas either.
• No Predicting: Trends exist everywhere, always coming and always going. Markets are no different: They trend up and down. That being said, no one can predict a market trend, you can only react to one. Trend following never anticipates the beginning or end of a trend. It only acts when the trend changes. There is no need to figure out why a market is trending, just follow it! You don't need to understand electricity to use it.
• The Big Money of Letting Profits Run: Trend following at its best aims to compound Absolute Returns. It doesn't shoot for average. Trend following also has the unique ability to lie and wait for targets of opportunity. That means killing it on unpredictable surprises.
• Risk Management is Top Priority: Trend following always has defined exit protocols to control injury to your account. Stop losses and proper leverage usage are standard practice. Trend following also has low to negative correlations with most other investment opportunities.
• Takes Advantage of Mass Psychology: Trend following takes advantage of panicky, sheep-like social behavior. Strict discipline minimizes behavioral biases. It solves the eagerness to realize gains and reluctance to crystallize losses. Most behaviors are simply driven by the impulsive moment of now. Trend following wins because of that.
• Scientific Approach to Trading: Trend following doesn't require a belief, but rather it relies on unwavering scientific principles. Trend following uses rigid rules rooted in numbers. Think process, not outcome. Remember, frequency of correctness is not the issue, the magnitude of correctness is what truly matters.
• Strong Historical Performance in Crisis Periods: Trend following is adaptable to differing climates and environments performing best during periods of rising volatility and uncertainty. The unknown will happen again.
• No Traditional Diversification: Trend following is not restricted to any single market or instrument. A focus on price action allows trend following to be applied to an exceptionally large variety of markets. Price is the one thing that all markets have in common. Trend following is robust.