Trend Following

Trend following is an investment approach that seeks to profit from sustained price movements, buying assets that are rising and reducing exposure to those that are falling. It is closely related to Momentum investing but often applied at the portfolio or market level rather than individual stocks. Trend signals are typically derived from moving averages, breakout levels, or cumulative returns over specific lookback periods. When prices remain above trend thresholds, exposure is maintained or increased. When trends reverse, risk is reduced. Trend following works because markets often move in persistent waves driven by investor behavior, macro forces, and liquidity cycles. These trends can last longer than most participants expect. One of the strengths of trend following is drawdown control. By exiting positions when trends break, strategies can sidestep prolonged bear markets. However, trend systems can suffer during sideways markets, generating false signals and whipsaws. Trend following emphasizes discipline over prediction. It does not attempt to forecast tops or bottoms. Instead, it reacts to observable price behavior. In quantitative portfolios, trend following is often combined with other factors such as Quality or Low Volatility to balance growth with stability. Trend following captures the market’s direction, not its narrative.