Trend Following
A strategy that enters in the direction of the established trend and rides it until structural evidence of a reversal appears.
Trend following is the discipline of buying strength and selling weakness — entering after a trend is confirmed and holding until that trend breaks. It is the opposite of mean reversion and is based on the empirical observation that markets exhibit serial correlation (trends persist).
Key principles:
- Let winners run; cut losers quickly.
- Use pullbacks to trend support (moving averages, trendlines) as lower-risk entries rather than chasing breakouts.
- Accept that many small losses fund the occasional large winner.
Trend following underperforms in choppy, mean-reverting environments — knowing market regime is as important as the technique itself.