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Trend following

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they perceived that a trend has established with their own particular reasons or rules) and ride it. These traders normally enter in the market after the trend "properly" establishes itself, betting that the trend will persist for a long time, and for this reason they forego the initial turning point profit. A market "trend" is a tendency of a financial market price to move in a particular direction over time. If there is a turn contrary to the trend, they exit and wait until the turn establishes itself as a trend in the opposite direction. In case their rules signal an exit, the traders exit but re-enter when the trend re-establishes.
1294: 1284: 1274: 1304: 981: 78:. An initial risk rule determines position size at time of entry. Exactly how much to buy or sell is based on the size of the trading account and the volatility of the issue. Changes in price may lead to a gradual reduction or an increase of the initial trade. On the other hand, adverse price movements may lead to an exit from the entire trade. 92:
Let's break down the term Trend Following into its components. The first part is "trend". Every trader needs a trend to make money. If you think about it, no matter what the technique, if there is not a trend after you buy, then you will not be able to sell at higher prices..."Following" is the next
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Trend following is an investment or trading strategy which tries to take advantage of long, medium or short-term moves that seem to play out in various markets. Traders who employ a trend following strategy do not aim to forecast or predict specific price levels; they simply jump on the trend (when
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Some traders may exit the market when they perceive a downtrend in order to minimize losses and to avoid becoming ‘trapped’ in a stock that has fallen well below their held cost average. Conversely, traders may "let the profits run" when the market trend goes as expected until exhausted, at which
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It is possible that a majority of the trades may be unprofitable, but by "cutting the losses" and "letting profits run", the overall strategy may be profitable. Trend trading is most effective for a market that is quiet (relative low volatility) and trending. For this reason, trend traders often
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and channel breakouts. Traders who employ this strategy do not aim to forecast or predict specific price levels; they simply jump on the trend and ride it. Due to the different techniques and time frames employed by trend followers to identify trends, trend followers as a group are not always
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showing where price may go next or what it should be but as a general rule these should be disregarded. A trader need only be worried about what the market is doing, not what the market might do. The current price and only the price tells you what the market is
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Cut losses is the rule. This means that during periods of higher market volatility, the trading size is reduced. During losing periods, positions are reduced and trade size is cut back. The main objective is to preserve capital until more positive price trends
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In addition to quiet low volatility markets, where trend following strategies perform well, trend trading is also very effective in high volatility markets (market crash). Trend traders "short" the market and benefit from the downside market trend.
50:(CTAs) as the predominant strategy of technical traders. Research done by Galen Burghardt has shown that between 2000-2009 there was a very high correlation (.97) between trend following CTAs and the broader CTA index. 37:
There are a number of different techniques, calculations and time-frames that may be used to determine the general direction of the market to generate a trade signal, including the current market price calculation,
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the strategy, using actual data and would evaluate the strategy. The simulator would generate estimated number of trades, the fraction of winning/losing trades, average profit/loss, average holding time, maximum
109:: People tend to look for information that confirm their views and beliefs. This can lead investors to buy assets that have recently made money, and sell assets that have declined, causing trends to continue. 63:
point profits are taken. Some traders may set a specific stop limit or sell once a certain return has been met, or sell at a point once unrealized profits begin diminishing as a stock falls back down.
115:: Some risk-management models will sell in down markets as, for example, some risk budgets have been breached, and buy in up markets as new risk budgets have been unlocked, causing trends to persist. 720: 173:
Another decisive factor of trend following is not the timing of the trade or the indicator, but rather the decision of how much to trade over the course of the trend.
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Covel, Michael W. (2009). Trend Following (Updated Edition): Learn to Make Millions in Up or Down Markets. FT Press; 1 Updated edition (February 25, 2009).
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Exit: Exit long and go short the next day when 100 period SMA crosses over 50 period SMA. The crossover suggests that the trend has turned down.
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Trend following should be systematic. Price and time are pivotal at all times. This technique is not based on an analysis of fundamental
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on stop losses set the risk per trade anywhere between 1%-5% of capital for a single trade; this risk varies from one trader to another.
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A trader would identify a security to trade (currencies/commodities/financials) and would come up with a preliminary strategy, such as:
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focus on commodities, which show a stronger tendency to trend than on stocks, which are more likely to be mean reverting (which favors
231:(SMA) crosses over the 100 period SMA, go long when the market opens. The crossover suggests that the trend has recently turned up. 858: 800: 732: 688: 666: 647: 625: 603: 581: 555: 380: 459: 93:
part of the term. We use this word because trend followers always wait for the trend to shift first, then "follow" it.
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The key reasons for trending markets are a number of behavioral biases that cause market participants to over-react:
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Christensen, Hugh (2012). "Forecasting High-Frequency Futures Returns Using Online Langevin Dynamics".
134:, i.e., if the broad market is moving up, do not bet on a downward move. The term "tape" refers to the 1259: 1203: 922: 849: 793: 47: 771: 1096: 966: 319: 162:
One of the first rules of trend following is that price is the main concern. Traders may use other
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Trend Following: How Great Traders Make Millions in Up or Down Markets, New Expanded Edition
240:: Set a stop loss based on maximum loss acceptable. For example, if the recent, say 10-day, 200:
shows that cross asset diversification is an essential part of professional trend following.
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Way of the Turtle:The Secret Methods that Turned Ordinary People into Legendary Traders
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goes up, and sell when its trend goes down, expecting price movements to continue.
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The Complete TurtleTrader: How 23 Novice Investors Became Overnight Millionaires
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Trend Following (Updated Edition): Learn to Make Millions in Up or Down Markets
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is 0.5% of current market price, stop loss could be set at 4x0.5% = 2%.
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The Complete TurtleTrader: The Legend, the Lessons, the Results
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This trading or "betting with positive edge" method involves a
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Swing Trading: Power Strategies to Cut Risk and Boost Profits
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Valeyre, S. (2024). "Optimal trend-following portfolios".
358:"Measuring the impact of trend following in the CTA space" 452:
Following the Trend: Diversified Managed Futures Trading
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component that uses three elements: number of shares or
745:(November 2015). "Trend Following - Expected Returns". 511:
IEEE Journal of Selected Topics in Signal Processing
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according to which one should buy an asset when its
598:. FT Press; 1 Updated edition (February 25, 2009). 355: 118:"Don't fight the tape" is a term that means do not 74:held, the current market price, and current market 576:. Financial Times Prentice Hall (March 19, 2007). 569: 1320: 794: 1278:Alternative investment management companies 1255:Standards Board for Alternative Investments 508: 412:by John Downes, Jordan Elliot Goodman 2003 1303: 1159:Taxation of private equity and hedge funds 801: 787: 410:Barron's finance & investment handbook 356:Dr. Galen Burghardt (December 13, 2010). 196:Research published by hedge fund manager 642:. Collins Business (February 24, 2009). 364: 741: 697: 675: 495: 325: 1321: 449: 859:fixed-income relative-value investing 782: 656: 634: 612: 590: 564: 545: 370: 719: 43:strongly correlated to one another. 373:Trade Your Way to Financial Freedom 87:Trade Your Way to Financial Freedom 13: 548:Trend Trading: Timing Market Tides 489: 146:. It is analogous to the trader's 14: 1345: 454:. Wiley & Sons. p. 300. 153: 1302: 1293: 1292: 1283: 1282: 1273: 1272: 979: 498:Journal of Investment Strategies 808: 550:. John Wiley & Sons, Inc. 468: 443: 423: 403: 349: 332: 150:, "The trend is your friend." 1: 620:. Collins (October 9, 2007). 227:Entrance: When the 50 period 53: 1133:security characteristic line 703:"How to determine the trend" 7: 1121:Capital asset pricing model 840:Capital structure arbitrage 450:Clenow, Andreas F. (2012). 276: 46:Trend following is used by 10: 1350: 923:Commodity trading advisors 531:10.1109/JSTSP.2012.2191532 432:by David Logan Scott 2003 204: 48:commodity trading advisors 1268: 1260:Managed Funds Association 1242: 1204:High-net-worth individual 1176: 1084: 1038: 1029: 988: 977: 955: 910: 877: 825: 816: 727:. John Wiley & Sons. 657:Faith, Curtis M. (2007). 1097:Arbitrage pricing theory 395:: CS1 maint: location ( 320:Mean reversion (finance) 1209:Institutional investors 1102:Assets under management 927:managed futures account 546:Brown, Kedrick (2006). 1234:Sovereign wealth funds 1006:High-frequency trading 855:Fixed income arbitrage 766:Cite journal requires 371:Tharp, Van K. (1998). 252:The trader would then 213:Commodity: soybean oil 95: 1076:Structured securities 892:Distressed securities 864:Statistical arbitrage 850:Equity market neutral 845:Convertible arbitrage 229:simple moving average 138:used to transmit the 90: 1194:Financial endowments 1139:Fundamental analysis 887:Shareholder activism 869:Volatility arbitrage 326:Notes and references 1308:List of hedge funds 1298:Hedge fund managers 1214:Insurance companies 1199:Fund of hedge funds 1107:Black–Scholes model 1021:Proprietary trading 996:Algorithmic trading 963:Fund of hedge funds 523:2012ISTSP...6..366C 375:. 83: McGraw-Hill. 283:Algorithmic trading 246:Conventional wisdom 1334:Technical analysis 1164:Technical analysis 725:The Art of Trading 299:Related phenomena: 242:average true range 216:Trading approach: 1316: 1315: 1172: 1171: 975: 974: 942:Long/short equity 918:Convergence trade 902:Special situation 734:978-1-876627-63-8 721:Tate, Christopher 690:978-0-471-20678-1 668:978-0-07-148664-4 649:978-0-06-124171-0 636:Covel, Michael W. 627:978-0-06-124170-3 614:Covel, Michael W. 605:978-0-13-702018-8 592:Covel, Michael W. 583:978-0-13-613718-4 566:Covel, Michael W. 557:978-0-471-98021-6 430:Wall Street words 382:978-0-07-064762-6 188:supply and demand 171:Money management: 132:financial markets 107:Confirmation Bias 1341: 1306: 1305: 1296: 1295: 1286: 1285: 1276: 1275: 1219:Investment banks 1066:Foreign exchange 1036: 1035: 983: 823: 822: 803: 796: 789: 780: 779: 775: 769: 764: 762: 754: 738: 716: 714: 713: 694: 677:Markman, John D. 672: 653: 631: 609: 587: 575: 561: 542: 505: 483: 472: 466: 465: 447: 441: 427: 421: 407: 401: 400: 394: 386: 368: 362: 361: 353: 347: 336: 194:Diversification: 81:In the words of 28:trading strategy 16:Trading strategy 1349: 1348: 1344: 1343: 1342: 1340: 1339: 1338: 1319: 1318: 1317: 1312: 1264: 1250:Fund governance 1238: 1168: 1092:Absolute return 1080: 1031: 1025: 1016:Program trading 1011:Prime brokerage 984: 971: 951: 947:Trend following 932:Dedicated short 906: 873: 830: 818: 812: 807: 767: 765: 756: 755: 735: 711: 709: 701:(August 2006). 691: 669: 661:. 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Opalesque TV. 354: 350: 337: 333: 328: 279: 207: 156: 113:Risk Management 68:risk management 56: 40:moving averages 20:Trend following 17: 12: 11: 5: 1347: 1337: 1336: 1331: 1314: 1313: 1311: 1310: 1300: 1290: 1280: 1269: 1266: 1265: 1263: 1262: 1257: 1252: 1246: 1244: 1240: 1239: 1237: 1236: 1231: 1226: 1224:Merchant banks 1221: 1216: 1211: 1206: 1201: 1196: 1191: 1189:Family offices 1186: 1180: 1178: 1174: 1173: 1170: 1169: 1167: 1166: 1161: 1156: 1151: 1149:Securitization 1146: 1141: 1136: 1118: 1104: 1099: 1094: 1088: 1086: 1082: 1081: 1079: 1078: 1073: 1068: 1063: 1058: 1053: 1048: 1042: 1040: 1033: 1027: 1026: 1024: 1023: 1018: 1013: 1008: 1003: 998: 992: 990: 986: 985: 978: 976: 973: 972: 970: 969: 959: 957: 953: 952: 950: 949: 944: 939: 934: 929: 920: 914: 912: 908: 907: 905: 904: 899: 897:Risk arbitrage 894: 889: 883: 881: 875: 874: 872: 871: 866: 861: 852: 847: 842: 836: 834: 832:relative value 820: 814: 813: 806: 805: 798: 791: 783: 777: 776: 768:|journal= 743:Nilsson, Linus 739: 733: 723:(March 2001). 717: 695: 689: 673: 667: 654: 648: 632: 626: 610: 604: 588: 582: 562: 556: 543: 517:(4): 366–380. 506: 491: 488: 485: 484: 467: 461:978-1118410851 460: 442: 422: 402: 381: 363: 348: 330: 329: 327: 324: 323: 322: 317: 312: 307: 305:Business cycle 296: 295: 290: 285: 278: 275: 250: 249: 235: 232: 225: 214: 206: 203: 202: 201: 198:Andreas Clenow 191: 181: 174: 168: 155: 154:Considerations 152: 85:, in the book 55: 52: 15: 9: 6: 4: 3: 2: 1346: 1335: 1332: 1330: 1327: 1326: 1324: 1309: 1301: 1299: 1291: 1289: 1281: 1279: 1271: 1270: 1267: 1261: 1258: 1256: 1253: 1251: 1248: 1247: 1245: 1241: 1235: 1232: 1230: 1229:Pension funds 1227: 1225: 1222: 1220: 1217: 1215: 1212: 1210: 1207: 1205: 1202: 1200: 1197: 1195: 1192: 1190: 1187: 1185: 1184:Vulture funds 1182: 1181: 1179: 1175: 1165: 1162: 1160: 1157: 1155: 1152: 1150: 1147: 1145: 1142: 1140: 1137: 1134: 1130: 1126: 1122: 1119: 1116: 1115:delta neutral 1112: 1108: 1105: 1103: 1100: 1098: 1095: 1093: 1090: 1089: 1087: 1083: 1077: 1074: 1072: 1071:Money markets 1069: 1067: 1064: 1062: 1059: 1057: 1054: 1052: 1049: 1047: 1044: 1043: 1041: 1037: 1034: 1028: 1022: 1019: 1017: 1014: 1012: 1009: 1007: 1004: 1002: 999: 997: 994: 993: 991: 987: 982: 968: 967:Multi-manager 964: 961: 960: 958: 954: 948: 945: 943: 940: 938: 935: 933: 930: 928: 924: 921: 919: 916: 915: 913: 909: 903: 900: 898: 895: 893: 890: 888: 885: 884: 882: 880: 876: 870: 867: 865: 862: 860: 856: 853: 851: 848: 846: 843: 841: 838: 837: 835: 833: 828: 824: 821: 815: 811: 804: 799: 797: 792: 790: 785: 784: 781: 773: 760: 752: 748: 744: 740: 736: 730: 726: 722: 718: 708: 704: 700: 696: 692: 686: 682: 678: 674: 670: 664: 660: 655: 651: 645: 641: 637: 633: 629: 623: 619: 615: 611: 607: 601: 597: 593: 589: 585: 579: 574: 573: 567: 563: 559: 553: 549: 544: 540: 536: 532: 528: 524: 520: 516: 512: 507: 503: 499: 494: 493: 481: 480:0-13-702018-X 477: 471: 463: 457: 453: 446: 439: 438:0-618-17651-9 435: 431: 426: 419: 418:0-7641-5554-7 415: 411: 406: 398: 392: 384: 378: 374: 367: 359: 352: 346: 345: 340: 339:Trend Trading 335: 331: 321: 318: 316: 315:Herd behavior 313: 311: 310:Chart pattern 308: 306: 303: 302: 301: 300: 294: 293:Swing trading 291: 289: 286: 284: 281: 280: 274: 270: 268: 267:swing traders 262: 260: 255: 247: 243: 239: 236: 233: 230: 226: 223: 219: 215: 212: 211: 210: 199: 195: 192: 189: 185: 182: 178: 177:Risk control: 175: 172: 169: 165: 161: 158: 157: 151: 149: 145: 141: 137: 133: 129: 125: 121: 116: 114: 110: 108: 104: 102: 98: 94: 89: 88: 84: 79: 77: 73: 69: 64: 60: 51: 49: 44: 41: 35: 33: 29: 25: 24:trend trading 21: 1329:Stock market 1061:Fixed income 946: 937:Global macro 879:Event-driven 759:cite journal 724: 710:. 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Wiley. 391:cite book 238:Stop loss 180:reappear. 83:Tom Basso 819:strategy 679:(2003). 638:(2009). 616:(2007). 594:(2009). 568:(2007). 440:page 113 420:page 353 277:See also 259:drawdown 254:backtest 190:factors. 1039:Markets 1030:Related 989:Trading 751:2689861 539:2233222 519:Bibcode 205:Example 130:in the 101:Herding 72:futures 1111:Greeks 1056:Equity 749:  731:  687:  665:  646:  624:  602:  580:  554:  537:  478:  458:  436:  416:  379:  184:Rules: 167:doing. 160:Price: 144:stocks 1154:Short 1144:Hedge 1125:alpha 1032:terms 956:Other 535:S2CID 222:short 148:maxim 140:price 128:trend 124:trade 26:is a 1129:beta 1085:Misc 772:help 747:SSRN 729:ISBN 685:ISBN 663:ISBN 644:ISBN 622:ISBN 600:ISBN 578:ISBN 552:ISBN 476:ISBN 456:ISBN 434:ISBN 414:ISBN 397:link 377:ISBN 220:and 218:long 707:FAQ 527:doi 269:). 142:of 122:or 120:bet 22:or 1325:: 1131:/ 1127:/ 1113:: 965:/ 925:/ 857:/ 763:: 761:}} 757:{{ 705:. 533:. 525:. 513:. 502:12 500:. 393:}} 389:{{ 341:. 1135:) 1123:( 1117:) 1109:( 829:/ 802:e 795:t 788:v 774:) 770:( 753:. 737:. 715:. 693:. 671:. 652:. 630:. 608:. 586:. 560:. 541:. 529:: 521:: 515:6 504:. 482:. 464:. 399:) 385:.

Index

trading strategy
price trend
moving averages
commodity trading advisors
risk management
futures
volatility
Tom Basso
Herding
Confirmation Bias
Risk Management
bet
trade
trend
financial markets
ticker tape
price
stocks
maxim
indicators
supply and demand
Andreas Clenow
long
short
simple moving average
Stop loss
average true range
Conventional wisdom
backtest
drawdown

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