Key Takeaways
- • Trend following is a systematic trading strategy that capitalizes on directional price movements by buying assets in uptrends and selling in downtrends, without attempting to predict specific price levels. The strategy relies on technical indicators including moving averages, channel breakouts, and current market price calculations to identify and execute trades.
- • Commodity trading advisors (CTAs) employ trend following as their predominant strategy; research by Galen Burghardt demonstrated a 0.97 correlation between trend-following CTAs and the broader CTA index during 2000-2009, indicating strong alignment within the strategy category despite varying techniques and timeframes used by individual traders.
- • Trend-following strategies manage an estimated $350 billion in assets under management globally and represent among the most established and longest-standing investment approaches in institutional portfolios.
- • Trend followers deliberately forgo early-stage turning point profits by entering markets only after trends are clearly established, positioning themselves to capture sustained directional moves while exiting on contrary turns that establish themselves as new opposing trends.
- • During severe market drawdowns exceeding 20% since 2000, trend-following strategies posted strong positive average returns, substantially outperforming buy-the-dip approaches that suffered significant losses during identical periods.
Summary
Trend following is a systematic investment strategy that seeks to profit from directional price movements across multiple asset classes and timeframes. The methodology is straightforward: traders buy assets when prices trend upward and sell when trends reverse downward, with the fundamental assumption that established price movements tend to persist. Notably, trend followers do not attempt to forecast specific price levels or identify market turning points; instead, they enter positions only after trends have clearly established themselves, deliberately sacrificing early-stage profits in exchange for capturing sustained directional moves.
The strategy employs multiple technical approaches to identify trends, including moving average calculations, channel breakouts, and current market price analysis. Due to the diversity of techniques and timeframes employed across the industry, trend followers as a cohort do not maintain uniformly high correlation with one another, though individual strategy families demonstrate significant alignment. Commodity trading advisors (CTAs) have adopted trend following as their predominant strategy; academic research by Galen Burghardt documented a 0.97 correlation between trend-following CTAs and the broader CTA index during the 2000-2009 period, reflecting the strategy's centrality to professional commodity trading.
The strategy's institutional adoption remains substantial, with an estimated $350 billion in assets under management globally pursuing trend-following approaches. This makes trend following among the most established and longest-standing systematic investment strategies in alternative asset management. Empirical performance data indicates particular strength during extreme market stress: during the worst market drawdowns since 2000—periods where losses exceeded 20 percent—trend-following strategies generated strong positive average returns, substantially outperforming traditional buy-the-dip approaches that incurred significant losses during identical periods. This defensive characteristic during severe dislocations has reinforced institutional allocation to trend-following strategies across bull, bear, and black swan market environments.
The strategy employs multiple technical approaches to identify trends, including moving average calculations, channel breakouts, and current market price analysis. Due to the diversity of techniques and timeframes employed across the industry, trend followers as a cohort do not maintain uniformly high correlation with one another, though individual strategy families demonstrate significant alignment. Commodity trading advisors (CTAs) have adopted trend following as their predominant strategy; academic research by Galen Burghardt documented a 0.97 correlation between trend-following CTAs and the broader CTA index during the 2000-2009 period, reflecting the strategy's centrality to professional commodity trading.
The strategy's institutional adoption remains substantial, with an estimated $350 billion in assets under management globally pursuing trend-following approaches. This makes trend following among the most established and longest-standing systematic investment strategies in alternative asset management. Empirical performance data indicates particular strength during extreme market stress: during the worst market drawdowns since 2000—periods where losses exceeded 20 percent—trend-following strategies generated strong positive average returns, substantially outperforming traditional buy-the-dip approaches that incurred significant losses during identical periods. This defensive characteristic during severe dislocations has reinforced institutional allocation to trend-following strategies across bull, bear, and black swan market environments.
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