Definition
Trend Following
Trend following is a strategy that buys assets whose prices are rising and sells or shorts those that are falling, on the premise that established trends tend to persist for some time.
Indian trend-following systems are common in futures, where they can take both long and short positions across indices, stocks and commodities on the NSE and MCX. Signals are typically based on moving-average crossovers, breakouts or momentum measured over weeks to months.
Trend following accepts many small losses during choppy, range-bound markets in exchange for a few large gains when a strong trend develops. Its return profile is positively skewed and tends to do well in crises when markets move persistently, making it a useful diversifier against mean reversion strategies.
Related terms
- Mean Reversion StrategyA mean reversion strategy assumes that prices or spreads that deviate from a historical average will tend to return to it, so it sells what has risen sharply and buys what has fallen.
- Walk-Forward AnalysisWalk-forward analysis is a backtesting technique that repeatedly optimises a strategy on one window of historical data and tests it on the immediately following out-of-sample window, rolling forward through time.
- Momentum FactorThe momentum factor captures the tendency for stocks that have performed well recently to keep outperforming in the near term, and recent losers to keep lagging, over horizons of roughly three to twelve months.
- Signal (Quantitative)A signal is a quantified indication, derived from price, fundamental or alternative data, that a security is likely to rise or fall, forming the predictive core of a systematic strategy.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.