trend following
Karl Montevirgen is a professional freelance writer who specializes in the fields of finance, cryptomarkets, content strategy, and the arts. Karl works with several organizations in the equities, futures, physical metals, and blockchain industries. He holds FINRA Series 3 and Series 34 licenses in addition to a dual MFA in critical studies/writing and music composition from the California Institute of the Arts.
Doug is a Chartered Alternative Investment Analyst who spent more than 20 years as a derivatives market maker and asset manager before “reincarnating” as a financial media professional a decade ago.
Before joining Britannica, Doug spent nearly six years managing content marketing projects for a dozen clients, including The Ticker Tape, TD Ameritrade’s market news and financial education site for retail investors. He has been a CAIA charter holder since 2006, and also held a Series 3 license during his years as a derivatives specialist.
Doug previously served as Regional Director for the Chicago region of PRMIA, the Professional Risk Managers’ International Association, and he also served as editor of Intelligent Risk, PRMIA’s quarterly member newsletter. He holds a BS from the University of Illinois at Urbana-Champaign and an MBA from Illinois Institute of Technology, Stuart School of Business.
In technical analysis, trend following is a trading strategy that aims to buy a position when a stock or other asset is trending up and sell or sell short a position when an asset is trending down. Some practitioners of trend following may choose to maintain an active position at all times in the market, whether it’s long or short, while others may go long (or long and short) only when a trend has been confirmed.
Because trends are difficult to predict and often can be confirmed only after the fact, many trend-following systems speculate or evaluate trends based on certain principles or calculations that may have a record of historical accuracy. For example, some trends may be determined by trendlines, larger price swings, moving averages, or various indicator readings. The biggest risk in trend following occurs when a price is fluctuating within a trading range. In a trading range (also called a “sideways” market), price will fluctuate between a relative support and resistance level, going up and down over a prolonged period of time but with no clear direction.
Trend followers attempting to buy and sell an asset that’s fluctuating within a range risk taking losses every time price reverses. This is known among traders as getting “whipsawed.” There are times when trends may occur infrequently, but the rationale behind most trend-following strategies is that capturing a long trend will often make up for the smaller losses that might occur during nontrending (whipsaw) periods.
As trend followers like to say: “The trend is your friend, until the end of the trend.”