Definition
Trend following
Trend following holds a position while a move persists and exits when it stops. The rules, why most trades lose, and why the exit carries the whole strategy.
Trend following is a rules-based strategy that enters in the direction of an established move and stays in it until a predefined exit triggers. It makes no forecast about where price is going and no judgement about value; it reacts to what has already happened. Most individual trades lose small amounts, and the strategy depends on a minority of long-held positions paying for all of them, which is why cutting a winner early is more damaging here than taking a loss.
- Also known as
- managed futures · trend trading · systematic trend
How it is calculated
Trend following is defined by its exit, not its entry:
· Entry — a breakout, a moving-average cross, or a volatility band
· Stop — the loss that ends a trade that never trended
· Trailing exit — what gives back part of a winner to keep the rest
Win rate is typically ~30–40%. The largest handful of trades carries the whole return.
Most trades lose, and that is the design
A typical trend-following system wins on roughly a third of its trades. The distribution is deliberately skewed: many small losses at the stop, and occasional very large gains from a move that keeps going. This is the opposite of a high-win-rate system, and it means the equity curve spends long stretches flat or drifting down between the few trades that matter.
Choppy markets are the tax
A trend-following rule cannot tell an emerging trend from noise, so it enters both and lets the exit sort them out. In a range-bound market it is repeatedly stopped out, and that sequence of small losses is the cost of being positioned when a real move finally starts. The cost is unavoidable rather than a flaw to be optimised away, and optimising it away is usually how a system gets overfitted.
How it gets misread
Trend following is often confused with prediction. It forecasts nothing: the entry is a reaction to a move already visible, and the exit is a predefined rule rather than a view about the top. Judging it by win rate rather than by the size of its largest winners misreads the strategy completely, because the whole return comes from a handful of trades.
Sources
- A Century of Evidence on Trend-Following Investing — The Journal of Portfolio Management (Hurst, Ooi & Pedersen), hosted by AQR
- Time Series Momentum — Journal of Financial Economics (Moskowitz, Ooi & Pedersen), hosted by AQR
Definitions are educational. Nothing here is investment advice, and no metric described on this page predicts future results.
Definitions are the easy part
Knowing what drawdown means is not the same as having a system that halts on it. QANTERION applies these limits while a strategy runs.