Learning This Week: Trend Following
Every week I learn something interesting about a topic.
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What is Trend Following?
Trend following is an investment strategy that seeks to capitalize on the sustained movement of prices in a particular direction, either upward (bullish) or downward (bearish). Traders use this strategy to identify and ride trends until the trend reverses.
Trend following relies on the following:
Price action is the primary indicator (technical analysis is heavily used).
Trades are usually medium- to long-term in nature.
Stops are used to protect against large losses.
The strategy assumes that trends persist due to investor psychology and market inefficiencies.
Common Tools and Indicators:
Moving averages (e.g., simple or exponential moving averages).
Breakout strategies (e.g., 52-week highs or lows).
Trendlines and channels.
Relative Strength Index (RSI) and Average Directional Index (ADX).
How is it different from Absolute Momentum?
Trend Following seeks to profit from sustained price movements in a particular direction (up or down). It involves both long and short positions, depending on whether the trend is upward or downward.
For example, a trader might use a 50-day and 200-day moving average crossover system. When the 50-day MA crosses above the 200-day MA, they go long; when it crosses below, they go short.
Main Proponents of Trend Following
Richard Donchian: Often called the "Father of Trend Following," he introduced the Donchian Channel and popularized systematic trend-following strategies.
Ed Seykota: A pioneer in computerized trading systems, featured in Market Wizards by Jack Schwager.
John W. Henry: Founder of JWH & Co., he utilized trend-following strategies to become one of the world's leading commodity traders.
Paul Tudor Jones: Known for applying trend-following methods with discretionary trading.
The Turtle Traders (Richard Dennis and William Eckhardt): Famous for teaching trend-following principles as part of their experiment.
Summary
Although people sometimes confuse trend following and absolute momentum strategies, they are distinct. A trend can still be in place even when momentum has started to reduce or even reversed. Usually, momentum strategies are shorter term in nature in relation to trend following strategies.
Note: Between the two funds I manage, Shree Lakshmi is more trend-following and Shree Vriddhi is more of a momentum strategy.
To know more about our PMS, email us at equity@shreerama.co.in
DISCLAIMER:
Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.
SEBI Registered Research Analyst - Cupressus Enterprises Pvt Ltd - INH000013828.
Registration granted by SEBI and certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.