Trend following enters a position once a trend is established and holds until the trend shows signs of ending. It doesn’t predict; it reacts. The core assumption is that markets move in persistent directions more often than a random walk would suggest.
How it differs from momentum
Momentum ranks assets against each other and holds the strongest. Trend following judges each asset against its own history and holds it only while its own trend persists. Momentum is usually cross-sectional; trend following is time-series.
In practice the two overlap heavily and many strategies are both.
The mechanics
A trend signal — moving-average crossover, breakout above a trailing high, positive trailing return. An exit signal — the reverse, or a trailing stop. Position sizing scaled to volatility so that a trend in a calm asset and one in a wild asset carry similar risk.
The return profile
Many small losses from false starts, a few large gains from trends that run. Win rate below 40% is normal. The strategy’s entire year can come from a handful of trades, which makes it psychologically hard to run manually and well suited to being systematic.
Why it survives
Trend following has been documented as profitable for a century across every liquid market. It works because it captures the way capital moves slowly into and out of themes, and because it’s uncomfortable enough that not everyone does it.