Risk glossary

 

Trend following

Trend following is a systematic investment strategy that seeks to profit from long-, medium- or short-term trends in markets based on the assumption that price trends tend to endure. The strategy does not attempt to predict the price of an asset but rather aims to buy an asset when its price is trending up and sell when its price is trending down.

Trend following is typically the domain of commodity trading advisers (CTAs), who use proprietary quantitative models to determine when a trend has established itself and invest based on the assumption that the market price will continue to move in a specific direction over a given time period.

As well as investing in trends over different timeframes, trend followers also use many different methodologies to calculate trends.

One of the biggest risks of trend following is being caught out when an asset that previously gave a positive trending signal unexpectedly reverses. As a result, trend followers are often accused of exacerbating market selloffs in periods of volatility as they systematically unwind positions.

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