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StockCram is not a broker-dealer, investment adviser, or financial institution. All content is for educational and informational purposes only and should not be construed as personalized investment advice. Consult a qualified financial professional before making investment decisions. Past performance does not guarantee future results.Simple Definition
A strategy built on the assumption that a price already moving in one direction is more likely to keep going that way.
Why It Matters
Trend following is the mirror image of mean reversion: instead of betting a move will reverse, it bets the move will continue. A simple version buys when price rises above a long moving average and exits when it falls back below. Trend systems tend to take many small losses in choppy markets and occasionally catch one large winning move. Like every pattern, the trend 'working' is a historical tendency, not something that must repeat.
Key Points
- Assumes existing moves tend to persist
- Often many small losses punctuated by rare large wins
- The opposite assumption to mean reversion
Related Terms
Common Questions
A strategy built on the assumption that a price already moving in one direction is more likely to keep going that way. Trend following is the mirror image of mean reversion: instead of betting a move will reverse, it bets the move will continue. A simple version buys when price rises above a long moving average and exits when it falls back below.
Trend following is the mirror image of mean reversion: instead of betting a move will reverse, it bets the move will continue. A simple version buys when price rises above a long moving average and exits when it falls back below. Trend systems tend to take many small losses in choppy markets and occasionally catch one large winning move. Like every pattern, the trend 'working' is a historical tendency, not something that must repeat.
Assumes existing moves tend to persist
Often many small losses punctuated by rare large wins
The opposite assumption to mean reversion