Trend Following

Trend Following is an investment strategy that seeks to capture gains through the analysis of an asset's momentum in a particular direction. It is based on the premise that markets exhibit strong serial correlation—what is going up tends to keep going up, and what is going down tends to keep going down.

In quantitative finance, trend following is often implemented using Moving Averages (like the 10-month or 200-day SMA) or Absolute Momentum rules. If an asset's price is above its moving average, the trend is positive. If it falls below, the trend is negative.

Tactical portfolios, such as Meb Faber's Ivy Portfolio or Gary Antonacci's Dual Momentum, rely heavily on trend following. By moving to cash or bonds when the equity trend turns negative, these strategies act as a systematic circuit breaker against severe bear markets.

While trend following provides excellent downside protection during prolonged crashes (like 2008), it can suffer from "whipsaw" during choppy, sideways markets where trends frequently reverse.