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What Exactly Is Trend-following?

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Some suggest that trend-following is the only investment style any thinking man should ever use. As opposed to all other investment styles. But what exactly is trend? Seems an easy task to define trend as a general direction in which any particular price tends to move.

Yet, when to apply time frame to price series, then the term gets more obscure. Day trader is just someone who trades intra-day trends. And a scalper is just another trend-follower who trades very short-term trends lasting minutes, if not seconds.

I once asked to Ed Seykota, a well-known apologete of trend-following, on his blog, if he considers trend-following as the only valid approach to markets. His answer was that all profitable systems trade trends; the difference in price necessary to create the profit implies a trend. However, he expands it a bit further. Full article available here (scroll down to Trend as a Law of Nature?).

I personally think that the term trend-following is more a notion than an investment style. Basically, the only important trend is the performance trend of any particular investment strategy.  If performance, on risk-adjusted basis, is good, one shouldn´t care if the underlying strategy is trend-following or not.


Written by A.S.

June 1, 2011 at 6:44 pm

One Response

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    March 23, 2013 at 2:20 am

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