What Is Trend Following? A Plain-English Explanation

Trend following is one of the oldest and most studied approaches to investing. The core idea is simple: assets that have been rising tend to continue rising, and assets that have been falling tend to continue falling — at least for a meaningful period of time. By systematically identifying and following these trends, investors can participate in market upswings while reducing exposure during downturns.

Simple as that sounds, the implications are profound — and the academic evidence supporting it spans over a century of market data.

Why Do Trends Exist in Markets?

Financial markets are driven by human beings, and human beings are predictably irrational. Two behavioral patterns in particular create the conditions that allow trends to persist:

These behavioral patterns don't cancel each other out — they reinforce each other. The result is that markets don't move in random walks the way academic theory once suggested. Instead, price movements exhibit a measurable tendency to persist in the same direction over meaningful time periods. Academics call this serial autocorrelation. Practitioners call it a trend.

A Brief History: Trend Following Has Worked for Over 100 Years

Trend following is not a new idea dressed up in modern clothing. It has been studied, practiced, and documented across every major asset class and virtually every market environment for well over a century.

Research from academics including Jegadeesh and Titman established the "momentum effect" in the early 1990s — showing that stocks with strong recent returns tend to continue outperforming in the near term. Since then, the literature has expanded dramatically, with studies documenting trend following returns across stocks, bonds, commodities, currencies, and international markets going back to the 1800s.

What makes this particularly compelling is that trend following has historically performed best during the periods when traditional diversification fails most — extended bear markets and financial crises. During the 2008 financial crisis, for example, while the S&P 500 fell over 50%, many systematic trend following strategies produced positive returns. This quality — performing well precisely when other strategies fail — is sometimes called crisis alpha.

How Trend Following Actually Works

At its core, trend following involves three steps:

1. Identify the trend. Using objective, measurable signals — typically based on price data over various time horizons — determine whether an asset is in an uptrend or downtrend.
2. Align your exposure. Increase exposure to assets in uptrends. Reduce or eliminate exposure to assets in downtrends. The rules dictate this — not emotion, not opinion.
3. Follow the signal, not the story. News, analyst predictions, and economic forecasts are deliberately ignored. The price trend is the signal. Everything else is noise.

Different managers implement these steps in different ways. At Dauble+Worthington, we use proprietary signals across long, intermediate, and short-term time horizons, allowing our portfolios to respond appropriately to both gradual market shifts and faster-moving conditions.

The Trade-Off: What Trend Following Gives Up

Honest discussion of any strategy requires acknowledging its limitations. Trend following is no exception.

Whipsaws: In choppy, directionless markets — when prices oscillate without establishing a clear trend — trend following strategies can generate a series of small losses as signals trigger and then quickly reverse. This is the primary cost of the strategy, and it's a real one.

Late to the party: Because trend following requires confirmation that a trend is established before acting, it will never buy at the exact bottom or sell at the exact top. A trend following strategy will typically miss the first portion of a new bull market and the last portion of a rally. This is by design — the rules require evidence of a trend before committing capital.

Underperformance in strong, uninterrupted bull markets: When markets rise in a straight line for years without meaningful pullbacks, a fully invested buy-and-hold portfolio will often outperform a tactical strategy that maintains some defensiveness. The 2010–2021 period was unusually favorable for passive strategies for precisely this reason.

Trend Following at Dauble+Worthington

Our investment approach is built on trend following principles applied across multiple time horizons. We believe that markets communicate valuable information through price behavior, and that a disciplined, rules-based system for reading and responding to that information — rather than relying on forecasts or opinions — gives our clients the best chance at consistent, risk-managed returns over time.

Our portfolios are designed to participate meaningfully in bull markets while actively managing exposure during deteriorating conditions. We are not trying to be fully invested all the time, and we are not trying to perfectly call every top and bottom. We are trying to build wealth steadily over time while protecting against the large losses that can permanently impair a retirement portfolio.