What a Trend Follower Actually Does
Trend following is the oldest and most common managed futures strategy. The system measures price movement — nothing else — and takes a position in the direction of the prevailing move. If crude oil has been rising for weeks, the model is long. If the euro is in a persistent decline, the model is short. There is no forecast and no opinion about what a market should do; the model reacts to what it is doing.
Most trend followers are diversified across dozens of markets: grains, energies, metals, currencies, interest rates, and equity indexes. Diversification is the engine — no single market needs to cooperate for the portfolio to find a trend somewhere. Position sizes are typically set by volatility, so a quiet market gets a larger position and a wild one gets a smaller one, keeping risk roughly even across the book.
The Honest Trade-Off
Trend following wins by losing small and often. Most entries are false starts that get stopped out for modest losses. The strategy depends on a minority of trades running far enough to pay for all the scratch losses and then some. In choppy, directionless markets — which can last a year or more — trend followers grind sideways or down. That is not a malfunction; it is the design.
It also means the experience of owning a trend-following program is mostly waiting. Long quiet stretches test investors harder than sharp losses do, and many abandon the strategy shortly before the kind of sustained move it exists to catch. If you cannot tolerate years of nothing much happening, this is the wrong allocation no matter how good the long-term numbers look.
The historical appeal is crisis performance: sustained moves in either direction, including crashes, are exactly what the models are built to ride. But no strategy wins all the time, and past crises say nothing certain about the next one. Futures trading involves substantial risk of loss and is not suitable for all investors.
Questions to Ask a Trend-Following Program
- Markets: how many and which sectors does the system trade?
- Speed: does it chase fast moves or slow, patient trends — and how does that change whipsaw losses?
- Leverage: how much margin-to-equity does the program typically run?
- History: how deep and how long were the drawdowns in trendless years?