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Trend Following
"A systematic approach that consists of identifying and following established market trends, maintaining positions in the direction of the dominant move."
In-Depth Definition
Trend Following is one of the most proven strategies in quantitative finance, with managers like Winton, Man AHL, and Millburn generating returns over several decades. The principle is simple: markets exhibit persistent trends due to human behavior (anchoring, momentum, feedback effects) and slow institutional flows. In practice, one goes long when price breaks a recent high and short when it breaks a recent low, with a trailing stop protecting gains. The two enemies of trend following are range-bound markets (false signals) and sharp reversals. That's why diversification across many uncorrelated markets is essential.
StarQuant Insight
StarQuant optimizes trend detection parameters (breakout period, ATR multiple for stop) via machine learning on multi-market historical data, and dynamically adapts exposure according to trend strength measured by the ADX.
Pro Tip
Trend following often underperforms for 12 to 18 months in range markets. Don't abandon it during these difficult periods: it's precisely when you're tempted to change systems that major trends tend to resume.