What is Trend Following? (Explained Simply)

Introduction: What is Trend Following? (Explained Simply)

You’ve probably heard the term “trend following” thrown around in a finance podcast or a YouTube video with lots of charts and not a lot of explaining. And maybe you nodded along like, “Ah yes, of course, trend following… totally get that,” while secretly thinking, “What does that even mean?”

You're not alone. Trend following sounds like something a slick Wall Street type does with six monitors and caffeine-induced optimism. But at its core, it's actually a simple, logical idea that even non-traders can understand—if someone would just explain it without the jargon.

That’s what this article is here to do.

You’re going to learn what trend following really is, how it works in plain English, and why it’s been a surprisingly successful approach for decades (despite sounding like something a teenager might do on TikTok). Along the way, we’ll clear up some common myths, share a few real-world examples, and help you figure out if it’s something you could actually use in your own investing strategy.

Let’s strip it back to basics—and finally make sense of this mysterious, trend-chasing strategy.

What is Trend Following, Really?

Imagine you’re at the beach. You see someone on a surfboard, gliding effortlessly on a wave. They didn’t create the wave—they just spotted it early, paddled into position, and rode it as long as it carried them. That, in a nutshell, is trend following.

Trend following is a trading or investing strategy where you try to profit by identifying the direction of a market trend—up or down—and riding that trend until it ends. You’re not trying to predict when it will start or end. You’re simply reacting to what’s already happening.

If prices are going up, trend followers buy. If prices are going down, they sell or “go short.” The key idea? The trend is your friend—until it ends.

It works across many markets—stocks, commodities, currencies, crypto—because it’s not about the what, it’s about the movement. Trend followers don’t care if they’re buying gold, tech stocks, or soybeans. They care that it’s moving in one direction long enough to catch a ride.

Still sounds a bit abstract? Let’s make it even simpler:

• If you see a stock has been going up for weeks, a trend follower says, “Looks like it's climbing—I’ll get in and ride the momentum.”
• If the same stock starts tumbling consistently, they say, “Time to hop off—or maybe ride it down if short selling is in play.”

They’re not trying to guess the top or bottom. They just follow the price action. Like a dance partner, they go where the market leads.

How Does It Work?

Trend following works on a simple principle: you buy when prices are going up, and sell when they start going down. That’s it. But let’s unpack what that actually looks like in practice—because there’s a method to the madness.

📈 Step 1: Spot the Trend

Trend followers don’t guess where prices might go. They wait for evidence. That evidence usually comes in the form of a chart showing a clear uptrend (higher highs and higher lows) or downtrend (lower highs and lower lows).

They often use tools like moving averages to help smooth out the noise. For example, if a stock price crosses above its 100-day moving average and keeps climbing, that might signal a trend is in motion.

🛒 Step 2: Enter the Trade

Once the trend is confirmed (using whatever rules the trader has set), they buy in. They don’t wait for a “better price” or try to catch the absolute bottom. The idea is: once momentum is on your side, get on board.

✂️ Step 3: Use a Stop-Loss

Here’s where trend followers protect themselves: they set stop-loss orders. If the trend reverses and the price falls back below a certain level, they automatically exit the trade. No gut feelings. No “let’s wait and see.” It’s all rules-based.

💸 Step 4: Let Profits Run

If the price keeps climbing? Great. Trend followers don’t take profits too early—they ride it out. They might adjust their stop-loss to lock in gains as the price rises, but they only exit when the trend actually ends, not just because they “felt like it.”

So to sum up:

• Get in when the trend starts.
• Get out when the trend ends.
• Ignore the noise in between.

It’s systematic, disciplined, and often boring, which is exactly the point.

Why It’s Not as Dumb as It Sounds

At first glance, trend following sounds like financial FOMO—“everyone’s buying, so I’ll buy too!” And let’s be honest, that kind of thinking doesn’t exactly scream “smart investor.” But here’s the twist: trend following isn’t impulsive—it’s methodical.

Let’s tackle the biggest misconception straight away:

“Wait… isn’t this just buying high and selling low?”

Not quite. It’s buying higher with confirmation—after a trend has already started—and selling when that trend breaks down. It’s not chasing hype; it’s backing momentum with a rule-based system. You’re not trying to buy at the absolute bottom or sell at the peak. That’s a gambler’s game. Trend followers are fine catching the “middle meat” of a move and skipping the extremes.

It’s Not Guesswork

Trend following doesn’t rely on predicting what will happen tomorrow. It’s based entirely on what’s happening right now. If something is moving up, and the rules you’ve set say it’s a strong trend, you jump in. If it reverses, you get out. Simple. No tea leaves. No crystal ball. Just price movement.

It’s Backed by Decades of Data

This isn’t just a quirky strategy someone made up on Reddit. Some of the most successful hedge funds in the world have used trend following for decades. They don’t rely on breaking news or insider info. They rely on systems that say: “if X happens, do Y.” And historically, those systems have worked well—especially in volatile or trending markets.

So no, trend following isn’t just “follow the crowd” in disguise. It’s more like “follow the direction the crowd is actually going, with a helmet, a map, and an exit plan.”

Famous Examples of Trend Following in Action

Trend following isn’t some internet-born tactic cooked up in a Discord chat. It has a long, well-documented history—and some of the biggest names in trading have used it to make serious returns. Let’s look at a few of the most iconic examples.

🐢 The Turtle Traders

In the 1980s, two seasoned traders—Richard Dennis and William Eckhardt—had a friendly argument: can anyone be trained to trade successfully using a simple system? Dennis said yes. Eckhardt said no.

So they ran an experiment.

They placed an ad in a newspaper, trained a group of complete novices in trend-following principles, and gave them real money to trade. These “Turtles” followed strict rules: buy when prices break out, sell when the trend ends, and always manage risk.

The result? Many of them went on to become millionaires. The strategy worked—not because they were geniuses, but because they stuck to the rules.

📉 CTA Funds and Managed Futures

CTA stands for Commodity Trading Advisor, and these funds—many of which manage billions—often use trend-following models. They trade across markets: oil, wheat, gold, currencies, interest rates—you name it.

Firms like Winton Capital, AQR, and MAN AHL are all known for systematic trend-following. Their success doesn’t come from predicting the future. It comes from identifying trends early and managing risk relentlessly.

🧪 Even Academics Agree

If you're thinking, “Well, okay, but that’s just a few funds,” it gets more interesting. Numerous studies (like those published by AQR or included in The Journal of Finance) show that trend-following has delivered positive returns across centuries and markets.

In fact, trend-following has been profitable in everything from 18th-century rice markets in Japan to modern crypto trading.

Does It Actually Work Long-Term?

Short answer? Yes—but with an asterisk. Trend following can work over the long run, but it’s not a get-rich-quick scheme, and it absolutely has its rough patches.

The Good News: It’s Proven Over Time

Decades of data show that trend following tends to perform well—especially during periods of high volatility or when markets are in strong directional moves. It's one of the few strategies that has worked across different asset classes (stocks, bonds, commodities, currencies) and different time periods, from the 1800s to now.

It particularly shines during market crises. While most investors are panicking, trend followers are often positioned to profit from the chaos. In 2008, for example, many trend-following funds did very well, simply by riding the downtrend.

The Not-So-Great News: It Can Be Painful in the Short Term

Here’s the part most people gloss over: trend following can go through long periods of underperformance. When markets are choppy, flat, or constantly reversing direction, trend-following systems can get “whipsawed”—meaning they jump in and out of trades too often, racking up small losses.

It takes serious discipline to stick with it during those dry spells. Many traders abandon ship right before a big trend starts again. This is why trend following works best for people who commit to it long-term and follow their rules no matter what.

It’s Not Magic, It’s Maths and Mindset

The real secret to long-term success with trend following isn’t a perfect entry point or a fancy algorithm—it’s consistency. The edge comes from always following the system, not just when it feels good.

Think of it like fishing with a net instead of a spear. You won’t catch every trend, but you’ll catch enough over time to come out ahead—as long as you keep throwing the net.

Common Misconceptions About Trend Following

Trend following might be one of the most misunderstood strategies in the investing world. From the outside, it can look like mindless chasing or lazy strategy. But a lot of what people think they know about it is just plain wrong. Let’s clear up a few big ones.

❌ Misconception #1: “It’s Just Guesswork”

Nope. Trend following is actually the opposite of guessing. It’s based on rules, not gut feelings. You don’t buy because you think something will go up. You buy because your system says, “There’s a clear upward trend—now’s the time.” Every decision is based on observed price movement, not predictions.

❌ Misconception #2: “You Have to Watch the Market All Day”

Not at all. Many trend followers check their charts once a day—or even once a week—depending on their time horizon. Some use automated systems entirely. This isn’t day trading. You’re not glued to a screen trying to scalp pennies. You’re riding waves, not chasing raindrops.

❌ Misconception #3: “It Doesn’t Work in Today’s Market”

Markets change, yes. But humans don’t. Fear and greed still drive price movements. That’s why trend following has worked across centuries and asset classes. It doesn’t rely on which market, just that something is trending. Whether it’s gold in 1970 or crypto in 2021—the logic holds.

❌ Misconception #4: “You’ll Miss the Start of Every Move”

Yes—and that’s by design. Trend followers wait for confirmation. They accept that they won’t catch the bottom or sell at the very top. But they’re okay with that because they’re not trying to be perfect—they’re trying to be profitable.

Can You Do It?

The short answer is yes—you can absolutely use trend following. But whether you should depends on your personality, patience, and willingness to follow rules (even when your gut tells you otherwise).

✅ The Pros

• Simple to understand: You don’t need an economics degree or insider info. You just need to spot trends and follow a rules-based system.
• Works across markets: Stocks, crypto, commodities—if it has a price chart, you can apply trend following to it.
• Built-in risk management: Proper trend-following systems use stop-losses and position sizing to limit losses. You’re never “all in” on hope.

⚠️ The Cons

• Emotionally challenging: You’ll feel like a fool sometimes—buying after a big run-up or exiting right before a bounce. That’s part of the game.
• It can be boring: There’s no adrenaline rush. In fact, good trend following is kind of dull. That’s why it works—it avoids drama.
• You’ll face long dry spells: You need patience. Some months (or even years), nothing will trend. That’s when most people quit. That’s also when the edge kicks in—if you stay in the game.

So… Can You Really Do It?

If you’re someone who:

• Can follow a system without second-guessing it every other week,
• Doesn’t mind missing out on tops and bottoms,
• Can emotionally handle losing trades (and there will be lots of them),

...then yes, you absolutely can.

But if you’re drawn to flashy predictions, fast action, and constant excitement, trend following will probably feel like watching paint dry—and it’ll test your discipline more than your brainpower.

Final Thoughts: Ride the Trend, Not the Hype

Trend following isn’t flashy. It’s not going to win you points at a dinner party. It won’t help you predict the next market crash or call the bottom of Bitcoin. But that’s the whole point.

This strategy is about cutting out the noise, following the price, and staying disciplined. You’re not trying to be the smartest person in the room—you’re just trying to stay on the right side of the market.

It’s a strategy that rewards patience over precision, discipline over drama. It might not be exciting, but it works—if you stick with it.

So if you’ve ever felt overwhelmed by technical jargon, spooked by volatility, or frustrated by all the hot takes and hype… trend following might be exactly the kind of grounded, no-nonsense approach you’ve been looking for.

Remember: you don’t have to catch the first wave. You just need to ride the right one long enough to make it count.