trend following

Written By: Ehsan Jahandarpour

Trend following is an investment strategy based on the technical analysis of market prices, rather than on the fundamental strengths of the companies. In financial markets, traders and investors using a trend following strategy believe that prices tend to move upwards or downwards over time. They try to take advantage of these market trends by observing the current direction and using this to decide whether to buy or sell. There are a number of different techniques, calculations and time-frames that may be used to determine the general direction of the market to generate a trade signal (forex signals), these including the current market price calculation, moving averages and channel breakouts. Traders who employ this strategy do not aim to forecast or predict specific price levels; they simply jump on the trend and ride it. Due to the different techniques and time frames employed by trend followers to identify trends, trend followers as a group are not always correlated to one another. Trend following is used by commodity trading advisors (CTAs) as the predominant strategy of technical traders. Research done by Galen Burghardt has shown that between 2000-2009 there was a very high correlation (.97) between trend following CTAs and the broader CTA index.