Careers Contact Us Search
Insights & Education  /  Education Center

What is Trend Following?

July 2022

Trend following is an investment strategy based on the technical analysis of changing market prices, rather than on the fundamental strengths of the investments. This strategy believes that prices tend to move upwards or downwards over time. Therefore, trend followers try to take advantage of these “market trends” by observing current trends and deciding whether to buy or sell based on these factors.

Potential Benefits for Trend-Following Strategies

Owning trend-following strategies within your overall portfolio may bring many benefits, such as the potential to provide:

  1. Reduced risk
  2. Portfolio diversification
  3. Enhanced returns
  4. Exposure to a broad range of markets

Potential for Reduced Risk

Adding a trend-following strategy to a portfolio has the potential to provide a better risk-adjusted return. Allocating 20% of a portfolio to a trend-following strategy helps provide lower volatility, lower market risk, and significantly lower maximum drawdown, all while producing similar returns to that of a traditional stock/bond portfolio.

Pie chart showing a traditional portfolio compared to a diversified portfolio

Seeks Portfolio Diversification

Trend-following strategies have historically shown low or virtually zero correlation to a variety of traditional and alternative investments, providing the ability to further diversify an investment portfolio.

- trend following

Potential for Enhanced Returns

Trend-following strategies can potentially enhance a portfolio’s overall performance by producing positive returns in bull and bear markets. As the chart illustrates, these strategies have yielded positive long-term performance, even during market downturns.

Performance of Trend-Following Strategies and U.S. Stocks

Growth of a Hypothetical $1,000 investment – September 1, 2000, through June 30, 2022

Chart showing Performance of Trend-Following Strategies and U.S. Stocks

Exposure to a Broad Range of Markets

Trend-following strategies have the ability to provide exposure to a broad range of global markets. This may include, but is not necessarily limited to, sectors such as currencies, stock indices, commodities and fixed income.  As you can see below, there are multiple markets within each sector, providing the ability for more diversification as compared to traditional stock and bond portfolios.

- trend following

 

Learn more about Managed Futures >

 

Click here for important disclosure and definition information.