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Systematic Trend Following: Building Profitable Strategies Based on Market Trends

Systematic Trend Following
Discover the power of systematic trend following, a proven trading strategy based on market trends. Uncover the secrets behind building profitable strategies, learn from real case studies, and explore the tools needed for success. Unlock the potential of market trends and take your trading to new heights. Read on for practical insights and guidance.

Embarking on a journey into the financial markets introduces you to a myriad of strategies. Among these, systematic trend following stands tall. Time-tested and versatile, it’s an approach that has proven its worth in various market conditions. But what is systematic trend following? How can it become a cornerstone in your trading strategy? Here’s an in-depth look at this approach, complete with practical insights and examples.

Unraveling the Core of Systematic Trend Following

Systematic trend following revolves around a key principle: trade in the direction of the market trend. If the trend heads upwards, trend followers buy. If it heads downwards, they sell. While it may sound simplistic, its success hinges on a trader’s understanding of market trends and disciplined execution.

Unlike predictive strategies, systematic trend following is inherently reactive. It does not attempt to forecast market movements, but rather reacts to the current market direction. This characteristic sets it apart from other strategies and contributes to its enduring appeal among traders. But what does this reactive approach entail?

The Reactive Nature of Systematic Trend Following

In essence, systematic trend following accepts market prices as they are, eschewing predictions about future trends. Traders maintain a reactive stance, ready to shift with the ebb and flow of the market. This approach can be a mental challenge, as it requires going against our innate desire to predict and control.

Instead of trying to predict or force market movements, trend followers let the market guide their actions. They trade long when prices are rising and go short when prices are falling. Thus, they participate in large market movements, which can lead to significant profits.

Applying Systematic Trend Following: A Step-by-Step Guide

Getting started with systematic trend following requires an understanding of its key steps: identifying trends, setting up rules, and maintaining discipline in execution.

Identifying Trends: The first step involves identifying market trends, whether they’re upwards, downwards, or sideways. Traders use various tools and techniques for this, including moving averages, trendlines, and price action analysis.

Setting up Rules: Once trends are identified, traders establish a set of rules for trading. These rules cover all aspects of trading, including when to enter and exit trades, how much to risk per trade, and how to manage ongoing trades. For instance, a trader may decide to enter a trade when a 50-day moving average crosses above a 200-day moving average, a common signal of a new upward trend.

Maintaining Discipline: The last step—and perhaps the most challenging—is to follow the rules with unwavering discipline. Markets are unpredictable, and there will be times when trades result in losses. In such situations, the temptation to deviate from the system can be strong. However, consistent application of the rules is critical to the success of a systematic trend following strategy over the long term.

Case Study: The Success of the Turtle Traders

The story of the Turtle Traders underscores the potential of systematic trend following. In the early 1980s, famed commodities trader Richard Dennis and his partner William Eckhardt ran an experiment. They wanted to see if they could train a group of novices to become successful traders using a simple trend following system.

Recruited for their diverse backgrounds but lack of trading experience, these novices—known as the Turtle Traders—were given a set of rules to follow. They were instructed to buy when prices hit a 20-day high and sell when prices hit a 20-day low, among other rules. The results were remarkable: Over four years, the Turtles reportedly earned an aggregate profit of over $175 million, highlighting the power of the strategy when executed with discipline.

Upsides and Challenges of Systematic Trend Following

Systematic trend following, while effective, is not without challenges. On one hand, it offers simplicity and versatility, with potential applicability in a variety of markets and conditions. However, it also involves periods of drawdowns, when markets are range-bound or choppy. Moreover, maintaining discipline, particularly during drawdown periods, can be psychologically challenging.

Successful systematic trend following requires a long-term perspective and the ability to withstand temporary setbacks. It’s crucial for traders to understand these aspects and set realistic expectations before employing this strategy.

Incorporating the Right Tools

Successful systematic trend following relies heavily on the right tools and resources. Traders need charting software to identify and track market trends. They also need access to quality market data—ideally in real-time—to make informed decisions.

Moreover, backtesting tools are crucial. These allow traders to test their strategies on historical data, assessing their potential effectiveness and fine-tuning them before live trading. This step, although often overlooked, can be the difference between success and failure in systematic trend following.

Advanced Concepts in Systematic Trend Following

As traders gain experience with trend following, they can explore more advanced concepts. These include methods for trend filtering to avoid whipsaws, techniques for portfolio construction to diversify risk, and risk management strategies to protect capital during drawdowns. Each of these can add layers of sophistication to a systematic trend following approach and further enhance its effectiveness.


Systematic trend following offers a practical, disciplined approach to trading that can yield significant profits when executed correctly. Its essence lies not in predicting the market’s next move, but in reacting appropriately to market trends as they unfold. Whether you’re new to trading or a seasoned market participant, a systematic trend following approach could be a valuable addition to your trading toolbox. By understanding its principles and nuances, and by diligently applying your strategy with discipline, you can harness the power of market trends for trading success.



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