Traders who employ this strategy do not aim to forecast or predict specific price levels; they simply jump on the trend and ride it.
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.
[2] Trend following is an investment or trading strategy which tries to take advantage of long, medium or short-term moves that seem to play out in various markets.
Some traders may exit the market when they perceive a downtrend in order to minimize losses and to avoid becoming ‘trapped’ in a stock that has fallen well below their held cost average.
This trading or "betting with positive edge" method involves a risk management component that uses three elements: number of shares or futures held, the current market price, and current market volatility.
In the words of Tom Basso, in the book Trade Your Way to Financial Freedom[3] Let's break down the term Trend Following into its components.
If you think about it, no matter what the technique, if there is not a trend after you buy, then you will not be able to sell at higher prices..."Following" is the next part of the term.