In 1983, legendary trader Richard Dennis made a bet that would reshape how we think about market success. He believed trading could be taught through simple, systematic rules—and his 'Turtle Traders' went on to earn over $175 million using straightforward trend-following strategies. Decades later, the academic evidence supports what Dennis intuited: simple momentum rules have consistently outperformed complex forecasting models across nearly every asset class studied.

This creates an uncomfortable puzzle for financial theory. If markets efficiently incorporate all available information, how can something as basic as 'buy what's going up, sell what's going down' generate persistent profits? The answer lies not in market inefficiency per se, but in how human psychology systematically creates predictable price patterns.

Yet knowing that trend following works and actually doing it are vastly different challenges. The strategy's historical success masks periods of brutal drawdowns and extended underperformance that shake out most practitioners before they capture the big moves. Understanding both the edge and its psychological demands is essential for anyone considering this approach.

The empirical case for trend following is remarkably robust. A comprehensive study by AQR Capital Management examined 137 years of data across 67 markets and found that time-series momentum generated positive returns in every decade since 1880. This isn't a statistical fluke or curve-fitting—the same simple rules worked across equities, bonds, currencies, and commodities with striking consistency.

What makes this finding so compelling is its simplicity. Most trend-following systems use variations of basic rules: buy assets trading above their moving average, sell those trading below. Some use breakout systems, entering positions when prices reach new highs or lows. The specific parameters matter less than having a systematic approach. Studies show that strategies using 3-month, 6-month, or 12-month lookback periods all generate positive returns over time.

The strategy's diversification benefits deserve special attention. Trend following tends to perform best during market crises—precisely when traditional portfolios suffer most. During the 2008 financial crisis, managed futures funds (predominantly trend followers) gained while stocks collapsed. This crisis alpha occurs because trends accelerate during panics, and systematic followers capture moves that discretionary traders often miss while frozen by fear.

Critics argue that increased competition and faster information flow should have eliminated this edge. Yet recent data suggests otherwise. While returns have compressed from historical highs, the fundamental pattern persists. The edge may be smaller, but it hasn't disappeared—likely because its source isn't informational but behavioral.

Takeaway

Trend following has delivered positive returns across 137 years of data and multiple asset classes, with particular strength during market crises when conventional portfolios struggle most.

Efficient market theory suggests prices should instantly reflect new information, leaving no exploitable patterns. So why do trends persist? The answer lies in how humans actually process and act on information. We systematically underreact to new data and overreact to established narratives—creating the momentum that trend followers capture.

Consider what happens when a company reports surprisingly strong earnings. Rational markets should immediately reprice the stock to reflect this information. But research by behavioral economists shows that investors anchor to previous prices and adjust insufficiently. The stock drifts upward over weeks or months as analysts gradually revise estimates and investors slowly update their views. This underreaction creates the initial trend.

Once a trend becomes established, a different bias takes over: herding. As more investors notice rising prices, they pile in—partly from fear of missing out, partly because recent performance dominates their assessment of future prospects. Media coverage amplifies the narrative. The trend extends beyond what fundamentals alone would justify. Eventually, the process reverses as reality reasserts itself, but the cycle takes time to complete.

This behavioral explanation clarifies why the trend-following edge persists despite being widely known. The biases that create trends aren't trading mistakes that sophisticated investors can arbitrage away—they're deeply wired psychological responses. Anchoring, herding, and narrative-driven thinking are features of human cognition, not bugs that education eliminates. As long as humans trade, these patterns will likely continue.

Takeaway

Trends exist because humans systematically underreact to new information initially, then overreact through herding behavior—biases too deeply wired into our psychology to be arbitraged away.

Here's the paradox of trend following: the strategy is simple to understand but psychologically brutal to execute. Most practitioners abandon ship during the inevitable drawdowns, missing the big trends that generate most of the long-term returns. The edge exists partly because it's so hard to capture.

The core challenge is whipsaw losses. Trend-following systems generate frequent small losses as they enter positions that reverse before developing into sustained moves. A typical system might have a win rate of only 35-40%, meaning most trades lose money. The strategy profits because winners are substantially larger than losers—but experiencing loss after loss tests even the most disciplined trader.

Drawdowns compound the psychological difficulty. During range-bound markets, trend followers can suffer extended periods of negative returns while buy-and-hold investors post gains. The 2010s presented exactly this challenge as low volatility and quick reversals punished momentum strategies. Many investors abandoned trend following during this period—right before it delivered strong returns during the 2020 crash and subsequent inflation trade.

Successful implementation requires accepting the strategy's rhythm rather than fighting it. This means committing capital you can afford to have underwater for years, automating execution to remove emotional interference, and diversifying across many uncorrelated markets to smooth returns. Most critically, it requires understanding that the discomfort you feel during drawdowns is the very thing that prevents this edge from being competed away.

Takeaway

The trend-following edge persists partly because it's psychologically difficult to execute—frequent small losses and extended drawdowns cause most practitioners to abandon the strategy before capturing its largest gains.

Trend following offers a rare combination in finance: a strategy with robust historical evidence, a sensible behavioral explanation for why it works, and genuine diversification benefits. The simple rule of following price momentum has proven more durable than countless sophisticated models that promised to predict market movements.

Yet this simplicity is deceptive. The strategy demands a particular psychological constitution—the ability to accept frequent losses, endure prolonged underperformance, and maintain discipline when every instinct screams to deviate. Most investors lack this temperament, which is precisely why the opportunity persists.

For those considering trend following, honest self-assessment matters more than backtested returns. The question isn't whether the strategy works historically—the evidence is clear. The question is whether you can execute it faithfully through the inevitable periods when it doesn't.