We profit in both bull and bear markets by using systematic trend following strategies that ride momentum without predicting direction. Our approach employs moving averages and breakout models like Donchian Channels while managing position sizes based on volatility. This strategy thrives across stocks, commodities, and currencies—particularly during market chaos when traditional investments falter! The disciplined, emotion-free system delivers those coveted asymmetric returns: small losses and big wins. The secret sauce lies in the details of implementation.
The Core Principles of Trend Following Analysis
While many investors obsess over predicting market moves, trend following takes a refreshingly different approach. We don’t waste time with crystal balls or financial fortune telling—we simply identify and ride existing market momentum.
At its heart, trend following relies on systematic rules and technical indicators rather than gut feelings. We look for clear signals like higher highs in uptrends or lower lows in downtrends, then let our positions run until the trend reverses.
This methodology works across virtually all asset classes—stocks, bonds, commodities, you name it!
The beauty of this strategy? It outperforms traditional buy-and-hold approaches over time while maintaining strict risk management.
After all, preserving capital is just as important as growing it.
Key Moving Average and Breakout Models for Market Navigation
When successful traders discuss their edge in the markets, two directional tools consistently rise to the top: moving averages and breakout models.
These aren’t just fancy terms to impress your friends at dinner parties—they’re actionable structures that decode market psychology.
Simple Moving Average crossovers offer straightforward trend confirmation, while their exponential cousins (EMAs) react faster to recent price action—perfect for those volatile days when markets move like caffeinated squirrels!
Combine these with strategic breakout models like Donchian Channels, which identify the highest highs and lowest lows over specific periods, and you’ve got a powerful toolkit.
The real magic happens when you adapt these models to different market environments. An uptrend calls for aggressive moving average crossovers, while choppy markets demand more sophisticated range-bound approaches with RSI confirmation.
Position Sizing and Risk Management Techniques
We’ll now examine how position sizing determines your trend following success as much as what you trade and when.
Volatility-based sizing adjusts your exposure based on market conditions, while the fixed fractional method (risking a set percentage on each trade) offers simplicity without sacrificing effectiveness.
The Kelly Criterion—a mathematical formula that optimizes growth rate—represents the sweet spot between risk and reward, though most professionals use “half-Kelly” in practice to avoid the white-knuckle volatility of full Kelly position sizes.
Volatility-Based Position Sizing
As markets fluctuate with varying intensity, smart trend followers recognize that position sizing can’t be static—it must breathe with the market.
Volatility-based position sizing uses the Average True Range (ATR) to normalize risk exposure across diverse assets, ensuring we’re not overexposed when markets get wild—and trust us, they will!
- Calculate position size inversely to volatility—higher ATR means smaller positions
- Monitor and adjust regularly as market conditions evolve
- Combine with stop-loss strategies for thorough protection
We’ve found this approach particularly effective for managing portfolios across different asset classes.
By maintaining consistent dollar volatility per trade, we’re essentially “speaking the same language” with each market.
The beauty of this system? When volatility spikes, you’re automatically reducing exposure—no panic required.
It’s like having market-responsive shock absorbers for your trading account.
Fixed Fractional Method
While volatility-based sizing responds to market turbulence, the Fixed Fractional method takes a different approach—it responds to your account balance. Developed by Ralph Vince, this technique allocates a consistent percentage (typically 2%) of your current equity to each trade, maintaining proportional risk exposure regardless of market conditions.
Unlike fixed position sizing, which keeps lot sizes constant, Fixed Fractional adjusts fluidly with your equity. Having a winning streak? Your position sizes grow naturally. In a drawdown? They shrink accordingly—no emotional override needed!
This graceful simplicity creates a more stable equity curve while supporting the compounding effect during profitable periods.
The beauty of Fixed Fractional is its balance between protection and growth potential. It won’t consider individual trade volatility, but it will keep you in the game long enough to catch those massive trends that matter most.
Kelly Criterion Applications
Although many position sizing methods exist, the Kelly Criterion stands in a league of its own as the mathematical heavyweight of risk management techniques.
We’ve found that when properly applied to trend following strategies, Kelly helps optimize our capital allocation while preventing catastrophic drawdowns.
Here’s how we integrate Kelly in our trading:
- Use Fractional Kelly (typically 1/2 or 1/3) to reduce portfolio volatility while maintaining growth potential
- Combine with strategic stop-losses to limit downside on individual positions
- Adjust position sizing flexibly as market volatility changes
Market Selection: Where Trend Following Thrives
Commodities and currencies top our list due to their pronounced long-term price movements and high liquidity.
The S&P 500 and Nasdaq can be goldmines during prolonged downturns—yes, trend following works beautifully in bear markets too! Interest rate markets also exhibit the sustained momentum that our strategies crave.
When selecting markets, we prioritize systematic screening criteria and consistent timeframes.
Liquid markets are non-negotiable; we need to enter and exit positions without moving the market.
Portfolio Diversification Through Multi-Asset Trend Strategies
Beyond selecting the right markets, true trend following proficiency comes from immersing across multiple asset classes simultaneously.
When we diversify across stocks, bonds, commodities, and currencies, we’re not just spreading risk—we’re positioning ourselves to capture trends wherever they emerge. This approach shines particularly during market stress, when correlations between traditional investments often spike.
- Low correlation magic – Trend strategies typically show minimal correlation with your standard 60/40 portfolio, giving you genuine diversification when you need it most.
- Systematic discipline – Rules-based systems eliminate those pesky emotional biases that derail even seasoned investors.
- All-weather adaptability – Unlike your brother-in-law’s “can’t-miss” stock picks, trend following works in both bull and bear markets—adapting rather than hoping.
Performance During Market Stress: The Convex Payoff Advantage
When market chaos strikes and traditional investments crumble simultaneously, trend following strategies reveal their true superpower: the convex payoff structure.
Unlike typical investments that collapse under pressure, trend following actually thrives in turbulence.
When markets fall apart, trend following stands tall, turning chaos into opportunity through disciplined, systematic advantage.
We’re not paying hefty premiums for options protection; instead, we’re mechanically generating convexity through strategic position sizing and disciplined exit rules.
It’s like getting insurance that sometimes pays you! During sustained market shifts, trend following captures those juicy, protracted moves while limiting downside damage.
The beauty lies in the positively skewed returns—small losses are acceptable because they’re offset by occasional massive wins.
While others panic watching their portfolios tank 20%, trend followers often find themselves riding profitable waves in the opposite direction.
This isn’t luck—it’s systematic, emotion-free, market-aligned trading.
Implementing Trend Following: Vehicles and Practical Considerations
The practical roadmap to trend following implementation begins with choosing the right investment vehicles and establishing essential operational guardrails.
We’ve found that investors can access these strategies through managed accounts, UCITS funds, or mutual funds—each offering different liquidity profiles to match your needs.
The systematic nature of trend following is its secret sauce; algorithms don’t panic or get greedy!
- Market selection matters: Commodities and futures typically provide the fertile ground where trends flourish most consistently.
- Position sizing isn’t optional: It’s the difference between surviving drawdowns and blowing up your account.
- Liquidity considerations: Daily, weekly, or monthly redemption options let you match your strategy to your cash flow needs.
Most modern implementations integrate machine learning to enhance traditional moving average and breakout models—old dogs learning impressive new tricks.
