Trend Following

You may wonder why we are subscribing to the idea of ?Trend Following?? Isn?t a contrarian investor supposed to go against the crowd (that is, counter the prevailing trend) at times? Paradoxically, we find that Trend Following fits into the overall scheme of our philosophy. How?

Firstly, we will examine the case when we take a contrarian position. We wouldn?t take a contrarian position unless we believe that the market is wrong. Eventually, the market will see its error and attempt to correct what it had done wrong in the first place. When that happens, the market?s attempt will manifest itself as a trend. If we have not already taken the contrarian position, then this will be the time to follow the trend. On the other hand, if we have already taken the contrarian position, it?s time to sit back and relax.

Secondly, examine the case when we are about to take a contrarian position. As value-oriented investors, we may see that the market has valued a potential investment below its intrinsic value. But is it a right time to take that contrarian position? While we concede not to know when the market will see its error, we will not, on the other hand, push against the undercurrent of the market when the flow is at its strongest. We would prefer to wait till the undercurrent exhaust itself significantly before taking a position against it. On one hand, as value-oriented investors, we are not overly perturbed if we suffer temporary paper loss on our investments. But on the other hand, we would like to suffer as little temporary paper loss as possible. For this, we see a useful role in Trend Following.

Thirdly, a traditional value-oriented investor can only profit when the market eventually sees its error and goes up. It cannot profit when the market is going down. Thus, Trend Following provides us an additional useful tool to understand when the right time to profit from a falling market is. But be warned: profiting from a falling market involves more risks. This is because for traditional Value Investing, one can hold on to an investment indefinitely without immediate financial penalty and wait for the market to rise. But for a falling market, there is yet a financial instrument to be invented that can allow one to wait indefinitely, without immediate financial penalty, for the market to eventually fall. In other words, to take advantage of a falling market, one has to get the timing right to a fair degree as well.

Finally, we have to make two points clear: (1) being a contrarian investor does not mean blindly taking contrarian positions indiscriminately. As we said before, ?sometimes, the majority is simply wrong.? The keyword is ?sometimes.? At other times, it is wiser to hop along the same path as the crowd. The difficulty lies in discerning when the right time to follow the trend is and when is the right time to counter the trend. (2) Trend Following does not attempt to predict future price movements. It merely informs you as soon as possible (before the rest of the mob hears about it) that a trend has already happened and that it is time to act. Simply put, Trend Following aims to react early to whatever the market is already behaving- its aim is not to anticipate what the market will be going to behave.

This book is a very good starting point for those totally new to the idea of Trend Following. For those who are sceptical about Trend Following, you may want to examine the author?s research, arguments, empirical evidences (i.e. statistics) and back tests results on the Trend Following strategy- the author is very meticulous in his effort to prove that Trend Following actually works in the real world. But for those who want to learn the technical nuts and bolts of the Trend Following strategy, I?m afraid to say that you will be disappointed. For this, you will need to go to the author?s web site ( for more (at a cost).
This book is very useful for those who want to learn the practical know-how of trend following from a practising trader. Most notable in the book is the author’s own technical indicator?the Guppy Multiple Moving Average Indicator. Included are developments in using the count back line, practical look at setting stop loss conditions to protect capital and profits, and a bonus section on Darvas-style trend trading. This book shows readers how to use and apply the analysis tools to find effective long-term trades. These can be applied to any group of selected stocks, whether chosen on fundamental criteria, from stock tip newsletters, or found using database technical scans. From this starting point, Guppy shows how the better trades are identified, how risk is managed, and how the trades are closed successfully.