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Trend following

By Jarosław Wasiński • Published: • Updated:
A family of strategies taking exposure aligned with direction defined by a particular rule, together with an exit method. Some variants combine small losses with fewer large gains, but the label mandates neither win rate nor expectancy. Trend definition, timing, costs and risk need evaluation within the whole system.
Example. A simplified model assumes 35% of outcomes at +3R and 65% at −1R. Gross expectancy is 0.35 × 3 − 0.65 = +0.40R; an additional 0.10R cost reduces it to +0.30R. This illustrates fewer winners coexisting with a positive mean, not a property of every trend strategy.

Define trend and exit

Trend following seeks exposure aligned with a specified direction and retains it under exit rules. A breakout, average or swing structure can define direction. The future end of the movement need not be known. Reversal timing and trailing rules must be reconstructible without future information, including the delayed confirmation of swings.

Outcome distribution

Some variants produce numerous small losses and fewer larger winners, but no mandatory sub-40% win rate exists. Examine payoffs, holding periods, dependence and costs. History without a sustained movement can differ from a sample containing an exceptional trend; one large winner does not establish a durable edge or its future distribution.

Consolidation and limits

Repeated breaks can return into the range and cause whipsaw. Filters or period changes guarantee no removal of losses and can miss a later trend. Document portfolio exposures, total risk and gap scenarios. Rule adherence differs from rule profitability, so both require review rather than assuming faithful execution makes the strategy sound.

FAQ

Must trend following have a low win rate?
No. Distribution depends on entries, exits, markets and costs.
Does a range filter guarantee no whipsaw?
No. It is another hypothesis that can alter profitable trades as well.

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Jarosław Wasiński

Editor-in-chief, ForexMechanics.com • Macro & FX analyst

Independent analyst and practitioner with over 20 years of experience in financial markets. Actively involved in Forex since 2007, with a focus on fundamental analysis, OTC market structure, and disciplined capital risk management.

  • Creator and editor-in-chief of MyBank.pl, providing reliable financial education since 2004.
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