Stock Market · Trading Systems

Trend following systems

Trend following is the oldest and most consistently profitable systematic strategy in financial history. The premise is simple: when prices trend, they tend to continue trending. Catch the trend early, ride it long, exit when it reverses.

Classic trend-following rules

Entry: Buy when price closes above the 200-day moving average AND 50-day MA is above 200-day MA.

Exit: Sell when 50-day MA crosses below 200-day MA.

Position size: Volatility-adjusted (riskier stocks get smaller positions).

The legendary trend followers

• Richard Dennis (Turtles): teach a group of amateurs the rules, they collectively make ₹1,000+ crore over a decade
• John W. Henry: built a hedge fund empire on trend following, then bought the Boston Red Sox
• Bill Dunn: 40+ year track record, 15% annualised returns through pure trend following

Performance characteristics

• Win rate: typically LOW (35-45%)
• Average win: LARGE (3-5x average loss)
• Long stretches of small losses, punctuated by huge wins on big trends
• Performs spectacularly in trending environments (2003-2007, 2020-2021)
• Underperforms in choppy, range-bound markets (2014-2016)

> Trend following is psychologically brutal. You take 6 small losses in a row, then catch one trade that 10x's. Most retail traders quit before the big winners arrive.

Why it works

Market trends emerge from accumulated investor behaviour. Institutions slowly building positions over weeks or months. Trends often last longer than expected because:

• Information diffuses gradually
• Momentum traders pile in once trends are established
• Index funds buy as stocks rise (passive flows)

Indian markets context

Trend following works in Indian large-caps. Small/mid-cap trends are choppier but produce huge winners when they work. Examples: TATA Motors 2020-2024 (3x), Adani Enterprises 2022 (5x then -70% reversal).

Takeaway. Trend following: low win rate (35-45%), large average wins (3-5x losses). Psychologically brutal. Many small losses for occasional huge winners. Most consistent systematic strategy historically but requires patience through losing streaks.