Guiding Principles of Trend-Following

When it comes to philosophies about investing, there are two extremes. At one end are those who purchase their investments and sit on them for the long term, waiting out both up and down markets. We call that buy-and-hold. It is the most prevalent method, often touted by financial advisers who understand the downside of emotional investing.

Others choose to jump into the frenzy, trying to exploit every small up and down wave in the water. We call that daytrading. And while daytraders may benefit from very short-term swings, over the long term they rarely beat buy-and-hold.

But there's another philosophy that shows compelling returns. It's based on practicing preparedness and always being ready with a strategy for how to react when you see that the tide has reached its peak and is starting to reverse. When that strategy is strictly determined by an unemotional, mathematical method, we call that trend-following.

Trend-following has been around in various forms and flavors for more than half a century. In the past, it was viewed as too technical and complicated for the average individual investor. However, with the growing availability of new tools, such as widely accessible data and online graphing, along with new investment vehicles, such as exchange-traded funds, trend-following is becoming more manageable and easy to implement at the individual investor level.