Trend Following
A rules-based approach that enters in the direction of an established price move and exits when that move ends.
How it is identified
Test: entry and exit are determined by a stated trend rule, with no forecast of turning points and no valuation input
Unit
qualitative
In depth
Trend following makes no attempt to predict tops or bottoms; it accepts entering late and exiting late in exchange for participating in the large moves that produce most of a strategy's return. Its statistical signature is a low win rate with a high average win to average loss ratio, so most trades lose small amounts and a few pay for all of them. That distribution is psychologically difficult, which is the main reason people abandon otherwise sound systems. It performs poorly in range-bound conditions, which are the market's usual state, and this entry describes the approach without recommending it.
Worked example
A system with a 35% win rate, an average win of ₹4,500 and an average loss of ₹1,500 has an expectancy of 0.35 x 4,500 - 0.65 x 1,500 = 1,575 - 975 = ₹600 per trade — profitable while being wrong two times out of three.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Trend Following” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.