What is Trend?

A trend is the persistent direction of a price over weeks, months or years. In an uptrend, each rally reaches a higher high and each pullback stops at a higher low; a downtrend is the mirror image. Trends exist because information spreads slowly, investors herd, and big shifts in the economy — interest rates, profits, technology — play out over long periods.

Trend-following does not try to predict the future. It reacts to what the market is already doing: stay invested while the price trend is up, step aside when it turns down. The price of this approach is that it is always a little late — it gives up part of every move at the turning points in exchange for avoiding the largest, longest declines.

Professional trend-followers (often called CTAs or managed-futures funds) have used this idea for decades across stocks, bonds, commodities and currencies.

By Dr. Harry Hamann