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How do I Choose the Best Trend Following Systems?

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  • Written By: A. Leverkuhn
  • Edited By: Andrew Jones
  • Last Modified Date: 05 November 2016
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In order to profit from trend following system options, investors must know how a specific trend following tool or strategy relates to a greater market, and how good “financial problem solving” can help to evaluate any one system or strategy. A vast variety of trend following systems present themselves to anyone with capital and involvement in financial markets. The nature of these systems tends to change over time, making good current reading a critical part of investor education.

One of the best tips for choosing a trend following system is to understand the markets that the investor is working in. This can be related to choosing individual stock positions, dealing in futures contracts, or in other parts of the markets. In all cases, a trend following systems helps to provide assistance on immediate decision making.

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Another good tip is to understand how trend following systems have changed over the years. Some financial experts are talking about how, in past times, certain kinds of trend following systems helped investors make money, but are now largely irrelevant. For instance, certain traders have mentioned the past appeal of trend following systems that were “always in.” “Always in” systems had held continual positions, or remained invested in the same products over a longer period of time. Some experts have pointed out that, since the advent of personal computers, online brokerage services, and other technologies, trading has generally become so volatile that “always in” systems are not really a good strategy for most investors anymore.

Investors should know how to evaluate all sorts of trend following systems like simple algorithms for trend following, sophisticated trend filters, or anything else designed to produce good analysis of short-term stock or financial patterns. Looking at current market pricing of equities involves a lot of judgment calls by investors, brokers, and others making decisions about positions. Systems for trend following can help, but only if they fit in with a “smart investment strategy” that has a chance of producing returns and avoiding big risks and losses.

In general, some of the same tips apply to choosing the best trend following systems, as apply to choosing anything else in a comprehensive investment plan. One key feature is to diversify into different equities that fit a plan for hedging against risk. A simple way to say this is to avoid “putting all of your eggs in one basket,” although expert traders have a lot more to say about specific ways to facilitate successful diversification. In using trend following systems, one of the key points is to understand all of the risks in any immediate or short-term trade, and not to let either lack of education on a system or emotion on markets interfere with best trading practices.

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