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Risk & trading systemTrend following8 min readBeginner friendly

Trend Following: What a 22-Year Study Actually Shows

Trend Following: What a 22-Year Study Actually Shows — Investing 101 guide cover

Key takeaway

  • The study tested a style, not a magic entry: follow a direction, control the stop and let the result distribution stay uneven.
  • A trend system can lose often. The few large winners are not an accident around the edge; they are the reason the system exists.
  • A backtest that beats an index on one sample is evidence to study, not a promise to copy. Costs, universe, rules and risk all matter.

Learning pathChoose how you trade before you choose what to tradeStep 4 of 7

Read before this:Three Swing Trading Rules — Wait for the Hard Trade, Then Follow the Trend

Based on a clip by Financial Wisdom (@FinancialWisdom) — YouTube

Watch the original

The idea is simple, the outcome is lumpy

Trend following buys strength or sells weakness because continuation is possible — not because the next candle is knowable.

The three states a market can be in: uptrend, downtrend and sidewaysAn uptrend steps up with higher highs and higher lows, a downtrend steps down with lower highs and lower lows, and a sideways market oscillates within a band.UptrendDowntrendSidewaysHH + HL · LH + LL · no clear direction
Every trend system needs a different answer for rising, falling and sideways markets. A rule that assumes one state will be surprised by the other two.

The video discusses a long-only study across more than 24,000 U.S. stocks over 22 years. Its core lesson is not that every stock rises. It is that a rule can participate when a sustained move appears while limiting the damage when the move never develops.

Price breaking above the twenty-day highA price line swinging between a dashed upper line marked as the twenty-day high and a lower line marked as the twenty-day low, then pushing through the upper line and continuing up.20-day high20-day lowbuy here
A breakout is a mechanical way to join a new high. It does not tell you whether this breakout will become a trend or a failed attempt.

The losing trades are part of the design

If you need every trade to feel right, you will exit the system before the trade it was built to catch.

Twenty trade outcomes in a row, with a run of five losses inside a winning sequenceTwenty small squares run left to right, green for a win and red for a loss. Five red squares appear consecutively in the middle. A bracket beneath marks that run.Twenty trades from one profitable processfive in a row11 wins, 9 losses — the sequence is profitable.The run in the middle is not evidence of anything.
Even a positive edge arrives in messy runs. A losing streak is a normal sequence inside the method, not automatic proof that the method has stopped working.

In trend following, a quick reversal can turn a breakout into a small loss. That can happen repeatedly in a range. The system survives by making those losses small enough to wait for a move that keeps going.

What beginners expect

  • Many correct entries
  • Small, regular profits
  • A smooth equity curve

What the style needs

  • Small failed attempts
  • A few large payoffs
  • Patience through flat periods

Risk control is the engine, not the footnote

The system cannot hold a large winner if one early loss has already made the account too small to continue.

A rising price with the stop level raised twice beneath itA price line climbs from left to right. Below it a dashed stop level starts under the entry, steps up to the entry price, then steps up twice more as the price advances.initial stopbreak-eventrailing
A trailing stop gives a trend room, then reduces open risk as the move develops. The exact distance is a design choice that must be tested.

The study summary highlights a few rules: do not add to losing trades, reduce winners only to reduce risk, honour stops and limit open risk. These are not exciting rules, but together they stop one opinion from becoming an account-sized event.

A twenty-trade record drawn in R multiplesThirteen bars fall below the line at one R or less, and seven rise above it. One reaches eight R and is taller than the other six put together.+8R+4R0one trade7 wins, 13 losses, net +7R — expectancy +0.35R
Count results in units of planned risk. A 2R winner can pay for two 1R losses; the account does not need a high hit rate if the distribution is controlled.

Trend following is a temperament test

This style may fit someone who can follow a rule through boredom, accept that the next breakout may fail and leave a profitable position alone while it continues. It may not fit someone who needs frequent feedback or cannot tolerate giving back an open gain.

The useful beginner experiment is small: choose one liquid market, write one breakout rule, predefine the stop and record at least a meaningful sample. Your first goal is not to prove trend following works. It is to discover whether you can execute its losing side without rewriting the method.

Try this week

  • Write the exact breakout, stop and exit rule before checking old charts.
  • Mark every failed breakout in a sample instead of collecting only the long trends.
  • Measure each result in R and include spread, commission and slippage.
  • Run the method at small or simulated size long enough to observe a full losing run.

Common questions

What is trend following?

Trend following is a trading approach that tries to participate in sustained moves using rules for direction, entry and exit. It does not require predicting the exact top or bottom.

Does trend following have a high win rate?

It often does not. The approach can work through a combination of many controlled losses and a smaller number of much larger winners, so win rate alone is a poor score.

Can I use trend following on one stock?

You can test it, but one stock gives you few independent opportunities and can carry company-specific risk. A broader, liquid universe usually gives the style more chances to meet a trend.

What is the biggest risk in trend following?

A long run of failed signals during a sideways market, especially when each position is too large. A fixed risk cap and a rule for total open risk help keep that run survivable.

Reading about a system is not having one.

Plutux is where you write your rules down, test them against real data, and keep the record your memory would otherwise rewrite. Join the waitlist for early access.

Next in this path

Step 4 of 7 — Choose how you trade before you choose what to trade
Mean Reversion: When a Price Has Gone Too FarThe opposite idea, and the reason style is a real choice rather than a preference. Prices returning toward a reference needs a range; the previous step needs a trend. One market cannot give you both at once.Charts & market structure

Also part ofBuild a trend-following system: ride winners, cut everything else

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Trend Following Strategy for Beginners: What a 22-Year Study Shows | Plutux