A columnist for TheStreet.com “Rev Shark” recently wrote about technical analysis. Among other things he offers:
Mechanical trading systems can work, but few of them are adaptable to the ever-changing market environment.
We agree and disagree. If Rev Shark is speaking of the technical gurus who try to predict and use black boxes, we agree with him. However, trend following is indeed technical trading and it indeed adapts to changing markets. This point is made clear in the book Trend Following.
Rev Shark needs to update this article to recognize the existence of trend following trading!
The Distinction That Matters
Rev Shark’s critique applies accurately to a specific type of mechanical system: the pattern-matching, curve-fitted, or prediction-based technical approach that was optimized on historical data and then deployed unchanged into new market conditions. Those systems do fail when market conditions change. They were designed for the conditions of their backtest period, not for the conditions they will actually trade in. When the environment shifts, the system fails because it was never built to adapt.
Trend following is not that type of system. The distinction is fundamental. A curve-fitted technical system asks: what pattern in historical data would have produced the best backtest results? Trend following asks: what systematic response to current price movement produces positive expected value across all market conditions? The first question produces brittle systems that require constant re-optimization. The second produces robust rules that remain valid because they exploit a structural feature of markets, that prices trend, rather than a historical pattern that may or may not repeat.
Adaptability in trend following is built into the rules themselves, not retrofitted. Volatility-based position sizing automatically adjusts position sizes when markets become more or less volatile. ATR-based stops widen in volatile markets and tighten in calm ones, keeping risk consistent without requiring the trader to identify which regime they are in. Entry signals based on price breakouts work in any market because they define entry relative to recent price behavior rather than to a fixed historical level. The rules do not need to change when the market changes because they are designed to respond to current conditions rather than to forecast them.
Rev Shark’s observation that mechanical systems are rarely adaptable is accurate for the category of systems he is describing. It is not accurate for systematic trend following, which has produced documented performance across four decades of widely varying market conditions, including multiple recessions, bull markets, bear markets, currency crises, commodity booms, and interest rate regimes. No system optimized to a specific historical period survives that range of conditions. A system built on the structural principle that prices trend survives it because the principle is not period-specific.
Frequently Asked Questions
Is trend following considered technical trading?
Yes. Trend following uses price data as its primary input and makes entry and exit decisions based on price movement criteria. It does not use fundamental analysis, earnings forecasts, or economic models. In this sense it is technical. The distinction from other technical approaches is that it does not attempt to predict price direction. It reacts to price movement that has already occurred and follows it.
How does trend following adapt to changing markets?
Through rules that respond to current conditions rather than predetermined levels. Volatility-based position sizing adjusts automatically as market volatility changes. Breakout-based entries define the threshold relative to recent price behavior, so the entry level moves with the market. Trailing stops adjust to current price levels rather than fixed levels from the original entry. These mechanisms mean the system is continuously recalibrated to current conditions without requiring re-optimization.
What is the difference between a curve-fitted technical system and systematic trend following?
A curve-fitted system finds the parameters that produced the best historical backtest results and applies them to future trading. It is optimized for the past and fails when conditions change. Systematic trend following uses parameters that work across a range of values and across diverse market conditions because they reflect a structural feature of markets rather than a historical pattern. The test of a trend following system is not how well it fits historical data but how consistently it applies its principles across conditions that differ from any specific historical period.
Trend Following Systems
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