To some traders, trend following looks like an offshoot of momentum investing. But the truth is, although they appear similar, in reality they are poles apart.

The Similarities

Both approaches are disciplined forms of investing with a focus on price, a focus on trends, and a focus on when to exit. Both buy on the upswing and sell on the downswing. Both cut their losses. And that is where the similarities end.

The Differences

Momentum investing relies on predictive fundamental analysis. Momentum-style investing relies on earnings momentum in selecting and shedding investments. It is a bottom-up style that looks at fundamentals first and foremost, concentrating on sales, earnings, and so on. By looking at fundamentals first, momentum investors trip up. Predicting and timing buys, sells, and shorts from changes in the fundamentals, whether these changes are interpreted as positive or negative, does not pan out. Crystal-ball forecasts never do. The arbitrary periods momentum investors use to predict earnings, sales, and all other fundamental data do not guarantee what an investment will do tomorrow, whether these periods are measured in years, quarters, months, days, or even minutes.

Momentum investing looks for earnings estimates. Why even bother with earnings at all? All of the statistics, all the increases and decreases from the prior quarter and year, all the estimates from analysts constantly revised, and all the whisper numbers are simply relative. They are numbers that can be manipulated over and over again to mean anything one wants them to mean. You will hear one set from a company’s CFO and a different set from competing analysts at big brokerages. The media reports all of them and then the talking heads chime in with their spin. Trying to obtain the truth about earnings is like playing the old telephone game where a chain of people whisper a sentence to the person next to them and it comes out something completely different at the end.

Real earnings estimates do not exist. There is little truth in the earnings numbers you hear about. The estimates are padded to keep investor expectations high, or conversely, low-balled to keep investor expectations low. Even when the real earnings number comes out, it is revised again a month, a quarter, or a year later. Real earnings numbers are like real economic data. Chances are the data has been revised again and again to reflect whatever the current administration wants you to believe about the economy during that particular period. The data is usually negative for the opposing party and positive for the party in power, and therefore no different from a company’s earnings statements. Once again, if price is the key, why bother with all the rest?

Momentum investing involves mind games. Investors, both individual and institutional, have gotten so wise to the unreality of earnings estimates that they often take up for down and down for up, so that a game of double or even triple reverse psychology ensues. Using fundamentals, investors play mind games trying to discern what is really going on. Mind games do not generally make people any money. If you want to make money and keep on making money, avoid the mind games and figure out what you must be focusing your attention on, which is price.

Trend followers look at price. That is the major difference between the two approaches. Trend followers ignore predictions, whatever they are based on. Year-over-year or quarter-over-quarter changes in sales and earnings are meaningless to a trend follower, since these fundamentals have no bearing on what a price will do tomorrow. How different is that difference? It makes all the difference. Momentum-style portfolios and investors have tanked while trend followers over the long haul outperform.

Trend followers cultivate patience. Unlike momentum investors who are constantly moving, buying and selling in the market every day, trend followers can wait months, even years, before making a move at all. They do not even need to know the name of the market to trade it. They look for the price trend and buy long on the upswings and sell short on the downswings.

Trend followers focus on size. While momentum investors concern themselves with fundamentals, trend followers concern themselves with the size of their trades. They manage their capital for every move. In so doing, they limit risk when the trend changes. Their discipline keeps their increases exponential while their decreases gently taper off. Like blackjack, the size of the bet matters. Tailoring the size of the bet to the trend, up with uptrends and down with downtrends, keeps the trend follower in the game with capital to invest tomorrow. The Turtle trading rules were built precisely around this principle: systematic sizing tied to volatility, so that no single trade could do lasting damage to the account.

Frequently Asked Questions

What is the main difference between momentum trading and trend following?

Momentum investing uses fundamental data like earnings and revenue growth to pick trades. Trend following uses price alone. One tries to predict what should happen based on business performance; the other follows what is already happening in the market.

Why don’t trend followers use earnings estimates?

Because earnings estimates are unreliable, constantly revised, and subject to deliberate manipulation by companies and analysts. Trend followers argue that price already reflects all available information, so reacting directly to price is more reliable than trying to interpret earnings figures.

Can trend following be applied to any market?

Yes. Trend followers do not need to understand the fundamentals of a market to trade it. The same rules apply across currencies, commodities, equities, and bonds. This is a core reason the managed futures industry is built largely on trend following systems.

Why does position sizing matter more in trend following than in momentum investing?

Because trend following systems size every position relative to market volatility, ensuring that risk stays consistent regardless of which market is being traded. Momentum portfolios typically weight by market cap or equally across holdings, without that direct link between volatility and exposure. Proper sizing is what keeps trend followers alive through losing periods and able to capture the large moves that drive long-term returns. See how the Turtle traders applied this in practice.

Do trend followers ever use fundamental analysis?

No. A pure trend following system makes no use of earnings, economic forecasts, analyst opinions, or any fundamental data. The drawdown management and entry and exit rules are driven entirely by price. That is not a limitation; it is the point.

Trend Following Systems
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