Every trading approach makes an implicit claim about what information matters. Fundamental analysts believe earnings, economic data, and supply and demand forecasts are the key inputs. Technical analysts scan dozens of derived indicators, each calculated from price but one step removed from it. Trend following makes a simpler and more direct claim: price itself is the only indicator that counts. Not because other information does not exist, but because price already contains it, processed faster and more accurately than any individual trader can do manually.

This is not a philosophical position adopted for elegance. It is a practical conclusion drawn from decades of observation about how markets actually work.

What Trend Following Answers

A complete trend following system is built to answer five fundamental questions that every trader must resolve before placing a single trade:

• How and when to enter the market.
• How many contracts or shares to trade at any time.
• How much money to risk on each trade.
• How to exit the trade if it becomes unprofitable.
• How to exit the trade if it becomes profitable.

The indicator used to answer all five? Price, price, and more price. The system does not require earnings reports, analyst upgrades, weather forecasts, or central bank commentary. It requires a price series and the discipline to follow what that series is doing.

Price Is the Reality

The reasoning behind this approach is explained directly in excerpts from The Complete TurtleTrader, where the philosophy behind the original Turtle program is laid out in full. The key passage concerns how the Turtle traders were trained to think about the relationship between information and price:

“Trading numbers” was just another Dennis convention to reinforce abstracting the world in order not to get emotionally distracted. Dennis made the Turtles understand price analysis. He did this because at first he “thought that intelligence was reality and price the appearance, but after a while I saw that price is the reality and intelligence is the appearance.”

He was not being purposefully oblique. Dennis’s working assumption was that soybean prices reflected soybean news faster than people could get and digest the news. Since his early twenties, he had known that looking at the news for decision-making cues was the wrong thing to do.

If acting on news, stock tips, and economic reports were the real key to trading success, then everyone would be rich. Dennis was blunt: “Abstractions like crop size, unemployment, and inflation are mere metaphysics to the trader. They don’t help you predict prices, and they may not even explain past market action.”

The greatest trader in Chicago had been trading five years before he ever saw a soybean. He poked fun at the notion that if “something” was happening in the weather, his trading would somehow change: “If it’s raining on those soybeans, all that means to me is I should bring an umbrella.”

The umbrella line is not a throwaway joke. It encapsulates a complete philosophy of market information. Weather affects soybeans. Soybean prices reflect that effect as it becomes priced in by the market. By the time an individual trader reads a weather report, processes it, forms a view, and attempts to act on it, the price has already moved. The only reliable source of current market information is current market price. Everything else is history or speculation about the future, neither of which can be traded directly.

The phrase “price is the reality and intelligence is the appearance” is worth sitting with. Most of the financial industry operates on the opposite assumption: that accumulated analysis, expertise, and insight are the real inputs, and price is merely the output that will eventually confirm the analyst’s view. The trend following answer is that this has it exactly backwards. Price does not confirm analysis. Analysis, at best, describes what price has already done.

Trend Following Compared: What It Is Not

The second excerpt from The Complete TurtleTrader addresses the drawbacks of the approach directly, and does so in terms that cut through the noise surrounding alternative strategies. The quote comes from Jerry Parker, the most successful of the original Turtle traders, who has run a systematic trend following operation for decades:

Trend following is like a democracy. Sometimes it doesn’t look so good, but it’s better than anything else out there. Are we going to rely on buy and hold? Buy and hope, that’s what I call it. Are we going to double up when we lose money? The world is too big to analyze. The fundamentals are too large. We need to aggressively, unrepentantly sell trend following and describe it as it is: a system of risk controls that gets in the right markets at the right times and limits the disaster scenarios.

In Jerry Parker’s world, the unexpected eventually happens. If you think the world is tidy, get ready for the hurricane to blow you away. For example, if there’s a good side to the 2006 implosion of the Amaranth hedge fund (to the tune of $6 billion), it’s the embarrassment suffered by the state and city pension funds that invested in it. And in Amaranth’s case, its name (a mythical flower that never fades) may have held a hidden meaning. The secondary meaning: a pigweed.

The Amaranth example is instructive. The fund collapsed because it had taken enormous concentrated positions in natural gas futures based on a fundamental view that did not materialize. It was not a trend following fund. It was a discretionary fund that believed it understood the fundamentals better than the market. The price told a different story, and Amaranth was not built to listen to it.

“Buy and hope” is Parker’s name for the passive investment approach that assumes markets always recover and that holding through any decline is the rational response. Trend following does not assume markets always recover on any particular timeline. It follows what is actually happening in price, cuts positions that are moving against the system, and holds positions that are moving with it. The rules govern every decision. The fundamentals do not.

Why Fundamentals Are Not Enough

The case against fundamental analysis is not that economic data is irrelevant. It is that by the time a trader acts on it, the market has already acted. Prices in liquid markets reflect available information with a speed that individual analysis cannot match. The trader who builds a sophisticated model of crop yields, unemployment trends, or inflation trajectories is doing real intellectual work, but that work is competing against the aggregate processing power of every other participant in the market who has access to the same data.

Price, by contrast, is the output of all that processing. It is what every participant, discretionary and systematic, has already decided the market is worth at this moment. Following price does not require beating anyone at analysis. It requires the discipline to act on what price is doing rather than on what you believe price should do based on a model that may be missing information the market already has. For the full picture of how these ideas connect to position sizing and risk management, the breakout and risk pages cover the mechanics in detail.

Frequently Asked Questions

Why do trend followers use price instead of fundamental data?

Because price reflects all available information faster than any individual can process it. By the time a trader reads a report, forms a view, and acts on it, the market has typically already moved. Price is the real-time output of the market’s collective judgment. Trend following systems use that output directly rather than trying to anticipate it through analysis.

Does trend following ignore volume?

Most systematic trend following systems are built primarily around price. Volume can be used as a filter or confirmation tool, but it is not the primary signal. The core logic is price-based: identify a sustained directional move, enter in that direction, manage the position with predefined rules, and exit when the move ends.

What is the problem with “buy and hold” from a trend following perspective?

Buy and hold assumes that markets trend upward over time and that the correct response to any decline is to hold through it. Trend following does not make this assumption. It follows what price is actually doing and exits positions that are moving against the system. In exchange for missing some of the upside during strong bull markets, trend following aims to reduce exposure during sustained declines and to participate in trends across asset classes beyond equities.

What happened to Amaranth and what does it illustrate?

Amaranth Advisors was a multi-strategy hedge fund that lost approximately $6 billion in 2006 through concentrated positions in natural gas futures driven by a fundamental view on energy prices. When the market moved against those positions, the fund did not have the systematic risk controls to limit the damage. It is cited as an example of what happens when a large, concentrated bet on a fundamental thesis is not constrained by price-based exit rules. A trend following system would have cut the losing positions according to its rules long before the losses reached that magnitude.

Trend Following Systems
Want to learn more and start trading trend following systems? Start here.