Unveiling Trend Following: A Closer Look at Stig Ostgaard's Insights

Trend following has been a buzzword in the trading world for many years, but how much do we really know about its origins and history? Surprisingly little, according to financial expert Stig Ostgaard. In his insightful analysis, he delves into the nature and beginnings of trend following, revealing its dual character and shedding light on the first trend followers.

The Dual Nature of Trend Following

At its core, trend following has two distinct natures: a psychological aspect and a meta-level approach. On one hand, it's an expression of Keynesian "animal spirits" that drive human behavior in various aspects of life, from music to art to financial markets. On the other hand, trend following is a systematic strategy employed by traders based on logical relationships or mathematical formulations.

The Psychological Aspect

Trend following taps into the herding instinct inherent in human nature. When people conform to innovations in their immediate environment, they create trends that can be observed and capitalized upon by trend followers.

The Meta-Level Approach

At this level, trend following involves observing market behavior as a whole and designing intelligent responses based on the perceived direction of the trend. This approach can be further broken down into three essential elements: initiating positions, holding positions, and liquidating positions based on the trend's direction.

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The First Trend Followers

While we may not know who the very first trend followers were, their existence is undoubtedly tied to human nature and our innate desire to conform to innovations in our environment. These early adopters likely observed market movements and made decisions based on the perceived direction of trends.

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Practical Implications for Portfolios

Trend following can be applied to various financial instruments such as stocks (C), emerging market ETFs (EEM), gold-related assets (UNG), and even banking institutions (GS and BAC). Implementing trend following strategies in portfolios can help investors capitalize on long-term trends, potentially increasing returns and reducing risk.

Risks

While trend following has its merits, it's not without risks. Market volatility, for instance, can negatively impact the performance of trend following systems. Moreover, identifying the right entry points and exiting at the right time can be challenging.

Opportunities

Despite these challenges, trend following offers numerous opportunities for investors. By capitalizing on long-term trends, investors can potentially earn substantial returns over time. Additionally, trend following can help diversify portfolios and reduce overall risk exposure by incorporating assets that may not be closely correlated with the broader market.

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Embracing Trend Following in Your Investment Strategy

By understanding the dual nature of trend following, investors can better incorporate this strategy into their portfolios and potentially capitalize on long-term trends. While there are risks associated with trend following, the potential rewards make it a worthwhile endeavor for many investors.