# Trend following: how it works and what it costs

> What trend following is, the research back to 1880, five classic ETF trend rules with dated backtests, and the whipsaws and flat years that come with it.

Written by [Tactfolio research team](https://tactfolio.com/about/editorial-policy.md), published 2026-10-16, updated 2026-10-16, data as of 2026-09-25.

Trend following is a way of investing that holds assets while their prices are rising and steps aside when they start falling. It uses fixed rules, such as "hold the S&P 500 while it is above its 200-day average". Over long periods it has softened the worst bear markets, but it lags in choppy markets and can trail buy and hold for years.

## Key points

- Trend following does not predict. It reacts to a move that has already started.
- Most rules compare a price with its own past: its average, or its return over the last few months.
- Studies going back to 1880 found trend rules made money on average and did well in many big stock market falls.
- The cost is whipsaws: selling after a dip, then buying back higher, again and again.
- Long flat or losing stretches are normal, even for rules that worked over decades.

## What is trend following?

Trend following is a rules-based method that bets recent price direction will last a while longer. If a market has been going up, you hold it. If it has been going down, you move to something safer, often cash or short-term Treasury bills.

The most common version is called **time-series momentum**. "Time series" means each asset is judged against its own past, not against other assets. A rule might ask: "Is this fund's price higher than it was 12 months ago?" If yes, hold it. If no, hold bills.

That is different from ranking assets against each other, which is relative momentum. Our guide to [momentum stocks](https://tactfolio.com/learn/momentum-stocks.md) covers that side, and the [momentum strategy guide](https://tactfolio.com/learn/momentum-strategy.md) shows how the two kinds combine. Trend following is one of the oldest ideas in [algorithmic trading](https://tactfolio.com/learn/algorithmic-trading.md), because the rules are simple to write down and test.

## How a trend following strategy works

A trend rule has three parts: what to watch, when to check, and where to go when the trend turns down.

1. **What to watch.** A price against its moving average, or its return over a set time. A [moving average](https://tactfolio.com/learn/moving-average.md) is the average closing price over the last set number of days.
2. **When to check.** Daily, weekly or at each month end. Checking less often means fewer trades but slower exits.
3. **Where to go.** Treasury bills, bonds or cash when the trend is down.

Say you hold a fund at $100. Its 10-month average is $95, so the trend is up and you stay in. Over the next months the price slides to $90 and the average rises to $93. Now the price is below the average. At the month end, the rule sells and moves to bills.

## What does the research say about trend following?

The evidence for trend following is stronger than for most chart rules. It still cannot promise future results.

Tobias Moskowitz, Yao Hua Ooi and Lasse Pedersen studied 58 futures markets in their 2012 paper [Time Series Momentum](https://doi.org/10.1016/j.jfineco.2011.11.003). They found that a market's returns over the past 1 to 12 months tended to carry forward. The effect partly reversed over longer spans.

Brian Hurst, Yao Hua Ooi and Lasse Pedersen then pushed the test back to 1880. Their AQR paper, [A Century of Evidence on Trend-Following Investing](https://www.aqr.com/Insights/Research/Journal-Article/A-Century-of-Evidence-on-Trend-Following-Investing), used 67 markets. It found positive average returns in every decade they studied. The strategy made money in 8 of the 10 worst falls for a 60/40 stock and bond portfolio.

Three cautions come with that paper:

- The returns are hypothetical. The authors subtracted estimated costs and fees, but no one ran this exact portfolio since 1880.
- The test traded futures, went short as well as long, and used leverage. A long-only ETF version behaves differently.
- The authors noted disappointing results in the years after 2008. They judged them within the normal range for the strategy.

For a longer story about the traders behind the method, Michael Covel's book [Trend Following](https://openlibrary.org/isbn/9781119371878) (Wiley, fifth edition, 2017) is a popular read. It tells the traders' stories but does not test the rules.

## Trend following with ETFs: five classic examples

You can follow trends with ordinary ETFs by holding a fund or Treasury bills. These five classics on Tactfolio do that. The figures are hypothetical backtests as of September 25, 2026, from mid-2007 onward.

| Strategy | The rule | Return a year | Worst fall |
| --- | --- | --- | --- |
| [200-day moving average](https://tactfolio.com/strategies/200-day-moving-average.md) | S&P 500 above its 200-day average, else bills. Checked daily. | About 8% | About 22% |
| [Faber 10-month moving average](https://tactfolio.com/strategies/faber-10-month-moving-average.md) | S&P 500 above its 10-month average, else bills. Checked monthly. | About 8% | Less than half the S&P 500's |
| [Global Tactical Asset Allocation](https://tactfolio.com/strategies/global-tactical-asset-allocation.md) | Five asset classes, each held only above its 10-month average | About 5% | About 15% |
| [US risk parity trend following](https://tactfolio.com/strategies/us-risk-parity-trend-following.md) | Five US asset classes sized by risk, each with a 10-month filter | About 4.2% | About 11% |
| [Trending Fast and Slow](https://tactfolio.com/strategies/trending-fast-and-slow.md) | S&P 500 on a 1-month or 12-month trend, picked by recent volatility | About 8% | About 28% |
| S&P 500 (buy and hold) | Always invested | About 11% | About 55% |

Every rule above returned less than the S&P 500 over this stretch. Each one also had a much smaller worst fall. That trade, less loss for less gain, is what trend following has usually offered.

## Whipsaws and long flat stretches

A **whipsaw** is when a rule sells after a dip and buys back higher, over and over, in a market that keeps changing direction. Each one costs a little. Together they can cost a lot.

The classics show it plainly:

- The 200-day rule lost 10% in 2011 while the S&P 500 gained 2%. Its worst fall ran from April to September 2010, and it did not regain its high until March 2013.
- The Faber 10-month rule lost about 2% in 2010 while the S&P 500 gained 15%.
- Global Tactical Asset Allocation lost less than 2% in 2008, when the S&P 500 lost 37%. But it gained only about 4% to 5% in the strong years 2019, 2020 and 2023.
- Trending Fast and Slow lost 25% in 2022, more than the S&P 500's 18%, and did not recover until June 2024.

Fast crashes are a second weak spot. A fall that is over in a month, like early 2020, can end before a slow rule reacts.

## Common mistakes

- **Expecting it to win every year.** In long bull markets, trend rules usually trail.
- **Quitting after a whipsaw year.** The rule's value shows up in rare, deep bear markets. Leaving after a bad year can mean missing the next one.
- **Tuning the average to the past.** A 187-day average that tested best is likely fitting noise.
- **Checking too often.** Daily checks react faster but whipsaw more than monthly checks.
- **Using one asset only.** Spreading the same rule across several assets, as in [tactical asset allocation](https://tactfolio.com/learn/tactical-asset-allocation.md), can smooth the ride.

## Try it on Tactfolio

You can open any of the five classics above, read every rule and see each year of its backtest, including the bad ones. To build your own, open the [strategy builder](https://tactfolio.com/builder) and add an If / Else block, such as "SPY above its 200-day moving average, else BIL". Strategies on US stocks and ETFs run on daily prices and hold long positions only. That means trend rules here move to cash or bonds instead of going short.

## Common questions

### Does trend following still work?

Over the long run, research found it made money on average and helped in many deep bear markets. Results since 2008 have been weaker, and classic ETF versions have trailed the S&P 500 since 2007 in hypothetical tests. No one knows if the next decade will look like the past.

### What is the best trend following strategy?

No single rule is best in every market. Slow rules, like a 10-month average, trade less but react late. Fast rules react sooner but whipsaw more. Compare full backtests, including the worst years, before choosing.

### What is the difference between trend following and momentum?

Trend following, or time-series momentum, compares an asset with its own past. Relative momentum compares assets with each other and picks the strongest. Many strategies, like dual momentum, use both.

### How often do trend following strategies trade?

It depends on the check. A monthly rule on one fund may trade only a few times a year. A daily rule can trade many times in a choppy year.

### Which indicators do trend followers use?

Most use moving averages or past returns over 1 to 12 months. Our guide to the [best indicators for trading](https://tactfolio.com/learn/best-indicators-for-trading.md) compares these with other chart tools.

## Put it into practice

- [Trend following bot](https://tactfolio.com/bots/trend-following-bot.md): A trend following bot that holds SPY above its 10-month moving average and Treasury bills below.
- [Crypto backtesting](https://tactfolio.com/crypto-backtesting.md): Backtest crypto rules on Hyperliquid perps like BTC and ETH, daily or hourly, with funding and costs counted.
- [Backtesting](https://tactfolio.com/backtesting.md): Free backtesting software for stocks, ETFs, and crypto perps.
- [SPY: State Street SPDR S&P 500 ETF Trust](https://tactfolio.com/etf/spy.md): What SPY holds, its 0.0945% yearly fee, returns by year, its worst drop, and which Tactfolio strategies hold it.
- [BIL: State Street SPDR Bloomberg 1-3 Month T-Bill ETF](https://tactfolio.com/etf/bil.md): What BIL holds, its 0.1353% yearly fee, returns by year, its worst drop, and which Tactfolio strategies hold it.

## Sources

- [Time Series Momentum](https://doi.org/10.1016/j.jfineco.2011.11.003), Moskowitz, Ooi and Pedersen, Journal of Financial Economics, 2012, accessed 2026-10-16
- [A Century of Evidence on Trend-Following Investing](https://www.aqr.com/Insights/Research/Journal-Article/A-Century-of-Evidence-on-Trend-Following-Investing), Hurst, Ooi and Pedersen, AQR Capital Management (Journal of Portfolio Management, 2017), accessed 2026-10-16
- [Trend Following, fifth edition](https://openlibrary.org/isbn/9781119371878), Michael Covel, Wiley, 2017 (Open Library record), accessed 2026-10-16
- [A Quantitative Approach to Tactical Asset Allocation](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461), Mebane Faber, SSRN, 2007 (updated 2013), accessed 2026-10-16
- [200-Day Moving Average Strategy](https://tactfolio.com/strategies/200-day-moving-average), Tactfolio, figures as of September 25, 2026, accessed 2026-10-16
- [Global Tactical Asset Allocation](https://tactfolio.com/strategies/global-tactical-asset-allocation), Tactfolio, figures as of September 25, 2026, accessed 2026-10-16
- [Trending Fast and Slow](https://tactfolio.com/strategies/trending-fast-and-slow), Tactfolio, figures as of September 25, 2026, accessed 2026-10-16