Trend Following is an investment strategy that seeks to capitalize on sustained directional movements in asset prices by identifying and systematically trading in the direction of established trends. This strategy operates on the premise that financial markets exhibit inertia, meaning past price movements can indicate future direction.
Mechanism
The mechanism of trend following typically involves algorithmic identification of trends using technical indicators such as moving averages, price breakouts, or channel analysis. These algorithms generate buy signals when prices rise above certain thresholds or averages, and sell signals when they fall below, triggering entry and exit points. Position sizing and risk management rules are integral to its operation.
Methodology
The methodology of Trend Following in crypto investing involves systematic capital allocation designed to capture large, multi-day or multi-week price swings across various digital assets. It often employs a diversified portfolio of trend-following models across different timeframes and markets to smooth returns. This approach aims for positive asymmetry in returns, allowing profits from strong trends to outweigh losses from false signals, while emphasizing disciplined execution and risk control.
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