A trend-following approach is a type of investment strategy that involves buying assets that are trending upwards and selling assets that are trending downwards. The goal of this approach is to profit from the momentum of the market by buying assets that are likely to continue to rise in value and selling assets that are likely to continue to decline in value.
Trend-following strategies typically involve identifying the overall direction of the market and then using various technical analysis tools to identify specific assets that are trending in the desired direction. These tools might include moving averages, oscillators, and other indicators that are designed to predict the direction of the trend.
Once a trend has been identified, the investor will typically make a trade based on the expected direction of the trend. For example, if the market is trending upwards and the investor sees a stock that is also trending upwards, they might buy the stock in anticipation of it continuing to rise in value.
Trend-following approaches can be useful for investors who are looking to capitalise on the momentum of the market. However, like any other investment strategy, they are not foolproof and can produce false signals. It is important for investors to use them in combination with other analysis tools and to carefully monitor their investments.