Trend Following with Managed Giveback
Capture the meat of major moves while containing reversals and false signals
- Difficulty
- Advanced
- Time to result
- ~months to results
- Steps
- 5
- Confidence
- 97%
The method uses momentum signals to detect when a sustained price move is already underway, then establishes a position in the direction of that move. It does not attempt to forecast the exact beginning or end of a trend. Instead, it accepts late entry and a controlled giveback after reversal as the cost of capturing the move’s profitable middle. The approach becomes more robust when applied across numerous markets and asset classes because only some markets will trend at any given time. Risk controls contain losses and whipsaws in quiet or sideways markets, while occasional large right-tail moves provide the principal return engine. Success therefore depends on disciplined signals, diversification, predefined exits, and realistic expectations about unavoidable reversals.
Origin
Ken Tropin used trend-following systems when launching Graham Capital Management, designing features intended to capture large right-tail moves while reducing the givebacks commonly associated with reversals.
Core principles
- 01Enter after momentum confirms that a trend is underway
- 02Accept that no system will identify the exact top or bottom
- 03Give back a controlled portion of profits when a trend reverses
- 04Diversify across markets so a few strong trends can offset non-trending positions
- 05Manage risk actively in quiet and sideways markets
How to run it
- 1
Scan for Momentum
Measure price momentum across a diversified universe of liquid markets. Treat momentum as evidence that a trend may be underway rather than as a prediction of its ultimate size.
Pro tip Use consistent measurements so signals remain comparable across asset classes.
Watch out A short price move may be noise rather than a durable trend.
- 2
Confirm the Trend
Require the selected momentum signal to cross a predefined threshold before entering. Take the position in the direction indicated by the signal.
Pro tip Automate signal generation to reduce discretionary hesitation.
Watch out Waiting for confirmation means surrendering the earliest part of every move.
- 3
Ride the Move
Remain positioned while the trend signal persists, even if the move extends farther than prevailing expectations. Avoid imposing an arbitrary price target on a strong trend.
Pro tip Let systematic evidence, not a narrative about fair value, govern the holding period.
Watch out Normal countertrend moves can tempt traders to exit prematurely.
- 4
Exit After Reversal
Close or reverse the position when the trend signal breaks. Accept that this exit will occur after the peak and will surrender some unrealized profit.
Pro tip Define the acceptable giveback before entering the trade.
Watch out Trying to identify the exact top can replace a repeatable process with guesswork.
- 5
Control Non-Trending Losses
Limit exposure and cumulative whipsaw losses in markets that remain quiet or move sideways. Evaluate risk across the complete portfolio rather than one trade at a time.
Pro tip Diversify broadly enough that strong trends can outweigh small failed signals elsewhere.
Watch out Concentrating in one market makes results dependent on that market producing a trend.
In the wild
As energy prices rise over several months, momentum signals confirm an upward trend and establish a long position. The system remains invested as the move extends. When prices eventually reverse enough to break the signal, it exits below the peak but retains most of the accumulated gain.
→ The strategy captures the profitable middle of the energy move without needing to predict either endpoint.
A portfolio runs the same disciplined process across energy, currencies, rates, and equity futures. Several sideways markets generate small losses, but a major currency trend and an extended rates move produce larger gains.
→ Diversification allows a limited number of sustained trends to drive positive portfolio returns.
Common mistakes
Trying to Call the Exact Top
Trend following exits only after reversal evidence appears. Demanding a perfect top encourages premature exits or discretionary overrides.
Ignoring Sideways-Market Risk
Repeated false signals can accumulate meaningful losses when markets are quiet. Position sizing and portfolio-level risk limits must contain those periods.
Judging the Method One Market at a Time
The mechanism relies on diversification because trends occur unevenly. A narrow universe reduces opportunities for large winners to offset failed signals.
Is it for you?
Best for
It is best for systematic macro traders operating across diversified, liquid futures and currency markets.
Not ideal for
It is not ideal for investors who require exact turning-point predictions or cannot tolerate interim volatility and profit givebacks.
From the transcript
“a good trend following system will identify based on momentum UH signals that a trend is underway.”
“it's always gonna expect to lose some of those profits when the trend reverses, but still end up capturing the meat of the trend.”
“if you're able to do that in a diverse uh number of markets and asset classes, UH while managing risk and the markets that aren't…”
From the episode
Kenneth Tropin on Quantitative Hedge Fund Strategies
Kenneth Tropin