Clenow demystifies managed futures and trend following — a strategy that profits from sustained directional moves across diverse markets.
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Key Concepts from Following the Trend
Trend Following Philosophy: At its core, trend following is based on a simple yet profound observation: markets don't move randomly, but instead create sustained directional movements that can last for months or even years. Andreas Clenow argues that these trends exist not because markets are inefficient, but because of fundamental human psychology and the mechanics of how information spreads through global financial systems.
The driving forces behind market trends are deeply rooted in behavioral finance. When investors receive new information, they don't all process it simultaneously or rationally. Some investors react quickly to news, others take weeks or months to adjust their positions, and many suffer from confirmation bias – only seeking information that supports their existing beliefs. Additionally, herding behavior kicks in as more investors see a trend developing and jump on board, creating momentum that can persist far longer than pure fundamental analysis would suggest.
Consider the dot-com bubble of the late 1990s as a perfect example. Even as clear warning signs emerged about overvalued technology companies, the upward trend continued for years because information about the true financial health of these companies diffused slowly through the market. Institutional investors, retail traders, and pension funds all moved at different speeds, with many choosing to ignore negative signals because "everyone else was making money." This created a sustained upward trend that trend-followers could capitalize on, right up until the eventual reversal.
The practical implication for investors is powerful: you don't need to predict why markets will move or when trends will end. Instead, you can systematically identify and follow existing trends across multiple markets and timeframes. This might mean buying stocks, commodities, or currencies that are making new highs, or selling short those making new lows, while always maintaining strict risk management rules.
The key takeaway is that trend following works not despite human irrationality, but because of it. Rather than fighting against market psychology or trying to outsmart other investors with superior analysis, trend followers embrace the reality that markets trend due to predictable human biases. This philosophical shift – from trying to predict markets to simply following their natural movements – forms the foundation of one of the most enduring and successful investment strategies in financial history. (Chapter 2)
Diversification Across Markets: Imagine you're a chef preparing a balanced meal – you wouldn't serve just potatoes, even if they're perfectly cooked. In investing, diversification across markets works the same way. Andreas Clenow emphasizes that trading multiple uncorrelated futures markets is like creating a well-balanced portfolio meal, where each ingredient (market) contributes something different to the overall experience.
When markets move independently of each other, they're considered "uncorrelated." For example, while crude oil prices might surge due to geopolitical tensions, agricultural commodities like wheat could simultaneously fall due to favorable weather conditions. By trading across various futures markets – energy, metals, grains, currencies, and bonds – you're not putting all your eggs in one basket. This approach significantly reduces the wild swings in your portfolio's value because while some positions lose money, others often gain.
Consider a practical scenario from 2008: while stock indices crashed and many equity-focused investors lost fortunes, some currency pairs and certain commodities moved in completely different directions. A diversified futures trader might have been long Japanese yen (which strengthened as a safe haven), short equity indices (profiting from the decline), and positioned in gold (which performed well during uncertainty). This multi-market approach helped smooth out the devastating losses that concentrated strategies experienced.
The mathematical beauty of this concept lies in something called the "correlation coefficient." When you combine multiple uncorrelated return streams, the overall volatility of your portfolio decreases while potentially maintaining similar returns. This isn't just theory – it's the foundation of modern portfolio management and explains why professional trend followers often trade 50 or more different futures markets simultaneously.
The key takeaway is that diversification across markets isn't about being right all the time; it's about being wrong less catastrophically. By spreading your trend-following strategy across many uncorrelated futures markets, you create a smoother equity curve that's easier to stick with psychologically. This consistency is crucial because the biggest enemy of successful trading isn't market volatility – it's the emotional decision to abandon a good strategy after a rough patch. (Chapter 5)
Position Sizing by Volatility: Imagine you're building a portfolio where you invest $10,000 in both Apple stock and a small biotech company. While the dollar amounts are equal, the risk you're taking is dramatically different – the biotech stock could easily swing 30% in a day while Apple might move just 2%. This is where position sizing by volatility comes in, a powerful technique that adjusts your investment amounts based on each asset's price volatility rather than using equal dollar amounts.
The core idea is beautifully simple: instead of risking different amounts across your positions, you risk the same percentage of your portfolio on each trade. Andreas Clenow explains that this approach prevents any single volatile position from dominating your portfolio's performance. When you size positions by volatility, you're essentially buying fewer shares of wild, unpredictable stocks and more shares of stable ones, creating equal risk contribution across all your holdings.
Here's how it works in practice: let's say you want to risk 2% of your $100,000 portfolio on each position. For a stable utility stock with 10% annual volatility, you might invest $20,000. But for a cryptocurrency with 50% volatility, you'd only invest $4,000. Both positions now contribute roughly the same 2% risk to your portfolio, even though the dollar amounts differ significantly. This prevents the crypto position from overwhelming your returns when it inevitably makes dramatic moves.
This approach matters because it's one of the most effective ways to manage portfolio risk while maintaining diversification benefits. Without volatility-based position sizing, your calmest investments become irrelevant noise while your most volatile holdings drive all your returns – and losses. Professional trend followers and systematic traders rely heavily on this technique because it allows them to trade across different asset classes and volatility regimes while maintaining consistent risk exposure.
The key takeaway is that true diversification isn't about spreading money equally across positions – it's about spreading risk equally. By adjusting your position sizes based on volatility, you ensure that no single investment can hijack your portfolio's performance, whether for better or worse. This disciplined approach to risk management often makes the difference between sustainable long-term returns and boom-bust cycles that destroy wealth. (Chapter 7)
Drawdown Management: Imagine you're a trend-following trader riding a beautiful upward trend for months, only to watch your profits evaporate during a brutal three-month losing streak. This painful reality highlights why drawdown management—your ability to survive and psychologically endure extended losing periods—often determines whether you'll succeed as a trend follower. Andreas Clenow emphasizes that while capturing profitable trends gets all the glory, it's your preparation for and navigation through the inevitable rough patches that separates successful traders from those who quit.
Drawdowns are simply the peak-to-trough decline in your portfolio value, but their psychological impact runs much deeper than the numbers suggest. Even the most successful trend-following strategies typically experience drawdowns of 20-40% during challenging market periods, and these losing streaks can last anywhere from several months to over a year. The key insight is that these drawdowns aren't bugs in your system—they're features of trend following that you must plan for and accept.
Consider a practical example: You start with $100,000 and experience a 30% drawdown, leaving you with $70,000. To get back to breakeven, you now need a 43% gain—not just 30%. This mathematical reality explains why position sizing and risk management become crucial. Smart trend followers typically risk only 1-2% of their capital per trade, ensuring that even a series of losses won't create a drawdown so deep that recovery becomes nearly impossible.
The psychological challenge often proves more devastating than the financial one. Many traders abandon perfectly good strategies during drawdowns, selling at exactly the wrong time. Successful drawdown management requires setting realistic expectations, maintaining detailed records of your strategy's historical performance, and having enough capital reserves to weather extended storms without being forced to liquidate positions at unfavorable times.
The ultimate takeaway is counterintuitive but essential: your success in trend following depends more on how well you lose than how well you win. Prepare for drawdowns mentally and financially before they happen, treat them as the cost of doing business rather than personal failures, and remember that the best trends often emerge just when your confidence is at its lowest point. (Chapter 9)
Systematic vs. Discretionary: Imagine two traders facing the exact same market situation: stocks are plummeting 15% in a single week. The first trader, let's call him Dave, stares at his screen with sweaty palms, paralyzed between fear and greed, wondering if he should sell everything or buy the dip. The second trader, Sarah, calmly executes her pre-defined trading rules without hesitation. This fundamental difference illustrates the core distinction between discretionary and systematic investing approaches.
Systematic investing relies on predetermined rules and algorithms to make all trading decisions, removing human emotion and bias from the equation. Every entry point, exit strategy, position size, and risk management decision is defined in advance and executed mechanically. Discretionary investing, on the other hand, depends on human judgment, intuition, and real-time decision-making, where traders analyze market conditions and make choices based on their interpretation of current events and market sentiment.
The importance of this distinction cannot be overstated for long-term investment success. Human emotions – particularly fear and greed – are the greatest enemies of consistent returns. Studies show that the average investor significantly underperforms market indices, largely due to emotional decision-making like panic selling during crashes or FOMO buying during bubbles. Systematic approaches eliminate these psychological pitfalls by forcing investors to stick to their strategy regardless of market noise or emotional impulses.
Consider a simple systematic rule: "Sell any position that drops 8% below its recent high." When a stock hits this trigger, a systematic trader sells automatically, no questions asked. A discretionary trader might think, "But the earnings report comes out next week," or "This is just temporary market volatility," and hold onto a losing position that continues to decline. The systematic approach protects capital through consistent execution, while the discretionary approach opens the door to costly emotional mistakes.
The key takeaway isn't that systematic investing is always superior – successful discretionary traders do exist – but rather that most individual investors dramatically overestimate their ability to make rational decisions under pressure. By developing and following systematic rules, you transform investing from an emotional roller coaster into a disciplined, repeatable process that can compound wealth over time without the psychological toll of constant decision-making. (Chapter 3)
About the Author
Andreas F. Clenow is a seasoned quantitative trader and hedge fund manager with over two decades of experience in systematic trading and investment management. He has worked as a portfolio manager and trading system developer for several hedge funds, specializing in trend-following and momentum-based strategies across global markets.
Clenow is best known for his book "Following the Trend: Diversified Managed Futures Trading," which has become a respected resource in the quantitative trading community. He has also authored "Stocks on the Move" and maintains the popular finance blog ACIM (Andreas Clenow Investment Management), where he shares insights on systematic trading strategies and market analysis.
His authority in finance stems from his practical experience managing real money using quantitative methods, combined with his ability to explain complex trading concepts in accessible terms. Clenow's work bridges the gap between academic finance theory and real-world trading implementation, making him a trusted voice among both institutional investors and individual traders interested in systematic approaches to the markets.
Frequently Asked Questions
What is Following the Trend by Andreas Clenow about?
Following the Trend is a comprehensive guide to trend following and managed futures trading strategies. Clenow explains how to profit from sustained directional price movements across diverse markets including commodities, currencies, and financial instruments.
Is Following the Trend a good book for beginners?
While the book covers fundamental concepts, it's better suited for traders with some basic market knowledge due to its technical content. Clenow does explain concepts clearly, but beginners may need additional foundational reading to fully grasp the systematic trading approaches discussed.
What trading strategies are covered in Following the Trend?
The book focuses primarily on trend following strategies that capture sustained directional moves in various markets. Clenow covers systematic approaches to position sizing, risk management, and diversification across multiple asset classes and timeframes.
Does Following the Trend include backtesting results?
Yes, Clenow provides extensive backtesting data and performance analysis throughout the book. He demonstrates how trend following strategies have performed historically across different markets and time periods, including drawdown analysis.
What is the main philosophy behind trend following in Clenow's book?
Clenow's trend following philosophy centers on capturing persistent directional price movements rather than predicting market direction. The approach focuses on systematic rules, proper risk management, and diversification to profit from trends while managing inevitable drawdowns.
How does Andreas Clenow approach position sizing in Following the Trend?
Clenow emphasizes volatility-based position sizing as a key component of successful trend following. This approach adjusts position sizes based on the volatility of each instrument to maintain consistent risk levels across different markets and asset classes.
What markets does Following the Trend cover for trend following?
The book covers trend following across diverse markets including commodities, currencies, stock indices, and interest rates. Clenow emphasizes the importance of market diversification to reduce correlation risk and improve overall portfolio performance.
Does Following the Trend discuss drawdown management?
Yes, drawdown management is a central topic in the book, as Clenow recognizes that significant drawdowns are inevitable in trend following. He provides strategies for managing and surviving drawdown periods while maintaining discipline in systematic trading approaches.
Is Following the Trend more about systematic or discretionary trading?
The book strongly favors systematic trading approaches over discretionary methods. Clenow advocates for rule-based systems that remove emotional decision-making and provide consistent, repeatable processes for entering and exiting trades.
What are the key takeaways from Following the Trend by Andreas Clenow?
Key takeaways include the importance of systematic trend following rules, proper position sizing based on volatility, and diversification across multiple markets. Clenow emphasizes that successful trend following requires discipline, proper risk management, and the ability to endure drawdown periods.