Will Trend-Following Keep Working?

By Deb Shaw | on October 5, 2025 7 min read

Table of Contents

Will Trend-Following Keep Working?

A TiltFolio Perspective

There is a paradox at the heart of investing. Strategies that work eventually stop working, yet trend-following refuses to die. It has adapted through centuries of economic change, technological revolutions, and countless market participants trying to outsmart it.

Short-term edges often fade quickly. The 20-day moving average once worked as a simple system for generating profits, until it didn’t. But long-term trend-following has persisted through the South Sea Bubble, the Industrial Revolution, the rise of global commodities, and the age of quantitative trading.

One of the best pieces of evidence comes from the paper Two Centuries of Trend Following (Lempérière et al., 2014), which shows that trend-following worked across commodities, equities, bonds, and FX markets from the 1800s to today.

So, the question isn’t just whether trend-following will keep working. It’s why it has worked for so long, and what might cause it to change.

Why Short-Term Edges Disappear

Most strategies that look brilliant on paper eventually decay. Short-term edges are fragile because they depend on structural inefficiencies that vanish once enough people notice them.

There are three main reasons for this decay.

1. Crowding and Reflexivity

When too many investors exploit a short-term edge, their own trading erases it. Patterns become self-defeating as markets adjust to the behavior of participants who once profited from them.

2. Low Signal-to-Noise Ratio

Short-term mean reversion systems rely on microstructure inefficiencies. As trading spreads tighten and data access improves, these signals disappear. What was once a structural opportunity becomes statistical noise.

3. Regime Dependence

Many edges only work in specific environments. For example, a high-frequency edge that existed before ETFs or high-frequency trading may vanish in today’s faster, more liquid markets.

Jim Simons of Renaissance Technologies once said that their early systems worked beautifully until everyone else found out. Once the patterns became obvious, the edge was gone.

I have personal experience with this. A friend and I built an intraday mean reversion system a few years ago, buying dips across the Russell 3000 universe. The backtested period covered 2005–2020 with over 20,000 trades, so we were confident it wasn’t curve-fitted. In real trading, though, it fell apart.

In 2022, the system lost 40% despite backtested drawdowns of only 10%. Russell 2000 stocks stopped mean reverting intraday, and the recovery never came. Even with a huge sample size, the law of large numbers did not save it. The experience taught me an important lesson: even when a pattern looks statistically bulletproof, edges still decay.

The key takeaway is that short-term edges depend on structural inefficiencies. Long-term trend-following, by contrast, depends on human behavior, and that changes much more slowly.

Why Long-Term Trend-Following Has Worked for 200+ Years

A. Human Behavior Does Not Evolve on a Financial Timescale

Markets change fast, but people do not. Investors are still driven by fear, greed, and herd mentality. Behavioral biases like the disposition effect, anchoring, and confirmation bias cause trends to form and persist as investors underreact to new information and overreact later.

These cycles of emotion are as old as the market itself. They explain why prices tend to move in long waves. When something starts working, people are slow to believe it. When they finally do, they go all in and overshoot. The pattern repeats endlessly across generations and asset classes.

B. Market Structure Reinforces It

Institutional investors such as pensions, insurers, and central banks cannot move all at once. Their decisions unfold slowly due to mandates, liquidity constraints, and governance rules. This inertia creates gradual shifts in demand and supply that produce multi-year trends.

It is not about speculation. It is about the slow turning of massive capital flows.

C. Trends Reflect the Real Economy

Long-term market trends mirror real-world cycles: technological diffusion, monetary policy, inflation regimes, wars, and demographic shifts. When an economy transforms, asset prices reflect that transformation over time. As long as economies evolve in multi-year waves, markets will too.

The inflationary 1970s favored commodities, the disinflationary 1980s favored bonds, and the post-2008 QE era favored growth stocks. In 2025, gold has regained the lead as markets anticipate another era of excessive money creation. These shifts are structural, not temporary.

D. Diversified Sources of Trend

Trends exist across asset classes. Even if one dries up, another emerges. Commodities may trend in one decade, bonds in another, and equities after that. Trend-following’s persistence may lie in the rotation of opportunities across markets rather than the permanence of any single inefficiency.

This is why a diversified trend-following system can continue to work even as the individual edges within it come and go.

Structural Reasons It Could Break Down

Trend-following has survived centuries of change, but that does not mean it is invincible. There are a few plausible scenarios where its effectiveness could weaken.

A. Universal Adoption and Reflexivity

If every large institution became a systematic trend follower, markets might begin front-running trend signals. That could compress trends into shorter bursts, reducing long-term profitability.

However, this would likely create new opportunities in the opposite direction. The market would adapt, and mean reversion strategies could temporarily thrive. The system is self-correcting because financial participants evolve at different speeds.

B. Information Speed and Algorithmic Anticipation

As machine learning models absorb global data faster, price adjustments may occur almost instantly. If there is no delay between cause (information) and effect (price movement), there is no room for trends to form.

Yet even with faster information processing, humans still control capital allocation. Real-world institutions, policies, and emotions will always introduce delays that create opportunity for trend-followers.

C. Central Bank and Policy Intervention

If central banks permanently cap volatility through policies such as yield curve control or endless quantitative easing, long-term price moves could flatten into suppressed ranges.

However, history shows that excessive intervention often backfires. The post-2008 period of QE sparked powerful trends in gold and growth stocks. In 2025, gold is again in a strong uptrend as investors anticipate renewed money creation. Central banks can delay cycles, but they cannot eliminate them. When imbalances build up, new trends are born.

D. The Energy Efficiency Analogy

Markets are like biological systems. They evolve toward efficiency until new stressors appear. When that equilibrium breaks, trends re-emerge as the system resets. Efficiency is never permanent. Change is the constant that keeps trend-following alive.

Why It’s Still Likely to Work in Practice

Trend-following is not about exploiting tiny inefficiencies. It is about adapting to the large-scale structural and behavioral shifts that drive markets.

Even if the average trend weakens, risk-managed trend systems have an asymmetric payoff profile: small losses most of the time, large gains during crises or regime shifts. This convexity is what makes them so valuable.

Trend-following is as much a philosophy of risk management as it is a source of return. It cuts losses and rides winners, which naturally makes it “long volatility,” positioned to benefit from uncertainty rather than stability.

As long as markets are driven by human behavior and macroeconomic forces, trends will appear. They may change in form or location, but they will continue to exist.

This is precisely why TiltFolio Adaptive was built on this foundation. Its binary allocation, fully invested or fully defensive, removes human hesitation. It doesn’t guess. It follows. And over the long run, those who follow strong, long-term trends tend to capture the world’s most meaningful wealth shifts.

Conclusion: The Real Question

Mean-reversion edges die because they rely on transient structure. Trend-following endures because it’s rooted in human nature and macro evolution.

But survival doesn’t mean constant profitability. There will be long periods, years possibly, when trends are choppy, false signals multiply, and patience is tested. The investors who abandon it in those moments are the same ones who ask, “Does trend-following still work?” right before the next major trend begins.

So the real question isn’t “Will trend-following stop working?” It’s “Can you keep following it when it’s not working?”

That, ultimately, is what separates those who exploit enduring principles from those who chase temporary patterns.

How TiltFolio Works Series

This post is part of the “How TiltFolio Works” series. Explore all posts in the series: