Trend following is to investing as Arabic numerals are to mathematics.

The S&P 500 is now nearly 22% below peak. Treasury bonds of most western governments have begun to give way at an accelerating rate and all this is taking place against the backdrop rising inflation, supply chain disruptions and poor overall economic performance. At the same time, those investors who embraced trend following to navigate these events, are reaping a very substantial windfall. So, why isn’t everybody a trend follower?

For some reason, trend following continues to be regarded with suspicion and even disdain by the majority of investors and traders, and this is particularly true about the professionals among them. Over the last 20 years, I sat through countless meetings with such professionals, presenting the most compelling evidence about the effectiveness of trend following, gathered over many decades. In most cases by far, such evidence failed to move the decision makers. In fact, the dismissal of trend following often included a measure of derision. I often wondered why that is, and last year, when I published the book, “Alex Krainer’s Trend Following Bible” (free download here), I summarized my impressions from many of those meetings and presentations:

… most investors regard trend following as an oddity, not entirely fit for the ranks of serious market professionals. The reason for this has nothing to do with performance but is in part simply cultural. Namely, most of today’s market professionals were educated in the Cartesian tradition which validates rigorous scientific method as a way to acquire knowledge. Value is placed on understanding linear cause-and-effect relationships that allow us to make predictions about stuff. This mindset has an obvious appeal in investment speculation: we expect to predict and profit from market events by understanding how the conditions we observe would cause those events. That mindset also gives us comfort in the feeling of competence and control.

Trend following is a cultural misfit in this intellectual tradition. To begin with, it is based on a field of study called technical analysis where knowledge accrues through judgment heuristics and experience rather than empirical science. Trend following also blurs the relationship between intellectual work and its expected results. The linear thinking investor judges a transaction according to an explicit understanding of how and why that transaction should generate a profit. The trend follower simply implements a set of predefined rules, accepting that any given transaction may produce a loss. A trend follower expects profits, not from any particular transaction, but from a long sequence of trades extending far into the future.

Thus, while the conventional approaches to investing stem from an understanding of a particular situation, trend following is based on the belief that a certain predefined speculative behavior will deliver positive results over time, regardless of the economic situation, industry, market, or geography in which we trade. This reliance on belief is why I chose to use the word bible in this book’s title. As with any speculative endeavor, our beliefs ultimately determine the way we invest, and our actions (plus luck) compound over time to shape our fortune. In this sense, false beliefs can lead to poor results and correct beliefs and action will lead to greater prosperity. 

The intransigence of the entrenched establishment

It is odd that an effective method of solving a tough challenge (which, in this case, is uncertainty), should be such a hard sell, but this should indeed not surprise us. The financial industry and its anointed expert class have created an impenetrable echo-chamber of groupthink and they will not come to their senses just because someone presents them with a rational argument.

This intellectual intransigence should be a familiar feature of political, academic, social and economic institutions across history. As Max Planck put it, “A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation eventually grows up that is familiar with it.” One of the starkest examples of this rigidness was the dismayingly slow adoption of Arabic numerals in the renaissance Europe.

Adoption of Arabic numerals

Arabic or Hindu-Arabic numerals are such an obvious improvement over the Roman numerals that the innovation should have swept across the world like a wildfire through an arid savanna. But that’s not how it happened.

The first known mention of Arabic numerals in the west date back to 976 AD in the “Codex Vigilanus,” or “Albeldensis.” In the late 10th century, French monk and mathematician Gerbert d’Aurillac (ca. 946–1003 CE) took the disguise as a Muslim pilgrim and travelled to Seville and Cordoba in order to gain access to the Islamic universities there and study mathematics with Arabic scholars. Gerbert would become a man of considerable influence: he became the teacher of Emperor Otto III and in the year 999 rose to the Papacy, taking the name Silvester II. This was in fact the only time in history that a leading mathematician became the pope.

But in spite of his learning and influence, d’Aurillac was unable to break the establishment’s rejection of Arabic numerals. In medieval Europe, the use of Roman numerals made the advancement of mathematics impossible and the performance of simple arithmetic tasks was reserved to a specialist class of anointed experts, usually clergymen. They performed calculations for a living with the help of an abacus in the Roman tradition and announced the results of their calculations to the public that remained ignorant of their methods. It doesn’t take great imagination to discern the advantages of this privileged position. As a result, the church and the expert class would fiercely resist the innovation of Arabic numerals for centuries.

Two hundred years after Gerbert d’Aurillac’s death, it was “Liber Abaci,” the 1202 AD book by Leonardo da Pisa (today better known to us as Fibonacci), that revived the promise of Arabic numerals. At that time, the growing European trade with the East catalyzed their slow, but irreversible adoption. This was not because the expert class of the day finally came to their senses, but because the innovation suited the practical requirements of tradesmen and financiers infinitely better.

The entrenched establishment and their anointed expert class continued to resist and in many places this resistance continued and was finally overcome only with the European invention of the printing press by Johannes Guttenberg in the mid-15th century.

Trend following is to the financial industry as Arabic numerals were to medieval clergy

I think Michael Covel was on the right track with his comment that, “Trend following takes away the power of certain market players. If you accept trend following, you accept that so much of the financial industry is nonsense; is worthless; is simply people using their position – broker, analyst, whatever – to skim from the accounts of everyone. That’s how they make their money, and you make a lot of money that way. It comes down to a mind-set with trend following. Let’s call it a mindset barrier.”

And just as the medieval clergy fiercely rejected the Arabic numerals, today’s financial industry largely rejects trend following (it is still an exception among investment products). Understandably, after a 13-year bull market, everyone felt like a genius, fully redeemed in their views and few were inclined to question anything much. But if the current correction turns into a protracted bear-market, business-as-usual investing will cause a lot of pain for investors. Once more, I should encourage them to look into trend following which may well be the only valid answer to the problem of uncertainty. I also congratulate those who have already done so, because today the’re likely reaping very significant benefits, as indicated by the blue curve in the chart below:

Alex Krainer is the creator of I-System Trend Following offering effective, reliable and cost-efficient portfolio solutions. I-System Trend Following also publishes the TrendCompass report providing daily real-time CTA intelligence on more than 200 financial and commodities markets including Crude Oil, Gold, Wheat, Bitcoin, Japanese Yen and many others. One month free trial is always on the house. To request a trial, just drop us a note to

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