The Trend Following Bible

Author: Andrew Abraham | Categories: Trend Following, Trading Systems, Futures Trading, Risk Management

Executive Summary

"The Trend Following Bible" by Andrew Abraham, published by John Wiley & Sons as part of the Wiley Trading series, presents a comprehensive guide to trend following as a trading methodology. Abraham, a veteran commodity trading advisor (CTA) and trend following practitioner, provides both the theoretical foundation and practical implementation details for building trend following systems across multiple markets.

The book covers the philosophy and history of trend following, the psychological challenges of staying with trends through inevitable drawdowns, specific entry and exit methodologies, risk and money management principles, and the construction of diversified trend following portfolios. Abraham's approach emphasizes simplicity, discipline, and the critical importance of letting profits run while cutting losses short -- the fundamental principle that underlies all trend following strategies.

Core Thesis & Arguments

Abraham's central thesis is that trend following is the most robust and time-tested approach to trading across all liquid markets, because it aligns with the fundamental tendency of markets to move in persistent trends driven by economic cycles, behavioral biases, and institutional flows.

Key arguments include: (1) Trend following works because human behavioral biases (anchoring, herding, slow information diffusion) create persistent price trends. (2) The simplest trend following systems, based on moving averages and breakouts, perform as well as or better than complex systems over long periods. (3) Diversification across uncorrelated markets is the most important factor in reducing drawdowns. (4) The primary challenge of trend following is psychological -- enduring inevitable periods of drawdown and whipsaw losses while maintaining discipline.

Key Concepts & Frameworks

• Trend Following Philosophy: Markets trend, and the most profitable strategy is to identify trends early, stay with them, and let profits run while cutting losses quickly.
• Multiple Market Diversification: Trading trend following systems across many uncorrelated markets (commodities, currencies, bonds, equities) to reduce portfolio volatility.
• Simple Entry/Exit Rules: Using moving average crossovers, channel breakouts, or similar simple rules rather than complex predictive models.
• Risk Management as Edge: The primary edge in trend following comes not from superior prediction but from superior risk management and position sizing.
• The Psychology of Drawdowns: Understanding and preparing for the inevitable losing periods that are inherent in any trend following approach.

Practical Trading Applications

1. Build your trend following system using simple, robust rules (moving average crossovers, breakout systems) rather than complex indicators.
2. Diversify across as many uncorrelated markets as your capital allows -- this is the single most important factor in reducing drawdowns.
3. Size positions based on each market's volatility to equalize risk across the portfolio.
4. Let winning trades run and cut losing trades quickly -- the entire edge of trend following depends on this asymmetry.
5. Prepare psychologically for drawdown periods of 6-18 months, which are normal and expected in trend following.

Critical Assessment

Strengths: The book provides a practical, accessible introduction to trend following with enough detail for implementation. The emphasis on psychology and risk management alongside system design is well-balanced. The multi-market diversification framework is sound.

Weaknesses: Some of the material covers well-trodden ground for readers already familiar with trend following literature. The specific system examples could be more detailed. The book does not address the challenges of trend following in the post-2008 era of central bank intervention and reduced trend persistence.

Best for: Traders interested in implementing a trend following approach, particularly those new to the methodology who want a comprehensive overview combining philosophy, system design, and risk management.

Key Quotes

"The trend is your friend until it ends. The key is knowing how to ride it and when to let go."

"Simplicity in system design is not a weakness -- it is the most reliable path to robustness."

"Diversification across markets is the only free lunch in trend following."

Conclusion & Recommendation

"The Trend Following Bible" provides a solid, practical introduction to trend following methodology. Abraham's combination of philosophical foundation, practical system design, and risk management principles creates a useful resource for anyone looking to implement or improve a trend following approach. While not breaking new ground, the book does an excellent job of presenting the core principles in an accessible, actionable format.