“Trend following” is the common term for investing using price momentum. Going long securities whose prices have been rising over recent months and going short securities whose prices have been falling has provided consistent profits. This strategy is so popular that an entire investment style called “managed futures” is dedicated to nothing more than straightforward trend following. 

The persistent profits from long–short trend following may create a conundrum for believers in efficient markets, but few actual participants in financial markets can fail to notice the reality of price trends. New information immediately moves the price of a security or group of related securities. While the direction of the move may be obvious, the correct magnitude of price change consistent with the news is much less certain. Press attention to both the news and the following price reactions in the market creates feedback that reinforces the initial price moves, thereby creating trends.

Trends may begin with moving the prices of securities toward a changed perception of value resulting from fundamental news, but often persist far beyond any reasonable estimate of fair value. Investors often seem to jump on a trend without much regard for the connection of prices to fundamentals. History is replete with such self-reinforcing trends divorced from valuations: the tulip craze in 1630s Holland, the South Sea Bubble of 1720, railway manias of the mid-1800s, the roaring bull market of the 1920s, Nifty Fifty stocks in the 1960s, Japan’s asset price bubble of the 1980s, and the late 1990s tech bubble, to name just a few. Momentum has proven to be robust across the financial markets, including currencies, commodities, equities, and fixed income.