The True Essence of Trend Following: Beyond Market Euphoria

In the world of stock trading, it is not uncommon for market participants to get caught up in short-lived euphoria, chasing stocks that appear on the top gainers list or those that have surged by double digits in a single session. While this practice is often mistaken for trend following, in reality, it is closer to crowd following when done without a solid understanding of trend structure and volatility dynamics. From a professional standpoint, true trend following is not about simply buying what is going up, but about identifying healthy, confirmed, and sustainable trends—while understanding the underlying price behavior that drives them.

A key concept here is volatility clustering. This phenomenon shows that periods of high volatility tend to be followed by more high volatility. In other words, when an asset has just experienced a sharp spike, the likelihood of large swings in the days ahead remains elevated. Under such conditions, stop losses need to be placed wider to avoid premature exits caused by erratic price movements. However, wider stops also mean smaller position sizes in order to keep nominal risk under control, which in turn compresses the reward-to-risk ratio significantly.

How Professionals Position Early: The Power of Low-Volatility Entries

Understanding Volatility Clustering: A Core Market Concept

Experienced trend followers take the opposite approach: they focus on periods of low volatility, especially during the early stages of a trend, often referred to as the stealth phase. This is when institutional players—the so-called “big money”—begin accumulating positions gradually, careful not to move prices too aggressively. Because price action is relatively stable, stop losses can be placed tighter, allowing for larger position sizes without increasing overall risk exposure. As the trend develops and transitions from underreaction to overreaction, buying pressure intensifies, creating sustained momentum.

This approach opens the door to far greater potential rewards compared to jumping in during the height of market euphoria. By positioning early, traders stand to capture not just two or three times their risk, but potentially multiples of ten or more—riding the entire trend cycle from accumulation through to the mania phase. This is the essence of genuine trend following: anticipating the wave before it breaks, not scrambling to catch it once it has already surged.

Crowd following vs. trend following → Chasing top gainers without context is following the crowd, not the trend.

Volatility clustering matters → High volatility often follows high volatility; wider stops mean smaller position sizes and weaker reward-to-risk ratios.

The stealth phase is critical → Early trends form during low volatility when institutional players accumulate quietly.

Better risk/reward profile → Tighter stops in stable conditions allow larger position sizes with controlled risk.

True trend following → Position early, ride the full cycle, and capture exponential returns instead of chasing late-stage euphoria.

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Key Takeaways