Trend following and market timing
Move toward cash, or reduce exposure, when prices are falling, and reinvest when trends turn up.
- When does it start protecting?
- After a decline is already under way, since a trend signal needs prices to fall first.
- Where does it stop?
- Sudden drops can happen before a signal triggers, and fast rebounds can be missed.
- Is upside limited?
- No hard cap, but returns can lag after a sharp recovery.
- Is the cost known or unknown?
- Unknown: losses from false signals, trading costs, and taxes on realized gains in taxable accounts.
- Fits best when
- You accept occasional false signals in exchange for stepping aside during long bear markets.
- Watch for
- It requires discipline. Many investors abandon it after a few false signals.