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Diversification in a Trend Following Philosophy

Gerald Loeb: Timeless Trend Following Advice
Gerald Loeb: Timeless Trend Following Advice

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Hi Michael,

Regarding your latest lesson on diversification, I understand the necessity to spread across different markets and accept small losses in the hope that other trends continue to absorb this with profits. But, you then give an example where all capital would be invested in one trend, with the obvious stop loss, giving a possible loss of 5% on a 10,000 stake.

Trend following involves diversification (yes), but if a big trend unfolds not only do you need rules to get you on it, but heavily on it. Trend following does not force a mandatory “this amount of money” equally across both trending and non-trending markets. This is not traditional diversification whereby you typically tie up capital in markets that are flat.


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