To Forecast or To Follow
by JESSE H. THOMPSON/Technical Analysis staff writer
Browsing the ads of Barron's Financial Weekly or Commodities magazine can be mesmerizing.
Financial gurus, "new discoveries" and "wonder" systems abound. Too much skepticism might be
unwise, since new discoveries are in fact made and old knowledge rediscovered all the time. But it's
doubtful given the velocity at which they are currently streaming forth, that all these discoveries are as
valuable as they claim. Nevertheless, the good is always there in the shadows of the bold print. So, the
task becomes to separate the wheat from the tares.
The task is best begun by attempting to differentiate between the underlying concepts, and then
gravitating toward one or another that by its own virtue appears to be practical and based on sound
I would venture to say that the philosophy or reasoning underlying a given method of implementing an
investment can be classified into one of two categories: the school of forecasting and the school of
trend following. Forecasting we will define as placing a primary emphasis on predetermining the
particular price level that a given market will reach, or how long the move in force will last. The
forecaster asks the question, "What is the market going to do?"
Trend following is similar in nature because it too is a type of forecasting, but instead of projected time
or price, the focus is on current activity and direction. We will define trend following as measuring the
current trend(s) of a given market, and then depending on the Law of Inertia or Momentum to enhance
the probability that a given trend will continue. The trend follower asks the question, "What is the market