In the vast, noisy world of the financial markets, there are broadly only two ways to position yourself. You can position that things will stay the same, or you can position that things will change.
Every complex algorithm, every squiggle on a chart, and every scream from a CNBC pundit boils down to this binary choice. The first philosophy is Trend Following. It believes that Newton was right: an object in motion tends to stay in motion. The second philosophy is Mean Reversion. It believes that gravity always wins: what goes up must come down, and usually harder than it went up.
Choosing between them is not an intellectual exercise. It is often a reflection of temperament and trading style. One requires the patience of a saint and the stomach of a hostage negotiator. The other requires the reflexes of a cat and the skepticism of an investigative journalist.
The Trend Follower: The Optimist with a Stop-Loss
Trend following is the art of buying high and selling higher. To the uninitiated, this sounds like insanity. We are taught from birth to hunt for bargains, to buy low, to find value. The trend follower rejects this entirely. They view “value” with caution. If something is cheap, there is often an underlying reason. If something is expensive and getting more expensive, the market knows something you don’t.
The trend follower’s job is deceptively simple. They identify a market that is already moving—a stock hitting a 52-week high, a currency pair in a six-month uptrend—and they jump on board. They do not ask “why.” They do not care about P/E ratios or supply chains. They only care about the line on the chart going up.
This philosophy requires a complete surrender of the ego. You cannot need to be the smartest person in the room. You are simply a passenger on a train that someone else built. You get on, you ride it as far as it goes, and you get off when it derails.
The challenge of trend following is not in the analysis; it is in the waiting. Markets spend most of their time moving sideways. They chop, they drift, they noise around. During these periods, the trend follower may experience a series of small losses. They get “whipsawed”: buying a breakout that fails, selling, then buying the next breakout that fails. It can feel like a gradual accumulation of minor setbacks.
The trend follower survives on the “fat tail.” They endure months of small, annoying losses for the privilege of catching the one monster move that defines the year. They are the like hunters who miss ten shots in a row but finally bag an elephant. The psychological strain comes from watching open profits retrace. A trend follower might be up substantially on a trade, but because they wait for the trend to bend before exiting, they might give back a portion of that profit before getting out. They almost always leave money on the table. That trade-off is inherent to the approach.
The Mean Reversion Trader: The Professional Cynic
Mean reversion is the art of buying low and selling high. It is built on the belief that markets are elastic. Prices can stretch away from their average value, driven by fear, greed, or a liquidity crunch, but often, the rubber band tends to snap back.
The mean reversion trader is a contrarian. When the world is panicking, they are buying. When the world is euphoric, they are shorting. They look for extremes. They hunt for the RSI reading of 90, the stock trading well above its historical average, the parabolic move that appears to defy historical norms.
This philosophy appeals to the intellectual vanity in all of us. It feels good to bet against the crowd. It feels smart to say, “This is irrational, and I am the only one who sees it.”
But the pain of mean reversion can be severe. The famous quote by John Maynard Keynes, “The market can remain irrational longer than you can remain solvent,” was written specifically for mean reversion traders. You might be mathematically correct that a stock is overextended, but that doesn’t stop it from doubling in price while you are short. This is called getting run over by a steamroller while picking up nickels.
Unlike the trend follower who may experience frequent small losses in pursuit of larger gains, the mean reversion trader often achieves a higher win rate but faces less frequent, larger losses. They bank consistent, small profits as prices snap back to the middle. But the one time the rubber band doesn’t snap back, the one time the market undergoes a paradigm shift and the “extreme” becomes the new normal, they face significant drawdowns. They are the turkey who lives a great life for 364 days, fed and cared for, right up until Thanksgiving.
The Personality Audit
Deciding which strategy suits you has nothing to do with which can be more profitable in theory. Both can work. Both can fail. The variable is you.
Trend following is for the person who can tolerate being wrong. If you can take a small loss, shrug, and take the next trade without feeling like a failure, you can follow trends. You need to be comfortable with uncertainty and capable of sitting on your hands for weeks, doing absolutely nothing while you wait for the fat pitch. You are playing the long game, relying on statistical outcomes over a large sample of trades.
Mean reversion is for the person who needs high frequency and constant feedback. If you crave the satisfaction of frequent winning trades and dislike leaving unrealised profit on the table, you may gravitate toward mean reversion. You get to be active. You get to feel smart. But you need iron discipline. You must be able to admit you are wrong instantly. If attempt to argue with a strong, persistent trend while trading mean reversion, losses can escalate rapidly.
The Hybrid Trap
One of the most common mistakes novices make is trying to be both. They buy a stock because it is trending up (trend following), but when it drops, they refuse to sell because “it’s now a better value” (mean reversion). This is not a strategy; it is an inconsistent decision-making process that often leads to prolonged losses.
You cannot play two games at once. The trend follower buys strength and sells weakness. The mean reversion trader buys weakness and sells strength. If you mix the signals, you end up buying the top and selling the bottom.
Pick a side. Are you the surfer riding the wave, accepting that it might crash on your head? Or are you the physicist calculating the tension in the rubber band, betting that gravity still exists? Markets involve risk in either case, but by committing to a single framework, you improve clarity, accountability, and learning—regardless of outcome.
Final Reminder: Risk Never Sleeps
Heads up: Trading is risky. This is only educational information, not an investment advice.