Value investing, value reversion, and trend following

Trend following generally refers to technical trend following. I’m not a big fan of this trading method, and in most cases, it’s unlikely to be profitable because it’s easy to falsify. For example, if you use the simplest dual moving average crossover for backtesting, it’s basically dominated by losses.

Moreover, I believe that trend following based on tracking candlestick charts lacks investment logic, because you’re not buying the candlesticks themselves, but rather the assets represented by the candlesticks. In this regard, I’m more in favor of value investing, which is more like a so-called “trend following.” For example, if you believe in AI, you hold shares of fundamentally sound AI companies for the long term—buying Nvidia a few years ago followed this logic. For valuable assets, their long-term moving averages must be rising, but assets with rising long-term moving averages don’t necessarily have long-term value, because it’s likely that the trend ends just as it begins, which could be at a high point. If you conduct investment research from the asset perspective, you have every chance to buy in before the long-term moving average forms a trend and continue holding.

What is truly valuable in technical analysis is value reversion: find assets with long-term value, sell when they move far above the long-term moving average, and buy again when they approach the long-term moving average. This way, you can also profit from some price swings.

I’ve seen many people doing trend following on-chain. They often buy at the top, sell at the bottom, and chase back in when the price rises again—repeating this cycle. In effect, trend followers are contributing liquidity. As a result, the asset may rise over the long term, but these trend followers still lose money. Therefore, understanding the fundamentals of the real world is indispensable. Even though trading is electronic, the assets being traded are closely tied to the real world.