Many institutional allocators, investment advisors, and high-net-worth investors seek a strategy that adapts to changing markets more effectively than traditional static buy-and-hold portfolios.
Two of the most widely used tactical approaches are trend following and momentum strategies. Each distinct strategy responds differently to different market conditions. The strategies use complementary signals to diversify decision-making, manage behavioral risk, and help portfolios adapt across a full range of market conditions.
This article makes the case that investors who employ a blended approach, using both trend and momentum strategies, may provide lower correlation to broad markets, minimize the risk of investing based on emotions, and adapt more effectively to a variety of markets.
Understanding Trend-Following and Momentum Investing
Unlike a traditional fixed-allocation approach that many managers use, tactical strategies adjust portfolios based on market information. While trend following and momentum share the goal of identifying persistent market behavior and translating it into disciplined investment decisions, they evaluate opportunities differently.
Trend-following
Trend-following can be summed up as a strategy that seeks to participate in sustained uptrends and step aside in sustained downtrends. This approach focuses on the market’s direction over time, typically using indicators like moving averages or price breakouts. A moving average is an asset’s average price over a specified period. When prices stay above that average, the trend is considered positive; when prices fall below it, investors may reduce or eliminate allocations. In our experience, trend following has helped manage downside risk during major market declines, though it can struggle in range-bound markets that lack a clear direction.
Momentum investing
Momentum investing can be explained as a strategy that aims to own the recent winners and avoid the recent laggards. This approach is designed to identify which securities, sectors, or asset classes are showing the strongest relative performance compared with their peers, directing capital toward areas of strongest relative strength as market leadership shifts.
A blended approach: trend and momentum investing
Because trend following and momentum respond to market conditions differently, many allocators view them as complementary building blocks rather than standalone solutions. Three reasons explain why pairing these tactical strategies may strengthen a portfolio: lower potential correlation, reduced behavioral risk, and greater adaptability in a variety of market conditions.
One: May Provide Low Correlation
While past performance is not a guarantee of future results, from our perspective, the historical relationship between diversified trend-following strategies and conventional 60/40 stock-bond strategies has typically been low, and even zero to negative in certain market environments.
Momentum and trend-following strategies both seek to benefit from persistent price movements. Because they may produce different return patterns, they may also offer performance with low correlation to a traditional 60/40 stock-bond portfolio.
Trend following looks to participate in sustained market moves in different asset classes, which may potentially help diversify a traditional stock-and-bond portfolio. The strategy may take long positions in rising markets and no position or short positions in falling ones. Results may be driven more by sustained trends across asset classes than by the broad direction of stocks or bonds, which can potentially create a return pattern distinct from a static portfolio.
Momentum investing emphasizes recent market leadership. The strategy seeks to rank assets by recent relative performance and emphasizes market leaders while avoiding or shorting laggards.
Trend-following and momentum strategies may also, at times, have low correlation with one another. Trend following may react to the direction and persistence of each market’s own price movement, while momentum ranks markets or securities against peers and shifts toward relative winners.
While not guaranteed, differences in signal construction, holding periods, rebalancing schedules, and the markets included can cause the strategies to lead or lag at different times.
Used together, momentum and trend following can potentially provide complementary return patterns and reduce reliance on a single investment factor.
Two: May Minimize the Negative Impact of Emotional Behavior
Financial markets are shaped as much by human behavior as by economic fundamentals. Fear, greed, overconfidence, and recency bias all influence investment decisions, often pushing investors to buy after prices have already risen and sell after they have already fallen—the opposite of a sound long-term approach.
By maintaining a rules-based framework, investors may be less likely to abandon a strategy at the worst possible time.
Trend-following and momentum strategies aim to reduce the potential negative impact of emotional investing by relying on systematic, rules-based processes rather than subjective judgment. A systematic strategy follows predefined criteria for entering and exiting positions, removing the emotional component that leads many investors to chase performance or panic-sell during downturns.
Combining the two approaches may reduce behavioral risk. Used together, the two strategies can potentially offset each other’s weak points. This built-in discipline is a key reason many allocators pair trend and momentum strategies rather than using one tactic alone.
Three: May Help Portfolios Adapt to Different Markets
For many institutional investors and advisors, adaptability has become an increasingly valuable portfolio characteristic.
Markets have historically swung from low inflation to high, near-zero interest rates to double-digits, and through a financial crisis and a pandemic. Change is the only constant, as growth has sped up, slowed down, moved sideways, and growth leadership has rotated from one sector and industry to another.
A static portfolio that never adjusts can struggle, since what drives returns rarely stays the same for long.
For allocators and institutional investors, combining trend following and momentum can potentially offer the advantage of diversification. The two strategies are built to detect and profit from different things.
Because the two strategies are constructed to meet different objectives, the combination may reduce a portfolio’s reliance on any single type of market behavior.
FAQs on Trend-Following and Momentum Investing
How could trend-following and momentum strategies impact portfolio risk for institutional investors?
Within an institutional allocation, trend-following and momentum strategies are typically used to diversify risk rather than just adding return, which may increase the overall portfolio’s return. Trend-following and momentum rely on different signals, absolute price direction versus relative strength, so their impact on risk tends not to move in lockstep.
Used as a tactical allocation with core equity or fixed income holdings, the combination may help moderate overall portfolio volatility and drawdown risk, though outcomes depend on sizing and implementation.
Are trend following and momentum strategies a net positive for allocators and investors?
For many allocators, the value lies less in guaranteeing outperformance and more in diversifying decision-making within a portfolio. Both approaches will likely have some periods of underperformance and outperformance. The important aspect is that in our experience those periods will not typically align to the same results in traditional allocations.
Combined, however, they may diversify drivers of return. Whether the combination is a net positive for a given allocator depends on sizing, implementation, and fit alongside existing holdings.
Do trend following and momentum strategies, when used in tandem, behave differently in crises vs. recoveries?
Yes. Trend following has historically reduced allocations as declines persist, since it directly tracks price direction. This scenario can help preserve capital during extended crises. Momentum strategies, by contrast, may struggle at sharp turning points, when leadership shifts quickly and yesterday’s winners reverse.
In recoveries, momentum can identify new leadership faster, while trend following typically waits for a sustained move to confirm before re-engaging. Because the two respond on different timelines, combining them may smooth the crisis-to-recovery transition.
Why Combining Trend Following and Momentum Strategies Can Strengthen Institutional Portfolios
The potential value of combining trend-following and momentum strategies comes from their differences. Because trend following and momentum respond to the market in distinct ways, their returns are not highly correlated.
The built-in difference also means the combination is designed to respond to two distinct types of opportunity. Trend-following is built to capture broad, market-wide moves, while momentum is built to capture relative-strength shifts within a market regardless of the overall trend.
Many investors already understand “don’t fight the tape” (trend) and “own the leaders, avoid the laggards” (momentum), even if they don’t use those labels. Combining the two lets investment managers tell the simple story to own what has been working and sell or don’t buy what has been hurting.
About McElhenny Sheffield
McElhenny Sheffield believes that avoiding material losses is the foundation of successful long-term investing. Risk management and capital preservation are the firm’s top priorities.
The firm is committed to protecting investors’ financial futures through a rules-based, tested, momentum-driven, trend-following tactical ETF strategy, and positioned as a tactical satellite portfolio for advisors who need to protect their clients’ core portfolio while still seeking growth.
Clients include independent-thinking investment advisors across the U.S., large investment allocators, and high-net-worth individuals and families looking for a second opinion. McElhenny Sheffield also provides sub-advisory services for RIAs and financial advisors. The firm was founded in Dallas, TX, in 2000, and manages more than $798 million in assets as of June 30, 2026.
The information contained in this article has been obtained from sources believed to be reliable; however, its accuracy, completeness, and timeliness cannot be guaranteed. Any opinions or estimates reflect the author’s judgment as of the date of publication and are subject to change without notice. This material is provided for informational purposes only and should not be construed as legal, tax, or investment advice. Investors should consult their tax advisor or legal counsel for advice and information concerning their particular situation. See other important disclosures below.