Nature does not make a jump and trend-following

 

Natura non facit saltum - "Nature does not make a jump" was inscribed on the first page of Alfred Marshall's Principles of Economics. He was referring to the core idea that economics is focused on marginal analysis. Economics studies the continuity of changes, the slow adjustment and response to changing prices and tastes. We don't see jumps from one state of the world to the next. We don't see immediate change as consumers and producers move up and down the supply and demand curves. We can use calculus and look at marginal utility and marginal cost to determine how agents reaction to change.

Market behavior generally does to not make jumps. Jumps do occur, but the norm is a world of transitions from one equilibrium point to another with a smooth behavioral response to prices. The speed of adjustment can be fast and at other times slow but there is a movement between prices which can be exploited because there is not. discrete shift between states of behavior.

For trend-followers, the investment strategy is all about trying to find the shift in behavior between one state of the economy and the next. It is not trying to find the cause of shifts in behavior and price. It about finding a method to extract a signal shift. The length of the look-back is the most likely time necessary to find these shifts. Trend is all about exploiting the shifts and not about finding the infrequent jumps.