Trend following strategies

Another type of trend trading technique is to use moving averages. This article explores the MACD + RSI trading strategy and how it can be effectively employed to identify trade opportunities in the forex market. A trader who wants to confirm a strong trend will find continuation chart patterns extremely useful. There are triangles, flags, pennants, wedges, and rectangles.

Trend following strategies

In a similar fashion, we’ll consider bearish opportunities when the price is moving below the 200 MA. The trader would then backtest the strategy, using actual data and would evaluate the strategy. The simulator would generate estimated number of trades, the fraction of winning/losing trades, average profit/loss, average holding time, maximum drawdown, and the overall profit/loss. Exit market when market turn against them to minimize losses, and “let the profits run”, when the market trend goes as expected until the market exhausted and reverses to book profit. Once a higher low or lower high is formed, the trader can cover their position and look to enter a trade in the direction of the new and opposite trend.

Trend Following trading strategy

And this is the same trade that caused you to blow up your account. I would lose often but, all I need is one trade to make it all back, and more. A company called Orange has been trading higher over the last 6 months. This depends on your winning ratio, the risk to reward, and your risk tolerance.

  • By its very nature, a trend following trading strategy depends on markets trending.
  • There is another indicator that serves as a powerful helper when it comes to working with trends.
  • A trendline is a line drawn along swing lows in an uptrend or along swing highs in a downtrend.
  • Similarly, some traders elect to short during a downtrend when the price rises to and then falls away from a declining trendline.
  • Trend trading strategies are great because their main concept is easy to understand, although the trading process itself can’t go without strict discipline.

If long, then place a stop loss of 2 ATR from your entry (your exit if you’re wrong). You should be able to trade about 60 markets from these 5  sectors. If you’re someone who holds a day job, trading the 4 hour and daily charts would suitable. Trading across different markets help reduce your drawdowns and improve your profitability.

Trading trend reversals

Fundamental trends include economic growth, inflation and interest rates. Sector trends can be just as important, and can be specific to the industry in which a company operates. As you can see on the picture above, the bullish flag is an ideal confirmation of a further bullish momentum. If it appears on the chart, you need to hold your long position. Get tight spreads, no hidden fees, access to 12,000 instruments and more.

  • Trend traders will also watch for chart patterns, such as flags or triangles, which indicate the potential continuation of a trend.
  • Secondary trends are shorter-term trends that last for weeks or a few months.
  • Price action traders look at the price movements on a chart.
  • Generally, traders do not seek to make any gains with this type of trend, unless they are analysing extremely short-term price movements, such as in a scalping strategy, for example.
  • Momentum investors aim to buy stocks or securities that are experiencing a sharp rise in price, which tends to be a short-term strategy.

The downside of trend following is that you could also get caught in false moves. It is important to use trend following strategies with caution and use a stop loss. In the picture above, you can see an example of a symmetrical triangle pattern.

#1 Moving Average Crossover trend trading strategy

If the price forms higher highs and higher lows, a trader can suggest that it moves within an uptrend. Vice versa, if the price forms lower lows and lower highs – you are facing a downward pressure, which will likely start a downtrend. In a scenario when a price trend shifts from an upward to a downward direction, or vice-versa, it is called a trend reversal. Traders can seek to gain from this by attempting to get out of positions before the shift manifests, or as early as possible if the movement has already begun. This is called trading trend reversals, which is also known as ‘counter-trend trading’.

Trend following strategies

In other words, if you see that the price is ascending, you go long. A major tenet of trend following is that markets move in trends in a manner that repeats over time and across asset classes. The idea is not to ‘predict’ when a new trend will happen, but to use price action signals and technical indicators to show that a new trend has already begun.

Trend Trading Strategies

However, when you start making predictions in the market, it clouds your judgment, and you start losing objectivity of the markets. It feels good to know you called the tops and bottoms in the market. The market is never too high to go long, or too low to short.

The MACD (Moving Average Convergence Divergence) is one of my favorite technical indicators because it can act both as an oscillator and as a trend indicator. The key principle of the trend following strategy is to be patient and to wait for the trend to develop before opening a position. There are a number of fundamental, sector and market trends that investors could use in their trading decisions. The strategy has since been adapted many times and is more broadly known as a moving average crossover strategy. They believed that anyone could be taught to trade successfully, so they recruited a group of novices and trained them in their method. This group became known as the “turtle traders.” They were incredibly successful, and their turtle trading system became the subject of much interest on Wall Street.

For an uptrend, a stop loss is placed below a swing low that occurred prior to entry, or below another support level. For a downtrend and a short position, a stop loss is often placed just above a prior swing high or above another resistance level. Trend following is an investment or trading strategy which tries to take advantage of long, medium or short-term moves that seem to play out in various markets.

For this strategy, I prefer to use three SMAs with periods 9, 21, and 50. You can use another configuration with similar proportions, such as 10, 20, and 50. This strategy usually works well on any timeframe and any market.


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