Trend following is one of the oldest trading approaches. The concept is simple: identify the market's direction and trade with it. Many traders use it; it tends to lose in ranges, and it relies on a few large winners to pay for many small losses.
What is Trend Following?
Trend following involves:
- Identifying the market direction (up or down)
- Entering trades in that direction
- Staying in trades as long as the trend continues
- Exiting when the trend shows signs of reversing
You're not predicting where the market will go—you're reacting to where it's already going.
Why Trend Following Works
Markets Trend
Economic forces, interest rates and sentiment can create sustained directional moves. Trends can last weeks, months, or even years.
Momentum Continues
Once a trend begins, it tends to continue. Large players (institutions, central banks) don't move in and out quickly—their participation sustains trends.
Risk Management is Clear
Trend following provides clear invalidation points. If the trend breaks, you exit. No guessing required.
Identifying Trends
Higher Highs and Higher Lows (Uptrend)
An uptrend shows:
- Each high is higher than the previous
- Each low is higher than the previous
- Price makes progress upward over time
Lower Highs and Lower Lows (Downtrend)
A downtrend shows:
- Each high is lower than the previous
- Each low is lower than the previous
- Price makes progress downward over time
Moving Averages
Simple trend identification:
- Price above 200 MA = uptrend
- Price below 200 MA = downtrend
- 50 MA above 200 MA = bullish
- 50 MA below 200 MA = bearish
Trend Following Entry Methods
Pullback Entry
Wait for price to pull back within the trend:
- Identify established trend
- Wait for pullback to support (uptrend) or resistance (downtrend)
- Enter when pullback shows signs of ending
- Place stop below recent swing low/high
Advantage: Better entry price, tighter stop
Breakout Entry
Enter when price breaks to new highs/lows:
- Identify trend direction
- Mark recent swing high (uptrend) or low (downtrend)
- Enter when price breaks through
- Stop below the breakout level
Advantage: Confirmation of trend continuation
Moving Average Entry
Use moving average touches:
- In uptrend, buy when price touches rising 20 or 50 MA
- In downtrend, sell when price touches falling 20 or 50 MA
- Moving average acts as dynamic support/resistance
Exit Strategies
Trailing Stop
Move your stop as the trend progresses:
- Trail below recent swing lows (uptrend)
- Trail above recent swing highs (downtrend)
- Use ATR-based trailing (2x ATR below price)
Moving Average Cross
Exit when trend structure breaks:
- Fast MA crosses below slow MA (exit longs)
- Fast MA crosses above slow MA (exit shorts)
Trend Line Break
Draw trend line along swing lows (uptrend) or highs (downtrend). Exit when broken.
Trend Following Indicators
Moving Averages
Most common tools:
- 20 EMA (short-term trend)
- 50 EMA (medium-term)
- 200 SMA (long-term)
ADX (Average Directional Index)
Measures trend strength:
- Above 25 = trending market
- Below 20 = ranging/weak trend
- Rising ADX = strengthening trend
MACD
Shows trend direction and momentum:
- MACD above zero = bullish
- MACD below zero = bearish
- Histogram shows momentum
Timeframe Selection
Multiple Timeframe Analysis
- Higher timeframe: Determine trend direction
- Trading timeframe: Find entry signals
- Lower timeframe: Fine-tune entry
Example:
- Daily: Identify uptrend
- 4-hour: Find pullback to support
- 1-hour: Time the entry
Best Timeframes for Trend Following
| Trader Type | Analysis TF | Entry TF |
|---|---|---|
| Swing | Daily/Weekly | 4-hour |
| Day | 4-hour | 1-hour |
| Position | Weekly | Daily |
Common Trend Following Mistakes
Fighting the Trend
Trading against the clear direction because you think it's "too far." Trends extend further than expected.
Exiting Too Early
Taking profits at the first sign of a pause. Trends require patience—let winners run.
No Defined Exit
Entering without knowing when you'll exit. Always have an exit plan before entering.
Overcomplicating
Using too many indicators. Simple trend identification often works best.
Risk Management
Position Sizing
Risk 1% of the account per trade, and a fixed 0.5% through your first year of live trading. Trend trades may need wider stops—adjust position size accordingly.
Stop Placement
Place stops at points that invalidate the trend:
- Below recent swing low (uptrend)
- Above recent swing high (downtrend)
- Below key moving average
Multiple Positions
Consider scaling in:
- Enter partial position at first signal
- Add on confirmation
- Never risk more than planned total
Key Takeaways
- Trend following means trading in the direction of the established trend
- Identify trends using higher highs/lows or moving averages
- Enter on pullbacks or breakouts
- Use trailing stops to let winners run
- ADX helps confirm trend strength
- Use multiple timeframes for better analysis
- Let winners run—don't exit too early
What's Next?
Learn about range trading strategy for markets that aren't trending.
This article is for educational purposes only and does not constitute financial advice.