Trend Following Strategy

"The trend is your friend" is one of the most well-known sayings in trading. And not without reason. Trend following is one of the most reliable strategies for consistent profits.

What Is Trend Following?

Trend following is a strategy where you trade in the direction of the prevailing trend. In an uptrend you buy, in a downtrend you sell. It sounds simple, but it requires discipline.

Trend Identification

1. Higher Highs and Higher Lows

An uptrend consists of consecutive higher highs (HH) and higher lows (HL). A downtrend consists of lower highs (LH) and lower lows (LL).

2. Moving Averages

Many traders use moving averages to determine the trend. If price is above the 200 EMA, the trend is bullish. Below the 200 EMA, the trend is bearish.

3. Trendlines

Draw a line along the lows in an uptrend or along the highs in a downtrend. As long as price does not break this line, the trend remains intact.

Trend Following Strategies

1. Pullback Trading

Wait for a pullback in a strong trend. When price returns to a support level or moving average, open a trade in the direction of the trend.

2. Breakout Trading

Wait for price to make a new high or low in the direction of the trend. Open a trade on the breakout.

3. Moving Average Crossover

Use two moving averages. When the fast MA crosses the slow MA upward, it is a buy signal. Downward is a sell signal.

Common Mistakes

• Entering a trend too late
• Trying to pick the trend (top/bottom calling)
• Not using a stop loss
• Taking profit too early

Tips

• Be patient and wait for the right setup
• Use a trailing stop to let your profits run
• Only trade in the direction of the trend on the higher timeframe
• Accept that not every trade will be a winner

Conclusion

Trend following is a timeless strategy. It requires patience and discipline, but it can help you make consistent profits. Remember: the trend is your friend.