Trend Following: Ride the Wave to Consistent Profits

Trend following is one of the most profitable and time-tested trading strategies. The concept is simple: identify a strong trend and ride it until it ends. As the old saying goes, "The trend is your friend." Many of the world's most successful traders, including Richard Dennis (Turtle Traders) and Ed Seykota, built their fortunes on trend following strategies.

What is Trend Following?

Trend Following Definition: A trading strategy that seeks to identify and capitalize on sustained price movements in one direction, entering positions in the direction of the trend and holding until the trend reverses.

Core Principle: Markets spend 60-70% of the time trending, and trends tend to persist longer than most traders expect. By identifying and trading with the trend, you align with the path of least resistance.

The Trend Following Philosophy:

• Don't predict, react
• Let profits run, cut losses short
• Trade what you see, not what you think
• Trend is your friend until it ends
• Be right less than 50% of the time, still profit

Types of Trends

1. Uptrend

Characteristics:

• Series of higher highs and higher lows
• Price above major moving averages
• Moving averages sloping upward
• Increasing momentum
• Strong bullish sentiment

How to Trade:

• Only buy (long positions)
• Buy pullbacks to support
• Trail stops upward
• Exit on trend break

Example: Price making consistent higher highs at $50, $55, $60, $65 with higher lows at $48, $52, $57, $62

2. Downtrend

Characteristics:

• Series of lower highs and lower lows
• Price below major moving averages
• Moving averages sloping downward
• Increasing downward momentum
• Strong bearish sentiment

How to Trade:

• Only sell short
• Short rallies to resistance
• Trail stops downward
• Exit on trend break

Example: Price making consistent lower lows at $100, $95, $90, $85 with lower highs at $98, $93, $88, $83

3. Sideways/Ranging

Characteristics:

• No clear higher/lower pattern
• Horizontal support and resistance
• Flat moving averages
• No momentum
• Choppy, indecisive

How to Trade (Trend Followers):

• DON'T - wait for trend to emerge
• Sit on hands
• Range traders profit here, not trend followers
• Patience is key

How to Identify Trends

Method 1: Price Structure

Uptrend Confirmation:

• Price making higher highs
• Price making higher lows
• Each swing higher than previous

Downtrend Confirmation:

• Price making lower highs
• Price making lower lows
• Each swing lower than previous

Simple Visual Test: Draw a line connecting swing lows (uptrend) or swing highs (downtrend). If line is diagonal, trend exists.

Method 2: Moving Averages

Uptrend Rules:

• Price above 50 MA and 200 MA
• 50 MA above 200 MA
• Both MAs sloping upward

Downtrend Rules:

• Price below 50 MA and 200 MA
• 50 MA below 200 MA
• Both MAs sloping downward

No Trend:

• Price crossing MAs frequently
• MAs flat or intertwined
• Wait for clarity

Popular MA Combinations:

• 20/50/200 SMA (classic)
• 8/21/50 EMA (responsive)
• 10/30 EMA (simple)

Method 3: ADX (Average Directional Index)

What It Measures: Trend strength, not direction (separate tool for that)

Reading:

• <20: No trend, ranging
• 20-25: Trend emerging
• 25-50: Strong trend
• >50: Very strong trend
• Declining: Trend weakening

How to Use:

• Trade only when ADX > 25
• Rising ADX = trend strengthening
• Falling ADX = trend weakening (prepare to exit)

Combine With:

• +DI above -DI = uptrend
• -DI above +DI = downtrend

Method 4: Trendlines

Drawing Trendlines:

• Uptrend: Connect swing lows with diagonal line
• Downtrend: Connect swing highs with diagonal line
• Need minimum 2-3 touch points
• More touches = stronger line

Trend Intact:

• Price respects trendline
• Bounces off line
• Continue trading trend

Trend Break:

• Price breaks trendline decisively
• Close beyond line
• Trend may be ending

Trend Following Entry Strategies

Strategy 1: Moving Average Bounce

Setup: Strong trend established (price above/below MAs)

Entry Rules (Uptrend):

1. Price in uptrend (above 50 MA)
2. Price pulls back to 50 MA or 20 EMA
3. Bullish reversal candle at MA
4. Enter on next candle or break of reversal high
5. Stop below MA or swing low

Example:

• Stock trending above 50 MA
• Pulls back and touches 50 MA
• Hammer candle forms
• Buy next day
• Stop below MA
• Ride until price closes below MA

Win Rate: 60-70% Best For: Swing trading, position trading

Strategy 2: Breakout Continuation

Setup: Trend pauses in consolidation (flag, pennant)

Entry Rules:

1. Strong trend established
2. Consolidation forms (1-3 weeks)
3. Breakout from consolidation in trend direction
4. Volume confirms
5. Enter on breakout

Example:

• Strong uptrend
• Bull flag consolidation
• Breaks above flag on volume
• Enter long
• Stop below flag
• Target = measured move

Win Rate: 55-65% Best For: All timeframes

Strategy 3: Moving Average Crossover

Setup: Fast MA crosses slow MA

Entry Rules (Uptrend):

1. 20 EMA crosses above 50 EMA (or 50/200 for longer-term)
2. Both MAs starting to slope upward
3. Enter on crossover close
4. Stop below slow MA

Example:

• 20 EMA crosses above 50 EMA
• Enter long next day
• Hold until 20 crosses back below 50
• Trail stop with 50 EMA

Win Rate: 45-55% (but catches big trends) Best For: Swing trading, position trading

Strategy 4: New High/Low Entry

Setup: Price makes new high (uptrend) or low (downtrend)

Entry Rules (Uptrend):

1. Price makes new 20-day high
2. ADX > 25 (strong trend)
3. Above major MAs
4. Enter on break of new high

Example:

• Stock breaks 52-week high
• Strong volume
• Enter on breakout
• Stop at 20 MA or previous high

Win Rate: 50-60% Best For: Strong momentum trends

Strategy 5: Trendline Bounce

Setup: Established trendline with 3+ touches

Entry Rules:

1. Clear uptrend line drawn
2. Price pulls back to trendline
3. Reversal candle at line
4. Enter on bounce
5. Stop slightly below trendline

Example:

• Uptrend line established
• Price pulls back to line
• Bullish engulfing at line
• Buy next day
• Stop below trendline
• Hold until trendline breaks

Win Rate: 65-75% (trendlines are strong) Best For: Clean, established trends

Trend Following Exit Strategies

Exit 1: Moving Average Break

Method: Exit when price closes below key MA (uptrend) or above (downtrend)

Common MAs for Exits:

• 20 EMA (tight trail, more signals)
• 50 SMA (medium trail, balanced)
• 200 SMA (loose trail, catch big moves)

Example:

• Long position, price above 50 MA
• Price closes below 50 MA
• Exit next day

Pros: Objective, catches most of trend Cons: Can exit on temporary pullback

Exit 2: Trendline Break

Method: Exit when price decisively breaks trendline

Rules:

• Draw trendline connecting lows (uptrend)
• Exit on close below trendline
• Add buffer (1-2% beyond line)

Example:

• Uptrend line at $95
• Price closes at $93
• Exit next day

Pros: Visual, clear signal Cons: Subjective trendline placement

Exit 3: Trailing Stop

Method: Move stop loss upward (long) or downward (short) as profit grows

Types:

• Percentage: Trail by 5-10%
• ATR: Trail by 2-3 ATR
• Swing-based: Trail to previous swing low/high

Example:

• Enter long at $100
• Stop at $95
• Price moves to $110
• Trail stop to $105 (5%)
• Price continues to $120
• Trail stop to $114
• Stopped out at $114 = $14 profit

Pros: Captures big trends, lets profits run Cons: Gives back some profit at end

Exit 4: Target-Based

Method: Predetermined profit target based on structure

Target Types:

• Measured move (consolidation height)
• Major resistance level
• Fibonacci extension
• Risk-reward ratio (2:1, 3:1)

Example:

• Enter breakout at $50
• Target previous high at $60
• Exit at $60 regardless of trend continuation

Pros: Locks in profit, objective Cons: May miss bigger moves

Exit 5: Time-Based

Method: Exit after predetermined time regardless of trend

Use Cases:

• End of week (swing trading)
• End of month (position trading)
• Before earnings/news
• Before vacation

Example:

• Enter swing trade Monday
• Exit Friday regardless of profit
• Fresh start next week

Pros: Limits exposure to gaps/news Cons: Arbitrary, may miss trend continuation

Recommended: Combine MA break + trailing stop for best results

Trend Following Risk Management

Position Sizing

The 1-2% Rule:

• Risk 1% on conservative trends
• Risk 2% on strong, clear trends
• Never more than 2%

Example:

• $50,000 account
• Risk 2% = $1,000 per trade
• Stop distance = $5/share
• Position size = 200 shares

Stop Loss Placement

Initial Stop (Uptrend):

• Below entry swing low
• Below moving average (50 MA)
• Below trendline
• Or 2 ATR below entry

Give It Room:

• Trends don't move straight up
• Pullbacks are normal
• Tight stop = stopped out on noise
• Typical: 5-15% stop for stocks

Never Widen Stop:

• If stop needs widening, exit
• Accept loss
• Don't hope for recovery

Pyramiding (Adding to Winners)

Concept: Add to winning positions as trend continues

Rules:

1. Only add to profitable positions
2. Add smaller size each time (1.0x, 0.5x, 0.25x)
3. Trail stop on all positions
4. Total risk still <2% from initial entry

Example:

• Enter 100 shares at $100, stop at $95 (risk $500)
• Price moves to $110
• Add 50 shares at $110, stop at $105 (risk $250)
• Price moves to $120
• Add 25 shares at $120, stop at $115 (risk $125)
• Total position: 175 shares
• Average entry: ~$107
• Trail stop on all

Pros: Compound winners, big profits Cons: Gives back more on exit, requires discipline

Trend Following in Different Markets

Stocks

Best Sectors for Trends:

• Technology (momentum stocks)
• Growth stocks
• Sector rotations
• Post-earnings momentum

Typical Hold:

• 2-8 weeks (swing)
• 3-12 months (position)

Tools:

• Relative strength (vs SPY)
• Sector analysis
• Fundamentals support

Forex

Best Pairs for Trends:

• Major pairs (EUR/USD, GBP/USD)
• Trending: Carry trades (high yield vs low)
• Clear in trending macro environment

Typical Hold:

• Days to weeks
• Follow central bank policy

Tools:

• Interest rate differential
• Economic data
• Risk sentiment

Commodities

Natural Trendiness:

• Oil, gold, agricultural
• Supply/demand driven
• Seasonal trends
• Multi-month trends common

Typical Hold:

• Weeks to months
• Follow fundamental drivers

Tools:

• COT (Commitment of Traders) reports
• Supply/demand fundamentals
• Seasonal patterns

Crypto

Characteristics:

• Extremely strong trends
• Bitcoin dominance
• Boom-bust cycles
• High volatility

Typical Hold:

• Weeks to months
• Larger stops needed (20-30%)

Tools:

• Bitcoin correlation
• On-chain metrics
• Funding rates

Common Trend Following Mistakes

Mistake 1: Trading Against the Trend

Problem: Trying to pick tops/bottoms, fighting the trend

Solution: Only trade in direction of trend. "Don't be a hero."

Mistake 2: Taking Profits Too Early

Problem: Exiting at first resistance, small winners

Solution: Let winners run. Use trailing stops. Big winners make the strategy.

Mistake 3: Not Cutting Losses

Problem: Holding losers, hoping for recovery

Solution: Use stops. Accept small losses. They're part of the business.

Mistake 4: Trading Choppy Markets

Problem: Trend trading in ranging markets, whipsaws

Solution: Wait for clear trend (ADX > 25). Patience is key.

Mistake 5: Over-Leveraging

Problem: Too much position size, one bad trade hurts

Solution: Risk 1-2% per trade. Protects capital for next trade.

The Trend Following Mindset

Accept Low Win Rate

Reality:

• Trend followers: 40-50% win rate common
• Many small losses (trends that fail)
• Few big winners (trends that run)
• Big winners MORE than compensate

Math:

• 40% win rate
• Average win: $3,000
• Average loss: $500
• 10 trades: 4 wins ($12,000), 6 losses ($3,000)
• Net: $9,000 profit

Be Patient

Key:

• Wait for clear trends
• Don't force trades
• 70% of time markets range
• Only trade the 30%

Let Profits Run

Hardest Part:

• Holding through pullbacks
• Watching profit fluctuate
• Fighting urge to take profit
• Trust the system

Focus on Process

Not P&L:

• Follow rules mechanically
• Process over outcome
• One trade doesn't matter
• 100 trades show edge

Trend Following System Example

Setup Rules:

1. Price above 50 MA and 200 MA (uptrend)
2. 50 MA above 200 MA
3. ADX > 25 (strong trend)
4. Price pulls back to 50 MA
5. Bullish reversal candle

Entry:

• Buy on break above reversal candle high
• Or next day open

Stop Loss:

• Below 50 MA
• Or below pullback low
• Whichever is closer

Position Size:

• Risk 1.5% of account
• Based on stop distance

Profit Target:

• None - let trend run

Exit:

• Price closes below 50 MA
• Or ADX drops below 20

Review:

• Track all trades
• Review weekly
• Win rate should be 50-65%
• Average win should be 2-3x average loss

Conclusion: Simplicity and Discipline

Trend following is simple but not easy. The strategy is straightforward - find trends and ride them. But execution requires patience to wait for clear trends, discipline to cut losses quickly, and courage to hold winners through volatility.

Key Takeaways:

• Trade with the trend - never against
• Let profits run - big winners make the strategy
• Cut losses quickly - small losses protect capital
• Be patient - wait for clear trends (ADX > 25)
• Use trailing stops - capture most of trend
• Risk 1-2% per trade - protects capital
• Accept low win rate - 40-50% is fine with right risk-reward

Getting Started:

1. Choose one market to master
2. Pick one entry strategy (MA bounce recommended)
3. Use 50 MA for exits
4. Track all trades
5. Focus on following rules
6. Be patient for clear trends

Ready to master trend following and ride market waves to consistent profits? Join our comprehensive trading course where we teach professional trend following strategies, multi-timeframe analysis, and complete risk management systems.

Start riding the trends today!