Trend Following Strategy
⚡ Read this before you open your next trade
Trend following is one of the oldest and most proven trading strategies, built on the simple principle that markets tend to move in sustained directions for extended periods. Rather than predicting reversals, trend followers wait for confirmation that a trend is established and then ride it until clear signs of exhaustion appear. This systematic approach has been used successfully by legendary traders and hedge funds for decades, generating profits across forex, commodities, equities, and cryptocurrencies.
Identifying Trends with Technical Tools
Trend followers use several tools to confirm directional moves. Moving averages are the most popular — a price above the 200-day MA signals an uptrend, while below signals a downtrend. Moving average crossovers, such as the golden cross (50 MA crossing above 200 MA), generate entry signals. The ADX indicator measures trend strength: readings above 25 suggest a strong trend worth trading. Donchian channels, which plot the highest high and lowest low over a period, provide objective breakout-based entry signals used by many systematic trend followers.
Trend Following Entry and Position Sizing
Entry timing in trend following prioritizes confirmation over precision. Traders typically enter after a breakout above resistance or after a pullback to a moving average within an established trend. The ATR-based position sizing method, popularized by the Turtle Traders, adjusts position size inversely to market volatility — smaller positions in volatile markets, larger in calm ones. This normalization ensures that each trade carries approximately equal risk regardless of the instrument. Risk per trade is usually capped at 1-2% of total equity.
Dealing with Whipsaws and Drawdowns
The biggest challenge of trend following is enduring choppy, range-bound markets where frequent false breakouts generate losing trades. Historically, trend following systems experience win rates of only 30-40%, relying on large winners to offset numerous small losses. Drawdown periods can last months or even years, requiring significant psychological resilience. Diversifying across many uncorrelated markets — currencies, commodities, bonds, and indices — helps ensure that strong trends in some markets compensate for whipsaws in others.
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Frequently Asked Questions
What markets are best for trend following?
Trend following works across all liquid markets, but historically performs best in commodities (gold, oil), forex majors, and equity indices. Cryptocurrency markets like BTC/USD also exhibit strong trends. The key is trading markets with sufficient liquidity and volatility to produce sustained directional moves.
How long should I hold a trend following position?
Hold as long as the trend persists. Trend following exits are typically signal-based rather than time-based — you exit when the trend shows signs of reversing, such as a moving average crossover or a break of a trailing stop. Some trends last weeks, others last months or years.
Can trend following be automated?
Yes, trend following is one of the most suitable strategies for automation because its rules are objective and systematic. Many successful hedge funds run fully automated trend following systems across dozens of markets. Even retail traders can code simple moving average crossover or breakout strategies using platforms like MetaTrader or Python.
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Kacper MrukXAUUSD & ETHUSD Trader | Macro + options data | Think, don't follow
Creator of Take Profit Trader's App. Specializes in XAUUSD and ETHUSD, combining macro analysis with options data. He teaches not how to trade, but how to think in the market. Actively trading since 2020.
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