The basic idea
Trend-following strategies attempt to participate in an established directional movement rather than repeatedly trading against it.
The trader first identifies evidence of a trend and then uses predefined conditions to determine whether an entry is justified.
Identifying a trend
Traders may use price structure, moving averages, trendlines, or other technical tools to evaluate whether a market is trending.
No single indicator should automatically be treated as proof of a trend. Context and multiple pieces of evidence can be useful.
- Higher highs and higher lows
- Lower highs and lower lows
- Price position relative to moving averages
- Breaks of important market structure
Managing trend trades
Trend-following trades can remain open while the original market conditions continue, but the trader still needs predefined risk and exit rules.
A trend can reverse unexpectedly, which makes stop-loss placement and position sizing important parts of the strategy.
Ready for the next step?
Review what you learned, then continue through the Trading Strategies course.