What is Trend Following?
Trend following is a trading strategy that tries to profit from trends in the market. A trend follower makes money when they follow the trend of a particular market. Trend Following can be done by big time banks on Wall Street or by online stock trading of an individual. If you want to learn how to trade by following the trend then trend following is the trading strategy that you want to use.
Stock trading online has grown in popularity over the past decade. People trade but many lose because they do not have a trading system. In this article we will discuss trend following. Once you finish this article you should be able to determine if trend following is a strategy that is right for you.
Trend Following: Market Trends
When thinking about using a trend following system you first need to understand what a market trend is. Look at the logo of our website.
What do you see?
It is a picture of a market trend. Trends occur in all markets. There are stock trends, futures trends, or gas trends. All markets have trends. Trend investing profits from those trends in the market. As markets move up trading signals are given to buy. As markets move down trading signals are given to sell. As long as the market is moving in one direction money can be made.
Technical Analysis of Stock Trends
Now that sounds complicated. Sometimes things are not as complicated as some might make them. I heard of a preacher that got up to give his sermon. Before he began to speak his wife gave him a note that said KISS. He thought that is such an encouragement. After the service he told his wife how much he appreciated the note. She told him it was not meant to be encouraging it stood for KISS (Keep it Simple Stupid).
Now when talking about stock trend analysis it can get very complicated quickly. Technical analysis of trends is just putting mathematical formulas to trend following or having a trend following system.
Trend Following: System
What is a trend following system? A trend following system is trend following with mathematical equations. You are not just looking at charts and saying it looks like a trend so I will buy. The trader is using a trend indicator to determine when to get into a market or when to get out of a market. This type of trading is known as systematic trading. Systematic trading is a repeatable process that can be applied to any market. Systematic trend following systems can be used on stocks or bonds, orange juice or cotton. You can adjust time frames for short-term trading strategies and adjust it again for longer term trading strategies.
Short term trading can be from 1 week to months depending on the trend. Long term trading can be from 1 week to years. It is good to have both in your trading system.
A good trend following strategy will look at each of the following areas.
Price is the foundation to any good system. When building a trend following trading system price should be the foundation for all calculations.
All new trading systems and methods should be back tested. Backtesting trading strategies is a very important step that should not be missed when building a trend following trading system. If your system did not work in the past it probably will not work in the future.
Trend Following: Trading
Traders like to trade. Some traders may even get a rush out of trading. A trend trader does not operate that way. If someone wants to make money trading or be trading for a living at some point then feelings and emotion must stay out of the equation.
Trading a trend following system is trading like a robot. Trend Following traders follow a mathematical repeatable system on each and every trade. The trend trader is disciplined to a process. The trend trader uses trade signals for buys and sell, shorts and covers. The best trading strategy is one where emotion is left out.
Someone has said good trading should be boring.
How to learn Trading
Trend following trading is not so much learned it is built and followed. If some one wants to learn how to shoot a basketball they can learn that skill. If someone wants to build a car they design the car then they build it the same way every time. A trend following trading system is like that. It is a repeatable process. Some people do trade on feelings but most who do that are unsuccessful.
Learning to trade is easy when you follow the same rules every time without fail. It’s not about how much money I made on a trade but did I follow the system. Learning how to trade can be complicated if you are looking at to many variables but if you are looking at price you can simplify trading.
Trend Following: Futures
Trend following became popular and is still widely used in the futures market. Trading futures might not be feasible for the average trader. If a trader’s account is less than 50k (preferably above 100k) they should not even consider trading futures. Many futures contracts only require a person to have as little as 10k in their account. What they don’t know or have not calculated is that they controlling 100K to 200K of a commodity. That means that a small move will completely wipe out a small account. A 1% move in 1 silver contract could be worth 10k or more depending on the price.
In todays time some have began to replace futures trading strategies with etf trading systems. Trading etfs can give you exposure to the futures market without all the risk. For example SLV is an etf that tracks the price of silver. You can buy 5K worth or 500,000K worth of the etf. One problem is that you can’t get the leverage that futures allow so your system might be limited. Using etfs for trend trading is a good way to trade in the futures market.
Trend Following: Stocks
Trend following stocks is good stock trading strategy. It is equally if not more important to be systematic if you want to learn to trade stocks. Most of the time stocks have more volatility than index etfs or index futures. To be successful in stock trading you need to be confident in your system.
Trend Following is just one of the many types of systems traders can use. We have found trend following to be the best for our style of trading. Trend Following takes emotions out of the equation. Trend Following minimizes risk. Trend Following uses price as the basis for all calculations.
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