What type of strategy exactly is trend trading or trend following?
“Trend followers use reactive technical analysis. Instead of trying to predict a market direction, their strategy is to react to the market’s movements whenever they occur. This enables them to focus on the market’s actual moves and not get emotionally involved with trying to predict direction or duration.” -Michael Covel
- The goal of a trend trader is to capture the trend in a market for profits.
- Trend traders use signals to enter and exit their trades in place of opinions, predictions, and feelings.
- Backtesting is a major tool for trend followers, by seeing what worked in the past they have better odds of signals working in the future.
- Big wins and small losses make trend trading systems profitable not a high wining percentage.
- They can use moving averages or break outs in price for entry signals.
- They use trailing stop losses to let a winning trade run for as long as possible.
- They use stop losses after entries to keep their losing trades small.
- They do not try to buy the bottom or sell the top they just try to capture a larger part of a trend.
- They do not try to predict what will happen they trade based on what is happening.
- The key to a trend traders profitability is the asymmetric nature of their trading. Their downside is managed through position size and tight stop losses but their upside profits are left open during a trend until they have a good reason to exit a trade.
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