Trend following is a widely used trading strategy for various trading asset classes. Trend following can be summarized in four basic steps. The first step in order is to determine the trend of the trading instrument that will be used. For instance, in the forex market, one would first determine in which way a currency pair is trending. After determining the trend, the second step is deciding the entry point. Depending on the direction of the trend, the trader will chose to either buy long or sell short. Once the trader has entered a position, the next step of this strategy is waiting. This is one of the most difficult steps for many traders since they have to patiently hold their positions as long as the trend keeps turning
their positions into profits. Finally, the last step is exiting the trade. The trader needs to exit the trade when he believes the trend is stopping and changing in direction.41 This final step is challenging for most traders since it is not simple to determine when a trend has changed direction or if it is only going through a temporary drawdown.
If applied correctly and with discipline, trend following can bring profits to many traders; however, a strict set of rules is needed in order to make disciplined trades. Many traders face problems while trading with a trend due to lack of discipline and not sticking to their set of rules. For example, one basic principle of trend following is buying when price is
trending up and selling when price is trending down. Even though this principle may seem obvious and simple at first sight, many traders break it on a daily basis. This principle is often broken when traders try to buy at the very bottom and sell at the very top. Winning traders wait until they have confirmed the trend before buying or selling. Another problem
traders face due to not following a strict set of rules is predicting. Once traders start to follow a trend, they stop using their set of rules and start predicting how the price is going to change instead of following what the trend says. This is another commonly made mistake that diminishes the effectiveness of trading with a trend.
To finalize, it is important to make an emphasis that trend following can be a successful part of a set of trading strategies when used with discipline and following a previously defined set of rules that work for one’s trading personality. It could be said that trend following can be a successful part of a set of trading strategies, since by itself it can be a
weak trading system. If trend following is combined with other trading strategies and applied with discipline, it can create a more robust and profitable trading system.