Trend following is a trading strategy that identifies the direction of established market trends and trades in that direction until the trend reverses. Trend followers don’t predict where prices will go—they react to what prices are doing and ride trends as long as they persist. It’s one of the oldest and most proven trading strategies, used by legendary traders for decades.
- “The trend is your friend”—trade with the trend, not against it
- Don’t predict; react to price action confirming trend direction
- Accept many small losses for occasional large wins
How Trend Following Works
Trend following is reactive, not predictive:
Trend Following Process:
1. Define what constitutes a trend (e.g., price above 200-day MA)
2. Wait for trend confirmation
3. Enter in the direction of the trend
4. Stay in as long as trend continues
5. Exit when trend breaks (price below 200-day MA)
6. Many small losses, few large wins = profitable
Quick Reference: Trend Identification Methods
| Method | Entry Signal | Exit Signal |
|---|---|---|
| Moving Average Cross | Price crosses above MA | Price crosses below MA |
| Golden/Death Cross | 50-day crosses above 200-day | 50-day crosses below 200-day |
| Donchian Breakout | New 20/50-day high | New 20/50-day low |
| Price Structure | Higher highs, higher lows | Lower highs, lower lows |
| ADX | ADX above 25 + direction | ADX falling or direction change |
Example: A Trend Following Trade
Setup: Reliance breaks above 200-day MA
Month 1: Stock crosses above 200-day MA at ₹2,400 Entry: Buy at ₹2,420 (confirmation) Stop: Trailing 10% below highest close
Months 2-6: Stock trends higher
- ₹2,600 → Stop raised to ₹2,340
- ₹2,800 → Stop raised to ₹2,520
- ₹3,000 → Stop raised to ₹2,700
- ₹3,200 → Stop raised to ₹2,880
Month 7: Stock pulls back to ₹2,850, stop triggered Exit: Sell at ₹2,880
Result:
- Entry: ₹2,420 → Exit: ₹2,880
- Profit: ₹460 per share (19%)
- Hold time: 7 months
- Max drawdown during trade: ~12%
Trend following trades in the direction of established trends and exits when trends break. Trend followers don’t predict—they react to price action. This strategy accepts many small losses for occasional large wins that more than compensate.
The Mathematics of Trend Following
Trend following has a low win rate but large winners:
Typical Statistics:
- Win Rate: 35-45%
- Average Win: 3-5× average loss
- Expectancy: Positive despite losing majority of trades
Example (100 trades):
- 40 wins × $500 average = $20,000
- 60 losses × $200 average = $12,000
- Net: +$8,000
The edge isn’t in being right often—it’s in making more when right than losing when wrong.
Famous Trend Following Systems
1. Turtle Trading
Richard Dennis’s system using 20-day and 55-day Donchian channel breakouts. Made $175+ million.
2. Moving Average Crossover
Simple 50/200-day MA crossover. Kept investors out of major crashes.
3. Dual Momentum
Gary Antonacci’s system switching between asset classes based on 12-month momentum.
4. Simple Price Breakout
Enter on new 52-week highs, exit when 10% below that high.
Why Trend Following Works
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Trends persist – Due to slow information flow and behavioral biases, trends continue longer than expected
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Unlimited upside, limited downside – Let winners run while cutting losers creates positive skew
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Systematic, not emotional – Rules-based approach removes human bias
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Diversification across markets – Same principles work in stocks, forex, commodities
The Challenge: Drawdowns
Trend following suffers in range-bound markets:
- False breakouts get stopped out repeatedly
- Small losses accumulate during chop
- Psychologically difficult to stick with after losing streak
This is why most traders can’t do it—they abandon the system during inevitable drawdowns.
Common Mistakes
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Cutting winners short – Trend following only works if you let winners run. Taking profits early destroys the math.
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Abandoning during drawdowns – Every trend following system has losing periods. Quitting guarantees failure.
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Adding complexity – Simple systems often work better. More indicators = more ways to second-guess.
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Fighting the trend – Trying to pick tops and bottoms fails. Accept that you’ll miss the first and last portion of every move.
How JournalPlus Tracks Trend Following
JournalPlus tracks your trend entries and exits, measuring whether you’re capturing the majority of trends and how long you hold positions. You can analyze whether you’re cutting winners short or successfully riding trends to their natural conclusion.
