📈 The Trend is Your Friend
Trend following is one of the most profitable trading strategies. By trading with the trend instead of against it, you increase your probability of success significantly.
What is Trend Following?
Trend following is a trading strategy that identifies and trades in the direction of the prevailing trend. Instead of trying to catch tops and bottoms, trend followers ride trends until they reverse.
Why Trend Following Works
- Markets Trend: Most markets trend 30-40% of the time
- High Probability: Trading with trend = higher win rate
- Big Moves: Trends can last weeks/months (huge profits)
- Simple: Easy to identify and follow
- Proven: Used by professional traders for decades
The Philosophy
"The trend is your friend until it ends."
Key Principle: Don't fight the trend. Trade with it.
Identifying Trends
Visual Identification
Uptrend:
- Price making higher highs and higher lows
- Price above moving averages (50 EMA, 200 EMA)
- Trendline connecting swing lows slopes upward
Downtrend:
- Price making lower highs and lower lows
- Price below moving averages
- Trendline connecting swing highs slopes downward
Sideways (Range):
- Price bouncing between support and resistance
- No clear direction
- Don't trend follow in ranges
Using Moving Averages
Simple Method:
- 50 EMA and 200 EMA on Daily chart
- Price above both: Uptrend
- Price below both: Downtrend
- Price between: Range/uncertain
Golden Cross:
- 50 EMA crosses above 200 EMA = Bullish trend
- 50 EMA crosses below 200 EMA = Bearish trend
Trend Following Strategies
Strategy 1: Moving Average Crossover
Setup:
- Fast EMA (9) and Slow EMA (21) on H1 chart
- Buy Signal: Fast EMA crosses above Slow EMA
- Sell Signal: Fast EMA crosses below Slow EMA
Entry:
- Enter immediately on crossover
- Or wait for pullback to fast EMA
Exit:
- When opposite crossover occurs
- Or use trailing stop
Example:
EUR/USD H1 Chart
Fast EMA (9) crosses above Slow EMA (21)
Entry: 1.1050 (Buy)
Stop Loss: Below recent swing low
Take Profit: Let trend run (trailing stop)
Strategy 2: Pullback to Moving Average
Setup:
- Identify trend on Daily chart
- Use 50 EMA on H1 chart
- Wait for pullback to 50 EMA
- Enter when price bounces off 50 EMA
Entry Rules:
- Uptrend: Buy on pullback to 50 EMA
- Downtrend: Sell on rally to 50 EMA
- Confirmation: Bullish/bearish candlestick pattern
Example:
EUR/USD Daily: Uptrend
H1 Chart: Price pulls back to 50 EMA at 1.1050
Forms Bullish Engulfing pattern
Entry: 1.1055 (Buy)
Stop Loss: 1.1020 (below 50 EMA)
Take Profit: Let trend run
Strategy 3: Breakout Trading
Setup:
- Identify consolidation (triangle, rectangle)
- Wait for breakout in direction of trend
- Enter on retest of broken level
Entry:
- Breakout above resistance (in uptrend)
- Retest of broken resistance (now support)
- Enter on confirmation
Example:
EUR/USD: Uptrend
Consolidation: Triangle pattern
Breakout: Above triangle resistance at 1.1100
Retest: Price retests 1.1100 (now support)
Entry: 1.1105 (Buy)
Stop Loss: 1.1080
Take Profit: Measured move (triangle height)
Best Timeframes for Trend Following
Higher Timeframes (Trend Identification)
- Daily (D1): Identify major trend
- 4-Hour (H4): Confirm trend direction
- Weekly (W1): Long-term trends
Lower Timeframes (Entry Timing)
- 1-Hour (H1): Entry timing
- 15-Minute (M15): Precise entries
Multi-Timeframe Approach
Recommended:
- Daily: Identify major trend
- 4-Hour: Confirm trend
- 1-Hour: Find entry point
- 15-Minute: Precise entry
Entry and Exit Rules
Entry Rules
Best Entries:
- Pullback to Moving Average: In direction of trend
- Breakout from Consolidation: In direction of trend
- Trendline Bounce: Price bounces off trendline
Avoid:
- Entering at extremes (tops/bottoms)
- Entering against trend
- Entering in ranges
Exit Rules
Trailing Stop:
- Move Stop Loss in profit direction
- Lock in profits as trend continues
- Exit when trend reverses
Target Levels:
- Next major support/resistance
- Measured move (pattern height)
- Risk/Reward targets (1:2, 1:3)
Trend Reversal Signals:
- Moving average crossover (opposite direction)
- Break of trendline
- Lower high in uptrend (or higher low in downtrend)
Risk Management for Trend Following
Position Sizing
Rules:
- Risk 1-2% per trade
- Larger positions in strong trends
- Smaller positions in weak trends
Stop Loss Placement
Rules:
- Below Recent Swing Low: For longs
- Above Recent Swing High: For shorts
- Below Moving Average: For longs in uptrend
- Outside Pattern: For breakout trades
Trailing Stops
How to Trail:
- Fixed Distance: 50 pips behind price
- Percentage: 2% behind highest price
- ATR-Based: 2x ATR behind price
When to Trail:
- After price moves 1:1 Risk/Reward
- Move Stop Loss to breakeven
- Continue trailing as trend continues
Common Trend Following Mistakes
- Trading Against Trend: Trying to catch reversals
- Entering at Extremes: Buying tops, selling bottoms
- No Stop Loss: Holding through reversals
- Exiting Too Early: Not letting winners run
- Trading in Ranges: Trend following doesn't work in ranges
- Ignoring Higher Timeframes: Not confirming trend direction
Trend Following Checklist
Before entering a trend following trade:
- [ ] Major trend identified on Daily chart
- [ ] Trend confirmed on 4-Hour chart
- [ ] Entry signal on 1-Hour chart
- [ ] Trading in direction of trend (not against)
- [ ] Stop Loss placed at logical level
- [ ] Take Profit targets set (or trailing stop)
- [ ] Position size calculated (1-2% risk)
- [ ] Not in range (clear trend direction)
Example Trend Following Trade
Setup:
- Pair: EUR/USD
- Daily Chart: Strong uptrend (above 50 EMA and 200 EMA)
- H1 Chart: Price pulls back to 50 EMA
Trade Details:
- Entry: 1.1050 (Buy on bounce from 50 EMA)
- Stop Loss: 1.1000 (below recent swing low)
- Take Profit 1: 1.1100 (1:1 R/R) - Close 50%
- Trailing Stop: After TP1, trail stop 50 pips behind
- Position Size: 0.20 lots (risk: $100 = 1% of $10,000)
Result:
- Price reaches TP1 → Close 50% (+$50)
- Price continues to 1.1200 → Trailing stop triggers at 1.1150
- Close remaining 50% (+$100)
- Total Profit: $150 (1.5% gain)
Summary
Trend following is one of the most profitable and reliable trading strategies. By trading with the trend instead of against it, you significantly increase your probability of success.
Key Takeaways:
- Identify trends on higher timeframes (Daily)
- Enter on pullbacks in direction of trend
- Use moving averages to confirm trends
- Let winners run (trailing stops)
- Cut losers short (tight stops)
- Don't trade in ranges (only in clear trends)
Remember: The trend is your friend until it ends. Trade with it, not against it.