DEFINITION of trend following
Trend following or trend trading is a trading strategy according to which traders should buy an asset when its price trend goes up. And sell when its trend goes down, expecting price movements to continue.
WHAT IT IS IN ESSENCE
There are a number of different techniques, calculations, and time-frames that may be used to determine the general direction of the market. In order to generate a trade signal. Including the current market price calculation, moving averages, and channel breakouts. Traders who execute this strategy do not aim to forecast or predict specific price levels; they simply jump on the trend and ride it.
Trend following is built on the following speculations:
– The market is falling, the trader doesn’t know when it will stop following.
If the market is falling and then reverses, the trader can get in early on the new uptrend. Because the trader can reasonably guess that the market will continue to rise.
– The market is rising, the trader doesn’t know when it will stop rising.
If the market is rising and then reverses, the trader can get in early on the new downtrend. Because the trader can guess that the market will continue to fall.
The reasoning behind this is that prices are more likely to continue in the same direction than they are to reverse. Hence, you shift the odds more in your favor. Many professional money managers trade with this philosophy. Also, many commodity trading systems are built around trend-following formulas.
HOW TO USE
Different forms of analysis will use different means to predict when a trend is about to reverse. Technical analysts will look to an asset’s price history to identify patterns, while fundamental analysts will look at market factors.
Commodity trading advisors use this as the main strategy of technical traders.
No one knows how high or how low a market will move. So you have to catch some very profitable moves in the commodity markets if you’re following trends. There is two common way to enter the markets:
– To buy on a pullback. The market has been moving higher for 10 days in a row. You have to wait for a two or three-day to prices decline, then buy.
– Or to buy when the market makes new highs. In this way, you can’t miss entering trend. But it’s the hardest thing for many traders. That’s why it’s one of the most successful techniques.
Remember that trends don’t last forever. You still have to control your risk and protect your profits.