Overview
Trend following is one of the oldest and most successful trading approaches in history. The strategy is based on a simple but powerful observation: markets tend to move in sustained directional trends, and traders who position themselves with these trends can capture substantial profits.
Unlike mean reversion strategies that fade price extremes, trend following embraces momentum. The philosophy is straightforward: when a trend is established, it's more likely to continue than reverse. As the saying goes, "the trend is your friend until the end."
The Trend Following Philosophy
Trend followers accept certain truths about markets:
- Trends exist: Markets exhibit persistent directional moves that can last days, weeks, or months
- Trends are unpredictable: No one knows when a trend will start or end - so we react, not predict
- Asymmetric returns: Small losses on false starts, large gains on successful trends
- Patience pays: Let winners run, cut losers quickly
Who Should Use Trend Following?
- Patient traders comfortable with lower win rates but larger average wins
- Swing traders who can hold positions for days or weeks
- Systematic traders who want clear, rules-based entry and exit criteria
- Portfolio diversifiers looking for strategies uncorrelated with buy-and-hold
Key Benefits
Unlimited Upside
No profit targets - ride trends for as long as they last, capturing full moves.
Defined Risk
Stop losses are set at trend invalidation points, capping downside.
Works in Any Direction
Profit from uptrends and downtrends equally with long and short positions.
Proven Track Record
Legendary traders like Richard Dennis and Bill Dunn built fortunes with trend following.
Key Concepts
Understanding these core concepts is essential for implementing a profitable trend following strategy.
Moving Averages
Moving averages are the backbone of trend following. They smooth price action to reveal the underlying trend direction:
- Simple MA (SMA): Equal weight to all prices - classic approach
- Exponential MA (EMA): More weight to recent prices - faster response
- 20-period: Short-term trend (fast)
- 50-period: Intermediate trend (medium)
- 200-period: Long-term trend (slow)
Golden Cross: 50 MA crosses above 200 MA = Bullish
Death Cross: 50 MA crosses below 200 MA = Bearish
ADX - Average Directional Index
ADX measures trend strength (not direction). It tells you whether a trend is worth trading:
- ADX below 20: No trend - avoid trend following
- ADX 20-25: Weak trend developing
- ADX 25-50: Strong trend - ideal for trend following
- ADX above 50: Extremely strong trend (but may be exhausted)
Pullback Entries
Smart trend followers don't chase price. They wait for pullbacks to get better entries:
MA pullback: Enter when price pulls back to a key moving average and bounces
Fibonacci retracement: Look for entries at 38.2%, 50%, or 61.8% retracements
Swing low/high: Enter on a higher low (uptrend) or lower high (downtrend)
Trailing Stops
Trailing stops are essential for letting winners run while protecting profits:
ATR Trailing Stop = Entry - (ATR * Multiplier)
Example: Long entry at 5000, ATR of 20, Multiplier of 2
Initial Stop = 5000 - (20 * 2) = 4960
As price rises, stop trails higher, never lower
Automate Your Trend Trading
Grid Pro can be configured with directional bias to trade with the trend. Combine systematic entries with trend filters for optimal results.
How to Trade Trend Following
Successfully implementing trend following requires patience, discipline, and proper risk management.
Identifying Trends
Before entering, confirm a trend exists using multiple methods:
- Price structure: Higher highs + higher lows = uptrend; Lower highs + lower lows = downtrend
- Moving average alignment: Price above 20, 50, and 200 MA (all sloping up) = strong uptrend
- ADX confirmation: ADX above 25 confirms trend strength
- Volume pattern: Higher volume on trend moves, lower on pullbacks
Warning: Avoid Choppy Markets
Trend following struggles in range-bound, choppy markets. When ADX is below 20 and moving averages are flat or intertwined, step aside. False breakouts will whipsaw your positions repeatedly.
Entry Timing
Three proven entry methods for trend followers:
- Breakout entry: Enter when price breaks above resistance (or below support) with volume
- Pullback entry: Wait for price to retrace to moving average or Fibonacci level
- Moving average cross: Enter when fast MA crosses slow MA in trend direction
Exit Strategies
The exit is more important than the entry in trend following:
- Trailing stop: ATR-based stop that follows price higher (long) or lower (short)
- Moving average exit: Close when price crosses back through 20 or 50 MA
- Swing point exit: Close on first lower high (uptrend) or higher low (downtrend)
- Time exit: Close if no progress after X bars (optional)
Position Sizing
Risk-based position sizing is crucial for trend following:
Position Size = (Account Risk %) / (Stop Distance %)
Example: $100,000 account, 1% risk, 2% stop distance
Risk Amount = $100,000 * 0.01 = $1,000
Position Size = $1,000 / (Price * 0.02)
NinjaTrader Setup
Configure these indicators and settings in NinjaTrader 8 for effective trend following.
Moving Average Crossover Setup
| Parameter | Description | Recommended |
|---|---|---|
| Fast MA | Short-term moving average | 20 EMA or 50 SMA |
| Slow MA | Long-term moving average | 50 EMA or 200 SMA |
| ADX Period | Trend strength measurement | 14 (standard) |
| ADX Threshold | Minimum trend strength | 25+ for strong trends |
SuperTrend Configuration
SuperTrend is an excellent trend following indicator that provides dynamic support/resistance:
| Parameter | Description | Recommended |
|---|---|---|
| ATR Period | Volatility measurement | 10-14 |
| Multiplier | Distance from price | 2.0-3.0 |
| Timeframe | Chart period | Daily or 4H for swing trading |
Backtesting Tips
- Test across market regimes: Include trending AND range-bound periods
- Expect low win rate: 35-45% winners is normal - profits come from size of winners
- Measure profit factor: Target 1.5+ (gross profit / gross loss)
- Account for slippage: Trend following entries often come on breakouts with gaps
Chart Template
Create a NinjaTrader chart template with these indicators:
- EMA 20: Fast trend line (green/red based on slope)
- SMA 50: Intermediate trend (blue)
- SMA 200: Long-term trend (orange)
- ADX (14): In separate panel with 25 reference line
- Volume: Confirm trend moves have participation
Frequently Asked Questions
What is trend following trading?
Trend following is a trading strategy that aims to capture gains by riding established price trends. Rather than predicting market direction, trend followers wait for a trend to be confirmed, then enter positions in the direction of the trend and hold until the trend shows signs of reversing. The core philosophy is "the trend is your friend."
How do I identify a strong trend?
A strong trend is identified by consistent higher highs and higher lows (uptrend) or lower highs and lower lows (downtrend). Key indicators include ADX above 25 (strong trend), price staying above/below key moving averages, and increasing volume on trend-direction moves. The slope and separation of moving averages also confirm trend strength.
What indicators confirm a trend?
The most reliable trend confirmation indicators include: Moving Average crossovers (50/200 golden/death cross), ADX (Average Directional Index) for trend strength, MACD for momentum confirmation, and SuperTrend for dynamic support/resistance. Combining multiple indicators reduces false signals.
When should I exit a trend trade?
Exit signals include: price crossing back through a key moving average, ADX falling below 20, a lower high in an uptrend (or higher low in downtrend), trailing stop being hit, or MACD crossing against the trend. Many traders use trailing stops that follow the trend to lock in profits while staying in winning trades.
How to handle trend reversals?
Trend reversals require patience and confirmation. Don't exit on the first sign of weakness - wait for confirmation like a moving average cross, break of recent swing low/high, or ADX declining with price reversal. Use trailing stops to protect profits while giving the trend room to breathe through normal retracements.
Can trend following work in all markets?
Trend following works best in markets that exhibit sustained directional moves - futures, forex, and commodities are ideal. It struggles in choppy, range-bound markets where false breakouts are common. The strategy has lower win rates (typically 35-45%) but wins are significantly larger than losses, creating positive expectancy over time.
