Trend following is one of the oldest and most profitable trading strategies. The concept is simple: identify the direction of the trend and trade in that direction. While the idea is straightforward, execution requires systematic identification of trends and disciplined entry at optimal points.
What is a Trend Following Setup?
A trend following setup is a specific configuration of price and indicators that signals an opportunity to enter a trade in the direction of an established trend. Instead of trying to pick tops and bottoms, trend followers join moves that are already underway and ride them for as long as possible.
The core philosophy: Trends exist, they persist, and they can be identified. By trading in the direction of the trend and cutting losses quickly on failed trades, trend followers capture the big moves that pay for the small losses.
Identifying the Trend
Before finding entry setups, you must first identify the trend direction:
Moving Average Analysis
- Price above rising MAs: Uptrend - look for long setups only
- Price below declining MAs: Downtrend - look for short setups only
- MA stacking: Short-term MAs above long-term MAs confirms trend direction
Higher Highs and Higher Lows
In an uptrend, price makes progressively higher swing highs and higher swing lows. In a downtrend, the opposite occurs. This is the most basic trend definition.
ADX (Average Directional Index)
ADX above 25 indicates a trending market. Combined with +DI and -DI, it confirms trend direction and strength.
Trend Identification Example
Stock ABC shows these characteristics:
- Price position: Trading above 20, 50, and 200-day MAs
- MA alignment: 20 MA > 50 MA > 200 MA (bullish stacking)
- Swing structure: Making higher highs and higher lows
- ADX: Reading 35 with +DI above -DI
- Conclusion: Clear uptrend - look for long entries only
Classic Trend Following Setups
Once the trend is identified, these setups provide entry opportunities:
Moving Average Pullback
In an uptrend, wait for price to pull back to a key moving average (20 or 50 day) and bounce. Enter when price shows signs of resuming the trend.
Trendline Touch
Draw a trendline connecting swing lows in an uptrend. Enter long when price touches and bounces off this trendline.
Flag Pattern
After a strong trend move, price consolidates in a tight range (the flag). Enter on the breakout from this consolidation in the trend direction.
Higher Low Entry
Wait for a pullback that forms a higher low (in uptrend). Enter when price breaks above the short-term high formed after the higher low.
Multiple timeframe alignment: The strongest trend following setups occur when the trend is aligned across multiple timeframes. A pullback entry on the daily chart is more powerful when the weekly trend is also up.
Entry Trigger Rules
Knowing when exactly to enter is crucial for trend following:
Breakout Entry
Enter when price breaks above the most recent swing high. This confirms the trend is resuming.
Reversal Candle Entry
At a pullback low, wait for a bullish reversal candle (hammer, engulfing) before entering.
Moving Average Reclaim
If price dips below a moving average, wait for it to close back above before entering.
Complete Trend Setup Example
Stock XYZ in a confirmed uptrend:
- Trend status: Price above rising 50-day MA, making higher highs
- Pullback: Price retraces to 50-day MA on declining volume
- Setup: Bullish hammer candle forms at MA
- Entry trigger: Buy above hammer high at $52
- Stop loss: Below hammer low and MA at $49
- Initial target: Prior swing high at $58
- Trail stop: Move stop below each new higher low
Stop Loss Strategies
Proper stop placement keeps losses small while giving trends room to work:
- Below swing low: Place stop below the most recent higher low
- Below moving average: Trail stop below the key moving average
- ATR-based: Use 2-3 ATR below entry for volatility-adjusted stops
- Chandelier exit: Trail stop based on highest high minus multiple of ATR
Position Management
Managing positions properly maximizes trend following returns:
- Let winners run: Do not take profits too quickly in trending markets
- Trail stops: Move stops up as the trend develops to lock in gains
- Add to winners: Consider pyramiding into profitable positions
- Cut losers fast: If the trend setup fails, exit immediately
Indicators for Trend Following
These indicators help identify and confirm trend following setups:
- Moving averages: 20, 50, 100, and 200 period for trend direction
- ADX: For trend strength measurement
- MACD: For momentum confirmation
- RSI: To avoid buying overbought or oversold conditions
- Volume: To confirm trend moves and spot exhaustion
Track Your Trend Trades
Pro Trader Dashboard analyzes your trend following trades to show your average winner size, how long you hold winners, and where you could improve.
Timeframes for Trend Following
Trend following works on all timeframes with adjustments:
Day Trading
Use 5-minute and 15-minute charts. Look for intraday trends and ride them with tight stops. Trends typically last hours.
Swing Trading
Use daily charts primarily. Trades last days to weeks. The 20 and 50-day moving averages are key levels.
Position Trading
Use weekly charts. Trends last months. The 10 and 40-week moving averages guide entries and exits.
Common Trend Following Mistakes
Avoid these errors that derail trend following success:
- Counter-trend trading: Fighting the trend by picking tops and bottoms
- Taking profits too early: Cutting winners before they run
- Wide stops getting hit: Then price reverses - tighter stops with smaller size work better
- Chasing extended moves: Entering too late in trends increases risk
- Ignoring the larger trend: Day trading against the daily trend
- Overtrading: Taking low-quality setups in choppy conditions
Building a Trend Following Routine
Systematic approach for finding trend setups:
- Scan for trends: Find stocks above rising moving averages
- Check trend strength: Filter for ADX above 25
- Identify pullbacks: Look for stocks pulling back to support
- Wait for triggers: Set alerts for entry signals
- Execute with discipline: Enter, set stops, manage positions
Summary
Trend following setups identify opportunities to enter trades in the direction of established trends. First confirm the trend using moving averages, swing structure, and ADX. Then find entry points at pullbacks to moving averages, trendline touches, or flag breakouts. Enter on specific triggers like breakouts or reversal candles, use stops below recent swing lows, and trail stops as the trend develops. The key to trend following success is letting winners run while cutting losers quickly. With discipline and patience, trend following captures the big moves that more than compensate for the smaller losses on failed setups.