Trend following is one of the oldest and most successful trading approaches in history. The basic idea is simple: identify the direction of the market and trade with it, not against it. In this guide, we will explore trend following timing strategies that help you enter trends early and exit before they reverse.
What is Trend Following?
Trend following is a trading strategy that aims to capture gains by riding the momentum of an asset in a particular direction. Trend followers do not try to predict market tops or bottoms. Instead, they wait for confirmation that a trend has started and then position themselves to profit from its continuation.
The core principle: Markets tend to move in trends. Once a trend is established, it is more likely to continue than to reverse. Trend followers aim to capture the middle portion of major moves, sacrificing the first and last parts for certainty.
Why Trend Following Works
Trend following has generated consistent returns across different markets and time periods. Here is why:
- Exploits market psychology: Trends persist because of herding behavior and the slow dissemination of information
- Cuts losses short: Trend followers exit quickly when wrong, preserving capital
- Lets winners run: By staying in trends, you can capture large moves that offset small losses
- Works across markets: Trends occur in stocks, forex, commodities, and cryptocurrencies
Identifying Trends
Before you can follow a trend, you need to identify one. Here are the key methods:
Higher Highs and Higher Lows
The most basic definition of an uptrend is a series of higher highs and higher lows. For a downtrend, look for lower highs and lower lows.
Uptrend Identification
- Each rally takes price higher than the previous rally peak
- Each pullback holds above the previous pullback low
- The pattern continues until a higher low is broken
Moving Average Slope
When the 50-day or 200-day moving average is rising, the trend is up. When it is falling, the trend is down. The steeper the slope, the stronger the trend.
Price Position Relative to Moving Averages
In a healthy uptrend, price stays above key moving averages (like the 50-day or 200-day). In a downtrend, price stays below these levels.
ADX (Average Directional Index)
ADX measures trend strength regardless of direction:
- ADX below 20: No trend or weak trend
- ADX 20-40: Strong trend
- ADX above 40: Very strong trend
Trend Following Entry Timing
1. Breakout Entry
Enter when price breaks out of a consolidation pattern or above resistance in the direction of the trend.
- Wait for a close above the breakout level for confirmation
- Look for volume expansion on the breakout
- Set stop loss below the consolidation area
2. Pullback Entry
Wait for price to pull back to a support level (like a moving average or previous breakout point) and then resume the trend direction.
Pullback Entry Example
Stock XYZ is in an uptrend, trading above its 20-day and 50-day EMAs.
- Price pulls back to the 20-day EMA
- A bullish candlestick pattern forms (like a hammer or engulfing)
- You enter long with a stop below the 50-day EMA
- This gives you a better entry price with defined risk
3. Moving Average Crossover Entry
Enter when a shorter-term moving average crosses above a longer-term moving average in the direction of the primary trend.
Trend Following Exit Timing
1. Trailing Stop Exit
Use a trailing stop that follows price at a fixed distance or percentage. This lets you stay in strong trends while protecting profits.
- ATR-based stops: Trail by 2-3 times the Average True Range
- Percentage stops: Trail by a fixed percentage (like 8-10%)
- Moving average stops: Exit when price closes below a key MA
2. Trend Break Exit
Exit when the trend structure breaks:
- In an uptrend: Exit when price makes a lower low
- In a downtrend: Exit when price makes a higher high
3. Moving Average Exit
Exit when price closes below a key moving average (for longs) or above it (for shorts). Many trend followers use the 50-day or 20-day MA as their exit trigger.
Building a Trend Following System
- Define your timeframe: Choose whether you are trading daily, weekly, or monthly trends
- Select trend identification tools: Pick 1-2 methods to identify if a trend exists
- Determine entry rules: Decide whether you will enter on breakouts, pullbacks, or crossovers
- Set exit rules: Define your trailing stop or trend break exit criteria
- Size your positions: Determine how much to risk per trade (typically 1-2% of capital)
- Diversify: Trade multiple markets to catch different trends
Managing Trend Following Challenges
Whipsaw Markets
Trend following struggles in choppy, sideways markets. To manage this:
- Use ADX to filter out low-trend environments
- Reduce position sizes during choppy periods
- Accept that some small losses are part of the system
Late Entries
By definition, trend followers enter after a move has started. This is okay because:
- Confirmation reduces false signals
- The middle of a trend is often the safest and most profitable part
- Missing the first part is better than catching a false start
Key mindset: Trend following is about the long game. You will have many small losses and some big wins. The big wins more than compensate for the small losses over time. Trust the process.
Track Your Trend Following Performance
Pro Trader Dashboard helps you analyze your trend following trades. See your win rate, average winner vs. loser, and identify which markets are trending best for your strategy.
Summary
Trend following timing is a powerful approach that has created consistent profits for traders and funds across decades. By identifying trends early, entering on pullbacks or breakouts, and using trailing stops to stay in winning trades, you can capture significant market moves. Remember that patience and discipline are essential, as trend following requires accepting small losses while waiting for big winners.
Continue your timing education with our guides on momentum timing and relative strength timing.