Trend following is a systematic trading strategy that assumes assets moving in a specific direction will continue to do so. Traders using this method do not attempt to predict market tops or bottoms. Instead, they wait for a clear trend to establish itself before entering a position. Once a trend is identified through technical indicators like moving averages or price breakouts, the trader buys into the strength or sells into the weakness.
This strategy relies on capturing the bulk of a price move. Trend followers often accept a high frequency of small losses while waiting for large, profitable moves to compensate. For example, a trader might use a 200-day simple moving average to determine the long-term direction of an asset. If the price remains above this line, the asset is considered to be in an uptrend. If it falls below, the trader exits the position to preserve capital.
Success in trend following requires strict adherence to risk management rules. Because markets can reverse suddenly, traders use stop-loss orders to limit potential drawdowns on individual trades. Trading involves significant risk, and past performance does not guarantee future results. Consistent execution and emotional discipline are essential to managing the inherent volatility of this approach.
How this answer was produced
AI-assisted draft, human-reviewed by AlphaScala editorial against our standards before publication. General education, not advice for your specific situation.