Trend Following is a trading methodology that, seeks to capture trends across all markets, using proper risk management.
You’re wondering:
Why does Trend Following work?
The reason is simple.
Markets are driven by emotions, greed, and fear.
When either side is in control, there will be a trend, and Trend Followers can take advantage of this phenomenon. I absolutely believe that price movement patterns are being repeated. They are recurring patterns that appear over and over, with slight variations. This is because markets are driven by humans, and human nature never changes. – Jesse Livermore
Here are a few pieces of research that further validates Trend Following:
• Studies by M Potters proves that Trend Following is profitable over the last 200 years
• Studies by Kathryn M. Kaminski validates that Trend Following thrives during crisis periods
• Following the trend by Andreas Clenow explains how hedge funds and professional traders have been consistently outperforming traditional investment strategies
Now:
Behind this trading methodology, lies 5 trading principles that every successful Trend
Follower must follow.
I agree with this, but a bit general. I would add that it is advisable to trade in the medium term trend.
Trend following is a trading strategy in which traders aim to identify and follow market trends, typically using technical analysis tools such as moving averages and oscillators.
The idea is to enter trades in the direction of the trend and stay with the trade as long as the trend persists. Trend followers look for momentum in the market, and they typically trade with the trend rather than trying to pick tops or bottoms.
There are different ways to identify and follow trends, and traders may have different approaches. For example, some traders may use trend-following indicators like Moving Average Convergence Divergence (MACD) or the Average Directional Index (ADX). Others may use chart patterns or price action analysis to identify trends.
Trend following can be a helpful strategy for traders looking to capitalize on longer-term moves in the market, as it allows them to stay with a trade for extended periods and potentially capture more significant profits. However, it is essential to note that trend following is not a guarantee of success, and it is still possible to experience losses even when following a trend. Therefore, as with any trading strategy, it is essential to carefully assess the risks and rewards before entering any trades.
By following the accurate market trend, you can bear large amount of profit.