Trend following is an investment trading strategy that takes advantage of long-term moves that play out in various tradable markets like stocks, commodities and futures. The system aims to work on market trends and benefits from both sides of the market enjoying the profits from the ups and downs of the stock or other markets.
Trend Traders who use this approach can use current market price calculations, or other systems based on price to determine the direction of the market and to generate trade signals. Trend Following Traders who subscribe to a trend following strategy do not aim to forecast or predict markets or price levels; we simply jump on the trend and ride it.
This trading method involves a risk management component that uses three elements; the current market price, equity level in an account and current market volatility. An initial risk rule determines position size at time of entry. Exactly how much to buy or sell is based on the size of the trading account and the volatility of the issue. Changes in price may lead to a gradual reduction or increase of the initial trade. On the other hand, adverse price movements may lead to an exit for the entire trade.
Trend Following Traders normally enter in the market after the trend properly establishes itself and for this reason, we will sacrifice the initial turning point profit for much larger profits on the full trend.
If there is a turn contrary to the trend, our trend following systems signal a exit or wait until the turn establishes itself as a trend in the opposite direction. In case the trend following system signals an exit, the trader re-enters when the trend re-establishes.
