Trend Following Strategies
Trend following is one of the most reliable ways to make money in the markets. The philosophy is simple: don't predict, react.
What is Trend Following?
It involves buying assets that are going up and selling assets that are going down. You don't aim to buy the bottom or sell the top; you aim to capture the "meat" of the move.
"The trend is your friend until the bend at the end."
Identifying the Trend
Before you trade, you must identify the market direction.
- Uptrend: Higher Highs (HH) and Higher Lows (HL).
- Downtrend: Lower Highs (LH) and Lower Lows (LL).
- Sideways: Price stuck in a range.
Key Tools for Trend Following
Moving Averages
Moving averages smooth out price data to show the underlying trend.
- Golden Cross: When the 50-day MA crosses above the 200-day MA (Bullish).
- Death Cross: When the 50-day MA crosses below the 200-day MA (Bearish).
ADX (Average Directional Index)
ADX measures the strength of the trend, not the direction.
- ADX > 25: Strong trend.
- ADX < 20: Week trend or ranging market.
Simple Strategy: Moving Average Crossover
| Parameter | Rule |
|---|---|
| Entry | Buy when Price > 50 EMA and 50 EMA is sloping up |
| Stop Loss | Recent Swing Low |
| Exit | Close when Price < 50 EMA |
Psychology of Trend Following
- Patience: Trends take time to develop.
- Discipline: You must cut losses when the trend changes.
- Whipsaws: Be prepared for false signals in sideways markets.
Trend following strategies often have a lower win rate (30-40%) but a very high risk-to-reward ratio. One big win covers many small losses.
Sources & Disclaimer
- Standard Market Conventions for Technical Analysis
- BSE/NSE Charting and Analysis Guides
Note: Any benchmarks (e.g., "Good ROE is > 20%", or specific P/E ranges) are simplified industry heuristics for educational purposes. True evaluation depends on specific industry context, market cycles, and individual company circumstances.