Trading strategies
Trend following
Definition
Trend following is a strategy that buys markets in uptrends and sells or shorts them in downtrends without trying to predict tops or bottoms, then exits with a trailing stop when the trend ends. It accepts many small losses in choppy markets in exchange for staying in the few long trends. See our guide to trend following.
Example
Suppose a trend follower takes 10 trades in a year, risking up to $500 on each. Seven are stopped out in choppy markets for losses totaling $3,000, while three ride long trends with trailing stops for gains totaling $6,500, a net of $3,500 from winning 3 trades out of 10. In a year without long trends, the same rules would leave mostly the losses.
Hypothetical numbers, for illustration only.
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