Trend Following Trading Strategies and Systems Explained Including Backtest and Statistics Quantified Strategies Trading And Investing For Traders And Investors

We use this word because trend followers always wait for the trend to shift first, then “follow” it. To calculate the MACD, you subtract a 26-period Exponential Moving Average (EMA) from a 12-period EMA. The Exponential Moving Average is a moving average that gives greater weight to more recent price data. More recent data has a more considerable impact on this indicator, unlike a typical simple moving average. One of the problems with this approach is that when the price of a security is highly volatile, shorter duration crossovers using price can cause a lot of whipsaws.

You can probably do well even by using weekly bars/data and placing orders on Mondays, and doing absolutely nothing during the week. Markets spend a lot of time going nowhere and you must expect to find yourself “stopped out” frequently. This is probably the number one reason why most traders give up trend following. There is an abundance of info, bells, whistles, indicators, commentaries, expert opinions, movement, etc., that make you deviate from your original plan. A simple strategy can help you rise above all the unnecessary market noise.

What is Trend Following?

Crossovers may use two different moving averages, for example, 100 days and 25 days. When the smaller moving average crosses above the larger moving average (when the 25-day crosses over the 100-day ), a buy signal occurs. When the shorter moving average crosses below the larger moving average, this can be used as a sell signal.

When the win ratio is low, we are more prone to behavioral mistakes. No matter how good you are, it takes lots of experience to fight the most common trading biases. Trend following often experience many whipsaws that feel like “bleeding to death”. Most humans want the pleasure of winning frequently, and most of us prefer many small winners instead of occasionally “lump-sum” big gains.

What Is A Trend Following Strategy And How Does It Work

Statistical tests are not able to reject the
hypothesis that all these rules deliver the same performance. In stock markets, selling short the stocks should be
avoided. The performance of trend-following strategies with short selling is
very poor even in back-tests (Zakamulin 2017, Chapters 9 and 10). The other alternative is to shorts stocks when a Sell signal is generated. Specifically, when a Sell signal is generated, a trader needs not just to sell own stocks, but sell stocks borrowed from a broker. The idea in this strategy is not only to protect oneself from losses, but to profit from the stock price decrease.

You’ll win often but, eventually, there will be a trade that goes against you, till you blow up your trading account. And this is one of the biggest secrets behind a trend follower’s success. Trading across different markets help reduce your drawdowns and improve your profitability. Behind this trading methodology, lies 5 trading principles that every successful Trend Follower must follow. Jesse Livermore, the most famous trader of all time, made $100 million in 1929.

Top 10 trend following trading strategies

In this regard, 10-month (or 12-month) SMA rule should be preferred to 10-month (or 12-month) MOM rule. Current back-tests suggest that the MAC rule based on using 2- and 10-month SMA performs slightly better than the 10-month SMA rule. It is possible that a majority of the trades may be unprofitable, but by “cutting the losses” and “letting profits run”, the overall strategy may be profitable. Trend trading is most effective for a market that is quiet (relative low volatility) and trending. For this reason, trend traders often focus on commodities, which show a stronger tendency to trend than on stocks, which are more likely to be mean reverting (which favors swing traders). Another way traders may use moving average data is in a crossovers strategy.

• Instead of basing decisions on guesses or assumptions, trend-following traders use their indicators to help them spot trends and decide when to enter and exit a position.
• Bollinger band indicators are signals plotted on a singular line which represents the price fluctuations for a particular stock.
• The screenshot below shows the same 4H Gold chart with a multi-timeframe Stochastic at the bottom.
• In summary, trend following is a popular approach in trading that can be practised with both short and long-term strategies.
• Although, despite it’s complexity, the trend following trading strategy is actually easy to learn.

They believe that the price of a security is the most important thing to understand. Everything you need to know about a market can be ascertained from its price action. Wikipedia says that trend following strategies are based on technical analysis. Instead, you should focus on your risk management, markets universe and trading consistency. We’ve highlighted 10 of the best trend following trading strategies, but without a proper forex trading education, you’ll struggle to implement them correctly.

Investing with money managers

Although some markets are known for their compatibility with this approach, we at Unger Academy caution you to always test markets for their specific features before investing money. Using daily data produces better performance in back-tests,
but using monthly data produces better performance in forward-tests (Zakamulin
2017, Chapters 9 and 10). Because the results of back-tests are subject to
data-mining bias, the results of forward tests are more reliable. Consequently,
monthly trading seems to be better than daily. The fund is actively managed and seeks to achieve positive returns that are uncorrelated to broad market equity or fixed income returns. With the amount of our account we’re willing to risk per trade, we can now determine trade risk.

• An alternative is to buy close to oversold conditions when the trend is up and place a short trade near an overbought condition in a downtrend.
• Impatient traders will often get in too soon but waiting for a confirmed breakout may provide a more robust trading approach.
• For this article, let us keep the range from 1st January 2020 to 1st January 2022, and the company details to be used is Tesla (TSLA).
• Keep in mind that Stochastic should only help you get a sense of direction.
• This is one of the more advanced ichimoku trading strategies you will find.

To increase your odds and to identify trades that lead to smoother development, only trade into the direction of the higher timeframe. The hard part is finding rules that work consistently enough for you to achieve everything we just mentioned. An alternative is to buy close to oversold conditions when the trend is up and place a short trade near an overbought condition in a downtrend. Some characteristics of underlying assets can change over time, so it is good to always test approaches before trading with real money. Commodities rarely move sideways, and therefore are well suited to riding long-term trends.

Data Mining And Boredom (The Same Strategy Can’t Be Used On All Stocks)

For example, the Average True Range indicator (ATR) measures volatility and provides clues about what sort of price range to expect. With a reward to risk ratio of 3 to 1, you can afford to lose 75% of your trades and still break even. In this case, your total investment is $42000 – which is significantly more than the $2000 you are https://forexhero.info/how-to-write-an-effective-rfp-request-for-proposal/ risking. The only issue is if the market is illiquid enough that your stop loss doesn’t fill at $2.00. Generally speaking, longer breakout lengths (like the 52-week high) are more robust and less likely to result in whipsaw. In other words, the goal is to have a few big wins that more than offset a larger number of small losses.