The New Trader’s Guide To Trend Following

The New Trader’s Guide To Trend Following

This is a guest post by Jay you can find him on twitter @SmartStockTrend or his website

Getting started with trend following was one of the best things that happened to me as a trader. It helped me worry less, feel more confident and (most importantly), start getting consistent trading results! But I’ve got to admit, it wasn’t always this way.

Before I discovered trend following trading strategies, I was a little bit lost. While I spent a lot of time reading investing books and trader biographies, I was still having trouble earning steady profits. And to be honest, I can’t even remember how I originally discovered trend following. But for the reasons mentioned above, am I ever glad I did!

So in this short blog post, I want to share some free tips and tools to help you get up and running with a trend following trading system. And the best part is, no matter whether you’re trading stocks, forex or something else, trend following can help!

To get started then, let’s first look at what exactly trend following is. Then I’ll share some tools and resources to help you continue learning about this powerful yet simple approach to markets.

What is trend following?

The great thing about trend following is just how simple it is. As the name suggest, this strategy is all about finding a trend, and then jumping on for the ride! While this might sound basic, it has some important implications.

First, trend followers don’t try to predict what’s going to happen next. Instead, they just wait for a signal (such as a new 52-week high), and then they buy. They use a trailing stop-loss to help manage risk, and when the trend comes to an end they move on to the next trading opportunity.

The other thing to keep in mind here is that trend following strategies use technical analysis to make buy and sell decisions. So you don’t need to worry about fundamentals. You can just let the price of the asset be your guide. This also means you can use trend following on the short side, too.

The reason I like trend following is because it’s a very low-stress approach to trading. This is especially true if you use this strategy for longer-term swing or position trades. You can actually catch really big price moves, without having to sit in front of your screen all day.  Not bad, right?

Well, as I said, trend following systems have made a huge difference for me and my trading results. Let me show you why.

Why does trend following work?

Trend following isn’t a complex or exotic trading strategy that requires a PhD in finance to understand. In fact, the reason trend following works boils down to one simple fact. And that is: trend followers always cut their losses quickly, and let winning trades run. 

In practice, this is often done using a trailing stop-loss. Over time, the end result is a portfolio full of winning stocks that continue to push on up. And then whenever a holding does inevitably reverse, you simply let your stop loss trigger and you move on to the next opportunity.

Now to be clear: trend followers are not always right. In fact you might be surprised to learn many successful trend traders are only right about 50% of the time. But since the average winner is often 2 to 3 times bigger than the average loss, the end result is consistent trading profits. And again, all this is possible without you having to sit in front of your screen all day babysitting your trading positions.

If this sounds appealing, let me show you where you can learn a little more about this proven approach to trading.

Where can I learn more about trend following?

The good news is trend following is nothing new. It’s now been around for decades and has been applied to all kinds of different asset classes. There’s no shortage of research papers, books and free online tools to help you learn more. So here are some of my favorites.

200 years of trend following: in case you were curious about how robust trend following has been over time, this research paper provides a pretty compelling case. It goes to show no matter what market you’re in, price momentum can be a factor to keep in mind. 

Trend following on stocks: many trend following critics argue that it only works on a diversified portfolio of different markets (with a lot of focus on currencies and commodities). But this research provides convincing evidence that trend following methodologies can be applied successfully to stocks as well. This is especially worth a read if you want to see how trend following can protect your downside when things go wrong.

How to scan for trend following stocks: I put together this article to show how you can start moving from theory to practice. See how you can use free online tools to help you capture big trends in individual stocks.

 The Complete Turtle Trader: If you’re still on the fence about trend following, this enthralling and almost unbelievable story is really worth a read. See for yourself how a random group of people ended up learning trend following and making a fortune. And you’ll even learn the trading system they used!

Trend Following Book: Now if you really want to dive into the world of trend following this is the best book to get you started. Michael Covel has done a wonderful job explaining the ins-and-outs of trend following trading strategies. If you’re looking for a next step to learn more, this is a great place to start.

So I think the above sources are a great way for any new traders to start learning more about trend following, and help you decide if it’s the right trading strategy for you. And given the big difference this approach has made for me, I encourage you to at least think about if trend following might be right for you.