“Predictive technical analysis is chart/pattern reading. Trend following, on the other hand, is reactive technical analysis – a diversified portfolio perspective of markets using momentum indicators.” – Michael Covel
Trend following is a trading strategy which attempts to profit from long-term or short-term moves in price action that happen at times in financial markets. Trend following traders that use this type of strategy do not try to forecast or predict exact price levels for entries or profit targets they simply enter a market in the direction of the current trend with signals that show a historical edge for profitability due to creating large wins and small losses. The primary edge that trend followers have is asymmetric risk, they use stop losses to keep losing trades small and let winners run with trailing stops to make their winning trades in trends become as big as possible. Trend followers are not in the game of predictions, opinions, or forecasts, they instead operate off the basis of price action and the path of least resistance. Their entries and exits are based on quantified price action signals. Trend trading can be at times rocket science, you find a rocket in price and you ride it.
Here are four of the best books that will teach you the principles of trend following.
‘The Little Book of Trading’ is a great place to start with as it is a short and easy read to introduce first time readers to the concepts and principles of trend following.
‘Trend Commandments’ is a great book as it packs information, concepts, and principles about trend following in an engaging read with condensed bursts of wisdom. This book gets right to the core of what you need to know with no filler or wasted time.
The newest addition of ‘Trend Following’ is like the bible for trend following traders. The huge books takes a deep dive into all aspects of trend following, the stories of the legends, the returns and equity curves, and all the big core principles that made the traders in this method so successful for decades. This is one of the best values for your money you will find in any trading book. It is one of the few trading books you will every need.
‘The Complete Turtle Trader’ tells the story of how Market Wizard Richard Dennis recruited and hired average people to see if he could teach and train them to be successful trend following traders. One of the most interesting stories and trading books you will find. You will learn a lot from the experiences of these would be traders and learn how it all worked out.
“Let’s break down the term Trend Following into its components. The first part is “trend”. Every trader needs a trend to make money. If you think about it, no matter what the technique, if there is not a trend after you buy, then you will not be able to sell at higher prices…”Following” is the next part of the term. We use this word because trend followers always wait for the trend to shift first, then “follow” it.” – Van Tharp