Trend Following: Deceptive Ease

Published:22 March 2018 Updated:4 January 2024

I never argued with the prices.
Jesse Lauriston Livermore

Introduction to Trend Trading

Among multiple strategiesused in trading on the financial markets (raw material, stocks, bonds, futures, optionsThe most popular strategy is trend following (trend following). In almost any book on trading, in any training course, we will find:

“Trend is your friend,” that is, “Trend is your friend.

However, every reader who has at least tried trading on his own (and we must assume that the majority of those reading this article know that this friend is very … strange. It would seem, what is easier – you opened trading terminal, saw a trend (e.g., bullish) – and Trade on the trend, make a profit. Reality will disappoint us; it turns out it’s not that simple.

 

What is a trend?

First, there are dozens of definitions of the term “trend,” and they differ markedly. Let’s take the standard one: “A trend is a directional price movement. Where does the trend start? Where does it end? When does it turn around? Most often there are no answers, and if we think we have found those answers, the market can quickly and harshly, without warning, convince us otherwise. An obvious bullish trend suddenly subtly turns … into an equally obvious bearish trend, and then back again. Have you encountered anything like this? I’m sure I have.

Second, on what timeframe should we “make friends” with the trend? Open the terminal, for example, on the currency pair EURUSD:

on M5 – a bullish trend:

M5 - bullish trend

on M15 – a bearish trend:

M15 - bearish trend

on the H1 – a bearish trend:

H1 - bearish trend

Which one is our “friend”? All at once? Which position do we open – long or short? In this case, given the other conditions (the movement of other currency pairs, etc.) it is advisable to trade on the long-term trend, to be a bear.

For clarity, we opened a terminal of FinMax broker, you can also open a demo account there to test your tactics.

The ingredients for success in trading

Before answering these questions, it is important to realize the following:

These (next in order, strictly following each other) three components of successful trading do not work without each other. No trading system, including trend following, will help a greedy or impatient trader. The trader who violates risk management and opens too large a position will also inevitably lose in the long run. A trader who opens a position that is too small will make an insignificant profit (for example, a couple of dollars for an account of a thousand). The market is the forest, the profit is the prey, the trader is the hunter, and the trading system is his weapon. Giving a gun to someone who doesn’t know how to shoot or shoot past is not a smart thing to do.

 

Components of a successful transaction

And every successful transaction is divided into:

  • Opening a trade
  • Transaction support
  • Closing the transaction

Only professional execution of each of these three actions will steadily bring you profit. You entered the market at the wrong time – at least you will spend extra time and nerves. You have opened a position, and the price suddenly (always unexpectedly) powerfully goes against you, and you do not know what to do – again, there is nothing to talk about further. If the price moves in the direction we want, but we do not “sink” in, do not increase the profitable position – also bad, we do not use the potential that is given to us, we miss the profit, like sand through our fingers. You have to learn what you don’t know how to do.

 

Following the trend

But back to the trend, which is either our friend or our enemy. From personal experience, I can say that it is still a friend. A friend to whom you have to be faithful, and then everything will work out. Following a trend begins with its recognition. There is nothing very complicated about it. We know how to recognize the weather outside by looking at the calendar and outside the window. If it’s spring, like now, but it’s cold spring, so we should refrain from walking in a T-shirt, when it gets warmer, then it will be possible. In trading it is approximately the same – one must enter the market at the right time, act correctly while being in it, and exit at the right time.

If you are not loyal to the trend, the strategy does not work. The trader who closes positions (manually or by stop-loss) at insignificant market fluctuations will never make friends with the trend. As Al Capone said: “The world belongs to the patient” …

 

How to trade by trend following strategy

In order for your trading on this trading system to be effective, Follow the signalsThe following are the examples in our article:

Buying a KOLL option

In order to buy a Koll option on a trend following strategy, you need to:

1. From the list of currency pairs presented at the broker, choose a pair with a long-term bullish trend

2. Choose the moment when the short-term trend will coincide with the long-term trend (bullish + bullish)

3. Follow the trend, buy a KOLL option:

How to trade by trend following strategy

Buying a PUT option

In order to buy a PUT option on a trend following strategy, you need to:

1. From the list of currency pairs presented at the broker, choose a pair with a long-term bearish trend

2. Choose the moment when the short-term trend will coincide with the long-term trend (bearish + bearish)

3. Follow the trend, buy a PUT option:

Long-term bearish trend

 

Tips for trading on the trend:

  • In order not to be deceived, do not use timeframes before H1. More often than not on M1, M15, etc. we see just market “noise”, imitating a stormy market activity, and changing many times a day.
  • Always check the trend you have identified on a higher timeframe (for example, if you see a bullish trend on H1 – switch to D1 and check your conclusions). The trends coincide – good, this is one of the signals for entry, if they diverge – refrain from entering the market.
  • Professionals use trends that are obvious at least on the semi-annual chart, even better – the annual chart (it is well visible on W1). The rule is simple: a true, time-proven trend does not change quickly, and it is counterproductive and unprofitable to be distracted by false trends and breakthroughs.
  • Once you’ve chosen a trend, be true to it, up to a reasonable limit. Don’t react to the usual market volatility, the “chatter” that constantly provokes you to take the wrong actions. Allow profits to grow. For example, all of 2017 EURUSD was in a bullish trend, and traders who were able to use this (simple, in general) understanding – made good profits.
  • If you have entered the market against the trend – you need to know how to “flip” (we will surely analyze this technique in a separate article). If the price goes more than 200 points against your open positions – nothing you can do, there is no arguing with the market, you open in the right direction, take a loss (liquidate the losing position) and earn more than you lost.

 

Trend following strategy at Finmax broker

In order to buy a COLL option in Finmax trading terminal, follow these steps by going to finmaxbo.com and preparing an option by specifying

  • Type of asset: EUR/USD
  • Expiration: 60 seconds
  • Rate size: 25$
  • Forecast of movement of quotation: UP
  • Click the “buy” button and watch the result.

Trend following strategy at Finmax broker

In order to buy a PUT option in the Finmax trading platform, follow these steps by going to finmaxbo.com and preparing an option by specifying

  • Type of asset: USD/JPY
  • Expiration: 60 seconds
  • Rate size: 25$
  • Forecast of movement of quotation: DOWN
  • Click the “buy” button and watch the result.

Trend following strategy at Finmax broker

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