There’s an old saying on Wall Street: “The trend is your friend.” It’s one of the first things new traders learn, and for good reason. Fighting a powerful, established market trend is one of the fastest ways to drain a trading account. But simply knowing you should trade with the trend isn’t a strategy. It’s just advice.
A true trend following strategy is a complete system. It’s a set of rules that tells you how to identify a trend, how to enter it at a low-risk point, and, most importantly, how to stay in the trade to capture the majority of the move. Many traders get the first part right but exit far too early, leaving huge profits on the table.
Our team has spent decades refining our approach to riding trends. This guide will give you our complete, step-by-step playbook. We’re going beyond vague advice and giving you an actionable system for finding and managing trend trades.
What is Trend Following (And Why It’s Not Just “Buying High”)
Trend following is a trading methodology that seeks to capture profits by analyzing the momentum of an asset in a particular direction. The core philosophy is that markets driven by strong buying or selling pressure are more likely to continue in that direction than to reverse.
A common misconception is that trend followers are simply “buying high and hoping to sell higher.” This is a dangerous oversimplification.
Our team’s perspective: Professional trend following isn’t about chasing parabolic moves. It’s about identifying a structurally sound trend and looking for a temporary, low-risk moment of weakness—a pullback—to join the dominant flow of money. We aren’t chasing; we are ambushing.
The foundation of this concept rests on Dow Theory, a cornerstone of technical analysis that outlines how markets move. An uptrend is defined by a series of higher swing highs and higher swing lows. A downtrend is the opposite: a series of lower swing highs and lower swing lows. When this structure is broken, the trend is in question.
The Core Components of Our Trend Following System
Before we get to the step-by-step playbook, you need to understand the three tools we use to build our view of the trend. Each tool answers a specific question:
- Market Structure & Moving Averages: What is the direction of the trend? We use classic Dow Theory (higher highs/lows) combined with Exponential Moving Averages (EMAs) to get a clear, objective view of the trend’s direction.
- The ADX Indicator: How strong is the trend? This is the secret sauce many traders miss. The Average Directional Index (ADX) doesn’t tell you the trend’s direction, but it measures its strength or conviction. This helps us decide whether to be aggressive or cautious.
- Candlestick Patterns: What is our entry trigger? Once price pulls back to a key support level within the trend, we look for a specific bullish or bearish candlestick pattern to signal that the trend is ready to resume.
Our 5-Step Playbook for Trading Trends
This is our systematic process for executing a high-probability trend trade.
Step 1: Identify the Macro Trend (Market Structure & MAs)
First, we need to objectively define the trend’s direction. We use a two-part test:
- Moving Averages: On a daily chart, is the price above a rising 50-period EMA? Is the 20-period EMA above the 50-period EMA? If yes to both, our bias is bullish. The opposite is true for a bearish bias. This is the first filter we cover in our guide to trend following with moving averages.
- Market Structure: Does the chart show a clear series of higher highs and higher lows (for an uptrend)? This visual confirmation is crucial. Drawing trendlines and channels can help visualize the structure.
Step 2: Measure the Trend’s Strength (The ADX Litmus Test)
Once we’ve confirmed the direction, we need to know if the trend has enough fuel to be worth trading. We use the ADX indicator for this.
- ADX Reading > 25: This indicates a strong, healthy trend with conviction. We can be more aggressive with our entries and trade management.
- ADX Reading < 25: This signals a weak, choppy, or non-existent trend. In these conditions, we either stand aside or become much more conservative.
Step 3: Find a High-Probability Entry (The Pullback)
We never chase a stock that is making new highs. We wait for it to come to us. In a healthy uptrend, we look for a shallow pullback to a dynamic support level, typically the 20-period EMA. This is our “value zone” for entry.
Once the price reaches this zone, we wait for an entry trigger: a bullish candlestick pattern like a hammer, a bullish engulfing candle, or a simple doji showing indecision followed by a green candle. This confirms that buyers are stepping back in. This is the art of buying the dips in a trend.
Step 4: Define Your Risk (The Logical Stop Loss)
Your stop loss is your survival tool. In a trend trade, the logical place for a stop loss is just below the swing low of the pullback you used for your entry. This defines your risk clearly. If that level breaks, the “higher low” structure is violated, and the trade idea is invalidated. This is a non-negotiable part of risk management.
Step 5: Manage the Trade (Letting Your Winner Run)
Beginners set static 2:1 profit targets. Professionals manage the trade dynamically to capture the majority of the trend. Our preferred method is a trailing stop.
Once the trade moves in our favor and makes a new higher high, we manually move our stop loss up to just below the most recent higher low. We repeat this process as the trend continues, effectively locking in profit while giving the trade room to run. The trade is only stopped out when the market finally breaks the trend structure.
The Tools You Need for Trend Following
To execute this strategy effectively, you need a professional-grade charting platform. Manually scanning for these criteria is nearly impossible.
- TradingView (Our Top Pick): We believe TradingView is the ultimate all-in-one platform for this strategy. Its charting is best-in-class, and its screening tools allow you to build custom scans to find stocks that meet the criteria from Step 1 and Step 2 automatically. You can scan the entire market for stocks above their 50 EMA with an ADX reading above 25 in just seconds.
- Trade-Ideas: While known for its day trading prowess, Trade-Ideas can also be configured to find strong multi-day trends, making it another powerful option for automating your search.
Real Trade Simulation: Riding the Trend in AMD
Let’s walk through a realistic example using Advanced Micro Devices (AMD) during a recent uptrend.
- The Scenario: AMD has been in a strong uptrend for several weeks.
- Step 1 (Identify Trend): On the daily chart, the price is well above the 50 EMA, and the 20 EMA is above the 50 EMA. The market structure shows clear higher highs and higher lows. Verdict: Bullish Trend.
- Step 2 (Measure Strength): The ADX indicator is reading 32. Verdict: Strong Trend.
- Step 3 (Find Entry): The stock price pulls back over three days to touch the 20 EMA at approximately $165. On the fourth day, it forms a strong bullish engulfing candle right at the 20 EMA. This is our entry trigger. We enter long near the close of this candle at $166.
- Step 4 (Define Risk): The low of the pullback (the bottom of the engulfing candle’s wick) was at $163.50. We place our stop loss below this at $163.40. Our risk per share is $166 – $163.40 = $2.60.
- Step 5 (Manage Trade): AMD moves higher over the next week, forming a new swing high at $175 and a subsequent higher low at $171. We trail our stop loss up from $163.40 to $170.90 (just below the new higher low). The stock continues to trend to over $185, and we keep moving our stop up under each new higher low, capturing a large portion of the move.
The 3 Cardinal Sins of Trend Following (And How to Avoid Them)
- Fighting the Trend (Calling Tops/Bottoms): The single biggest mistake is trying to be a hero. Shorting a stock in a powerful uptrend because you think it’s “overvalued” is a recipe for disaster. The market can stay irrational longer than you can stay solvent. The Fix: Humble yourself and trade the direction you see, not the one you think should be happening.
- Chasing Extended Moves (FOMO): The second biggest mistake is entering a trade out of Fear Of Missing Out. Buying a stock after it has already run up 15% in three days, far from its 20 EMA, is a low-probability entry. The Fix: Be patient. If you miss a move, wait for the next pullback. There is always another bus.
- Cutting Winners Short: The psychological challenge of trend following is holding a winning trade. It’s tempting to grab a small, quick profit. This destroys the entire model, which relies on large wins to pay for the inevitable small losses. The Fix: Trust your trailing stop strategy. Let the market take you out of the trade when the trend structure officially breaks.
Frequently Asked Questions
What is the best trend following strategy?
The best strategy is a complete system that combines trend identification (moving averages), strength measurement (ADX), and a defined entry/exit plan (pullbacks and trailing stops).
There’s no single “best” set of indicators. Our team believes the most robust strategies are built on a framework that answers the critical questions: What’s the direction? How strong is it? Where do I get in? and Where do I get out? A strategy that only answers one of these is incomplete.
Key Takeaway: The best strategy is a holistic system, not just a single indicator.
How do you know if a trend is strong?
By using the Average Directional Index (ADX) indicator. A reading above 25 typically indicates a strong, healthy trend suitable for trading.
While a steep slope on a moving average can suggest strength, the ADX provides an objective, quantitative measure. It removes guesswork and helps our traders focus only on the trends with the highest probability of continuation, while avoiding choppy, range-bound markets.
Key Takeaway: Use the ADX indicator as your objective “trend strength meter.”
What indicators are best for trend following?
A combination of Exponential Moving Averages (like the 20 and 50 EMA) to define the direction and the ADX to measure the strength is an excellent starting point.
These are the core tools our traders use. MAs are simple and effective for identifying the path of least resistance, while the ADX provides a crucial layer of confirmation that prevents you from trading weak, choppy markets.
Key Takeaway: Combine moving averages for direction with the ADX for strength.
Can you make a living trend following?
Yes, many professional traders do, but it requires immense discipline, patience, and robust risk management.
Trend following is a psychologically demanding strategy. It often has a lower win rate (many small losses) but a high reward-to-risk ratio (a few very large wins). Success depends on a trader’s ability to consistently take those small losses and not cut their winning trades short.
Key Takeaway: Making a living with trend following is possible, but it depends more on the trader’s mindset than the strategy itself.
Is trend following a long-term strategy?
It can be applied to any timeframe, from intraday charts for day trading to weekly charts for long-term position trading.
The principles of market structure (higher highs and higher lows) are fractal, meaning they appear on all timeframes. Our team uses the exact same framework to identify a trend on a 5-minute chart as we do on a daily or weekly chart, simply adjusting for the different time horizons.
Key Takeaway: Trend following is a universal methodology that can be adapted to any timeframe or trading style.
How do you identify a trend in day trading?
You use the same principles as on a daily chart: identify higher highs and higher lows on your trading timeframe (e.g., 5-minute chart) and use short-term moving averages (like the 9 and 20 EMA) to confirm the direction.
For day trading, we look for a stock that is strong relative to the overall market. The goal is to see a clean structure and have the price holding above key intraday levels like VWAP or the shorter-term EMAs.
Key Takeaway: Identify intraday trends by applying the same market structure and moving average rules on a smaller timeframe.
What is the difference between trend following and momentum trading?
Trend following aims to ride a sustained, long-lasting directional move, while momentum trading often focuses on the sharpest, fastest part of that move, typically entering on breakouts.
Think of it this way: A trend follower might wait for a pullback to enter a trend that’s been going on for weeks. A momentum trader might jump into that same stock the moment it hits a new 52-week high, trying to capture the explosive surge. They are closely related, but trend following often involves more patience and longer holding periods.
Key Takeaway: Trend following is about the duration of the move; momentum trading is about the velocity.
How do you set a stop loss in a trend?
Place your initial stop loss below the most recent swing low (for an uptrend) or above the most recent swing high (for a downtrend).
This method aligns your risk with the market’s structure. If that swing point is violated, the trend’s technical structure is broken, and it’s a logical reason to exit the trade. From there, you can manage the trade by trailing the stop loss under new, higher swing lows as they form.
Key Takeaway: Your stop loss should always be based on the market’s structure, not an arbitrary dollar amount.
When should you exit a trend trade?
You should exit when the trend’s structure is broken. The most systematic way to do this is with a trailing stop-loss that moves up under each new higher low.
The goal is to let the market stop you out. Novice traders exit when they “feel” a profit is big enough, but this often means leaving the biggest part of the move behind. By letting the break in market structure dictate your exit, you remove emotion and maximize your potential gain.
Key Takeaway: Don’t decide when the trend is over; let the price action tell you by breaking its pattern.
Does trend following work in all markets?
Yes, the principles of trend following are applicable to stocks, futures, forex, and cryptocurrencies because they are all driven by human psychology and order flow.
Any market that can be charted and has sufficient liquidity will exhibit trending behavior at various times. The key is to apply a consistent set of rules to identify and manage trades regardless of the asset class.
Key Takeaway: Trend following is a robust methodology that works across virtually all liquid, traded markets.
What are the risks of a trend following strategy?
The main risk is a “whipsaw” market, where a trend appears to start but quickly reverses, causing multiple small losses in a row.
Trend following performs poorly in choppy, range-bound, or directionless markets. During these periods, the strategy can generate many false signals. This is why measuring trend strength with a tool like the ADX is so crucial—it helps you stay out of the market when no clear trend exists.
Key Takeaway: The biggest risk is a non-trending market, which can be mitigated by measuring trend strength before entering.
How do you use moving averages for trend trading?
Use a longer-term MA (like the 50 EMA) to define the overall trend direction and a shorter-term MA (like the 20 EMA) as a dynamic level of support or resistance for pullback entries.
If the price is above a rising 50 EMA, the primary trend is up. We then watch for the price to dip back to the 20 EMA as a potential low-risk entry zone. The combination of the two MAs provides a complete picture of both the macro trend and the short-term entry opportunities.
Key Takeaway: Use two moving averages: one for the long-term direction and one for short-term entry signals.
Conclusion: Your Next Steps
You now have a complete, professional-grade trend following strategy. This isn’t just theory; it’s a practical, rules-based system that provides an edge in trending markets.
Your next step is to open your charting software and start practicing. Don’t place a single trade yet. Go back in time on the charts of stocks you know and apply this 5-step process. Identify the trend, measure the ADX, spot the pullbacks, and practice managing the trade with a trailing stop.
By doing this “chart homework,” you will build the confidence and screen time necessary to execute this strategy flawlessly when real money is on the line.
