Trend Following — The Most Popular Strategy In All Financial Markets
Being a contrarian in the short term, while following the market in the longer-perspective is the core of a trend-following strategy
So what the long-term, trend following trader does is, being a contrarian, and picking up reversals for entry/exit points in short-term fluctuations while following the already established up- or downtrend, "following the herd" in the longer timeframe. Most traders have an understanding that timing the market is a deadly endeavor that sooner or later leads to disastrous results that get worse the more confident the trader is. Yet with short -term movements the opposite is true. Even as we contradict a short term counter-trend movement which we exploit for opening a position, we are in fact confirming the longer-term movement that underlies it, and as such, are not timing the market at all.
Of course, the crucial point in successfully implementing such a strategy is establishing concrete values, or tests, which will allow us to quit the trade if the short-term fluctuations that we aim to exploit prove to be something more than noise. We will keep to our position until our assessment of risk does not justify our basic assumptions about the underlying main trend, and quit when this is no longer the case, or when technical concerns about loss lead us to liquidate the position anyway.
In the ideal case a trend follower never exits his position.
This might sound puzzling, but we want to say is that, as long as there are concrete signs that a trend exists, the trader must maintain his position and ignore the short-term movements that frequently lead him to question the strength of his basic reasoning. The best way of trading a trend on this basis is establishing a test, frequently a technical one, but sometimes a fundamental method too, which will tell the trader to leave his bet. The aforementioned 100-day MA is an excellent example, since trends have been known to depend on this indicator as a support for months as they register new records. On the other hand, in forex, an excellent fundamental test for quitting a position can be established by referencing interest rates. We can decide to stick to a trade, for example, for as long as the interest rate gap between the two currencies is increasing, or decreasing, and choose to quit the trade when this is no longer the case. Of course, such fundamental tests must be tied to a technical value in order to quantize and minimize the risk being assumed, especially if the trade is leveraged.
Conclusion
Without a doubt, trend following is the most promising strategy available to any trader. The well-known record of trend followers has made this method the test of competence for a forex career. It is not that hard to master the strategy, but you will only succeed if you have a goal-oriented, disciplined, clear approach to your trading. Anything less than that is likely to lead to disappointment.
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Trend Following — The Most Popular Strategy In All Financial Markets
Article written by http://www.forextraders.com
How to create a trend following strategy – a step-by-step guide
If there is one strategy in currency trading that is equally popular with retail and professional, technical and fundamental traders, it must be the age-old and proven method of trend following where traders pursue the main thrust of the price action over the long-term while disregarding short-term events as much as possible on the assumption that they are little more than noise.
Trend following can be highly profitable, but it requires a clear-cut, disciplined trading style in order to deliver its results. Let`s take a look at the details.
Trend following is a combination of technical and fundamental methods
Trend following combines the strengths of fundamental and technical methods in the framework of a long-term strategy. Fundamental tools are good for establishing what to trade, but poor in deciding when to trade. Technical methods are great in establishing concrete levels for risk management, but are weak for analyzing causality behind the price action. The trend following method is a synthesis of these two approaches.
The trend to trade must be chosen on the basis of fundamental analysis
Just pick up any chart, and you will be able to see a number of trends in different timeframes, and between just about any two points in the chart. This is possible because even if two points do not show a credible trend in one timeframe, we could change the zoom level of the chart, from monthly, to weekly, to daily, or hourly, for instance, and would end up with a number of configurations all of which could be termed trends. Although we could speculate about the strengths of each, there is no guarantee at all that a trend seen to be stronger from a technical point of view will being great profits in practice.
As such, we must choose the trend that we trade on the basis of something more than technical methods. And since we know, from previous discussions, that the only tool that allows us to determine a solid, strong trend with observable causes, is fundamental analysis, iwe will make our decision on the basis fundamental arguments. These arguments will differ from person to person, and the goal of the trade initiated, but the main indicators of fundamental strength are interest rate differentials, growth trends, and balance of payments/current account dynamics.
Technical tools can be used for the determination entry/exit points
But even as we determine which trend to trade by fundamental methods, we can`t manage our risk in holding a position, nor can we decide when to enter or exit a trade with them alone. This is a consequence of leverage. An unleveraged trader could be able to wait until the reasons that justify a particular viewpoint dissappear before exiting a long-term trend following position. But this is not the case with a leveraged trader, who has concerns other than the correctness of his viewpoint, such as margin calls, and short-term volatility which must be taken into account. To deal with these, a technical approach is necessary.
We advise traders to limit the role of technical methods in their strategies to the mere task of defining, more or less arbitrarily, the trigger points for various trades, without resorting to speculation about which technical tool or pattern works and which does not. The main assumption behind a trade must be that it is viable on the longer-term, and thereafter its risk must be measured by tools such as the 100-day MA, trend lines, or Fibonacci levels, without any notions about the predictive value of these tools. In short, always be on board to the longer-term movement, and use any short-term deviation from it for the build-up of positions. On a six month-long uptrend, for example, purchase the weekly down-swings, in anticipation that they are the noise of the market.