trend following entry signal

Use Trend Following To Capture Market Moves

Salvatore Spaeth Strategies Leave a Comment

It’s easy to waste a lot of time while trading, not to mention money. Price can break out, and then reverse, and then go sideways for hours, or days. One thing to come to grips with as a trader is you make money when price moves.

When a repricing occurs and the market moves from one level up (or down) to another level, and stays there before moving again. The key is obviously to catch the move before or as it happens and book your profit.

This is the basics of a Trend Following approach to trading. As Al Hill of TradingSim notes:

“Trend trading is the practice of riding a security during a strong move up or down. Now, what one person calls a trend can vary from trader to trader. For example, a penny stock trader may expect a massive move higher of 20% or more intraday before considering a stock in an uptrend. Conversely, a low volatility trader may need minor price expansion before declaring a new trend in play.”

A Trend Following Classic

There are quite a few different ways to catch the beginning of a trend and enter the trade. An old classic is the use of Donchian Bands where price would break the two week high or two week low, the trade would be entered. There would be losses when price reversed back into the range, but when price continued after the break out the trader would be into the trend early and book enough profit from the trade to pay back the losses and have plenty left over.

Another reliable method of catching trend early is with the use of moving averages. As Steve Burns says on NewTraderU:

“Moving averages are technical trading tools that can act as filtering lines for trends and support and resistance lines on charts. They can also be combined together for crossover signals to filter out more of the volaitlity of price action. Moving averages can also be used in confluence with other techncial indicators for discretionary trading or backtested on historical price action to create mechanical trading systems that remove the traders need to make decisions, predict, or have an opinion on the next move. They are not magic, they are just tools for creating good risk/reward ratios for trading trends with strategic entries and exits based on price action.”

The Golden Cross

A classic Moving Average pairing is the 50 SMA (Simple Moving Average) with the 200 SMA, that is known as “The Golden Cross”. This is a staple entry signal of trend following hedge funds. While it can expensive in choppy markets, it earns it all back in the long-term trends that inevitably follow. The 2014-2015 bear trend of the EUR USD would be a case in point.

Take a look at trend following and the various ways to get into the trade, and importantly, how to exit the trade to book your profit. Ultimately price has to move for a trader to make money and trend following is a reliable way to capture that move.

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