Trend following is an investment strategy based on the technical analysis of market prices, rather than on the fundamental strengths of the companies. In financial markets, traders and investors using a trend following strategy believe that prices tend to move upwards or downwards over time. They try to take advantage of these market trends by observing the current direction and using this to decide whether to buy or sell.
Trend following is an investment or trading strategy which tries to take advantage of long, medium or short-term moves that seem to play out in various markets. Traders who employ a trend following strategy do not aim to forecast or predict specific price levels; they simply jump on the trend (when they perceived that a trend has established with their own peculiar reasons or rules) and ride it. These traders normally enter in the market after the trend "properly" establishes itself, betting that the trend will persist for a long time.
Trend following is exceedingly effective and profitable when the conditions are favorable, is quite straightforward in its methodology, and there are many individuals, past and present, famous or obscure, who have used this strategy to success and riches. The technical aspect of trend following is in fact quite simple, but also that it requires, before everything else, discipline, money management, and patience from the trader. Trend following is not a short-term method, and patience and determination are as important as correct analysis as a result.
One of the first rules of trend following is that price is the main concern. Traders may use other indicators showing where price may go next or what it should be but as a general rule these should be disregarded. A trader need only be worried about what the market is doing, not what the market might do. The current price and only the price tells you what the market is doing. Another decisive factor of trend following is not the timing of the trade or the indicator, but rather the decision of how much to trade over the course of the trend.
Trend following has its place as part of a complete strategy, not the total strategy. Trend trading obviously works in the forex market, however it’s harder than it looks. Large drawdowns are an inherent part of the strategy. The forex market has severe intraday swings that will knock out all but the much convicted, disciplined trend trader. Determining what drawdowns are actual changes in trend can’t be known until after the fact. Therefore, a strict set of rules and strong discipline are a must to make money trend following.
