7 Trend Following Strategies You Need to Know

Trend following strategies are among the most time-tested methods in the world of trading. Rather than trying to predict market tops and bottoms, these strategies focus on riding the momentum of established trends. Traders who adopt a trend-following mindset aim to profit from prolonged moves in price, whether the market is rising or falling.

In this article, we'll explore seven popular trend following strategies you need to know, how they work, and when they're most effective.

Ranking the Best Trend Following Strategies

1. Moving Average Crossover Strategy

One of the most common trend following strategies uses two moving averages — typically a short-term and a long-term average. A signal is generated when the short-term moving average crosses above or below the long-term moving average. For example, a 50-day moving average crossing above a 200-day average may suggest the beginning of an uptrend.

This strategy is popular because it smooths out price fluctuations and provides clear entry and exit points.

2. Breakout Trading

Breakout strategies aim to capitalise on prices that move outside of a defined support or resistance level. When a market breaks above resistance, it often signals the start of a bullish trend. Likewise, a break below support can indicate a downward trend.

Successful breakout traders often wait for confirmation — such as strong volume — to avoid false breakouts. This method is especially effective in highly liquid markets.

3. Price Action Trend Riding

This strategy involves analysing raw price movement without relying on indicators. Traders look for higher highs and higher lows in an uptrend or lower highs and lower lows in a downtrend. Patterns like flags, pennants and trendlines are used to identify entries and exits.

Price action trading requires strong chart-reading skills but offers a pure view of market behaviour, making it a reliable option for trend followers.

4. Donchian Channel Strategy

The Donchian Channel tracks the highest high and lowest low over a chosen time frame. A breakout above the upper band signals a long trade, while a break below the lower band signals a short. This strategy helps traders enter positions when markets are showing strong directional movement.

It's a classic example of rule-based trend following and is popular among futures and commodities traders.

5. Relative Strength Index (RSI) Confirmation

Although RSI is often considered a mean-reversion tool, it can also be used to confirm trends. In trend following strategies, traders use RSI to check for confirmation of a trend's strength. For example, in an uptrend, RSI readings staying above 50 suggest bullish momentum is intact.

Combining RSI with other indicators, such as moving averages, can enhance accuracy and reduce false signals.

6. Average True Range (ATR) Trailing Stops

Risk management is crucial for all trend following strategies, and the ATR trailing stop is a favourite among professional traders. The ATR measures volatility, helping traders set dynamic stop losses that adapt to market conditions.

Using ATR-based stops allows traders to stay in trends longer while avoiding premature exits due to normal price fluctuations.

7. Trend Following with Indicators Combo

Many traders use a combination of trend indicators for stronger confirmation. A typical combination might include the Moving Average Convergence Divergence (MACD), Average Directional Index (ADX), and Bollinger Bands. When all three tools align, it increases confidence in the trend's strength and direction.

These combinations reduce noise and help filter out false trends, making them ideal for traders seeking consistency.

Why Trend Following Strategies Work

The core idea behind trend following strategies is rooted in the principle that markets often move in sustained directions due to fundamental drivers like interest rates, earnings, or macroeconomic news. By waiting for a trend to establish and then entering with discipline, traders aim to catch a large portion of the move.

It's a strategy that embraces patience. Trend followers often accept small losses in exchange for the chance to participate in large winning trades. While not every trend lasts, the few that do can more than make up for the losses.

Common Mistakes to Avoid

While trend following strategies can be effective, they are not immune to errors. Some of the most common mistakes include:

• Entering too early: Jumping in before a trend is confirmed often leads to whipsaws.

• Ignoring risk management: Without proper stop losses, even strong trends can lead to significant losses.

• Over-relying on indicators: Indicators are tools, not guarantees. Context and price action should always be considered.

• Forcing trades: Not every market condition is favourable for trend following. Avoid trading during sideways or choppy periods.

Final Thoughts

If you're looking for a structured, rules-based approach to trading that does not rely on predicting market direction, trend following strategies could be a great fit. They offer a balanced approach to risk and reward and are adaptable to various asset classes, including forex, equities, and commodities.

However, they require emotional discipline. Not every trade will be a winner, and drawdowns are part of the process. Staying consistent and trusting the method is key to long-term success.

Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.