A trend following strategy buys markets that are already rising and sells markets that are already falling, then stays in for as long as the move continues. It does not try to call tops or bottoms. Its rules decide when a trend is strong enough to join, where to enter, where the stop sits and how to trail it out.
Quick answer: what is a trend following strategy?
Trend following is a rules-based way of trading in the direction of an established move. You confirm the trend, enter on a pullback or breakout, set a stop beyond the last swing, then trail that stop as the trend extends. Most trades are small losses; a few long trends pay for them.
What trend following is, and what it is not
Trend following is about joining a move that already exists. That makes it different from spotting a trend as it begins, which we cover in our guide on how to spot the start of a new trend with price action. Here we assume the trend is already visible and ask a simpler question: how do we ride it without being shaken out?
The reading of the chart rests on swing highs and swing lows. If you are not yet comfortable labelling them, start with how to identify market structure from highs and lows, because every rule below uses those swings.
Trend following is not a prediction. We never know how far a trend will run, only what we will do if it continues or stops.
Filter first: is the market trending enough?
Most losing trend trades are taken in markets that were never trending. A filter keeps us out of the chop, the sideways phases where price swings back and forth and stops get hit on both sides. We want at least three of these before we look for an entry:
- Clear sequence: at least two higher highs and higher lows in an uptrend, or the reverse in a downtrend.
- Higher timeframe agrees: the daily chart points the same way as the 4-hour chart we trade from. Our guide to top-down multiple timeframe analysis explains how to line them up.
- Pullbacks are shallow: price retraces part of each leg, then pushes on, rather than giving the whole leg back.
- Room to run: no major level sits just ahead of price.
- Slope on a long average: some traders only trade in the direction of a 200-period moving average.
If the market fails the filter, we do nothing. Knowing when not to trade and stay flat matters more here than in almost any other approach. Some traders use the Ichimoku cloud as their trend filter; see Ichimoku cloud explained.
How to trade with the trend: pullback or breakout
Once a trend passes the filter, there are two common ways in. Each trades stop size against the risk of missing the move.
| Factor | Pullback entry | Breakout entry |
|---|---|---|
| Where you enter | After price dips back towards support | As price clears the last swing high |
| Stop distance | Usually tighter | Usually wider |
| Main risk | Trend never pulls back, you miss it | False break, price snaps back |
| Suits | Steady, orderly trends | Fast trends that rarely pause |
With either entry, we want a trigger candle: a close that shows buyers (or sellers) taking control again. For breakout entries, our article on how to avoid false breakouts covers the traps.
Stops, trailing and exits
The initial stop goes beyond the most recent swing low in an uptrend, or swing high in a downtrend. If price breaks that swing, the sequence of higher lows has failed and the reason for the trade has gone.
After that, the stop moves only in the trend’s favour. Each time a new higher low forms and holds, we move the stop under it. Our trailing stop loss strategy for price action traders compares swing, ATR and moving-average trails in detail.
Most of our trend trades have no fixed target; the exit is the trailing stop being hit. Giving back some profit at the end of each trend is the cost of staying in the large ones.
The rules of a trend following strategy, step by step
Put together, this is the trend following strategy we teach, written as a checklist before any money is at risk:
- Filter: confirm the trend on two timeframes using the list above.
- Wait: let price pull back or break the last swing; never chase a candle already far from support.
- Trigger: enter on a candle that closes back in the trend’s direction.
- Stop: place it beyond the last swing point.
- Size: risk a fixed, small share of the account; our guide on how much to risk per trade explains why.
- Trail: move the stop behind each new swing as it forms.
- Exit: when the trailing stop is hit, or when the higher timeframe trend breaks.
Worked example: a hypothetical trend trade, losses included
All figures are hypothetical. On a £5,000 account we risk 1% per trade, which is £50. A currency pair has made higher highs and higher lows on the daily and 4-hour charts.
- Trades one to four: each pullback entry fails as the market chops sideways. Four stops at £50 each: minus £200.
- Trade five: price dips to 1.0850 and a 4-hour candle closes at 1.0870. The stop goes at 1.0820, 50 pips away, so we size at £1 per pip on a spread bet.
- Trailing: as new higher lows form, the stop moves to 1.0900, then 1.0960, then 1.1010.
- Exit: price falls back through 1.1010 and the stop closes the trade 140 pips in profit: £140.
After five trades the account is down £60, though the strategy did exactly what it should. Spread bets are leveraged, so a price gap through the stop can lose more than the planned £50.
Why the win rate is low, and why that is fine
Trend following usually loses more trades than it wins. The losses are small and frequent; the wins are rare and much larger. If that sounds uncomfortable, our article on win rate vs risk:reward explains why a low win rate is not a flaw in itself.
Losses also arrive in clusters. Research on momentum strategies, close cousins of trend following, found that their worst losing spells are rare but severe, and tend to come after falling markets when prices rebound sharply. That is what a turning point feels like from inside a trend trade.
The practical lesson is to size small enough to survive a long run of stops. The opposite approach, buying stretched moves in the hope of a snap back, is covered in our guide to mean reversion trading. Adding to a winner without raising risk is covered in our guide to pyramiding in trading.
Common mistakes with trend following
- Trading every chart. Most markets are not trending most of the time.
- Chasing extended candles. Entering far from the last swing means a huge stop or a badly placed one.
- Taking profit too early. Cutting winners at a fixed target removes the large trades that pay for the losses.
- Moving the stop away from price. A trailing stop only ever tightens.
- Quitting after a losing run. Judge the rules over many trades, not the last five.
Frequently asked questions
Does trend following still work?
Nobody can promise any approach will keep working, and results vary across markets and periods. What stays true is the structure: small losses in quiet or choppy markets, larger gains in the occasional long trend.
What timeframe is best for trend following?
We prefer the 4-hour and daily charts, where trends are clearer and stops can sit behind meaningful swings. Lower timeframes produce more trades but far more noise.
Is trend following good for beginners?
The rules are simple, which helps. The hard part is psychological: accepting long losing runs without changing the plan.
Next steps
Our complete beginner’s guide to price action trading shows how trends fit with levels and patterns. Before trading any plan, test it with our guide on how to backtest a trading strategy without fooling yourself.
Discovering the beginning of new trends and a filters and trigger process are both part of our price action trading course, and the basics section is free to start.
This article is for education only and is not financial advice. Trading leveraged products such as CFDs and spread bets carries a high risk of losing money.
