Trend Following: Principles, Rules and Why It Is Hard to Stick With

Trend following is one of the oldest systematic trading approaches. The idea is simple: buy what is going up, sell what is going down, cut losses quickly and let winners run. Its history includes many successful managed futures funds. It is also psychologically one of the hardest strategies to stick with.

Core principles

• Follow price, not predictions. Enter after a trend has started, not before.
• Cut losers quickly. Most trades fail; keep those losses small.
• Let winners run. A few large trends pay for all the small losses.
• Diversify across markets, because you never know which will trend.
• Size consistently with fixed risk per trade. See position sizing.

Typical rules

Entries:

• Breakout to a new high over a lookback period, such as 20 or 55 days.
• A fast moving average crossing above a slow one. See moving average strategies.
• Price above a long-term average as a filter.

Exits:

• A trailing stop, often based on ATR or a shorter lookback low.
• A moving average crossover in the opposite direction.

What to expect

Trend following typically has:

• A low win rate, often 30% to 45%.
• A large average win relative to the average loss.
• Long flat periods and drawdowns when markets are choppy.
• A few big winners that make the year.

This profile is hard on traders who judge themselves by win rate or by recent results. See win rate vs profit factor and process vs outcome.

Why traders abandon it

• Many small losses in a row feel like failure. See handling a losing streak.
• Giving back open profit at the end of a trend feels painful.
• Skipping one signal after a string of losses can mean missing the trade that pays for the year.

How a journal helps

• Record every signal, including those you skipped, to see the cost of skipping.
• Track R-multiples so the size of winners compared with losers is clear. See R-multiples.
• Watch the equity curve and drawdowns over a long period, not week to week.

In TradeThink

Tag trend trades, track their R distribution and drawdowns, and compare results by setup in the reports. The Sortino ratio often describes trend-following returns more fairly than the Sharpe ratio.