Trend Following: Profiting in Bullish, Bearish, and Volatile Markets

The phrase “The trend is your friend” is very likely to have appeared in any traders career at one point or another. While some traders agree with this saying, it is also important to realize that “the trend is your friend, until it ends”, meaning that trends are not always working in your favor, despite what many pundits insist. So, what is the accuracy of this information？  

Well, we believe in the KISS rule, which states, “keep it simple, stupid!” Heres how we determine trends and how trend following strategies can help you gain profits by capitalizing on persistent upward and downward trends in forex trading markets.

What is a Trend Following Strategy？ 

Simply put, a forex trend following strategy is a trading style where a trader simply relies on the trend when making trading decisions, i.e., buying when the price is rising and selling when the price is declining. Forex trend following strategies dont require forecasting or predicting, but rather require regular monitoring of the market to spot emerging trends.

There are several good reasons to trade forex using the trend following strategy. This method is simple, requires little time, and has an incredible performance record. Investing in this sort of trading system pays high dividends, and you can manage it even if you still have a day job – or if you want to travel and spend most of your time with family and friends. 

Why is it important to follow Trends？ 

When trading in a volatile market like forex, it is important to look at the overall market trend. Volatile markets indicate a change in trend, traders should pay attention to long-term trends to profit from them. It is always best to trade in the direction of the long-term trend in volatile markets. 

During volatile markets, the ability to conduct trend analysis can help traders devise effective strategies and skills. It is common for new traders to ignore trends when trading in volatile markets, resulting in losses. When entering a trade into a volatile market, it is important to always pay attention to market trends to be successful. You wont have to worry about losing orders once you develop the habit of trend following.

Trend Following and Volatility Management 

Using trend following strategies, forex traders can gain an edge by being able to profit systematically from persistent upward and downward price trends. Essentially, the performance of the market as a whole does not matter. Contrary to such interpretations, trend-following can operate effectively both when markets are high and when they are low.  

High volatility does not actually precondition good trend-following performance, but rather the presence of strong trends makes up for it.

Trend following strategies has historically demonstrated their value by providing attractive returns that are risk-adjusted and have proven effective in portfolio diversification as well. This has resulted in steady inflows of investors, which has contributed to an increasing number of trend-based strategies being offered. 

Sitting back sometimes is a good idea! 

A lot of forex newcomers try to make more money in the volatile market by trading randomly and end up losing their trading capital. What they dont realize is, placing a trade every now and then will not have any positive impact on your profits. In contrast, you should wait and focus on making profits by trading at the right time.  

Trading volatility is considered to be one of the most challenging tasks. At some point, you will never be able to understand how the price is moving. Even experienced traders avoid trading until the market returns to normal. For you to boost your trading profits, it is important that you develop patience as a skill. 

Keep an eye on the higher time-frames 

During volatile times, you should use higher timeframes to make effective trades as it helps you reduce your position size. Higher time-frames can be obtained by observing the chart patterns. In volatile conditions, traders are better able to make profitable trades with higher time frames. 

Trading on higher timeframes also forces traders to focus on the big picture rather than the details. Trading in a volatile market allows a trader to develop effective skills and strategies. In order to do so, higher timeframes should be considered.

Trend Following Strategies 

There is a bunch of forex trend following strategies, each using different indicators and price action. Nevertheless, every strategy should have a stop-loss order in place to manage risk.  

If the market is in an uptrend, a stop loss should be placed below the swing low or another level of support. In a downtrend, stop losses should be placed just above prior swing highs or another resistance point. 

The combination of these strategies is often used by forex traders when looking for trend trading opportunities. If the price is trading above a specific moving average, a trader might look for a breakout through a resistance level for a sign that a move higher may be starting. 

Best forex trading indicators to use for trend following strategies:  

• Moving Averages 

• Bollinger Bands 

• Moving average convergence/divergence (MACD)  

• Relative Strength Indicator (RSI) 

• On-balance volume (OBV) 

Heres a detailed overview of how this trend following forex strategies work. 

1. Moving Average Indicator 

Moving averages are a widely used forex technical indicator for making trading decisions based on trends rather than one or two episodes of price fluctuations. The price fluctuation of a particular currency pair will be observed for a predetermined period of time using historical data. In this way, the general direction of the trend flow can be visualized. 

The use of moving averages in trend-following strategies: 

By using moving averages, it is easy to determine whether to take a long or short position on the currency pair. Taking a short position on a currency pair is advisable if the price of the pair is below the moving average, indicating a negative trend. On the other hand, when the price of a currency pair is above its simple moving average, one must buy it because there is a strong expectation that the price will continue to rise. 

Typically, moving average strategies are combined with multiple other forms of technical analysis to remove unwanted signals. 

2. Bollinger Bands Indicator 

Using Bollinger bands, traders are able to measure volatility in the market and determine an entry and exit point for their trades based on the price movement.  

A Bollinger band consists of three lines: 

• Upper Bollinger band 

• Middle Bollinger band 

• Lower Bollinger band 

Using these bands, you can see if the price is oversold or overbought through their trading range.  

The use of Bollinger bands in trend-following strategies:  

During times of high volatility, the bandwidth widens as the distance between signals increases, and the reverse occurs during times of low volatility. The greater the volatility, the greater the cue to exit the trade. 

Bollinger bands are plotted two standard deviations away from the mean average so that any price above or below the bands will be highly significant since the distance between them accounts for more than 80% of the price action. 

3. Moving Average Convergence/Divergence (MACD) 

The Moving Average Convergence Divergence indicator (MACD) analyzes two moving averages for two different datasets. Using the MACD effectively can be advantageous for assessing price trends, predicting their continuation or reversal, and predicting their strength and momentum. 

Price fluctuations can be assessed for two different periods of time depending on the bandwidth of the time series. Consider one for a month and another for 200 days. Based on convergence, divergence, and dramatic rise, the moving average is compared for these two data sets. 

The use of MACD indicator in trend-following strategies:  

Using the MACD indicator is much like using a momentum indicator and you can use it to track the market and to determine changes in momentum, direction, and strength of a movement over time. 

It is wiser to take a short position on a trade if the price variations for one set of data are less than the moving average when the price fluctuations for the other set of data are higher than the moving average because there is a tendency for the price variations to not be stable. 

4. Relative Strength Indicator (RSI) 

In forex trading, the relative strength index (RSI) is one of the most common technical indicators used to detect overbought and oversold conditions, as well as price momentum and reversals.  

The relative strength indicator is represented by the levels 0 to 100. RSI values lower than 30 indicate an oversold market, while those higher than 70 indicate an overbought market. 

The use of RSI indicator in trend-following strategies:  

A currency will be considered overbought if it crosses the 70 level and oversold if it crosses the 30 levels. Depending on your trading strategy, you may need to make changes. 

5. On Balance Volume (OBV) 

The On Balance Volume (OBV) Indicator is a momentum-based indicator that measures volume flow in order to gauge whether the trend is trending in the right direction or not. There is a direct correlation between volume and price rise. 

OBVs represent rising and falling prices respectively. Rising OBVs indicate rising prices while falling OBVs indicate falling prices. An increase in OBV in line with increases in prices would be considered positive. Conversely, a pattern that contrasts with it indicates a negative indicator. 

The use of OBV Indicator in trend-following strategies: 

When it comes to price trends, OBV serves as a confirmation tool. It can be concluded that the price trend is sustainable if the OBV increases in line with the rising price trend. However, if the OBV declines as a result of an increasing price trend, then this could indicate a price trend reversal. 

Trend following is not emotionally easy…But it works! 

Many investors are unwilling to trust trading systems, especially long-term systems that lose 70% of their trades (even if they make a good profit overall). It can be attributed to a variety of factors, but lets just say that arrogance, insecurity, impatience, and insecurity all play a part. 

The biggest reason is impatience. Too many traders who arent willing to wait and do nothing while their position moves in the right direction while a trend is in play. This impatience is the reason why many traders struggle to follow trend following strategy.

Advantages of Forex Trend Following Strategy

Financial markets have long been dominated by trend following strategies. It is a highly effective and profitable trading strategy when the conditions are right, is straightforward in terms of its methodology, and many people, past and present, famous and obscure, have used this strategy to great success.  

Below are more reasons why trend following is a popular strategy among new and experienced traders alike. 

• Profit from Ups and Downs: Trend following does not rely on bullish or bearish market conditions. This strategy follows trends all the way to the end. It doesnt matter how ridiculous or insanely extended trends may appear at the beginning or at the end, you should follow them. Why？ It never ceases to amaze me how far it goes. 

• No more buy and hold, analysts, or news: With trend following, you don‘t need discretion, guesses, gut feelings, or hunches to make decisions. This isn’t day trading or buying and hoping. There is no passive indexing, no in-and-out trading, and no fundamental analysis involved in this method. There will be no 24-hour news cycles, daily turbulence, or sensational hype. Also, no magic formulas either. Be willing to let go of the Holy Grails. 

• There is no prediction: Trends exist everywhere, and they come and go constantly. Ups and downs are part of the market cycle. Having said that, no one can predict a market trend, but you can react to it. In trend following, the beginning or end of a trend is never anticipated. It only intervenes when trends change. Dont worry about why a market is trending; just follow it. 

• Let profits run: The goal of trend following is to compound absolute returns. Rather than aiming for the average, it aims for excellence. Our goal is to make the highest returns possible, not just passbook savings interest. Also, trend following is able to lie and wait for opportunities to present themselves. To do that, you have to capitalize on unexpected surprises. 

• Managing risk is a top priority: There is always an exit protocol in place to protect your account from injury. Using leverage properly and stopping losses are standard practices. The correlation between trend following and most other investment options is also low to negative. 

• Employs mass psychology: Trend following capitalizes on the panicky behaviors of sheep. Behavioral biases are minimized by strict discipline. By solving this problem, gains can be realized more readily and losses may be crystallized more quickly. It is too common for people to believe what they want to believe. Behaviors are usually driven by impulsive momentary impulses. This is why trend following is so successful. 

• Performance during crises: Trend following adapts well to varying climates and environments, performing best when volatility and uncertainty are high. There will be more unknowns. Be prepared. You must be able to ride a bucking bronco. Stay alive and ride out the storm. 

• Suits for all markets: The trend following applies to all markets and instruments. It is possible to apply trend following to a large variety of markets by focusing on price action. All markets are driven by price. Forex trading systems should also work with stocks and commodity markets. 

Markets go up, down, and sideways. They trend. They flow. They surprise.

Trend following strategy is neither a passing fad nor a secret black box. There is more to human nature than rules. Sticking with the trend and following its ups and downs in the market requires discipline and emotional control. The objective of trend following is to capitalize on a market trend, whether it is upward or downward, for profit. Across all financial markets, it aims to make significant profits. 

Disclaimer: This post is from Aximdaily and it is considered a marketing publication and does not constitute investment advice or research. Its content represents the general views of our editors and does not consider individual readers personal circumstances, investment experience, or current financial situation.