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What are the Best Tips for Trend Following Trading?

Article Details
  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 08 October 2019
  • Copyright Protected:
    2003-2019
    Conjecture Corporation
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Trend following trading is an investment strategy that requires the investor to accurately project the changes in trading activity and price associated with a specific security, then participate in that trend as a means of generating a return on the investment. This approach can be used both in terms of riding a security while it is climbing and selling it just before the price levels off, or buying securities when the price is at its lowest point but just before that price is anticipated to increase dramatically. In order to manage this process, there are a few basic tips and strategies that any investor must use in order to benefit from trend following trading.

Part of the process of effective trend following trading requires considering three essential points as they relate to the market activity. Price is a major concern, since the idea is to accurately read market indicators to identify if that price is likely to increase, decrease, or remain stagnant, based on what is happening in the marketplace right now. The investor must also be aware of the amount of money he or she can afford to devote to the investment for an undetermined amount of time, since the idea is to ride the trend for as long as possible. Considering the volatility of the investment is also crucial, since assuming greater risk does mean an enhanced opportunity to earn additional profits.

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When employing a trend following trading approach, the investor must ask a few key questions that help determine whether or not to actually make the investment. These include determining how and when to jump into the market and ride the trend, how much of a commitment in terms of resources would be practical at the present time, and when to exit a given trade before the investment becomes unprofitable. Depending on the nature of the trend and the movement of the assets in question, the ride may last for a few days or go on for a number of weeks. Developing an informed idea of what to do and when to do it will increase the chances of making a profit, rather than becoming a victim of the trend.

As with most investment strategies, trend following trading requires that the investor have a firm grasp of what is happening in the marketplace now, as well as how that current set of circumstances is affecting the value of a given asset. Only by beginning with events as they stand today can the investor hope to evaluate different indicators and formulate a strategy that results in earning a return. If the investor does not evaluate the trend properly, or fails to jump in or exit at the right time, then the trend following trading approach will fail, and the investor will emerge from the experience with fewer resources than before.

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