Trend following investing is used by institutional investors and hedge fund managers. Trend following, which doesn’t require an inordinate amount of time and research, also makes sense for independent and self-directed investors and traders. In this article, we’ll discuss how you can use trend following techniques to improve your chances for higher returns.
Look for strong, consistent price movements. Trend following is based on the assumption that prices that are rising tend to rise more, until they fall. And when they decrease, they tend to continue to decrease.
Select an entry point. According to professional traders like Van Tharp, the entry point is the least important aspect of a trend following system, but it can still give you an edge in the price.
Don’t follow losing positions by setting stop losses. Not every position will be a winning position. In fact, most won’t. But by setting a stop loss to limit your losses, you avoid catastrophic losses and concentrate your money in winning trades.
Let your profits ride. Continue to allow your winning positions to increase, but follow strict discipline to take profits off the table when the trend weakens.
Use position sizing. Rarely invest more than 5 percent of your account in any one trade. An excessive position size will increase the risk of a catastrophic loss.
Realize that an increase in leverage is an increase in risk. Leverage is an important tool for investors. Used correctly, it can swell returns. However, if your trade goes against you, it can compound losses.
Market Trend Signal™ trend following stocks trading system
Market Trend Signal™
Trend Following Stocks – Stock Ratings – Market Timing