Trend Following
A strategy that enters in the direction of the established trend and rides it until structural evidence of a reversal appears.
Trend following is the discipline of buying strength and selling weakness — entering after a trend is confirmed and holding until that trend breaks. It is the opposite of mean reversion and is based on the empirical observation that markets exhibit serial correlation (trends persist).
Key principles:
- Let winners run; cut losers quickly.
- Use pullbacks to trend support (moving averages, trendlines) as lower-risk entries rather than chasing breakouts.
- Accept that many small losses fund the occasional large winner.
Trend following underperforms in choppy, mean-reverting environments — knowing market regime is as important as the technique itself.
Related Terms
Consolidation
A period of tight, low-volatility price action — typically a pause within a trend before the next directional move.
BeginnerFibonacci Extension
Fibonacci-derived levels projected beyond a swing's origin to identify potential profit targets after a breakout or trend continuation.
IntermediateMean Reversion
The tendency of price to return toward its historical average after an extreme deviation — the foundation of counter-trend trading.
IntermediateMomentum
The rate of change of price — how fast and with what force price is moving in a given direction.
BeginnerMoving Average
The average closing price over N periods, updated each bar — smooths noise and exposes the underlying trend direction.
BeginnerPullback
A temporary counter-trend retracement within an ongoing trend, offering a lower-risk entry in the direction of the trend.
BeginnerTrend
The persistent directional bias of price over a defined timeframe — up, down, or sideways.
Beginner