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Trend following is an investment or trading strategy which tries to take advantage of long, medium or short-term moves that seem to play out in various markets. Traders who employ a trend following strategy do not aim to forecast or predict specific price levels; they simply jump on the trend (when they perceived that a trend has established with their own particular reasons or rules) and ride it. These traders normally enter in the market after the trend "properly" establishes itself, betting that the trend will persist for a long time, and for this reason they forego the initial turning point profit. A market "trend" is a tendency of a financial market price to move in a particular direction over time. If there is a turn contrary to the trend, they exit and wait until the turn establishes itself as a trend in the opposite direction. In case their rules signal an exit, the traders exit but re-enter when the trend re-establishes.
Some traders may exit the market when they perceive a downtrend in order to minimize losses and to avoid becoming ‘trapped’ in a stock that has fallen well below their held cost average. Conversely, traders may "let the profits run" when the market trend goes as expected until exhausted, at which point profits are taken. Some traders may set a specific stop limit or sell once a certain return has been met, or sell at a point once unrealized profits begin diminishing as a stock falls back down.
This trading or "betting with positive edge" method involves a risk management component that uses three elements: number of shares or futures held, the current market price, and current market volatility. An initial risk rule determines position size at time of entry. Exactly how much to buy or sell is based on the size of the trading account and the volatility of the issue. Changes in price may lead to a gradual reduction or an increase of the initial trade. On the other hand, adverse price movements may lead to an exit from the entire trade.
Some traders may exit the market when they perceive a downtrend in order to minimize losses and to avoid becoming ‘trapped’ in a stock that has fallen well below their held cost average. Conversely, traders may "let the profits run" when the market trend goes as expected until exhausted, at which point profits are taken. Some traders may set a specific stop limit or sell once a certain return has been met, or sell at a point once unrealized profits begin diminishing as a stock falls back down.
This trading or "betting with positive edge" method involves a risk management component that uses three elements: number of shares or futures held, the current market price, and current market volatility. An initial risk rule determines position size at time of entry. Exactly how much to buy or sell is based on the size of the trading account and the volatility of the issue. Changes in price may lead to a gradual reduction or an increase of the initial trade. On the other hand, adverse price movements may lead to an exit from the entire trade.
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