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In terms of finance, trend following is a type of an investment strategy undertaken by traders to make long term gains in the various types of financial markets. The system aims to understand the current market mechanism along with the trend of prices and the volumes of various financial instruments. The trader can make good profits from the ups and downs of the financial market.

Traders who make use of trend following make use of the current market price calculation and also channel breakout and moving averages to find out the direction of the stock market. The traders just follow the trend of the market. They are not interested in forecasting or predicting the price levels in the market. They simply study the trend and follow it along its lines.

Trend following involves risk management that uses the three important elements of current market volatility, equity level in an account and market price. The trader decides to buy or sell after determining the size of the trading account and the volatility of the issue. There could br a gradual reduction or increase in the current trade due to the price changes. The trader may exit the market if there are adverse price movements in the market.

Traders normally enter the market after the trend is stabilized. The traders may also ignore the initial profit trends. In case there is something that is contrary to the trend, the system makes a pre programmed exits or it waits until the trend changes for the better. In fact there is a saying that every trader needs a trend to trade in the stock market. If you buy and there is no trend then you might not be able to sell. In case of trend following the traders wait for a particular trend and then follow it.

The main concern for any trader in terms of trend following is price. The trader may also use other types of indicators which will show where the price is going to head. Some traders also concentrate on how they will trade over the period of the trend. They are not much concerned with the timing of the trade. The main purpose of trend following is to cut losses. Hence when the market volatility is high the size of the trading is reduced. When there are periods of losing, the trade size is cut back and the positions are reduced. A trader should follow trend following very systematically. The time and the price are very important at all times of trading.

Trade following will let you know as to how and when you should enter the market and also how many shares you should deal in at a given point of time. It also helps you decide how much money you should risk in each trade as well as how and when to exit the trade when it becomes profitable or unprofitable. Let’s take a simple example.

A trader will first identify a financial instrument to trade in. Such financial instruments include currencies or commodities. He will then decide the trading approach, whether it should be short term or long term. Then he will decide the entrance period, for how long you should he hold on to the shares. Then he will also have to decide on the exit to maximize his profits and minimize his risks. He will then test his data using special software such as Strategy Desk or Trade2Win. He would also take time to evaluate the strategy. He can even toy around with the stimulator. This is because the stimulator can generate an estimated number of trades and even the fraction of winning or losing trades along with average holding time and maximum losing and winning trades. This way the trader can experiment with different situations and change his strategy if he has to. The trader can make the overall strategy profitable by cutting his loses wherever he can and continuing with the profit trend. Trading according to the trend is more profitable when the market is less volatile. Hence there are many traders who pay more attention to commodities that have a string tendency to follow a particular trend than stocks that are favored by swing traders.

Some of the most popular trend followers are Richard Dennis, Richard Donchian, Bill Dunn and Ed Seykota. Many traders have taken a lot of inspiration from these traders and they have really achieved a lot of success in their lives. In fact, Donchian and Dennis are called the fathers of trend following. Dennis even trained some of the traders to follow his strategies and today many of his people rank amongst the best commodity trading advisors in the world.

Hence we see that trend is the general direction of the price in the stock market over a period of time. The trader often determines the trend by comparing the price of the financial instrument with the average volume of the instrument. In the stock market, the price and the volume are closely related to each other. They predominantly give rise to two trends in the market which are the bullish trend and the bearish trend. However there are intermediate trends also sometimes.

There is a bullish trend in the market when the overall market condition is on the higher side and there are more buyers. There is a bearish trend when there are more sellers in the market but still the buyer’s confidence is very low in buying the financial instrument. You can make good profits as an investor if you have ability to follow the trend in the market. There are thousands of investors who buy and sell stock according to the trend in the market. However if you are just trading in stocks to get income then trend following is not your cup of tea.

Many experts say that trend trading is the safest and the easiest way of investing in stocks. You can simply identify or study the trend and then make your investments. Once the trend begins to reverse you can close the deal. You can select a few stocks if the market is bearish and the stock prices are reducing. You can then wait for the trend to reverse and sell the stocks when the market is on the high. This way you can make substantial profits. However to do this strategy successfully you should regularly follow the trend. You should also be a good technical and research analysis. This way, you will be able to determine the exit and the entry point of the stocks that are important from the investment point of view.

Trend following in the stock market can be profitable to you only when you are investing from the long term point of view. You really have to wait for the right opportunity for the reversal of trend and if you can do that at the right time you can easily benefit for about 60% to 80%. Trend following involves keeping an eye on the market trend, identifying the right kind of stocks, investing in them at the right time and then selling them off to make profits. The stock trader should do his best to capitalize on the stock movements to maximize his profits. It is very important to get the right reading of the direction of the stock. As mentioned before, the most important factor in trend following is determining the entry and the exit point. You should know when to buy stocks and when to sell them. Other important decision that you will have to make is to how long you should hold on to a particular stock.

There are several approaches that may impact your decision when to buy (that is find out the lowest point) and sell (that is where is the highest point). Today researchers do make use of various technical analysis techniques such as the graph system and the charting systems that are able to identify the direction of the stock through trend lines and low/high price points. As mentioned before, people still make use of the candlestick technical analysis where the trader gets a visual cue to identify the high and the low points. The stock trader should follow the best trend following method which influences his buying and selling decisions. Off course, if the stock trader is able to ride on the trend he will yield a good profit. However he needs to have patience unlike day trading and he should think from the long term point of view.

So do read a lot of information about trend following from sources such as the internet and financial books. You can learn a lot by simply observing a stock trader. Remember that it is only through your mistakes that you can learn so don’t mind the hiccups in the beginning. Simply start working under a stock trader and learn the tricks of trend following.