The Philosophy of Trend Following
Trend following is the opposite of picking tops and bottoms. You don't predict. You don't forecast. You simply react to what the market is already doing—and ride it until it stops.
The greatest fortunes in trading history were made by trend followers: Turtle Traders, Ed Seykota, Bill Dunn. They caught oil from $20 to $140. Gold from $300 to $1,900. Bitcoin from $1,000 to $60,000.
They didn't know where the top was. They just knew the trend was up—and stayed in.
The Core Principle
"Cut your losses short, let your winners run."
Trend followers lose on 50-60% of trades. But winners run 3x, 5x, 10x+ the size of losers. That's the edge.
Win rate: 40-50%. Average win: 3-5x average loss. Math works in your favor.
The Simple Trend Following System
Here's the framework used by legendary traders:
The 200-Day Moving Average System
- Buy: When price closes above 200-day MA for first time in months
- Sell: When price closes below 200-day MA
- Stop: 2 ATR below entry (gives room for volatility)
- Trail stop: Move stop up as 200-MA rises
That's it. No indicators. No complexity. Just following the trend.
Best Markets for Trend Following
Trend following works best in markets with strong directional moves:
- Commodities: Oil, gold, copper (multi-year trends)
- Forex: Major currency pairs (EUR/USD, USD/JPY)
- Indices: S&P 500, Nasdaq (multi-month trends)
- Crypto: Bitcoin, Ethereum (explosive trends)
- Sector ETFs: XLE, XLF, XLK (rotation trends)
Avoid: Range-bound stocks, low-volatility markets, penny stocks.
Entry Signals
Three High-Probability Entries
1. Moving Average Crossover
50-day MA crosses above 200-day MA = Golden Cross = Buy signal
50-day MA crosses below 200-day MA = Death Cross = Sell signal
2. Breakout to New Highs
Price breaks above 52-week high = Trend likely continuing = Buy
3. ADX Above 25
ADX measures trend strength. Above 25 = strong trend. Above 40 = very strong. Enter pullbacks in strong trends.
Position Sizing and Risk Management
The Turtle Trader Risk Model
- Risk 1-2% per position
- Use ATR for stops (2 × ATR below entry)
- Scale in: Add to winners at each 1 ATR move up
- Max positions: 10-12 across uncorrelated markets
- Total portfolio risk: 10-20%
Real Example: Bitcoin 2020-2021
Case Study: The Trend of a Decade
Entry: October 2020, BTC breaks above $12,000 (previous high from 2019)
Signal: Price above 200-day MA, ADX > 30, new highs
Stop: $10,000 (2 ATR below entry)
Evolution:
- Nov 2020: $12k → $19k. Add to position.
- Dec 2020: $19k → $29k. Add again. Trail stop to $22k.
- Jan 2021: $29k → $42k. Trail stop to $35k.
- Feb 2021: $42k → $58k. Trail stop to $45k.
- March 2021: $58k → $61k (peak). Trail stop to $50k.
- May 2021: Crash to $30k. Stop hit at $50k.
Result: 4.2x return in 7 months. Initial risk: $2k (16% stop). Realized gain: $38k.
We didn't pick the top. We rode the trend until it broke.
Final Thoughts: Patience and Discipline
Trend following is boring. You wait months for setups. You endure choppy periods. You watch 50% of trades fail.
But when a trend materializes, you capture 80% of the move. That one trade pays for 10 losers and still leaves you up 200%.
The market rewards patience. It punishes prediction. Be the trader who reacts, not forecasts.
Because trends make fortunes. And all you have to do is follow.