Trend Following
Trend following is a class of strategies that enter in the direction of an established trend and exit when the trend reverses. Implementations include moving-average crossovers, breakouts of N-bar highs, and momentum filters. Trend following has the lowest win rate of any major strategy class but historically the highest expectancy.
The trend-follower's edge
Win rates of 30–45%, profit factors of 1.5–2.5, and Sharpe ratios of 0.7–1.5 — pedestrian numbers individually, but extraordinary when applied across a basket of uncorrelated markets.
The bitter pill
Most trend-following strategies have long, painful drawdowns that test conviction. The 2018 grind, the 2020 chop before COVID — these periods kill discretionary trend-followers. Systematic ones (a bot) sit through them.
Common implementations
- EMA Crossover — fast/slow MA
- Triple EMA Trend — alignment of three MAs
- ATR Trend Follow — volatility-adapted exits
- Donchian Breakout — N-bar high
Markets where it shines
Commodities (gold, oil), indices (S&P, Nasdaq), and major forex pairs. Less effective on mean-reverting pairs like EUR/CHF.
Strategies that use Trend Following
EMA Crossover
Two exponential moving averages — buy when the fast crosses above the slow, exit when it crosses back.
SMA Crossover
The classic golden-cross / death-cross signal — slower than EMAs, fewer false positives.
Triple EMA Trend
Three EMAs aligned — trade only when all three confirm the same direction.
ATR Trend Follow
Volatility-adjusted trend following — trail stops by ATR multiples.
Related Terms
Mean Reversion
Mean reversion strategies bet that prices stretched far from a moving average will snap back — works in range-bound markets, fails in strong trends.
Crossover
A crossover happens when one series crosses above another — used as the entry signal in moving-average and oscillator-based strategies.
Breakout
A breakout is a price move beyond a defined level (e.g. a recent high) that signals a new trend or continuation.
Stop Reading. Start Trading.
PineForge backtests every concept on this site against real market data.
Try It Free