How Trend Following Works: A Complete Guide
Trend Following is the trading approach we use in our Community. In the video, I explain how short-term trading and Trend Following work, and how we in the Community work to plan every detail of the business, ensuring limited risk and consistent results over time. Additionally, we cover the basics of management.
Watch the video and then read the following article to learn more. (Sub in English)
Trend Following exploits large market variations to make a profit
Trading has been practiced since the 1800s, making it a business with ancient roots. To generate profits, there has always been work done to gain a strategic position, allowing time and space for the market to develop new results over days, weeks, or months. Throughout history, many famous traders have made great fortunes in this way. No one has ever gotten rich in a day or in a short time. This is a false belief that has arisen in modern times, with the advent of computers and commercial brokers.
How Trend Following Works Commercial brokers earn based on the number of operations transmitted, whether the client earns or loses. If the trader is able to earn a large amount with limited risk and few operations, it is not a good investment for them. Moreover, their earnings increase further if the client uses high risk.
Therefore, a commercial broker, for obvious reasons, exclusively promotes very short-term trading with high risk. This ensures quick results, but also a very, very short average customer life. Many people quickly lose their capital in this way, thinking they have traded, but this is not the case.
I recommend reading Larry Williams’ book “The Secrets of Short-Term Trading.” Larry is a famous American trader who, over the course of his career, has shared a lot of information in his trading books, which I adore. He explains very clearly how the trading business works and how to protect oneself from very short-term commercial approaches.
I have created a section on the blog dedicated to trading books, where you can find some useful insights about this wonderful book. You will see, among other things, that the definition of “short term” always refers to several days or weeks in a professional context, never to a profit during the setup day (intraday).
With this premise, let’s see in summary how trading works. We work first of all to plan every detail, to find recognizable and repetitive events, to access new trends a certain number of times during the year, to achieve results. Therefore, the goal is to gain a strategic position in the market, in order to allow time for profits to develop.
But to give time and therefore to exploit time as an ally (as Larry Williams explains in his book), we need to manage risk. Once a trading plan-compatible opportunity is found and there is potential, the trader works to reduce risk, to take position and use time to generate profits.
Recognizable and repetitive events are needed to anticipate new trends at a limited cost
In the Community, we call trading opportunities low-risk recurrences. These are recognizable events that repeat several times during the year. These events generate a series of reactions, some always fruitless and others capable of always generating a profit. The trader’s task is to separate the fruitless opportunities, ensuring small expenses, from those that generate a trend, to produce a profit with limited risk. Take a look at this video where I explain low-risk recurrences based on congestions and possible reactions.
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The possible profit targets on markets like EurUsd or GbpUsd, for example, are 150/300 pips to mature in about 5/8 days, up to 500/700 pips in about 20/30 days. The same targets on faster markets like EurJpy or UsdJpy can mature even in 4/5 days, for variations of 500 pips. This is just to provide a parameter.
Risk management allows access to profits Management is the real secret to earning on financial markets
A secret always in plain sight for professionals in the sector, but not for novices. For a deeper understanding of this theme, I recommend the books by Van Tharp, who more than others has invested in explaining to the commercial public the importance of management.
Thanks to the correct use of management techniques, the trader can ensure small expenses for management. Expenses are an integral part of a broader job, leading to profits. They must be accepted and managed. In this way, it is possible to invest time and resources to find excellent trading opportunities, while at the same time recognizing predictive limits. No one has the ability to predict the future, and therefore some opportunities will always be fruitless.
Management work allows for a path, marked by fruitless opportunities, that gives access to profits. The application of management techniques results in very limited expenses and this allows the trader to achieve a greater net profit, once a sufficiently broad trend is intercepted. To learn more about the importance of management, watch this video I recorded some time ago.
Use this material to develop greater awareness, in order to understand how the business works and possibly then collaborate in our community. Good work and let me know if you have any questions.
Trend Following and the Legacy of Richard Dennis
The Story of the Turtle Traders Trend Following is an investment strategy that focuses on buying and selling assets based on evident directional movements in the market. This approach, based on the idea that markets move in recognizable trends, was made famous by Richard Dennis and his experiment with the Turtle Traders in the 1980s. Michael Covel has also extensively explored this topic in his books, contributing to spreading knowledge about Trend Following.
Richard Dennis and the Turtle Traders Experiment
Richard Dennis, a successful commodities trader, launched a unique experiment in 1983 to demonstrate that trading could be taught. He selected a group of people with no trading experience and trained them to become successful traders, following his Trend Following rules. This group became known as the Turtle Traders.
Principles of Trend Following
The methodology taught by Dennis was based on several fundamental principles of Trend Following:
Buying in Uptrend and Selling in Downtrend: The Turtles had to buy when prices exceeded a certain upward threshold and sell when prices fell below a specific threshold. Risk Management: Each trade was structured to limit losses, usually using stop-loss. Maximizing Trends: The idea was to let profits run as much as possible, capitalizing on large market movements. Results of the Experiment Dennis’s experiment was extraordinarily successful, proving that with the right training and rules, anyone could become an effective trader.
Michael Covel’s Books on Trend Following
Michael Covel, an author and financial researcher, has written extensively on Trend Following. In his books, Covel explores the history and principles of Trend Following, providing an in-depth analysis of this strategy and its most famous practitioners, including Richard Dennis and the Turtle Traders.
Some of his most notable books include: “Trend Following: How to Make a Fortune in Bull, Bear and Black Swan Markets”: This book offers a comprehensive overview of the Trend Following strategy, examining its origins and its application in modern markets. “The Complete TurtleTrader: The Legend, the Lessons, the Results”: Here, Covel tells the story of the Turtle Traders, from the initial experiment to the successful careers of many of its participants. Trend Following, as demonstrated by Richard Dennis’s experiment with the Turtle Traders and analyzed in Michael Covel’s books, remains an influential trading strategy. Through its emphasis on identifying and exploiting market trends and rigorous risk management, Trend Following provides a framework for making trading decisions in a wide range of market conditions. This rule-based, emotion-free approach continues to be a valid and popular method among traders around the world.
