Definition[ edit ] 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 peculiar 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 tranzacționarea pe niveluri sau tendință 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.
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In case their rules signal an exit, the traders exit but re-enter when the trend re-establishes. Cutting Loss. Exit market when market turn against them to minimize losses, and "let the profits run", when the market trend goes as expected until the market exhausted and reverses to book profit. This trading or "betting with positive edge" method involves a risk management component that uses three elements: number of shares or futures tranzacționarea pe niveluri sau tendință, the current market price, and current market volatility.
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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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The first part is "trend". Every trader needs a trend to make money. If you think about it, no matter what the technique, if there is not a trend after you buy, then you will not be tranzacționarea pe niveluri sau tendință to sell at higher prices We use this word because trend followers always wait for the trend to shift first, then "follow" it. The key reasons for trending markets are a number of behavioral biases that cause market participants to over-react: Herding : After markets have trended, some traders jump on the bandwagon, and thus prolonging the herding effect and trends.
Confirmation Bias : People tend to look for information that confirm their views and beliefs. This can lead investors to buy assets that have recently made money, and sell assets that have declined, causing trends to continue. Risk Management : Some risk-management models will sell in down markets as, for example, some risk budgets have been breached, and buy in up markets as new risk budgets have been unlocked, causing trends to persist.
The term "tape" refers to the ticker tape used to transmit the price of stocks. Traders may use other indicators showing where price may go next or what it should be but as a general rule these should be disregarded. A trader need only be worried about what the market is doing, not what the market might do. The current price and only the price tells you what the market is doing. Money management: Another decisive factor of trend following is not the timing of the trade or the indicator, but rather the decision of how much to trade over the course of the trend.
Risk control: Cut losses is the rule. This means that during periods of higher market volatility, the trading size is reduced.
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During losing periods, positions are reduced and trade size is cut back. The main objective is to preserve capital until more positive price trends reappear.
Rules: Trend following should be systematic. Price and time are pivotal at all times.
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This technique is not based on an analysis of fundamental supply and demand factors. Diversification: Research published by hedge fund manager Andreas Clenow shows that cross asset diversification is an essential part of professional trend following.
The crossover suggests that the trend has recently turned up. The crossover suggests that the trend has turned down.
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Stop loss : Set a stop loss based on maximum loss acceptable. For example, if the recent, say day, average true range is 0.
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The trader would then backtest the strategy, using actual data and would evaluate the strategy. The trader can then experiment and refine the strategy. Care must be taken, however, to avoid over-optimization.
It is possible that a majority of the trades may be unprofitable, but by "cutting the losses" and "letting profits run", the overall strategy may be profitable.
Trend trading is most effective for a market that is quiet relative low volatility and trending. For this reason, trend traders often focus on commodities, which show a stronger tendency to trend than on stocks, which are more likely to be mean reverting which favors swing traders.
In addition to quiet low volatility markets, where trend following strategies perform well, trend trading is also very effective in high volatility markets market crash. Trend traders "short" the market and benefit from the downside market trend.