Trend Following Strategy: Rules, Examples and Why It's Hard to Stick With

A trend following strategy buys markets that are rising and sells markets that are falling, and holds each position until the trend shows signs of ending. It doesn't try to predict tops or bottoms. Entries usually come from a moving-average crossover or a breakout above a recent high, exits from a trailing stop, and the strategy makes most of its money from a small number of large moves while losing small amounts on many false starts.

Trend following has a long systematic history. Richard Donchian traded price-channel breakouts in the 1960s, and the "Turtle Traders" that Richard Dennis and William Eckhardt trained in 1983 used breakout rules with fixed sizing and exits. Many managed-futures funds still follow trends today, usually across dozens of markets at once.

This is an educational description, not a recommendation. Backtests are not future results, and leveraged trading carries a high risk of loss.

Two classic entries

Moving-average crossover

• Entry: buy when the 50-period moving average crosses above the 200-period; sell short on the opposite cross.
• Faster versions use 20 and 50, or exponential moving averages.
• Simple and robust, but late: by the time two slow averages cross, part of the move is over.

Channel breakout

• Entry: buy when price closes above the highest high of the last 20 bars (a Donchian channel); sell short below the lowest low.
• Longer channels (55 bars) trade less often and catch bigger trends.
• Reacts faster than a crossover but takes more false breakouts.

Exits matter more than entries

Most of a trend strategy's result comes from how it exits.

• Trailing ATR stop: trail the stop 2 to 3 x ATR behind price. Wider stops stay in trends longer but give back more at the end.
• Opposite signal: exit long on the opposite crossover or a break of the 10 or 20-bar low.
• No fixed target: taking profit at 2R cuts off exactly the large winners the strategy depends on. If you add a target, test the strategy with and without it.

Why trend following is hard to stick with

• Low win rates. It is common for a trend system to lose on most trades. The edge, if there is one, comes from the size of the winners.
• Long flat or losing periods. In sideways markets the strategy keeps getting stopped out. Months without a new equity high are normal.
• Giving back profit. Trailing stops mean you always exit after the trend has turned, so some open profit is always given back.

These are exactly the conditions that make traders abandon a strategy just before it works. Running Monte Carlo on the backtest shows how long the losing streaks and flat periods could plausibly be, so you know in advance what "normal" looks like.

Which markets and timeframes

Trend following is usually run on 4-hour and daily candles across many markets: indices, currencies, metals, energy, bonds and crypto. Spreading across markets matters because any one market may go years without a strong trend. On short intraday timeframes, noise and costs make trend following much harder.

How to test a trend following strategy

1. Use a long history. A trend strategy needs many trends in the data. A year or two may contain only a handful.
2. Test across several markets with the same rules. Tuning separate settings for each market is a common way to overfit.
3. Include costs, and swap or financing for positions held overnight, because trend trades can last weeks.
4. Hold back an unseen period. See out-of-sample testing.
5. Check sensitivity. A 50/200 crossover should work about as well at 45/190 or 55/210. If it only works at one exact setting, it is probably luck. See how to tell if a backtest is overfit.
6. Look at the worst drawdown and the longest flat period, not just the total return.

In Strategy Lab you can build a trend strategy without code from moving-average crossovers, swing breaks, ATR stops and trailing exits, with a higher-timeframe bias filter. You can also describe it to TES, the AI strategy coach. Strategy Lab backtests on candles up to daily over up to 20 years of data, includes commission, spread and overnight swap, and can run the same rules on up to 50 other markets to see whether the edge holds beyond one market.

Free tools for this: use the profit factor calculator to work out profit factor from your own trades and the Monte Carlo simulator to see the range of drawdowns your trade results could produce. They run in your browser, with no account needed.