TREND FOLLOWING: One More Step to Trading Success (Part 1)

Every trader should understand the psychology of trading and the importance of eliminating trading emotions. This could be a tough task when money is involved, but that it can be accomplished by establishing and focusing on a set of plans and rules of action. This was one of the first principles which helped me to become a successful trader. However, besides learning how to manage emotions when trading, there is another key aspect which you need to master before you can become a successful trader. It’s your trading strategy.

The main reason I have survived in this battle of trading is because I have sacrificed a lot of time studying how the trading machine works, before learning how to control my emotions, as well as, what motivates buying and selling decisions. I clearly understand that there are two dimensions in the market: the winning side and the losing side. When the market is moving one way, someone is winning, and at the same time someone is losing. In the end, it is all about demand and supply and the market is driven by these two forces.

During my early steps in trading, I used to stare at the screen the entire day and I was trying to pick a side, to be a bull or a bear, and sometimes I would even visualise everything as a battle. I understood that by having a good strategy, I could increase my chances of winning these battles, just like the ancient Greeks did. I am a big fan of Greek history. If we go back to 480 B.C., ancient Greeks won most significant battles (Battle of Marathon, Battle of Salamis, Battle of Thermopiles) thanks to their smart tactics and unique strategies (i.e. The 300 Spartans). The same works with trading. You are battling against very smart, experienced and well-capitalized opponents and if you are not well prepared you will lose these battles.

“The Trend Is Your Friend… Until It Ends”

By understanding how the trading machine works and having a set of rules to help you eliminate emotions in trading, the next step you should consider to bring you a step closer to success is the trading strategy and style you use. Traders usually go through a stage when they discover the necessity of a strategy.

Most of them will find someone to guide them about when to buy or sell while some others will buy an expert advisor (EA). The majority of these amateur traders will look for something that does not exist: the strategy that never loses. Simply, this just does not exist. When they understand that neither of those processes worked, the remaining survivors will turn to the next stage: to find a trading system that suits them.

The truth is that a good trading system can allow the trader to focus on higher probability setups in an effort to be able to net a profit. Since I understood that there is no Holy Grail trading strategy, and that ‘The Trend is your Friend… Until it Ends,’ I have now classified myself as a “Trend Follower”, and more specifically a Mechanical Trend Follower.

Trend Following Strategy

Trend Following is a trading strategy in which traders attempt to capture gains by trading a rising (uptrend) or a falling (downtrend) asset. Thus they expect to profit from rising and falling trends, aiming for huge profits, as they’re betting that the trend will persist for a long time. Therefore, the trend follower trader enters into a long position when an asset is in an uptrend. Conversely, a short position is taken when the asset is trending downwards. This strategy assumes that once a market trend is firmly established, it is likely to continue into the future. Moreover, trend followers will remain in their initial positions
- long or short
- until they believe the trend has reversed.

Beyond mere rules, the human element is core. A trend follower, therefore, simply attempts to identify an asset’s momentum and trade in the direction of the trend; he simply jumps on the
trend and rides it. Therefore a trend follower will never get in at the bottom or out at the top of
a trend.

The book which had the most profound impact on my trading strategy, as well as my financial
and professional growth, is called ‘Technical Analysis of the Financial Markets’ by John Murphy.
According to Chief Technical Analyst John Murphy, there are 10 most important rules of technical trading:
1. Map the trends
2. Spot the trend and go with it
3. Find the low and high of it
4. Know how far to backtrack
5. Draw the line
6. Follow that average
7. Learn the turns
8. Know the warning signs
9. Trend or not a trend
10. Know the confirming signs.

With the above in mind and applying some of the Murphy’s rules, I have become a trader who strictly uses a trend-following strategy, which also made me become a more disciplined trader.