(+) Beginner Trading Strategies

Follow-The-Trend Strategy & 5 Ways to Identify Trends

Follow-the-Trend is perhaps the most popular strategy for trading any financial market with any financial instrument. As the saying goes, the trend is your best friend. In this article, you will find information on how to “Follow-the-Trend”, along with five different ways to identify trends through technical analysis.

 

📈 Follow-the-Trend Strategy Outlook

Financial markets tend to follow certain trends. They usually maintain a trend until it is temporarily interrupted by a short-term price pullback or fully reversed, leading to a new trend emerging in the opposite direction (reversals).

Trend Continuation is the Best Strategy

✅ It is better to focus on trend continuation rather than trend reversal.

✅ The Follow-the-Trend strategy is the best approach for profiting from any market, this strategy has a proven track record and is easy for any trader to implement.

✅ Its strength lies in statistics. Statistics show that a trend is more likely to continue than to reverse.

To apply the Follow-the-Trend strategy successfully, you need a basic understanding of technical analysis and charting. This article provides all the essential information on how to recognize and use trends.

 

♞ The ‘Follow-the-Trend’ Trading Strategy Implementation

Once a trend is confirmed, all you need to do is execute a trade in the same direction. Here are some simple steps to apply the strategy effectively.

 

Easy Steps for Implementing the Strategy in Short Timeframes

Here are some easy steps to apply a Follow-the-Trend Strategy:

(1) First, find an asset that is moving in a strong trend and open the 1-minute chart. To identify a trend, you may use Elliott Wave Theory or other technical analysis tools and methods presented later in this article.

(2) Once the trend is confirmed, execute the trade:

◙ Buy the market during an uptrend

◙ Sell the market during a downtrend

(3) If your trade is profitable, continue opening trades in the same direction until a loss occurs.

(4) When a loss occurs, pause and re-evaluate the trend:

◙ The trend may continue after a temporary pullback, or

◙ The trend may have fully reversed.

(5) If it’s a pullback, continue trading in the same direction. If it’s a reversal, stop trading immediately and look for another asset or wait for a better opportunity.

The Right Entry Levels

Choosing the right entry level is crucial. When a trend is confirmed, it’s often best to wait for a small correction before entering the trade.

Examples on charts:

→ Chart 1: The best entry occurs at each local low

→ Chart 2: (Elliott Principle) The best entry level is at Point 4

→ Chart 3: The best entry level is at the Break Point

 

 

📝 Five (5) Different Ways to Identify the Existence of a Trend

As mentioned earlier, financial markets tend to follow certain trends. The easiest way to identify these trends is through chart analysis. In this article, you will find information about:

1. Chart Formations using Highs and Lows

2. Eliot Waves

3. Support & Resistance

4. Trendlines

5. Technical Analysis Indicators

 

(1) Identifying Bullish and Bearish Chart Formations using Highs and Lows

The easiest way to identify a trend is by using the simple Highs/Lows trending rule:

(i) Uptrend Formation Recognition

A market is in an uptrend when the latest high is higher than the previous high, and the latest low is higher than the previous low (as shown in Chart 1).

(ii) Downtrend Formation Recognition

A market is in a downtrend when the latest high is lower than the previous high, and the latest low is lower than the previous low.

Chart 1: High & Low Uptrend

 

(2) Eliot Waves

The Elliott Waves Theory is one of the core concepts in technical analysis. According to Elliott, every market moves in a specific pattern consisting of an uptrend phase (1, 2, 3, 4, 5) and a downtrend phase (a, b, c), as shown in Chart 2.

Here is a basic explanation of each point:

Wave 1: The market begins to rise, reaching a local high at the end of the wave.

Wave 2: A corrective pullback of Wave 1.

Wave 3: A stronger upward move than Wave 1, as the uptrend is now confirmed and more traders open long positions.

Wave 4: A correction of Wave 3, often forming a ‘flag’ pattern as the final bullish wave is anticipated.

Wave 5: Another upward move, usually strong but not as strong as Wave 3. Once it ends, the trend is typically reversed.

Wave a: The initial correction, signaling the beginning of a new downtrend.

Wave b: A temporary upward correction within the downtrend, often referred to as a ‘bear market rally.’

Wave c: A strong downward move, typically more intense than Wave a, as many traders close long positions and enter short positions.

Chart 2: Elliott Wave Principle

 

(3) Using Support & Resistance to Forecast Upcoming Trends

An easy way to identify short-term trends is by analyzing price action near key support and resistance levels. Short-term trends often emerge when the price of an asset approaches, but does not break through, a support or resistance level.

Keep in mind that when an asset’s price reaches a strong support or resistance level for the first time, a pullback is almost certain. The second time the same level is reached, there is roughly a 50% chance of a breakout.

◙ First-time reach → 1st Pullback

◙ Second-time reach → 2nd Pullback or Breakthrough

– If a 2nd pullback occurs, it often forms a “Double Top” (or “Double Bottom”) pattern, indicating a potential trend reversal.

– If a breakout occurs, the resistance level becomes support (and vice versa).

Chart 3: Support, Resistance, and Trendlines

 

(4) Using Trendlines to Forecast Upcoming Trends

Trendlines (/ or ) often signal trend continuation or trend reversal. Trading based on trendlines can be challenging because they are highly dynamic and constantly shift over time. Typically, an asset’s price reacts to trendlines similarly to how it reacts when approaching support or resistance levels.

◙ First-time reach → 1st Pullback

◙ Second-time reach → 2nd Pullback or Breakthrough

Trading short-term using trendlines is generally not recommended. Trendlines are more effective when applied to long-term charts.

 

(5) Using Technical Indicators to Identify Trends

Another tool for identifying trends is technical analysis indicators. Here are some of the most commonly used trend indicators:

◙ Moving Averages (MA) – typically the 50-period MA

◙ ADX (Average Directional Index) – explained below

◙ DMI (Directional Movement Index)

◙ MACD

◙ Parabolic SAR

The ADX Indicator (Average Directional Index)

The ADX is widely used to assess the strength of a trend:

(i) If the ADX line is rising, the trend is strengthening

• ADX between 20 and 30 indicates a trend is forming

• ADX between 30 and 50 signals a strengthening trend

• ADX above 50 shows the trend is maturing

(ii) If the ADX line is falling, the trend is weakening, signaling potential price consolidation.

 

🎯 Important Notes for Profitable Trading Using the ‘Follow-the-Trend’ Strategy

• Deepen your understanding of chart analysis and price trends (basic resources are provided in this article).

• Combine a couple of trend-identification methods and test their effectiveness. Avoid using more than two methods at once to maintain speed and clarity in trading.

• Be selective in choosing assets to trade. Focus only on assets showing strong, clear trends. If none are available, stay out of the market.

• Implement and stick to strict money management rules. For example, stop trading for the day after losing three trades in a row.

• Set a trading budget that allows room for losses. Define an upper limit for the value of any single trade.

• If you are a beginner, rigorously test your strategy on a demo account before trading with real money. Mastering chart analysis and trend recognition takes time and practice.

 

□ Follow-The-Trend Trading Strategy and 5 Ways to Identify Trends

George Protonotarios for ForexExperts.net