Lesson 1 of 20 · 10 min
Trend Following
Step 1
What it is
A trend is a series of swings in one direction: higher highs and higher lows going up, lower highs and lower lows going down. Trend following means trading in that direction instead of guessing where it ends.
This is the idea behind many rule-based systems. You accept being late to the move and wrong fairly often, in return for the chance that a winner runs well past your risk.
Traders use it because it gives a plain answer to which way to look. It avoids the constant temptation to call a top or a bottom.
Step 2
See it on a chart
Two swings up, a higher low, and a pullback on lighter volume.
Illustrative chart with made-up prices and tick volume, built for teaching. It is not real market data and not a trade idea.
Step 3
The exact rules
What must be true before entry
- At least two swings in one direction.
- Price pulling back without breaking the last swing.
- Lighter volume on the pullback than on the move before it.
What volume should show
Where to enter
Where the hard stop goes
Where the target goes
What invalidates the idea
- Price closes past the last higher low or lower high.
- Pullbacks start to grow larger than the swings.
When not to take it
- The market is moving sideways.
- The trend is already far from its last pullback.
- Major news is due soon, or you would be trading outside your planned hours.
- You have just taken a loss and feel the need to win it back.
Step 4
Your turn: plan the trade
Price is falling in lower highs and lower lows, and has just pulled back up. Mark your plan.
This setup is a short. Look at the candles and the volume. Choose a line below, then tap the chart to place it. You can also drag its label or type a price.
Illustrative chart with made-up prices and tick volume, built for teaching. It is not real market data and not a trade idea.
Step 5
The trap: taking profit too early
After a few small wins, a trader will often cut a winner short to feel safe, then let a loser run out of hope. That is the reverse of what trend following needs. Decide your exit before you enter, and let the plan do its job.
Read why journaling mattersStep 6