Trend following is the oldest and most proven trading strategy in financial history. The idea is simple: identify the direction of the trend and trade in that direction. Don’t predict reversals. Don’t fight the market. Just follow the trend until it ends. In crypto, where trends can last months and produce 100%+ moves, trend following is especially powerful.
The Core Principle
“The trend is your friend until the end.” In an uptrend, you only look for buying opportunities. In a downtrend, you only look for selling opportunities (or stay in cash). You never try to pick tops or bottoms. You accept that you’ll miss the first 10-20% of a move and the last 10-20%. You capture the middle — the meat of the trend.
How to Identify Trends
- Moving averages: Price above 200 SMA = uptrend. Below = downtrend.
- Higher highs and higher lows: The definition of an uptrend
- ADX indicator: ADX above 25 = trending market. Below 25 = ranging. Above 50 = strong trend.
- MACD above zero: Confirms uptrend momentum
A Simple Trend Following System
Entry
- Wait for Bitcoin to close above its 50 EMA (uptrend signal)
- Buy on the next daily open
- OR wait for a pullback to the 20 EMA for a better entry
Exit
- Sell when Bitcoin closes below the 50 EMA (trend may be ending)
- OR use a trailing stop at 2x ATR below the highest close since entry
Results
This simple system, applied to Bitcoin since 2015, would have captured most of the major bull runs while sitting out most of the bear markets. It’s not perfect — there are whipsaws during consolidation periods. But the big wins more than compensate for the small losses.
Trend Following Psychology
- You WILL have many small losses (false signals during consolidation). Accept this.
- You WILL miss exact tops and bottoms. That’s by design.
- Your profits come from a few big winning trades that last weeks or months.
- The win rate is often only 35-45%, but the winners are 3-10x larger than the losers.
- Patience is the most important quality — trends develop slowly.
What NOT to Do
- Don’t exit because the move “seems too big” — trends can extend far beyond what seems reasonable
- Don’t add to losing positions hoping for a reversal
- Don’t switch from long to short too quickly — wait for your system to confirm
- Don’t trade in ranging markets — trend following only works when there’s a trend
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