Technical & Chart AnalysisMomentum trading
Trend Following
A strategy family that enters in the direction of an established move and holds while it persists, rather than predicting turns.
What Trend Following means
Trend following makes no attempt to forecast tops or bottoms. It defines a trend using objective tools such as a moving average crossover, a breakout of an N-period high or low, or a directional strength filter like ADX, and takes a position in that direction once the condition is met. Exits are equally rule-based, commonly a trailing stop measured in Average True Range multiples or an opposite signal. The style originated in managed futures and remains the basis of many systematic programmes.
The characteristic return profile is a low win rate paired with a high average win to average loss ratio: most trades are small losses in choppy conditions, while a minority of large trends carry the performance. That profile demands strict adherence to the rules, since skipping trades to avoid losses often means missing the few that matter. The honest limitations are long flat or losing stretches in range-bound markets, deep equity drawdowns while giving back open profit at the end of a trend, and repeated whipsaws when volatility compresses.
Worked example
A system buys EUR/USD when the 50-period EMA crosses above the 200-period EMA at 1.0790 and trails a stop three ATRs behind price. If ATR is 60 pips, the initial stop sits near 1.0610 and rises as the trend extends.
Related terms
- TrendA sustained directional bias in price, conventionally defined by a sequence of higher highs and higher lows, or the reverse.
- Moving AverageA line that averages price over a rolling lookback window in order to smooth noise and reveal underlying direction.
- ADX (Average Directional Index)A Wilder indicator measuring trend strength on a 0 to 100 scale, without indicating trend direction.
- Mean ReversionA strategy family that assumes price stretched far from an average will tend to return toward it, so extremes are faded.
- DrawdownThe decline from a peak in account equity to a subsequent trough, usually stated as a percentage of the peak.
Frequently asked questions
What does Trend Following mean in forex trading?
A strategy family that enters in the direction of an established move and holds while it persists, rather than predicting turns.
How does Trend Following work in practice?
The characteristic return profile is a low win rate paired with a high average win to average loss ratio: most trades are small losses in choppy conditions, while a minority of large trends carry the performance. That profile demands strict adherence to the rules, since skipping trades to avoid losses often means missing the few that matter. The honest limitations are long flat or losing stretches in range-bound markets, deep equity drawdowns while giving back open profit at the end of a trend, and repeated whipsaws when volatility compresses.
What is an example of Trend Following?
A system buys EUR/USD when the 50-period EMA crosses above the 200-period EMA at 1.0790 and trails a stop three ATRs behind price. If ATR is 60 pips, the initial stop sits near 1.0610 and rises as the trend extends.
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