One of the simplest strategies, trend following is known to almost all market participants.
“Stay with the trend” is often touted as a basic rule of markets, with good reason.
Trend following is a high probability trading strategy.
Trend following using a Moving Average:
1- Two Moving averages:
Take your pick from 100 day, 200 day, 50 day simple moving average to exponential moving averages.
Only rule is one has to be slower and the other faster.
2- Decide the cross:
Let us assume we chose the 100 day and 200 day simple moving average(SMA).
There can be two cases:
a) 100 SMA above 200 SMA
We decide: BUY when this happens.
b) 200 SMA above 100 SMA
We decide: SELL when this happens.
I have left out a couple of other cases, they can be treated as noise.
Plus I have left out where the price should be for our entry, that is for you to make cases decide on decisions and then test them.
Trend following using Trendlines:
Any timeframe you pick, see if you can draw a trendline the basic rule at least three touches to the line.
Once you have the trendline the aim is to buy if price is above the trendline and sell it when it goes below. For stoploss we use the trendline as a resistance/support.
That’s all there is to basic trend following.
Where to use trend following?
Backtests are your friend here, the more data you have for a particular share/stock/security the better you can determine whether the stock is suitable for trend based trading.