Trend Following Strategies
Trend following is a trading approach that attempts to capture gains by riding extended moves in asset prices. This guide covers trend following methodologies available on the TradeAnon platform.
Core Philosophy
Trend following is based on several key principles:
- Markets trend — Prices tend to move in sustained directions
- Let winners run — Stay in profitable positions
- Cut losses short — Exit losing positions quickly
- Don't predict — React to price action, don't anticipate
- Diversify — Trade multiple uncorrelated markets
The Webster Power Trend
TradeAnon implements the Webster Power Trend methodology for equity selection.
Entry Conditions
All four conditions must align:
| Condition | Rule | Purpose |
|---|---|---|
| A | Low > 21 EMA for 10+ days | Consistent strength |
| B | 21 EMA > 50 SMA for 5+ days | Momentum leading |
| C | 50 SMA rising vs 10 days ago | Intermediate uptrend |
| D | Green candle (Close > Open) | Bullish confirmation |
State Transitions
Inactive → Active → Warning → Breached
- Inactive: Conditions not met
- Active: All conditions satisfied
- Warning: Low pierces 21 EMA but close holds
- Breached: Two closes below 21 EMA
Exit Rules
Exit when breached (two consecutive closes below 21 EMA).
Alternative exits:
- Close below 50 SMA (aggressive exit)
- Break of key support level
- Position becomes overextended (optional)
Position Management
Initial Position:
- Enter on activation with stop below 21 EMA
- Size based on ATR risk
Additions:
- Add on pullbacks to 21 EMA that hold
- Reduce size on additions
- Don't add after extended moves
Exits:
- Full exit on breach
- Partial exit on warning signals
- Trail stop along 21 EMA
Moving Average Crossover Systems
Classic trend following using moving average crossovers.
Golden/Death Cross Strategy
Entry:
- Long when 50 SMA crosses above 200 SMA
- Exit when 50 SMA crosses below 200 SMA
Characteristics:
- Slow, reduces whipsaws
- Significant lag at turning points
- Works best in long-term trends
Dual Moving Average
Parameters:
- Fast MA: 21-day EMA
- Slow MA: 50-day SMA
Entry:
- Long when fast crosses above slow
- Exit when fast crosses below slow
Characteristics:
- More responsive than 50/200
- More signals, more whipsaws
- Better for intermediate-term trading
Triple Moving Average
Parameters:
- Fast: 10-day EMA
- Medium: 21-day EMA
- Slow: 50-day SMA
Entry:
- Long when Fast > Medium > Slow
- Exit when Fast < Medium
Characteristics:
- Graduated entry and exit signals
- Reduces false signals
- Multiple confirmation points
Breakout Trading
Trading breakouts from consolidation ranges.
Donchian Channel Breakout
Calculation:
- Upper band: Highest high over N days
- Lower band: Lowest low over N days
Classic Parameters:
- Entry: 50-day breakout
- Exit: 25-day breakdown
Rules:
- Buy when price exceeds 50-day high
- Sell when price falls below 25-day low
ATR Channel Breakout
Calculation:
- Upper: 50 SMA + (2 × ATR)
- Lower: 50 SMA - (2 × ATR)
Rules:
- Buy on close above upper band
- Sell on close below lower band
Advantage: Adapts to volatility.
Momentum Overlays
Combining trend following with momentum filters.
RS Line Filter
Only trade stocks with relative strength:
- RS line in uptrend
- RS above 21-day moving average
- RS making new highs (optional)
Avoids laggards even if trend signals activate.
ADX Filter
ADX (Average Directional Index) measures trend strength.
- ADX > 25: Strong trend, trade it
- ADX < 20: Weak trend, avoid
Filter trend signals with ADX to avoid choppy markets.
Futures Trend Following
TradeAnon applies trend following to micro futures.
Universe
| Contract | Symbol | Description |
|---|---|---|
| MES | Micro S&P 500 | Equity index |
| MNQ | Micro Nasdaq 100 | Tech-heavy index |
| M2K | Micro Russell 2000 | Small cap index |
| MCL | Micro Crude Oil | Energy |
| MGC | Micro Gold | Precious metals |
Position Sizing
Risk-based sizing using ATR:
Contracts = Risk Per Trade / (ATR × Contract Multiplier)
Example:
- Risk $500 per trade
- ATR = $50
- Multiplier = 5 (MES)
- Contracts = $500 / ($50 × 5) = 2 contracts
Trend Signals
Multi-timeframe analysis:
- Daily trend direction (50/200 SMA)
- Intermediate momentum (21 EMA)
- Short-term trigger (breakout or pullback entry)
Risk Management
Position Sizing
Never risk more than 1-2% of capital per trade.
Position Size = (Account × Risk%) / (Entry - Stop)
Correlation Management
Avoid excessive correlation:
- Don't load up on all equity indices
- Diversify across asset classes
- Reduce position sizes when adding correlated trades
Maximum Exposure
Limit total portfolio heat:
- Maximum 6-10 positions
- Maximum 10-20% total portfolio risk
- Reduce during high volatility
Drawdown Limits
Consider reducing trading when:
- Strategy down 10% from peak
- Multiple consecutive losses
- Market conditions unfavorable
Common Mistakes
Fighting the Trend
- Don't short uptrends
- Don't buy downtrends
- Wait for confirmation of reversal
Overtrading
- Not every signal is worth trading
- Quality over quantity
- Patience is an edge
Premature Exits
- Let winners run
- Don't exit on first pullback
- Follow your exit rules
Ignoring Regime
- Trend following works in trending markets
- Avoid choppy, range-bound conditions
- Reduce size when conditions are unfavorable
Performance Expectations
Typical Characteristics
- Win rate: 30-45%
- Average win: 2-3× average loss
- Many small losses, few large wins
- Long periods of sideways performance
Psychological Challenges
- Accepting small losses frequently
- Sitting through retracements
- Maintaining discipline during drawdowns
- Patience during sideways periods