Trend following is one of the oldest ideas in futures trading: buy markets that are rising, sell markets that are falling, and stay in until the trend appears to end. Some managed futures funds have built entire approaches around it. Understanding it is useful even if you never use it, because trend followers are part of the crowd that moves prices.
The core idea
Trend followers don't try to predict where a market will go. They react to where it has already gone. The bet is that once a meaningful move is underway, it may continue longer than many people expect, whether because of shifting supply and demand, slow-moving economic changes, or crowd behavior.
The approach accepts that the trader will usually be late: they enter after a move has started and exit after it has started reversing. They give up the beginning and the end of a move to try to capture the middle.
How traders define a trend
There's no single definition. Common methods include:
- Moving averages. Price above a long moving average, or a shorter average crossing above a longer one. See technical analysis basics.
- Breakouts. Price making a new high or low over a set number of days, such as a 20-day or 50-day high.
- Higher highs and higher lows. A visual definition based on swing points on the chart.
Whichever definition you study, write it down precisely enough that two people would agree on whether a signal occurred.
Entries, exits, and sizing
A trend-following approach is usually defined as much by its exits as its entries. Common exits include trailing stops that follow price, an opposite signal (for example, a new 20-day low), or a volatility-based stop placed a multiple of the market's typical daily range away.
Because volatility differs widely between markets, many trend followers size positions by volatility so that each trade carries roughly the same dollar risk. The math is the same as in our position sizing guide.
An illustrative example
Imagine a simple rule studied on a daily chart: buy when price closes at a 50-day high, sell short when it closes at a 50-day low, and exit when price closes at a 20-day low (for longs) or a 20-day high (for shorts). Position size is set so a typical stop-out costs about the same dollar amount in every market.
In a strong, persistent move, such as a commodity rallying for months on a supply shortage, a rule like this can stay in for much of the move. In a choppy year, the same rule can trigger repeated breakouts that immediately reverse, producing a string of small losses. The rule doesn't know which kind of year it's in. That uncertainty is the core trade-off of the whole approach.
Why trend followers trade many markets
Because a single market can go sideways for a long time, professional trend followers often spread risk across many unrelated futures markets, such as currencies, rates, energy, metals, and grains, hoping that some will trend while others don't. For individual traders with small accounts, that's difficult, since even one contract in several markets can be too much risk. Micro futures make this somewhat more practical, but correlation between markets can still rise sharply during market stress.
How trend following fails
Every strategy page on FuturesSignal includes this section, because understanding failure is more useful than hearing about success.
- Sideways markets. When prices chop back and forth, breakouts fail repeatedly and each one costs a small loss. These "whipsaws" can last months.
- Low win rates. Many trend approaches lose on more trades than they win. That's psychologically hard, and it tempts traders to abandon the rules right before a big move.
- Giving back gains. Trailing exits mean a winning trade often gives back a chunk of open profit before the exit triggers.
- Gaps and reversals. Sharp overnight reversals can jump past stops.
- Crowding. When many participants follow similar signals, exits can cluster and moves can reverse violently.
- Overfitting. Tuning a moving-average length until historical results look great usually produces something that fails on new data.
Be skeptical of backtests
Anyone can find settings that would have worked in the past. Hypothetical or simulated results have well-known limitations, including hindsight and the absence of real trading costs and emotions.
Studying trend following safely
If you want to study this idea, start in a simulator or with paper trades. Pick one simple definition, write exact rules in your trading plan, log every signal in your journal, and pay special attention to how you feel during losing streaks. Compare it with the opposite philosophy, mean reversion, to understand why the two tend to do well in different market conditions.
Before you trade
Futures are leveraged. A small price move can produce a large gain or loss, and losses can exceed the money in your account. This article is general education, not a recommendation to buy or sell any contract.
- Practice in a simulated (paper) account before using real money.
- Decide your maximum loss per trade before you enter, and size positions to it.
- Confirm current contract specifications and margin requirements with the exchange and your broker.
Common questions
Is trend following a guaranteed way to profit?
No. Trend following can have long periods of losses, especially in sideways markets. No strategy is guaranteed, and past results don't predict future ones.
Why do trend followers have so many small losses?
Because many signals turn out to be false starts. The idea relies on occasional large moves making up for frequent small losses, which may or may not happen.
Do trend followers use stops?
Yes. Exits, usually trailing stops or opposite signals, are central to the idea. Without them, a trend-following trade is just a hope.
Sources
- Technical Analysis course — CME Group Education. www.cmegroup.com/education/courses/technical-analysis.html
- Trade and Risk Management — CME Group Education. www.cmegroup.com/education/courses/trade-and-risk-management.html
- Commitments of Traders — U.S. Commodity Futures Trading Commission. www.cftc.gov/MarketReports/CommitmentsofTraders/index.htm
Last reviewed October 17, 2026. Educational content only; not investment advice. Contract specifications and margins change, so confirm current figures with the exchange and your broker. See our risk disclosure.
