Trend Following: Surfing the Market Waves (Patreon)

This post is a in depth follow up on  my original idea that I have posted on my dutchalgotrading.com blog. I thought it would be nice to give you a more in depth view on how what I think about these subjects. 

I hope you like these! 

In this post  I will go more in depth into the concept of trend following strategies.  The allure of identifying and riding the waves of market trends, letting the market itself be my guiding star, is both compelling and pragmatic. After all, what better way to navigate the vast ocean of financial markets than by surfing the waves of market momentum?

The core principle of trend following is rooted in the belief that the past can hold valuable insights into the future. Rather than indulging in the treacherous pursuit of predicting market movements, I embrace a more objective and data-driven approach. I seek to identify existing trends and align my trading decisions accordingly, focusing on what the market is telling me rather than imposing my subjective opinions.

One of the essential tools at my disposal in trend following is the Moving Average (MA) indicator. This elegant mathematical construct allows me to smooth out the inherent noise and fluctuations in asset prices, distilling the underlying trend. By calculating the average closing prices over a specific period, I create a moving average line that glides gracefully across the price chart, revealing the broader market sentiment.

To apply a main trend following strategy, I often utilize two moving averages - a short-term MA and a long-term MA. When the short-term MA crosses above the long-term MA, it signals a potential bullish trend. Conversely, when the short-term MA crosses below the long-term MA, a bearish trend might be in the making. The beauty of this approach lies in its simplicity and versatility, as I can adjust the lengths of the moving averages to suit different time frames and market conditions. However, this is not a single indicator to detect trends, ofcourse I have multiple strategies in my toolbox to decide if a trend is there or not.

Just let me illustrate the said trend following strategy with 2 moving averages with an world famous example example to illuminate the power of trend following in action. A lot of markets use these two moving averages to determine if there is a bear market or a bull market:

For an exampe:

Imagine you are trading a popular tech stock, and have observed its price chart over the past year. You can then decide to use a 50-day moving average (short-term) and a 200-day moving average (long-term) to identify large market trends.

In February, the short-term MA (50-day) rises above the long-term MA (200-day). This golden cross signifies the birth of a bullish trend, indicating that the stock's price is on the rise. Seeing this, I decide to go long on the stock, buying shares at the current market price.

As the days turn into weeks, the stock continues to surge, confirming the strength of the bullish trend. Staying true to my trend following principles, hold onto your position, resisting the temptation to lock in quick profits.

In May, however, the short-term MA (50-day) begins to dip below the long-term MA (200-day). This death cross signals a potential reversal of the trend and a shift towards a bearish territory. Taking heed of this warning, you can then decide to exit the position, selling the shares and securing gains.

Throughout the rest of the year, the stock's price fluctuates, but you can then remain on the sidelines, patiently observing for another opportunity to ride the waves of a new trend.

Trend following is not without its challenges. It requires discipline, as it demands that I detach myself from emotional impulses and stay committed to the strategy's principles. I must be willing to accept small losses during periods of market turbulence, trusting that the overarching trend will eventually carry me to profit. It is a strategy that rewards patience and resilience, as successful trend following is not about winning every battle but riding the larger trend to victory.

In the world of trend following, I find solace in embracing uncertainty, knowing that I do not need to predict the future, but rather flow with the currents of the present. Armed with the power of the moving average and a steadfast commitment to the trend, I step confidently into the realm of algorithmic trading, ready to surf the market waves with grace and precision.

Ofcourse you can also use this strategy by using a bot, but then the possibility exitst that the bot does nothing for the most of its time since these trends can happen for several weeks of even months. Giving opportunity costs because shorter timeframe algo's can also be made during these periods of having positions.