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Trend Following and Moving Averages

Updated on 2010-02-16

For a specific timeframe, if the market is not trending then it is ranging (trendless). Note, however, that the market could be trending up or trending down in one timeframe and ranging in another timeframe.

Each time the market or a security is trending, several traders jump into that trend and earn big money if the trend last for a long period. These traders invest in different assets, including stocks, futures, forex, ETFs; they also trade no only when the security is trending up, but also when it is trending down.
All these traders have something in common; they follow an investment strategy called trend following. They analyze the market and use well-known tools to detect a potential trend and then simply follow that trend. If a stock for example is trending up, a stock trader will buy that stock (follow the trend) and wait until the stock is not trending anymore.
A security could be seen as trending from a trader point of view and not trending from another trader perspective. It all depends on the definition of a trending market and which rules a forex, stock or ETFs trader uses to spot these trends.

As you may have guessed, Trend following systems works well in a trending market and performs badly in a trendless market. In a trend following system, entrances and exits have equal importance. A trader should enter the market as soon as possible in order to catch the big move and he also need to avoid exiting the market too soon; false signals, when you think that the trend is diminishing and/or reversing, occur very often.

Most trend following systems use breakout and moving average entry rules. Some use simple moving averages, other use weighted moving averages. There are so many different types of moving averages, each one with its proper calculation formula.

Here is a list of all moving averages available in this trading software:
Simple Moving Average: Sma(14) or Ma(14, _MaSma)
Weighted Moving Average: Wma(14) or Ma(14, _MaWma)
Triangular Moving Average: Trima(14) or Ma(14, _MaTrima)
Exponential Moving Average: Ema(14) or Ma(14, _MaEma)
Double Exponential Moving Average: Dema(14) or Ma(14, _MaDema)
Triple Exponential Moving Average: T3(14, 1) or Ma(14, _MaT3)
Kaufman Adaptive Moving Average: Kama(14) or Ma(14, _MaKama)
Following Adaptive Moving Average
Mesa Adaptive Moving Average

There are also several shared moving averages you can use in trend following systems:
Moving Average: Rule-based
Elastic Volume Weighted Moving Average - eVWMA
Buff Moving Averages Indicator
GMMA - Guppy Multiple Moving Average

And of course, whether your are a stock, futures, forex or ETF trader, you can create your own trading function or custom moving average and simply use it in your trend following system.
For further information about trend following, you can read Michael Covel's book, The Complete TurtleTrader.

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