Trend Following Strategy — "Go With the Flow"

Today, we're diving into what might be the single most powerful strategy for beginners in the futures market: trend following. I've guided thousands of trading newcomers to success over my career, and I can tell you with absolute certainty that learning to "go with the flow" is like discovering a trading superpower that the majority of struggling traders never master.

Think about it: have you ever tried to swim against a powerful current? It's exhausting, dangerous, and ultimately futile. Yet this is exactly what many beginning traders do in the markets every day—fighting against established trends rather than using them to their advantage. Today, I'll show you how to identify, confirm, and ride powerful market trends for consistent profits while avoiding the common pitfalls that trap most beginners.

Why Trend Following Is Critical for Beginners

Before we dive into our story, let me emphasize why trend following is absolutely essential for your early success in futures trading:

"The trend is your friend until the bend at the end. Most beginners try to predict the bend instead of profiting from the trend."

Trend following offers several critical advantages for new traders:

• Simplicity: It's easier to identify an existing trend than to predict a reversal
• Probability: Trends tend to continue more often than they reverse
• Psychology: Trading with the trend feels more natural and less stressful
• Risk management: Trend trades typically offer clearer stop-loss placement
• Profitability: Trends can run much further than most beginners expect

Master this approach, and you'll already be ahead of 80% of retail traders who constantly fight the market's natural direction.

The Tale of Two Traders: Going With vs. Against the Flow

Meet Carlos and Jennifer, two neighbors who both decided to try futures trading after attending a financial workshop. They each funded accounts with $10,000 and began trading Micro E-mini S&P 500 futures contracts.

Carlos was drawn to the excitement of picking tops and bottoms. "The real money is in catching the reversals," he told Jennifer over coffee one morning. "Anyone can buy when the market is already going up. I want to be ahead of the crowd."

Jennifer took a different approach. "I've been studying successful traders, and most of them say to focus on trend following when you're starting out," she replied. "I'd rather make consistent smaller gains than try for home runs and strike out."

Carlos smirked. "We'll see who makes more money."

The following Monday, both neighbors noticed that the S&P 500 futures had been in a strong uptrend for several weeks. The market had risen from 4300 to 4500 over the past month, with only minor pullbacks along the way.

Carlos looked at the chart and thought, "This has gone up too far, too fast. It's due for a reversal." He decided to short (sell) two Micro E-mini contracts at 4500, expecting the market to drop back to at least 4400.

Jennifer observed the same uptrend but came to a different conclusion. "The trend is clearly up, with higher highs and higher lows," she thought. She waited patiently for a small pullback within the uptrend, then bought three Micro contracts at 4480 when the market resumed its upward movement.

Understanding Trend Following: The Basics

Let's break down the essential components of trend following that Jennifer applied:

1. Identifying the Trend

The first step is determining whether a market is trending up, down, or sideways. This can be done through several methods:

• Higher Highs and Higher Lows: In an uptrend, each peak is higher than the previous peak, and each dip is higher than the previous dip.
• Lower Highs and Lower Lows: In a downtrend, each peak is lower than the previous peak, and each dip is lower than the previous dip.
• Moving Averages: When price is above a rising moving average, the trend is up. When price is below a falling moving average, the trend is down.

"Don't try to predict the trend—simply observe it. The market will tell you which way it's going if you're willing to listen."

2. Confirming the Trend

Once you've identified a potential trend, look for confirmation through:

• Volume: Increasing volume in the direction of the trend confirms its strength.
• Momentum Indicators: Tools like RSI or MACD should support the trend direction.
• Market Breadth: In index futures, check if most underlying stocks are moving in the same direction.

3. Entering with the Trend

The key to successful trend following is entering during pullbacks or consolidations within the larger trend:

• Pullback Entries: Buy during small dips in an uptrend or sell during small rallies in a downtrend.
• Breakout Entries: Enter when price breaks above a short-term resistance in an uptrend or below support in a downtrend.
• Moving Average Bounces: Enter when price pulls back to and bounces off a key moving average.

4. Managing the Trade

Once in a trend trade, proper management is crucial:

• Trailing Stops: Move your stop-loss in the direction of the trend to protect profits.
• Partial Profits: Consider taking some profits at logical resistance/support levels.
• Adding to Winners: In strong trends, consider adding to your position after confirmation of continuation.

Back to Our Story: The Power of Trend Following

Let's return to Carlos and Jennifer as their trades unfold.

The day after they placed their trades, a major tech company announced better-than-expected earnings, giving a boost to the entire market. The S&P 500 futures gapped up at the open and continued climbing throughout the day, reaching 4550 by the close.

Carlos was immediately underwater on his short position. His two contracts were now showing a loss of $500 (50 points × $5 per point × 2 contracts). "It's just a temporary spike," he told himself. "The reversal is coming any day now."

Jennifer's long position, meanwhile, was showing a profit of $1,050 (70 points × $5 per point × 3 contracts). Following her plan, she moved her stop-loss up to her entry point at 4480, ensuring she wouldn't turn a winning trade into a loser if the market reversed.

Over the next week, the uptrend continued, with the S&P eventually reaching 4600. Carlos, still convinced a reversal was imminent, held his losing position, which was now down $1,000. The emotional stress was affecting his sleep and his judgment.

Jennifer, following her trend-following rules, had moved her stop-loss up several times as the market climbed. When the S&P finally had a larger pullback and hit her trailing stop at 4570, she was automatically exited from the trade with a $1,350 profit.

"The amateur trader hopes the market will validate their opinion. The professional trader simply validates what the market is actually doing."

The Trend Following Toolkit: Essential Tools and Techniques

Now let's explore the practical tools and techniques Jennifer used in her successful trend trade:

1. Moving Averages: The Trend Follower's Compass

Moving averages smooth out price action to help identify the trend direction:

• 20-period EMA: Shows the short-term trend
• 50-period SMA: Shows the intermediate-term trend
• 200-period SMA: Shows the long-term trend

How to use them:

• When price is above all three and they're stacked in ascending order (20 above 50 above 200), the uptrend is strong
• When the 20 EMA crosses above the 50 SMA, it's often a sign of a new uptrend beginning (the "Golden Cross")

2. Pullbacks: The Trend Follower's Entry Point

Pullbacks provide lower-risk entries in the direction of the trend:

• Fibonacci Retracements: Look for pullbacks to the 38.2% or 50% retracement levels
• Moving Average Tests: Entries when price pulls back to test a rising moving average
• Support/Resistance Levels: Previous resistance becomes support in an uptrend

Example: In an uptrend, wait for a pullback to the 20 EMA or 50 SMA, then enter when price shows signs of resuming the uptrend (such as a bullish engulfing candle).

3. Breakouts: Catching the Trend's Continuation

Breakouts signal the resumption of the trend after consolidation:

• Range Breakouts: Enter when price breaks above the high of a consolidation range in an uptrend
• Trendline Breaks: Enter when price breaks above a minor downtrend line within the larger uptrend
• New Highs: Enter when price makes a new high after a period of consolidation

Example: If the market has been consolidating between 4500 and 4530 within a larger uptrend, place a buy stop order at 4531 to catch the breakout.

4. Trailing Stops: Protecting Profits While Letting Winners Run

Trailing stops are the trend follower's best friend for maximizing profits:

• Percentage Trailing Stop: Move your stop to maintain a fixed percentage below current price
• Moving Average Trailing Stop: Place your stop just below a rising moving average
• Swing Point Trailing Stop: Move your stop below each new significant low in an uptrend

Example: In an uptrend, after each new significant higher low forms, move your stop-loss up to just below that low.

Real-World Application: A Day Trading Trend Following Scenario

Let's see how this works in a real-time day trading scenario:

Scenario: Trading an Intraday Trend in E-mini S&P 500 Futures

8:30 AM ET: Major economic data is released, causing the market to gap up and start trending higher.

Your Analysis: The market is showing strong momentum with each pullback being shallow and followed by new highs—a classic uptrend pattern.

Your Trend Following Plan:

1. Identify the Trend: The 20 EMA is above the 50 SMA, and price is making higher highs and higher lows—confirming an uptrend.
2. Wait for a Pullback: Rather than chasing the market higher, you patiently wait for a pullback to the 20 EMA.
3. Confirm the Entry: When price touches the 20 EMA and forms a bullish candle pattern (like a hammer or engulfing pattern), you enter long with two Micro E-mini contracts.
4. Set Initial Stop: Place your stop-loss below the most recent significant low or below the 50 SMA for wider protection.
5. Trail Your Stop: As the market makes new highs, move your stop up to protect profits, placing it below each new significant swing low.
6. Take Partial Profits: Consider selling one contract at a predetermined target (perhaps a previous resistance level) and letting the other run with a trailing stop.
7. Exit the Trade: Either your trailing stop will be hit as the trend eventually ends, or you'll exit based on a trend reversal signal (like a break of the 20 EMA with strong momentum).

The Transformation

Three months into their trading journeys, Carlos and Jennifer met again for coffee.

Carlos looked tired and stressed. "I've been fighting this bull market for weeks," he admitted. "Every time I short, thinking the top is in, the market keeps going higher. I've lost almost 40% of my account trying to catch the reversal."

Jennifer nodded sympathetically. "I found that trying to predict reversals was too hard. Instead, I've just been following the trend, entering on pullbacks, and using trailing stops. My account is up about 35%."

She showed Carlos her trading journal, which revealed her disciplined approach:

• She only took trades in the direction of the established trend
• She waited for pullbacks to reduce her risk
• She used trailing stops to protect profits while letting winners run
• She never argued with the market about which direction it "should" go

Carlos had an epiphany. "So instead of trying to guess where the market is going next, you just observe where it's already going and join in?"

"Exactly," Jennifer replied. "The trend gives you a tailwind. Fighting it is like trying to run up a down escalator—possible, but why make it so hard on yourself?"

"The market can remain irrational longer than you can remain solvent. Trend followers don't care if the market is 'rational'—they simply align themselves with its actual direction."

The next day, Carlos changed his approach. Instead of looking for reversal signals, he identified the current trend and waited patiently for a pullback to enter. His very first trend-following trade resulted in a modest profit, but more importantly, it felt much less stressful than fighting the market's direction.

Practical Tips for Successful Trend Following

Here are some guidelines to help you implement trend following in your trading:

1. Confirm the Trend on Multiple Timeframes

Always check at least two timeframes before entering a trend trade:

Example: If trading on a 15-minute chart, confirm the trend direction on the 1-hour and 4-hour charts as well.

2. Wait for Ideal Entries

Patience is crucial—wait for pullbacks rather than chasing the trend:

Example: If the market is in an uptrend but extended far above its moving averages, wait for a pullback to the 20 EMA before entering.

3. Scale Into Positions

Consider building your position as the trend confirms itself:

Example: Enter with 1/3 of your planned position at the initial pullback, add 1/3 when the trend resumes, and the final 1/3 when momentum confirms.

4. Use Multiple Exit Strategies

Don't rely on a single exit method:

Example: Take partial profits at predetermined targets while using trailing stops for the remainder of your position.

5. Adapt to Changing Trend Strength

Be aware that trends have different phases of strength:

Example: In a strong trend phase, use tighter trailing stops. In a weaker trend phase, give the market more room to breathe.

A Day in the Life: Using Trend Following in Real Trading

Let's walk through a typical trading day using the trend following approach:

7:00 AM: You begin your day by analyzing the overnight action in the E-mini S&P 500 futures. You notice the market has been in an uptrend for several days, with the 20 EMA above the 50 SMA and price making higher highs and higher lows.

7:30 AM: You identify potential support levels where you might enter if the market pulls back. The 20 EMA is currently at 4520, and there's also horizontal support at 4515 from yesterday's consolidation.

9:15 AM: The market opens and initially moves higher, but then begins to pull back toward the support levels you identified.

9:45 AM: The price touches 4518, right near the 20 EMA, and forms a bullish engulfing candle—a sign that buyers are stepping in at support.

Your Action: You enter long with two Micro E-mini contracts at 4520 as the market begins moving up again. You place your initial stop-loss at 4505, below the most recent swing low.

10:30 AM: The market continues higher, reaching 4535. You move your stop-loss up to 4515, locking in at least some profit if the market reverses.

11:15 AM: The uptrend accelerates, and the market hits 4550. You sell one contract to secure a profit of $150 (30 points × $5) and move your stop on the remaining contract to 4535, ensuring you'll keep at least $75 profit overall.

1:30 PM: The market continues trending up throughout the day, eventually reaching 4570. Your trailing stop is now at 4555.

2:45 PM: A sudden bout of selling hits the market, and your trailing stop at 4555 is triggered, closing your second contract for a profit of $175 (35 points × $5).

Total Profit: $325 ($150 from first contract + $175 from second contract)

The Key Insight: Throughout this entire trade, you never tried to predict where the market would top out. You simply identified the existing trend, entered on a pullback, and managed your position as the trend continued. When the trend eventually showed weakness, your trailing stop took you out automatically.

Final Thoughts

Trend following is not just a strategy—it's a philosophy that acknowledges a fundamental market truth: prices tend to move in persistent directions for longer than most people expect. By aligning yourself with these directional moves rather than fighting them, you dramatically increase your odds of success.

Remember:

• Identify the trend before considering any trade
• Enter on pullbacks to get better prices and reduce risk
• Use trailing stops to protect profits while letting winners run
• Never argue with the market about which direction it "should" go

As you continue your futures trading journey, make trend following your foundation. There will be time later to explore more complex strategies, but mastering the art of "going with the flow" will serve you throughout your entire trading career.

The most successful futures traders aren't those who make the most spectacular predictions—they're those who most skillfully align themselves with the market's actual behavior.