The terms ‘trend continuation’ and ‘trend following’ have caused me some confusion for quite some time until about 6 months ago.
The first obvious difficulty is the use of the words themselves. It’s natural to think that if a trend is continuing then you must be following it. But the two techniques are rather different. I will try to crystallise what I’ve discovered (and I may not be 100% correct). [See disclaimer at the end.]
I’ll consider bullish markets to make it easier. In bullish trend continuation trades you’re
- spotting the trend (by various methods)
- waiting for an opportune pullback and expecting the momentum of the trend to push price higher. (certain criteria used to determine size of pullback).
- You therefore enter long on the pullback with a reasonable stop-loss (possibly at the last level of support).
I’m unable to go into ‘how to’ on that else the idea will get lost in complexity. When you enter long at the pullback you work out where your target may be by various other techniques. If momentum of the trend pushes price up to your target, you take the money and run. Trend continuation trades can use support-resistance based assessments or harmonic trading methods. See example in video below.
Similarly I use bullish markets for explanation. This is actually following the trend of the market for very long distances up.
- The break in trend is identified using Williams Vix Fix or say Guppy techniques.
- You use various techniques to catch the entry point (e.g. Williams Vix Fix or Guppy CBL or various candlestick formations or all the latter together).
- Stop-losses are determined by other techniques.
- You trail your stop up according to certain criteria.
The big difference in trend following is that you allow the market to take back from you quite a lot, so long as you remain following the trend up. Trailing stops up in a trend continuation trade is not a simple matter. Some people use the 21 EMA, some use Guppy CBL, some use Vstops and others use ATR stop-loss calculations. There may be other things to use as well.
Trend following trades are not easy if one has been groomed and set to think in a trend continuation way or if one has been a scalper for a long time. Trend following is about winning the big Elliott wave three-type movements in price. Scalpers will have a fit, as trends following trades get stopped out by losing say 200 points out of 2000 points gain in the trend.
What is NOT trend following is important:
- It is not trend continuation.
- It is not harmonic trading (though harmonic techniques can be used to identify potential trend changes).
- Not scalping.
- Not taking the money and running when you think you’ve made enough money because you’d like to hold on to the money. Why? Because trend following involves giving back to the market but staying in the trend up according to specific criteria. This method is about stealth.
- Not taking money when you have enough on one instrument and then switching to another instrument and hoping to taking some more there. This should become apparent to those who have understood the Williams Vix Fix method.
This is not a tutorial on how to do the various methods above. A deep understanding of the methods above requires interactions with markets. It cannot be taught by reading about it, attending lectures, or just watching videos.
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