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🎯 Strategy and practice · Intermediate · 10 min read · Lesson 31 of 42 · Free with an account

Trend following for stocks and indices: how to find a trend, join it and get out

Trend following means buying something that is already rising and holding it while it keeps rising, then getting out when the rise ends. You do not try to buy at the bottom or sell at the top. You try to catch the middle of a big move, accept many small losses, and let a few big winners pay for them.

By the Africa.Forex Academy · Updated

What a trend looks like

An uptrend is a series of higher highs and higher lows: each rally goes further than the last, and each dip stops above the last dip. A downtrend is the opposite. A sideways market has no clear direction, and trend followers lose money there.

  • Daily chart first: decide the trend on the daily chart, then use a lower time frame only for timing.
  • Moving averages: a common filter is price above a rising 200-day moving average for long-term trends, or above the 50-day for medium-term trends.
  • Index first, stock second: many stock traders only buy shares when the index (for example the JSE Top 40 or the S&P 500) is itself above its 200-day average. Most stocks fall when the whole market falls.
Tip

Draw the last three highs and lows on a chart before you look at any indicator. If you cannot see higher highs and higher lows, there is no uptrend to follow.

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Questions people ask

Does trend following work on African stocks?

It can, on liquid shares and indices. On thinly traded shares, wide spreads and sudden gaps make it harder. Test on past charts of the specific shares first.

Which moving average is best for trend following?

There is no single best one. The 50-day and 200-day moving averages are the most widely watched, which is one reason they are useful. Test what fits your time frame.

Is trend following the same as buy and hold?

No. Buy and hold keeps the investment through falls. Trend following exits when the trend breaks and may stay out for months.

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Educational content only, not financial, investment or tax advice. Trading forex and CFDs carries a high risk of losing money. Look up any term in the trading glossary.