Trend-following revisited – trading setup

In Chapter 9, Trading Strategies and Their Core Elements, we considered trend-following and came to the conclusion that although it is one of the simplest and most intuitive trading strategies, we still need a set of rules that determine the following:

• Whether there is a trend in the market
• Whether the trend goes north or south (up or down, that is)
• When it’s time to join the trend (buy or sell respectively)
• When it’s time to exit the existing position (so we expect the trend to end and/or reverse)

Let’s understand more in the upcoming sections.

Determining a trend, part 1 – market model

If I ask you whether it’s sunny or rainy outdoors, I’m sure you won’t hesitate with an answer in most cases. You can easily tell one from another because you are very familiar with a number of attributes that help you make the decision. Indeed, it’s easy to tell...