Trend-following trading is somewhat overhyped, and in my past interactions with other traders, my preference for swing trading was often ridiculed, as if trend trading is the only orthodox approach, and all other trading methods are considered inferior or unorthodox.
In reality, whether it's a black cat or a white cat, the one that can catch mice is a good cat. Regardless of the trading method, each has its strengths and weaknesses. Today, I will analyze from the inside out why trend trading is difficult to profit from, to help everyone identify their own issues.
What is the trend-following trading method in forex?
As the name suggests, trend-following involves entering a position and then following the trend, closing the position when the trend reverses.
How do we follow the trend? The most common method is to use technical indicators to track the trend, closing the position when the indicators signal a reversal. For example, using a double moving average to track the trend, as shown in the image below.
The image shows an hourly candlestick chart of US crude oil, where the two moving averages cross at the bottom of the market to confirm a reversal, and a long position is entered, held until the moving averages form a death cross above, signaling that the trend is about to reverse, and then the position is closed.
Afterward, the market enters a consolidation phase, during which there is an opportunity to open a position with a golden cross and close it with a death cross, but this trade almost yields no profit.
After the consolidation ends, another golden cross signals to enter the position, and the position is closed at the death cross at a higher level.
This exit method is a technical standard for trend-following trading using double moving averages. Next, let's analyze the two reasons why this type of trading fails to make a profit.
Issue 1: Phase problem.This issue can be divided into two levels:
(1) The trading time frame is too short.
We all know that the market trend oscillates between consolidation and trend, and trend-following trades will suffer continuous losses when encountering a consolidative market. Moreover, the distribution of consolidation and trend is not uniform. If one experiences a long period of consolidation, the statistical results of trend-following trades will definitely be losses.
It's like running a business during the off-season; looking only at the profits during the off-season will certainly be unsatisfactory.
(2) The overall trend is biased towards consolidation.
Friends with years of trading experience can actually sense the changes in market trends across different years. Some years have smooth trend movements with large fluctuation ranges, while other years have more consolidative trends with smaller amplitudes.
This leads to the trend-following trading logic performing well in some years and poorly in others, with extreme cases even resulting in losses, which is possible.
Since 2024, the fluctuation range of gold has increased. Previously, it was around 20-30 USD per day, but now it is basically above 40 USD. With a larger space for trend trading, the profit performance will be better.
The chart is a daily K-line chart of spot gold. I have selected a relatively normal daily K-line in the chart, with a high point of 2328 and a low point of 2283, and the daily fluctuation reached 45 USD.
It's like running a business; some years are prosperous with more profits, while other times the market is not favorable, and profits are less. These are natural laws that cannot be changed.Question 2: The method of trend trading is too crude and cannot be executed properly.
Many people think trend trading is very simple, and there are also many super simple trend trading methods on the internet, such as tracking the trend by going long above a single moving average and short below it, following the trend with the channel method in the Turtle Trading Rules, and tracking the trend with trend lines in trend trading methods.
These methods are theoretically sound, but they all have problems when it comes to execution because they are too crude. They suffer significant wear and tear in incompatible choppy markets, leading to consecutive losses and severe account drawdowns.
Severe losses lead to a collapse of mentality, and the execution power will be compromised. The trading system cannot be carried out, ultimately resulting in losses.
I once traded for several months using the trend line tracking method in trend trading. At the beginning, I was full of ambition, but in the end, I was defeated after a series of mistakes, and I missed out on the big market movements that followed.
When it comes to the execution of trading, you might think you can achieve 10 points, but in actual operation, you can only achieve at most 3 points, which is not an exaggeration at all.
Therefore, the trading logic of tracking trends needs to filter signals and choose opportunities with higher certainty to trade. Although filtering may miss some market movements, it is still worth it in order to ensure execution.
Only when the execution is in place can the trading results be in place.
