A Trend-Following Strategy for 'BIG Profits'!
Trend-following is one of the best time-tested ways of trading in the stock market. It has been around for decades and seems to work as beautifully today as decades ago. In this type of trading, a trader simply tries to capture the majority of the trend by remaining invested in the security, till the trend reverses.
Despite being so simple, there are multiple variations to this technique and in this article, I am going to showcase one strategy, that works quite well and you can try it if you are a trend follower. I’ll try to keep it as simple and objective as possible.
First, you need an entry criterion to select which stocks to buy. For this, we will be using Bollinger Bands® which is a volatility-based indicator. The volatility spurt will be our entry criterion which is a good signal for an impending trend. Bollinger Bands denote volatility expansion when a stock closes above/below these bands. As we are talking about equity, we are only interested in upside breakouts. Once a stock closes above the upper band of Bollinger Bands, our entry criteria will be met. If there is some consolidation in the stock prior to this volatility breakout, it will be even better.
Once a stock closes above the upper band, traders can buy it the next day. Now, for the stop loss, we will be using SuperTrend with standard settings, a very famous and one of my personal favorite trend-following indicators. If the stock falls and closes below SuperTrend, our stop loss will be hit and an exit from the stock should be made.
This same SuperTrend will also be used to follow the trend. As the stock keeps on moving higher, SuperTrend will also trail behind and hence your stop loss will also keep moving up with the trend. As soon as the trend reverses and the stock closes below the SuperTrend, the trailing stop loss will be hit and profits can be booked. This strategy seems simple, yet it is quite powerful and will help you to capture the major chunk of the trend.
To further illustrate it via the chart, I have taken an example of Cyient Limited (NS: CYIE ) to showcase this strategy. As you can see, the stock gave a volatility breakout (closing above BB) on 16 November 2022 and met our entry criterion. On 17 November 2022, we can buy the stock around the previous day’s closing, in this case, it is INR 808.7.
Image Description: Daily chart of Cyient with Bollinger Bands (blue) & SuperTrend (green & red)
Image Source: Investing.com
Simultaneously, we have plotted SuperTrend (10,3) to trail our stop loss. If you look at the chart till now (26 May 2023), out exit condition hasn’t been fulfilled yet and we are sitting at a massive profit of 62%, as the current price of Cyient is INR 1,309.65. As the stock never closed below the SuperTrend, we are still holding the position.
Image Description: Daily chart of Cyient with Bollinger Bands (blue) & SuperTrend (green & red)
Image Source: Investing.com
This is the whole essence of trend-following. Obviously, you will not get such a large winner every time, but holding onto such positions can definitely make up for the small losses you will incur every now and then. After all, only 20% of your profitable trades account for around 80% of profits so it’s important not to miss such gigantic winners.
Read More: Weekend Read: A Book on ‘One of the Finest Traders’ of All Time!
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Hi Aayush,What's your view currently since the stock ha s corrected a lot since a week?Like 0
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So sweet.ideia G.Thankes.Like 4
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You're welcome :)Like
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👍Like 1
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Plsss mention the time frame also for this setup🙂Like
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you can see it the left side of the chart.. it is daily timeframeLike
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Daily.Like
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Wonderful analysisLike 1
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Thanks, Paul :)Like
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ALL THIS INDICATORS ARE LAGGING INDICATORS. THEY FOLLOW THE PRICE ACTION KEEP IT SIMPLE. FOLLOW THE PRICE ACTION INSTEAD FOLLOWING INDICATIONS AS INDICATORS ARE LAGGING AND YOU WILL BECOME LAGGARDSLike 3
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@rahul deshmukh how to follow price action??Like
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