AUSFOREX Official Website: Advantages and Disadvantages of Trend-Following Trading

The trend-following method is based on the trading philosophy of "cut off losses and let profits run". The trend-following method believes that the market will continue to rise or fall due to human greed and fear and the impact of the economic cycle, which will form a trend. By capturing the main trend of the market, the market will obtain average or exceeding market average profits.

Trend-following traders believe that market price fluctuations are unpredictable, that no one knows how high or low the market will go, that no one knows when the market will fluctuate or reverse, that the market is always right, and that only prices (rather than traders' predictions) can truly reflect the future.AUSFOREX official websiteTherefore, trend followers never predict the top and bottom of the market, but only passively follow prices. Trend followers will buy after an uptrend is formed and sell after a downtrend is formed, so the lowest and highest prices will never be with them.

Advantages of trend trading:

1. Since the holding time of trend trading is relatively long, there is no need to pay too much attention to the market.

2. Trend trading doesn't require daily operation, and transaction costs are relatively low.

3. Generally speaking, the average profit of each trend transaction is relatively large, and the average profit-loss ratio is high.

4. Most trend trading systems can be programmed to form a mechanical trading system, which can largely avoid the influence of personal emotions and achieve long-term stable returns.

Disadvantages of trend trading:

1. Trend trading takes a long time to hold positions, so it requires great patience.

2. There may be multiple false breakouts in the market during the consolidation period, resulting in frequent stop-loss appearances in the trend trading system, resulting in multiple consecutive losses and profit recovery, thus causing traders to lose confidence in the trading system.

The success rate of trend-following transactions is generally relatively low, only 30% to 40%, and generally does not exceed 50%, making it difficult for many people to persevere.

4. Trend trading is a typical case of chasing up and selling down, where you wait until the trend becomes apparent before buying or selling, resulting in significant profit taking.

When any trading strategy or system is accepted by the majority of the market and can be followed, then the system will lose its original effectiveness. It is precisely because of the shortcomings of trend tracking systems that go against human nature and intuition that trend tracking systems thrive.