Trend following is the oldest and most proven trading strategy. The concept is simple: identify the direction of the prevailing trend and trade in that direction until the trend ends. "The trend is your friend" is not just a cliché — academic research consistently shows that trend-following strategies have generated positive returns across decades and markets, including emerging markets like Egypt.
Identifying the trend: Use multiple timeframes to confirm trend direction. A stock is in an uptrend when: (1) Price is above the 200-day SMA (long-term uptrend). (2) Price is above the 50-day SMA (medium-term uptrend). (3) The 50-day SMA is above the 200-day SMA (confirmed trend). (4) ADX is above 25 (the trend has strength). When all four conditions are met, you have a strong, confirmed uptrend suitable for trend-following entries.
Entry strategies: (1) Pullback entry — the most common approach. Wait for price to pull back to a key support level (50-day SMA, Fibonacci 38.2% or 50% retracement, prior breakout level) and enter when it shows signs of resuming the trend (bullish candle pattern, RSI bouncing from oversold). This offers a better risk-reward than chasing breakouts. (2) Breakout entry — enter when price breaks above a significant resistance level with volume confirmation. Higher risk of false breakouts but captures the beginning of new trends.
Exit strategies: Knowing when to exit is more important than knowing when to enter. (1) Trailing stop: Use a 2-3× ATR trailing stop below the highest high. This keeps you in the trend while protecting profits. (2) Moving average exit: Exit when price closes below the 50-day SMA (for medium-term trends) or the 20-day EMA (for shorter-term). (3) Indicator exit: Exit when ADX peaks and starts declining from above 40, or when RSI shows bearish divergence at overbought levels.
Risk management in trend following: (1) Never risk more than 1-2% of your portfolio on a single trade. (2) Use ATR-based position sizing to normalize risk across all trades. (3) Accept that trend following has a low win rate (typically 35-45%) but high reward-to-risk ratio (2:1 or better). Most trades are small losses; the occasional big winner more than compensates. (4) Do not average down in a trend-following system — if the trend breaks, exit.
Common trend following mistakes: (1) Entering too late — after a trend has been going for months and is overextended. (2) Exiting too early — selling at the first sign of a pullback rather than using a systematic exit rule. (3) Fighting the trend — trying to short a stock in a strong uptrend or buy one in a strong downtrend. (4) Ignoring volume — a trend without volume support is unreliable. (5) Overtrading — not every stock is trending; be selective.
Trend following in the Egyptian market: The EGX has clear trending periods, especially when driven by institutional buying or macro events (currency moves, interest rate decisions). FoudaLens's scoring system is fundamentally a trend-following system — it rewards stocks with strong trends, confirmed momentum, and volume support. Use the Fouda Score as a screening tool to identify trending stocks, then apply your own entry and exit rules. Best applied to EGX30 and EGX70 stocks with adequate liquidity. This is not financial advice.
This content is for educational purposes only and does not constitute financial advice. Always do your own research before making investment decisions.