Quote from NoDoji:
Cut your losses, let winners run.
Trade price, not bias.
Trade what you see, not what you think.
Think continuation.
Ditch indicators, price alone tells you everything you need to know.
[/B]
The "How-To":
Effective trend-following requires the ability to enter from pullbacks and breaks out of consolidation. Chasing a trend will generally result in getting stopped and chopped until you give up and decide the only smart way to trade is to fade trends. That will generally provide short term scalping success, but will lead to the big blowout that erases your small profits or maybe even your account.
So first learn to identify a trend (higher lows/higher highs or lower highs/lower lows) and draw trend lines and parallel channel lines. Learn to identify consolidation (narrow ranges, flags and triangles).
This is your basic framework and this information is available free on-line or in books.
Then study a hundred charts of your instrument(s) in your time frame and collect statistics in spreadsheet format until you establish with-trend pullback setups and consolidation setups that provide a statistical edge and the best levels at which to place maximum protective stops and lock in minimum profits. Capture screen shots of the setups at the hard right edge as well as after the trade plays out (before and after), so you learn to recognize the setups in real time, not just on a static chart after-the-fact.
This is one of the most important steps! It will be extremely difficult for you to trade the setups at the hard right edge unless you burn the patterns into your brain and can trust them, because high probability with-trend setups look highly improbable at the ideal entry points; they only look obvious after-the-fact.
All trends come to an end and reverse. While studying charts and collecting data on with-trend setups with positive expectancy, notice the price patterns that occur during trend reversals. Make notes about these patterns and capture screen shots of them as well, at the hard right edge and after they play out.
Trade price based on the price patterns you want to trade and have memorized -
what you see), not what you think the news will cause price to do,
not what you think price is "due" to do because it's run "too far", and
not what you think an overbought/oversold indicator tells you.
When
what you see tells you a reversal pattern is forming, get flat and wait for confirmation of the signal to trade in the direction of the potentially new trend.
When price has made a strong push in one direction and consolidates (memorize those consolidation patterns), think continuation first. Consolidation appears to be the opposite of the trending move at the hard right edge. In other words, consolidation following a move up appears to be weakness, and consolidation following a move down appears to be strength. This appearance of strength or weakness against the prevailing trend attracts novices who put on positions counter to the trend. That's why effective consolidation occurs on low volume. The institutional money (high volume) that moves price is taking a breather and the inexperienced retail traders (low volume) are getting positioned based on what they perceive as a trend reversal.
As long as what you see remains within the constraints of an intact trend, think continuation in the direction of the previous move. Very often a measured move breaks out of the consolidation. Take the time during consolidation to calculate a measured move target, which will help you let the winner run when price breaks out.
In a trend the way you let a winner run is to note the next support/resistance levels in line to be tested and watch how price reacts to each level. If a level breaks out with some conviction you can hold for a test of the next level. Following consolidation, you can generally target a move similar to the previous move (measured move).
Finally, as you study your hundred charts, make note of the price patterns that indicate a failed breakout. This where breaks out of consolidation do not run very far before reversing and breaking down a trend line or other key S/R level. This is also where a previous high/low in an uptrend/downtrend either print a double top/double bottom, or break out weakly and reverse back through a key S/R level.
Failed breakouts can lead to more consolidation or a full-fledged trend reversal.
There you have it, successful trend-following in a nutshell
