A trend-following strategy is a trading approach that aims to capitalize on the continuation of existing market trends. It is based on the idea that asset prices tend to move in sustained directions (upwards or downwards) over time, and traders can profit by identifying and riding these trends until they show signs of reversal. This strategy is commonly used in stocks, forex, commodities, and futures markets.

Trend-following strategies rely heavily on technical analysis tools and indicators to identify trends. Commonly used tools include moving averages, trendlines, and momentum indicators like the Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD). For example, a trader might buy an asset when its price crosses above a long-term moving average, signaling an uptrend, and sell when it falls below, indicating a potential downtrend.

The strategy works by entering trades in the direction of the trend and holding positions until there is evidence of a trend reversal. It requires discipline and patience, as trends can last for extended periods. Risk management is crucial, as false signals or sudden reversals can lead to losses. Trend-following strategies perform well in trending markets but may struggle in sideways or choppy conditions. Overall, it is a popular strategy for traders seeking to capture large price movements over time.