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Whale Trading

MA Trend Following Strategy: Riding the Big Move with Moving Averages

In this article, we cover a Trend Following Strategy utilizing Moving Averages (MA).

Many learn that "Moving averages are support/resistance," but in practice, it is closer to the following:

"The moving average is the center line of the current trend, and pullbacks near it can be an opportunity to ride the trend."

In other words, rather than one line controlling the price, it is more realistic to view it as a tool to organize "where can I join cheaply/less riskily" within an already formed trend.

The diagram below shows:

  • Left: An example of following the trend by entering at every pullback near the MA in a clear uptrend.
  • Right: An example of frequent stop-losses occurring when applying the same MA criteria in a ranging market (box).

Comparing the two.

Understanding this difference is very helpful in distinguishing between:

  • Environments where the MA trend-following strategy works well and
  • Environments where you just keep getting stopped out.

1. Basic Idea of the Strategy

The core of the Moving Average Trend Following Strategy can be summarized in the following two lines:

  1. As covered in Trend Indicators, first define the major direction (trend) with MA slope/alignment.
  2. In that direction:
    • When a pullback occurs,
    • Or when a re-breakout after correction occurs, enter and hold as long as possible until the trend is invalidated.

Drawing a simple practical example:

  • Daily Uptrend Basis:
    • Price moves above the MA (e.g., 20~60 day line),
    • MA slopes upward.
  • Entry:
    • Price corrects near the MA → Strong buying candle seen in Candle Basics appears → Enter.
  • Stop Loss:
    • Clearly breaking the recent swing low,
    • Or multiple candles closing below the MA.
  • Exit:
    • When the big picture swing ends and from the perspective of Swing vs Correction, a point judged to be the start of an opposite swing.

2. Which MA to Use? (Short-term/Mid-term/Long-term Combination)

2-1. You Can Use Just One MA

Initially, just one MA is sufficient.

  • Example: Daily 20MA, 50MA, 60MA, etc.
  • Criteria:
    • It is important to choose an MA that fits "the period I view the swing".
    • Adjust like 20MA for day trading focus, 50~60MA for swing/position trading.

2-2. Short-term/Long-term 2 MA Combination

Once you get a little used to it, you will use a Short-term + Long-term MA combination.

  • Example: 20MA (Short-term) + 60MA (Long-term)
    • Look for longs only when the price is above the Long-term MA,
    • Aim for entry at pullbacks near the Short-term MA.

This combination expands into a more specific swing strategy in 60-Day Moving Average Strategy.

2-3. "Role" is More Important than "Number"

MA numbers can vary depending on the market/product/style, but the following two roles are almost common.

  • Long-term MA: Direction Filter deciding "Whether to view this item as Long or Short now"
  • Short-term MA: Pullback Entry Criteria or Trailing Stop Criteria within that direction

In other words, rather than "Which is better among 20 vs 21 vs 25?", "What role will I use this MA for within the strategy?" is more important.

3. Entry Scenarios: Pullback vs Breakout

There are largely two entry methods frequently used in MA trend following strategies.

  1. Pullback Entry
  2. Breakout (Trend Resumption) Entry

3-1. Pullback Entry

  • Condition Example:
    • Daily price sloping upward above Long-term MA
    • Price comes down near MA due to short-term correction
    • Strong buying candle, long lower shadow, small doji + next bullish candle, etc. seen in Candle Basics appear
  • Entry:
    • Enter at the close of that candle or early in the next candle
  • Stop Loss:
    • Immediately below Swing Low or a certain % below MA section

The diagram below shows:

  • Left: Example of entering in multiple splits at pullbacks near MA during an uptrend
  • Right: Example of observing without chasing in a section surging without pullback

Comparing the two.

3-2. Breakout (Trend Resumption) Entry

  • Condition Example:
    • During daily uptrend,
    • After days of box/triangle consolidation Long bullish candle strongly breaking the top + Volume increase
  • Entry:
  • Stop Loss:
    • Middle~Bottom of the breakout candle, or below the section where re-breaking the box top fails

Breakout entry has:

  • Psychological burden of "It seems to have risen a lot already...", but
  • The advantage of being able to catch the beginning of a trend or re-acceleration section.

4. Exit and Invalidation: How Far to Hold?

The most difficult part of trend following strategies is the exit. The general principles are as follows:

  1. Set an objective signal to view the trend as ended.
  2. Until then, assume it is "just a correction" and hold strategically.

4-1. MA Based Invalidation

Representative criteria are:

  • When multiple candles consistently close below MA (Long basis), or
  • When MA slope becomes flat or bends and it is judged that the trend has weakened on Trend Indicators.

You can use this as a partial exit signal, and view full exit together with the criteria below.

4-2. Swing Structure Based Invalidation

From the perspective of Swing vs Correction:

  • Uptrend:
    • When the "structure of higher highs and higher lows" breaks,
  • Downtrend:
    • When the "structure of lower highs and lower lows" breaks,

Are viewed as candidates for trend termination.

In practice:

  • Often place final exit or significant risk reduction
  • In the section where MA breakout + Swing structure collapse occur simultaneously.

The diagram below shows:

  • Top: Price following MA in an uptrend and intermediate pullback/re-acceleration sections
  • Bottom: Example marking swing highs/lows and final invalidation point in the same section

Together.

5. Risk Management and Position Sizing

MA strategies look simple on the surface, but if you violate Risk Management, your account will quickly shake.

Especially check the following:

  1. Maximum Loss Percentage per Trade

    • Whether 1% or 2%, first set a fixed risk limit based on the account.
    • If the stop loss distance has become far, you must reduce position size, not move the stop loss further.

  2. Consecutive Loss Tolerance Range

    • In ranging markets, MA strategies may produce multiple consecutive losses.
    • It is good to confirm through backtesting/review that "Due to the nature of the strategy I designed, N consecutive losses can sufficiently occur."

  3. Additional Entry (Pyramiding) Rules

    • When the trend continues well
      • Enter some initially,
      • You may do additional entry as the trend is confirmed.
    • However, total position size must be limited so as not to exceed the total risk limit per account set in Risk Management.

6. Which Market/Environment to Use In?

Finally, let's summarize when the MA trend following strategy becomes a "tool" and when it becomes a "trap".

  1. Time Frame

    • Basically, it is more stable to use for trend judgment on 4-hour ~ Daily or higher.
    • In minute/tick units, the MA itself is easily swayed by noise.

  2. Market Structure

    • As seen in Support/Resistance Basics, Swing vs Correction
    • MA trend following has meaning in sections where there is a clear swing structure upward/downward.
    • If you trade only looking at MA within a narrow box, you will fight against short-term noise.

  3. Combination with Indicators

    • MACD, DMI/ADX of Trend Indicators can be used to filter "Is this an environment worth trend following now".
    • RSI, Stoch of Oscillators help to additionally check if the pullback near MA overlaps with oversold/overheated structure.

7. Checklist Before Practical Application

Before actually using the MA trend following strategy, it is good to answer at least the questions below.

  1. Is the current market a trending market or a ranging market? (Refer to Trend Indicators, Swing vs Correction)

  2. What role (Direction Filter / Entry Criteria / Trailing Stop) does the MA I use play?

  3. Between Pullback Entry and Breakout Entry, which will I use as the main strategy?

  4. Is the invalidation criteria (criteria to view the trend as ended) clear from the perspective of Price/MA/Swing Structure?

  5. Is the risk being controlled from the perspective of Risk Management based on one trade and the entire account?

In the next article, we will continue to look at a trend following strategy designed a bit more "swing trader-like" centering on MA-60 (or similar long-term MA) in