Many are curious about the secret to safely earning a 1% daily profit through trend following trading, but achieving consistent returns actually requires clear principles and analysis. This article, based on Richard Kwon's book, breaks down the core principles of trend following trading into strategies that remain effective in 2026.
What is Trend Following Trading and Why Is It Important?
Trend following trading is a strategy that identifies existing market trends and trades in their direction. It's based on the simple principle of 'buy in an uptrend, sell in a downtrend,' but its practical application requires deep understanding. Author Richard Kwon, after mentoring numerous traders for 17 years, presents a method for defining and analyzing trends through the PST theory. PST stands for Trend, Period, and Strength, and Kwon further refined trend definition by developing the PTS2 indicator, adding Change, Intensity, and Cycle. This analysis can be applied to various assets like domestic and international stocks, futures, options, and cryptocurrencies, making it particularly suitable for busy professionals with time constraints. In my own investment experience, following the trend is a realistic way to reduce volatility and expect steady profits. However, since no trend lasts forever, identifying trend reversal points is crucial.
How to Analyze and Interpret Profitable Trends?
The key to trend analysis lies in understanding market participant psychology and trading volume. The author suggests visually interpreting charts through the concepts of 'buy area' and 'sell area.' This method not only tracks price movements but also expresses the strength of buying and selling pressure in specific zones as areas, aiding more intuitive comprehension. Furthermore, a specific signal system, including 'potential signals,' 'quantum signals,' and 'meta signals,' provides clear guidelines on when to buy and sell. These signals help detect subtle market shifts and capture high-profit potential timing. Utilizing these analytical tools allows for objective, data-driven trading decisions, free from emotional biases. However, this is not a perfect prediction method, so adhering to stop-loss principles is always essential.
What Are the Specific Signals and Application Methods for Trend Following Trading?
In trend following trading, establishing clear criteria for entry and exit is paramount. The potential, quantum, and meta signals introduced in the book serve as indicators to aid these decisions. Potential signals anticipate the possibility of a trend's start, quantum signals measure the trend's strength, and meta signals indicate whether the trend is continuing or likely to reverse. By comprehensively utilizing these signals, even busy investors can mechanically trade by checking charts at regular intervals. Trend following is particularly suitable for investors who appreciate patience, have low emotional volatility, and strictly adhere to principles. However, it can be challenging for investors with high volatility or those who frequently make emotional judgments. Therefore, it's important to carefully assess if it aligns with your investment style.
What Are the Precautions and Common Mistakes in Trend Following Trading?
While trend following trading is an attractive strategy, it's important to be aware of certain precautions and common mistakes. First, in sideways markets where trends are unclear, frequent losses can occur. In such situations, observing from the sidelines is better than forcing trades. Second, entering a trade after a trend has already significantly progressed can lead to substantial losses from unexpected reversals. Thus, precise signal interpretation at the entry point is critical. Third, failing to adhere to stop-loss principles. Trend following inherently requires stop-losses; therefore, positions must be closed without hesitation once the predetermined stop-loss level is reached. In my experience, many investors miss trend reversals or break their principles due to the psychological urge to recover losses. To minimize these mistakes, it's crucial to establish your own clear trading rules and consistently practice them. The optimal strategy can vary based on individual investment styles and market conditions, so seeking expert advice is also a good option.
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