Strategies · Lesson 6 · Beginner
Trend following: the four rules
You trade an established trend with a pullback entry, hold winners and cut losers fast, without guessing tops or bottoms.
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Goodman's four rules
Grow your Profits (let winners breathe), Cut your Losses (cut losers fast), Trade the Trend until it bends, Control the Voices (stay disciplined).
Get in during the early part of an already established trend, not at the bottom. Only monkeys pick bottoms. A good trend trade gives positive feedback fast.
Pullback entry, hold, cut when the trend bends
Interactive exercise: here you learn right on the chart, with feedback on every click. Sign up freeto start it.
Apply the four rules to a running trade.
Interactive exercise: here you learn right on the chart, with feedback on every click. Sign up freeto start it.
The key points at a glance
- Trade with the trend, do not guess the bottom.
- Enter on the pullback of an established trend.
- Stop below the structure, let winners run.
- A few big winners overcompensate for many small losers.
Deep dive
Grow your profits: the sitting is what makes the money
Letting a winner breathe is the hardest rule in practice. Livermore: it is not the thinking that makes the big money, it is the sitting. Meanwhile you only trail the stop upward, never down.
Marcus's most traumatic trade was not a loss but a winner sold too early: he watched a soybean bull market run twelve limit-up days while Seykota stayed in. Goodman's only monkeys pick bottoms: you buy the pullback of an established trend, not the exact low.
Cut your losses is the hardest rule
Cutting losses quickly runs against your nature. The disposition effect: selling winners too early, holding losers too long. Behind it sits the ego and the break-even trap, I get out as soon as I am back to zero.
- Odean, 10,000 accounts: the winners people sold rose 3.4 percent more than the losers they held
- Move the stop only in the direction of the trade, on a long held or trailed up
- When price breaks below the most recent structure, the trend is over
Honest limits of trend following in crypto
Trend following is not automatic. Marcus warns that it works worse than it used to because so many pros and bots see the same chart points. The result is more false breakouts: briefly above a level, sweep the stops, reverse.
- Only trade established trends with a clean pullback entry
- Do not put your stop at the round, obvious level
- Pyramiding raises the shakeout risk, add only in small size
- Drill the pattern risk-free on the demo exchange
Sources: Goodman, Schwager, Murphy
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