Trend Following: Riding the Wave of the Market

One of the most popular ways to trade is by following the trend. Instead of guessing tops and bottoms, you simply ride the wave in the direction the market is already moving. At GAR Capital, one of our favorite strategies is breakouts and breakdowns with high volume, especially in options contracts. Let’s break this down.

📈 What is Trend Following?

Trend following means trading with the overall direction of the market. If price is going up, you look for chances to buy. If price is going down, you look for chances to sell or buy puts/options. 👉 Think of it like surfing. You don’t try to fight the wave — you ride it.

🔑 Why Trend Following Works

1. Trends Last Longer Than You Think – Big moves often take weeks, months, or even years to play out.

2. Less Stressful Than Guessing – You don’t need to call the top or buy the bottom.

3. Volume Confirms the Move – Strong trends usually come with high volume and lots of participation.

🚀 Breakouts and Breakdowns (GAR’s Favorite Strategy)

Breakout: When price pushes above resistance, a ceiling it couldn’t pass before. Best breakouts happen with high volume, showing lots of buyers jumping in. Options traders often buy calls on breakouts. 👉 Example: A stock struggles to get past $100 three times. On the fourth try, it breaks above $100 with massive volume — that’s a breakout.

Breakdown: When price falls below support, a floor it bounced from before. Best breakdowns also happen with high volume, showing sellers in control. Options traders often buy puts on breakdowns. 👉 Example: A stock holds $80 many times. One day, it crashes below $80 with big volume — that’s a breakdown.

📊 Tools That Help Trend Followers

Moving Averages (50, 100, 200-day) confirm direction. Volume validates breakouts and breakdowns. Momentum indicators such as RSI and MACD check if strength is still there.

📝 Example Trade

Imagine Netflix has been trading sideways between $350 support and $400 resistance. Price finally breaks above $400 with the highest volume in weeks. A trend follower buys calls or shares, expecting price to continue higher. Stop-loss goes just below $400 in case it fails.

🚫 Common Mistakes

Jumping into breakouts without waiting for volume confirmation. Buying too late and chasing after the move already happened. Forgetting to set stop-losses if the breakout fails.

🎯 Quick Takeaways

Trend following means ride the wave, don’t fight it. Breakouts above resistance and breakdowns below support are powerful entry points. Always confirm with volume to avoid fakeouts. Works especially well with options contracts for bigger moves.

🔑 Next in Strategies & Tactics: Mean Reversion: Betting on the Bounce