“Trend following is an exercise in observing and responding to the ever-present moment of now.”

Trend following is the art of capturing momentum in the market.

Similar to a surfer whose job is to catch part of a wave, ride it the best he can, and exit before the closeout.

An important thing to note is that we are not trying to PREDICT a trend or a price move.

So there is no need to overanalyze fundamentals such as P/E, ROE, or all other ratios that exist.

Sure, we can use it to reinforce our analysis, but our main focus is to look at current trends taking place in markets.

This brings us to the first thing that interests us:

• Strong Momentum: We want to see a strong trend in price (in the sense of our trade). This is crucial to our selection process. It is shown by prices moving up over time with strong volume.

Then, the second point is:

• Lateral consolidation of price: A trend never goes up in a straight line. Instead, it moves like stairs: strong upward movement followed by phases of consolidation. As a trend follower, we want to see a lateral consolidation of prices in the form of a chart pattern. Here we will focus on only one of them: Cup and Handle.

The Cup and Handle is a bullish chart pattern that typically indicates a potential continuation of an uptrend after a brief consolidation phase. The pattern gets its name from its resemblance to a cup (rounded bottom) followed by a handle (smaller consolidation near the highs).

The Psychology behind this pattern:

• The Cup: This shows that sellers take control of the price (and thus the latter goes down). However, new motivated buyers show up and put buying pressure on the low of the cup.
• The Handle: It ****signals that there a no new waves of distribution for smart money. Hence price stays above its previous low and consolidates as there are not a lot of sellers and only new buyers. This is a phase of accumulation where bulls take back control.