A simple trend following strategy to get your money working for you.
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In today’s video, we’re taking a detailed look at Rayner Teo’s “Trend Following Trading Course,” an insightful PDF available for download in the description below. Rayner Teo, a well-known trading educator, YouTuber, and trend-following expert, is widely respected for his practical approach to trading. His content is built on helping traders develop skills such as risk management, patience, and a focus on long-term, sustainable success rather than quick profits.
Rayner emphasizes that achieving success in trading begins with developing a trading edge. A significant part of his philosophy is that before you can expect to see consistent success, you need to establish an edge in a specific strategy and give it enough time to prove itself.
Building an edge in trading is not a quick process; it requires careful testing over many trades. This concept is similar to the way casinos operate. Casinos rely on a statistical edge over thousands of wagers to ensure profitability. Rayner advises that you need to take the same approach in trading—think of trades as part of a larger strategy, letting the law of large numbers reveal your edge over time. A trader should focus on the overall probability and outcome across many trades rather than on each trade individually, just as casinos don’t fret over individual outcomes,.
Rayner suggests that trend following is a highly effective tool for building wealth and potentially replacing active income from a traditional job. However, he also points out that trend-following is a strategy that requires patience, as not every month will bring profits. There may be periods of drawdown or no growth at all, balanced by months of substantial gains. To allow your portfolio to grow effectively, it’s essential not to take out too much for personal expenses.
Compounding is a vital component in growing your capital, and frequent withdrawals can disrupt this process, making it harder to recover from drawdowns and hindering long-term growth. Letting your portfolio benefit from compounding gives it the resilience to endure inevitable downswings and capitalize on uptrends.
Rayner acknowledges that day trading or short-term trading strategies may be an option for those who need immediate, regular income. However, he cautions that these methods generally have lower success rates and demand a high level of focus and emotional resilience, which can lead to significantly greater stress compared to the more patient trend-following approach.
Let’s start by clarifying what Trend Following is not, according to Rayner’s philosophy. It’s not about:
● Scalping
● Intraday trading
● Holding long-term investments
● Placing large bets and hoping for the best
● Attempting to predict market reversals
● Relying on candlestick patterns
● Using Fibonacci levels or patterns
● Acting on fundamental news alone
Now that we know what trend following isn’t according to Rayner, let’s examine his definition of trend following and its essential principles. Rayner outlines five core principles for successful trend following:
The first principle is to “buy high and sell higher,” which goes against the traditional advice to “buy low and sell high.” In my own trading, especially in breakout trading, I also apply the “buy high, sell higher” philosophy. The goal is not to buy at the very bottom or sell at the absolute top; rather, it’s to join the trend as it unfolds. When a stock is in an uptrend, it frequently hits new highs, which might be uncomfortable for range traders but serves as a positive signal for trend followers. As we often repeat on the channel, “what seems expensive often gets more expensive, and what seems cheap often gets cheaper.”
The second principle is that trend followers don’t need to predict specific market movements. Rayner advises against relying too heavily on support and resistance levels since these can easily break in a strong trend. While trading based on support and resistance can work if approached with discipline, Rayner emphasizes that a trend-following strategy should avoid focusing on specific highs and lows. Instead, one must align with the direction of the current trend, applying strong risk management practices along with a solid contingency plan.
The third principle is to keep your risk on each trade to a fraction of your trading capital, avoiding the potential for ruin. For instance, a 10% loss requires an 11.11% gain to recover, which is feasible if managed carefully. However, a 50% loss would demand a 100% gain to break even, a daunting challenge for most traders.
Rayner’s recommendation to limit risk to only 1% of your capital per trade. That way you can withstand a series of losses without compromising your ability to trade. This conservative approach to risk management aligns closely with my own strategy and is critical for any trader aiming for long-term sustainability.
The fourth principle is to avoid fixed profit targets and instead allow the price to dictate your exit. Rayner discourages moving stop-losses to breakeven too soon and instead recommends trailing the stop based on price action. For example, if you are shorting a stock and take profits at an initial support level, you might miss the potential for a larger downtrend. By trailing stops at swing highs, trend followers can capture extended moves, especially in strong market trends. This approach is especially valuable in “fat tail” market events, such as the dot-com bubble or the 2008 financial crisis, where large market swings provide significant profit potential for those who stay in their trades.
The final principle Rayner advocates is to “trade across all markets.” Since trending periods are limited, focusing on a single asset or market can severely restrict opportunities. Diversifying across multiple markets—such as stocks, commodities, and currencies—broadens the potential for capturing trends and reduces the impact of market-specific risks. This approach not only expands your trading opportunities but also mitigates the risk of missing out on profitable trends in other asset classes.
Now that we’ve covered the principles, let’s move on to Rayner’s specific trend-following strategy, which is structured around five core elements:
1. Apply the 20 and 50-period exponential moving averages (EMAs) to charts that show a clear trend.
2. Look for situations where the price respects the zone between the two EMAs at least twice before considering an entry.
3. When the price revisits this EMA zone a third time, place a limit order within the zone for a potential trend continuation.
4. Set a stop-loss at twice the “average true range” (ATR) value at the entry time, using an indicator-driven, simple stop-loss approach.
5. Exit your position when the price closes below the 50 EMA, allowing you to capture as much of the trend as possible.
Here are some additional guidelines to bear in mind:
● Avoid moving your stop-loss to breakeven prematurely. Either let it hit, or exit using a trailing stop based on price action.
● Trade a diverse range of markets with low correlation to minimize risk.
● Limit your capital exposure to 1% per trade.
● Continue observing even if the price has tested the EMA zone multiple times.
● Use 4-hour or daily chart intervals for clearer trend signals.
While I prefer weekly charts for broader market perspective, let’s apply Rayner’s strategy to a recent trade using the daily chart of Interparfums Inc. The price tested the EMA zone twice, establishing a possible setup on the third approach.
An entry could have been made on February 9, 2023, when the price briefly tested the 20 EMA without closing below. The ATR at this time was $3.11, making the stop-loss $6.22, or around 5.4% of the entry price. The exit would have occurred when the price closed below the 50 EMA, yielding a reward-to-risk ratio of approximately 3:1.
Another potential entry around $140 would involve a stop-loss of $7.54, or about 5.3%. This trade would close at the stop-loss as the price failed to stay above the 50 EMA. Since the guideline is to avoid moving stops to breakeven, the trade would close at this level.
In trend-following, the win rate may not be the highest, but what it lacks in frequency, it often compensates for with large profits on successful trades. The well-known philosophy of “cut your losses and let your winners run” is central to this approach, allowing you to maximize returns when trends work in your favor.
Rayner’s eBook provides an accessible and comprehensive introduction for traders who are new to trend following. In the stock market, this system identifies lower-risk entry points and offers a process for maximizing gains on winning trades. If followed with discipline and consistency, the strategy can be incredibly effective in wealth-building.
One of the greatest strengths of Rayner’s approach is the way it instills a framework of discipline, patience, and consistency—qualities that are crucial but often lacking among newer traders.
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