Trend Trading

So I was reading a discussion by Mark Minervini of Market Wizards fame. He claimed in his long career he has met 3 types of traders, first those with no rules trading completely on gut feel, second those with rules but who fail to follow them, and third those who have rules and follow them. He said that almost without exception, those without rules blow up quickly and blame the market. Those who fail to follow their rules eventually blow up and blame themselves. Those who have rules and follow them wind up being successful traders. Typically their rule set starts out too optimistic or aggressive or lacking critical components and improves over time until they are successful.

During the course of trading, there should be a rule for every possible situation that presents itself. This is the heart of a trading plan. Right after entry, price either goes up or down. What is the rule either way? During trade management price retraces to entry point, what is the rule for that? Trying to decide on the fly what is best to do puts a trader in the first category. Having rules but modifying them on the fly puts traders in the second category. Working to improve rules when not in a trade and following them with precision when in a trade puts the trader in the third category.

I'm often asked by experienced traders, what is your edge? The question shows a deep understanding of market structure. Here is my "edge". The combination of trend trading and precise execution. I do love to talk about trading trends. As far as trend trading, well there's a ton of information about it on the web, but it's simple as a farm boy. If price has been going up we buy, if it's been going down, we sell. Sometimes it will turn against us just as we enter. We've already decided how much we are willing to risk on the trade and if it turns against us any more than that pre determined amount, we take the (very small!) loss and move on. If it keeps going in the direction we entered, our goal is to ride that single trade to a golden retirement. That's always our goal. We know the odds say there will be a big regression to mean or counter trend retracement or whatever some day that will take all our winnings back if we let it, so we don't let it. It's just a choice really. Do we allow a huge loss in our trading, or do we choose to not allow it. Most people like to think the market was mean to them and took back all their giant profits. That way they can feel that they weren't wrong. Humans hate to be wrong.

In fact, they were not wrong. At least, they were not wrong in their prediction if the price would go up or down. They were wrong in trying to predict the outcome of a purely random event in the first place.

The way I look at the markets, all of them, is like the casinos look at a roulette wheel. The casino can't predict the next number on the roulette wheel. They don't try to and they don't need to. They know they have a built in "edge" which will give them winners 5.26% more often than losers, as long as they survive enough spins to collect that edge. And since they are playing little plastic chips, they can survive essentially forever. Believe me, they have huge crates of those little plastic chips in a vault. Lots more chips are in their vault than the whole casino and hotel is worth. They must survive to collect their edge, and they will. Another thing the casinos do is limit their losses. They do that with a table limit. I use a stop and position sizing. Same thing really. I'm the casino, and the market is my roulette table. I take all bets that I get a signal on, limit my losses, control my position size to ensure I survive and collect my edge. I'm really never wrong, the ball just fell in the other guys favor this time. More often than not, it will fall in mine. Edge and rules to realize that edge. A couple important things to consider. Best success. - G

I was asked a good question here by Taigen and I wanted to answer it. He asked something like, how can we place a trade on long or short, without trying to predict the future direction of price. Isn't just placing the trade on in one direction predicting future price will go in that direction? Excellent question.

Let me try to answer that question with an example that I've given before. Suppose we have a coin that is weighted so it turns up heads 60% of the time when it is flipped. We can't predict the outcome of the next flip with any certainty, but we don't need to in order to make a smart bet. We will bet heads every time regardless of what the past results were. One can say we are predicting that the coin will come up heads more than tails over many trials, but we aren't specifically trying to predict the next coin flip. This is how we trade without trying to predict the future, which I maintain is impossible in a purely random event, even when the event has some sort of bias, like the weighted coin. The bias in the random event is what professional traders call their "edge".

Every trade I have posted in this thread has an implicit assumption or guess about what the bias or trend in price is. There are a few different possibilities about that guess. One is that there is no real bias or trend. It's like flipping a fair 50/50 coin and getting heads three times in a row. The next result is no more likely to be heads than tails. I'll win some of those trades just out of pure dumb luck, but I can't depend on that for an "edge". The probabilities say that after I deduct for spread or commissions, I should lose money on those trades overall. Another possibility is that there is a bias or trend, but I have guessed wrong and it's in the opposite direction of my trade. Probabilities say I should lose more of those trades than just trading at random. Finally, I may have guessed the trend correctly, and I might win if I trade my edge with precise execution, or I might still lose it if I make an execution error.

So, I never try to predict what price will do in the future. I do my best to decide if there is a trend and which way it's going and trade that possible trend with precise execution. That's my "edge". At the end of the trade, win or lose, I can never know if my guess regarding trend was correct or that specific outcome was just the result of good or bad luck. I can know if I executed the trade precisely according to my trading plan, and that's the best I can do, so I do that.

I hope that answers the question, but I'd be happy to discuss it further if anyone wishes. Best trading success to all. - G

Good post but no matter how many names you can call a specific concept, this does not change the meaning much. Predicting, guessing, anticipating, forecasting are all simply saying/declaring about an event before it happens. some negligible differences between the words but overall the same meaning. I do not think this is even worth discussing.

Yes, I see your point and in my opinion the difference is very subtle, but perhaps important from several aspects. One is people hate to be wrong. Sometimes that causes them to stay with an obviously bad trade to avoid being wrong. If we consider that price movement is purely random, perhaps with a bias or trend imposed, then we aren't wrong to lose a trade, as long as we followed our trading plan precisely. One could say that is only a psychological difference, but some would say psychology is half or more of good trading. If that's the case, it might be important to get the psychology correct.

There are many other differences between "guessing" the correct direction of a trend and predicting a specific future price movement. If a trend is a bias superimposed atop an essentially random set of price movements, which I have evidence it is, then time and effort spent to find the holy grail of perfect price movement prediction is wasted effort. Statically the best we can do is win more than we lose. I propose that's the world of probabilities we all live in, whether we realize it or not. Of course we would prefer to think classically and believe in definite cause and effect relationships, and that's a great shortcut for everyday life. Some would say we are hardwired to believe that, but evidence shows it's not reality. I don't want go deeper into all the statistical geek stuff, but I believe it's worth considering if price, anymore than a few minutes into the future, is more appropriately modeled by statistical means than deterministic methods.

Of course, that is just my own humble opinion. I could be wrong. Best success in trading. Happy Thanksgiving for those in the U.S. - G

Graviton you sure have a lot of experience in the market. I also believe the market is a random walk with a bias, there is a difference between saying "Right now the bias is bullish" and " the market will go up". One is fact and the other is an opinion.


Second, my experience is that simply knowing that there is a bias is not enough. One has to get his exits right. I think it gets down to a feel thing, even if you are given the right exits you can still screw it up if you trade with fear. Fear crowds your judgment. I know a trader that built a system, did extremely well in demo but once he started trading live he blew up his account.


The primary skill in trading is this: TRADING WITHOUT FEAR. This is the ultimate skill. Not caring about the outcome, everything becomes clear. cheers good luck to all. Don't be fearful but also don't be greedy. I think I didn't struggle so much with the fear aspect of trading as I did with the greed aspect. I was toooooooooo greedy and it undid me many many times.

mostly agree with everything you have said here and before throughout the thread. i am subscribed and follow interesting posts by time.
consider things i am saying just a comment or my personal thoughts, not willing to argue here about anything.
"differences between "guessing" the correct direction of a trend and predicting a specific future price movement" is really the same thing. if i am a kind of person with huge ego, i will take seriously absolutely everything related with me: my actions, words, thoughts, predictions, guesses etc. That huge ego of mine is the the one that makes me sentimentally and psychologically bound to everything related with me. so, it is not just about picking the words, it is about the personality.
many people use the mentioned words mixed and they do not have too much sense of it. predicting the lottery numbers or guessing them carry almost the some meaning to too many people. as i said there are noticeable differences from linguistic point of view but concentrating whole attention on this is really waste of time in practical word.
saying "my guess is price will go up" is nothing different than saying "my prediction is price will go up" or "i anticipate price will go up".
The other comment is that using the example of coin tossing or dice is not really relevant to trading. they are completely different animals and using such example will lead to incorrect results.

Thanks for the replies. Of course, consider all this "food for thought". I'm always willing to look at things from a different point of view. Sometimes that's difficult to do without others input, so thanks again. Best success. - G

An interesting conversation going on here. I hope you don't mind me chipping in from a completely different trading strategy. It's always good to get a different perspective. Here is a chart of the eurusd with an indicator at the bottom and each dot represents a news release. The black lines show the exact time of the release and where it meets price, shows exactly how the market reacted to that news. Most of these are economic releases with the remainder being central bank communication. What it doesn't show are unscheduled news which would fill in the other unmapped moves.

To me none of it is random during those events and up until a new event happens or interest is lost, or redirected.

rightly noted. Yes, the markets are random but there is also a predictable aspect to them. there are times price movement can be guessed with high probability under specific conditions and there are very valid explanations. those moments can be exploited by skilled traders. i wish that graph of yours could be enlarged for better view.

You can view it yourself go to tradingview.com. Under settings of advanced chart is a check box to expand economic releases to all history

I met this guy on FF years ago who goes by name of dove_alliance. He was a teacher in the Forex market and he invited me to train in his classes. And I think his system was called The Paradox or something like that. It was much too complicated for me but he had an incredible insight to see how the currency market worked.

Probably one of the most significant things that I got from his classes was that the forex currency market is always seeking balance. He designed many indicators and one was called the ROMAR. Although it had modifiers it somewhat matched the 200 SMA. And what it did was to determine the balance of the currency pair. So what appears to be seemingly random market action, is in reality, a striving for balance.

The other thing of significance I learned from him was that it is the central banks in relation to the economies of nation states that moves the currency market and retail traders—us—just go along for the ride. We influence nothing. And that is a great thing.

As you know trends can be up, down or flat depending on the timeframe of the chart. I use indicators only to refine my guess in choosing when to enter and exit the market.

Some here use a specific position and hope they win big or lose small. It’s a good strategy. I use a scattergun approach by putting many positions out there at once. And then, like everyone else, I try to win big and lose small.

Time and experience will perfect your strategy and no one strategy is better than the other.

I use the Trader Explorer to keep me honest. It’s a feel good when you are in the green and somewhat humiliating when you are in the red. I have a nothing account which I have blown many times. All accounts under 10k I call baby accounts. In the many years I have traded, I only got past 10k once.

Experiments are over. All I do now is refine. Good luck to all.

Even though the market may have a large degree of uncertainty in it, I'm thinking we need a very definitive and deterministic trading plan to profit consistently. So the response to any situation can be planned out and backtested in advance. Some of those backtest results will turn out to be just the opposite of what common sense might indicate.

Also, I agree that fundamental factors like Fed announcements affect the markets. I haven't seen any evidence though that anyone can trade that information for a profit. There are several problems in trying to trade on that information. Sometimes we don't know ahead of time which way that information will fall, like better employment numbers or worse employment numbers. Often, the market will react oppositely from the direction we think it should. I see that a lot in stocks where a company doesn't beat analyst forecasts as much as was expected, and the price goes down on increasing earnings. There are also many unexpected pieces of news that cannot be predicted in advance. Given all these factors and more, I see no reliable opportunity to predict future price movements based on fundamental information. If anyone has actual evidence that any method can predict specific future price movements, I'd like to see it.

I believe we can make up a story to go along with almost any price move after the fact. I see commentators do that on CNBC every day. If price goes down they say buyers were disappointed with the bad news. If price goes up, they say buyers were happy the news wasn't any worse than it was. They often say, people were taking profits today and that drove the market down. What a crock. In fact, I don't see any evidence at all that all these experts are any better than a 50/50 coin flip in their market predictions. I think that we want to find that holy grail of precognition so badly, we will gladly grab onto the 50% or so of correct predictions as evidence and happily ignore the 50% or so of incorrect predictions and use those results to justify our pet system.

I have evidence that the market is a random walk with a little bias. The bias may come from Fed policy or a booming economy or whatever. I see no reason we can't find a way to profit off the bias, or trend. I see no way to profit off random movements. Of course, I might have missed something. - G

There aren't any problems trading fundamental information. The issue is a lack of understanding on the traders part as to the context of the news, the current sentiment, and its importance with central bank policy. If I told you I derive every trade I make off fundamental factors without even looking at a chart and maintain an 80% hit rate, would that perk up your interest?

To maybe explain this differently, trading technically involves probability whereas trading news releases doesn't. This might seem incompatible with your understanding but look at it this way. A piece of news can change expectations and results in the factoring-in of that new information through price change. If you do the homework required to understand the overall context then it is instantly apparent when there is an opportunity and unlike probability, you can get in on that price change without bothering with probability.

This approach has 2 types of opportunity. The first is short term trading where a trade can last a few minutes or span across multiple sessions on the same trading day. The other is swing trading where a trade can last several sessions or even weeks. The later in my opinion lends well to trend trading because you can get in long before technical traders are even aware of an opportunity.

An example

Eurusd, at the bottom of the chart is scheduled news releases including central bank communication. I should point out that unscheduled news is not represented. I will find the time in the near future and note these down for a fullly inclusive example. The black lines represent the exact time of those releases and shows the intersection with price.

Not all news events are equal but its pretty easy to identify the important areas through research. Note the regularity of market moving data. All of it very predictably but it requires research to identify direction and also optimal pairing of strongest against weakest for maximum effect.

That's probably all too complex for me, but if you've got it, go for it! One issue I have with my trading is I must have decisions made by my system before I take action so I can remove emotional judgement. I suppose one could decide ahead of time if unemployment is up they will trade the USD down and visa versa, but the rules become extremely complex. Like what if it was up less than expected or what if we expect price to go up when an up number is announced and instead it goes down? Do we buy it anyway? In the end, I usually wind up making a lot of gut feel calls and lots of them will be wrong and that destroys my self confidence. For me at least, it's better that a deterministic system is wrong, because I can make smart changes and improve a system. If my personal on the fly judgement is wrong, I probably will have a lot of trouble fixing it. Best success. - G

Merry Christmas to all!

Same wisher to you, mate! Advance happy New Year 2019.

"Floor traders have a nickname for outsiders, which shows that they consider us less than human. They call us paper..."
Alexander Elder 1993
There have been numbers of studies published which clearly proved that time series momentum ( trend following ) is one of the strongest market anomalies. Few researchers also discovered that after including costs like spreads, swaps and other comissions many strategies did not make money but loose or break even instead. With growing number of ETFs replicating most popular factors it is easy to see that most of them are unable to beat their very respective benchmarks simply because of the costs involved in monthly rebalancing portfolios. That is why i only trade markets with positive swaps. For example if i will short 0,01 lot of EUR/TRY and after 100 days price will remain unchanged my profit from swap minus pretty decent spread is still around 60 USD. Simple 4H chart and 200 SMA should do to spot a pronounced trend. I will never risk more than half percent per single position and use daily ATR from last 20 periods to tell me how many lots i should trade. Healthy and prosperous 2019!

Thanks Soldier. That's an excellent quote from the classic Trading For a Living by Alexander Elder. That book holds a prominent place on my bookshelf and I hope to get a chance to read it again soon. We trade very similarly, but my trade durations seem to be shorter than yours. I typically have a duration of about 10 days to two weeks in a trade, so spread costs have a larger impact on my results than carry costs. To learn to trade longer durations, which is a goal of mine, I'll definitely want to consider giving priority to trades with positive swaps. Additionally, adjusting the size of the trade based on the pairs volatility to maintain a more consistent portfolio volatility is a technique that I've found the very best trend traders use. Thanks for your comments and best success in 2019. - G

We've discussed cutting losses short and letting profits run as well as adding to profitable trades quite a bit here. Those are great tactics for the microcosm of individual trades, but there is a bigger picture to consider. I'd like to open the discussion a bit to consider diversification and portfolio trading. In my style of trading, I don't try to delude myself into believing I know which pair will soar to new heights and which will just return to a dissatisfying range. I simply take all the entry signals I get and cut my losses while they are very small, ideally in a 30 to 60 pip range, and let the market sort the rest out.

Even though I'm cutting losses small, those many small losses add up and it can take quite a while before I have a good portfolio of 6 or more trades that are mostly going my way. I'll usually find that most of those trades are motivated by a single currency that's making a large run. A couple weeks ago it was JPY soaring that put me in a portfolio of pairs that I stacked more trades on until they spiked and hit very wide TP's for good profits. Those profits greatly exceeded the cost of all the small losses to set up the portfolio of trades. This week I'm doing the same thing with a portfolio of trades riding a surge up in the GBP. Even though the portfolio of trades, GU, GCad, GChf longs, are doing very well, they haven't yet quite exceeded the cost of the many small loses needed to set up the diversified portfolio trade in the first place. The trade may or may not end up being profitable after the costs, but it's showing promise.

Trading this way, any single trade is of very little importance to me. I simply concentrate on taking every entry and cutting losses small on those that go against me, which will be most trades for a long while. Eventually, some currency will go on a run and when it does, I'll usually be there with a widely diversified portfolio of pairs in that currency, loaded for bear and ready to stack more trades on winning pairs. It almost looks like pure luck to anyone watching, but as the Roman Senator Seneca said, luck is when preparation meets opportunity. I spend most of my time preparing for an inevitable opportunity that will make me look lucky. I say it's inevitable, but of course that assumes that some currency will eventually have a very large move. It's always happened in the past, but if it ever quits happening, I'll have to find a different market to trade.

I'm wondering if anyone else trades like this? Questions, comments? - G

Hello Graviton and all,

I have to say there is some interesting conversation going on here. My current portfolio is what is colloquially called "The Majors". In truth, I believe that no matter what pairs or sets you trade, the way the FX market works remains the same. It is simply a matter of choice, preference, volatility and risk appetite. I choose the Majors because of lower margin requirements, tighter spreads and more liquidity.

I do agree that "chance favors the prepared". And that is what FX, arguably all investing and trading, is. Preparing for a chance to capture a gain in the direction you hope it will go. I also like the quote,"Fortune favors the bold". You have to take risk in order to gain a reward. The fact that we even risk our money to make more money fits that bill nicely.

My daily goal in trading is capital preservation which I believe is paramount. We are in the business of trading money, if we have no money we are out of business. Each time I execute a trade, I am in the mindset of closing risk as quickly as plausible. I do not use super tight stops or anything like that. When my trade moves X amount in my direction, I secure 1 pip for interest paid and 2 pips for myself per day and if the daily move allows. If I will be gaining interest each day, such as going long USD/CHF, I just keep all 3 pip for myself. After that point, a after trade money management scheme takes over.

Using these scheme I find that losing trades, those that cost me money, are significantly reduced. Instead they are replaced with failed trades, trades that failed to achieve what my trading style said it should do, but do not cost me anything and actually net a few pips after I pay half-spread for closing the trade and any interest I owe. Now I am not saying I do not have any losing trades, I do of course. However, I do find in hidsight that the scheme also costs me some trades that would otherwise be winners. In truth, I am OK with that. There is no way to know if a trade will go in your direction or not. A trader has no control over that. All a trader has control over is risk.

- Ric

---- Edit Note----

I forgot to reply to a portion of Graviton's post. I also take every trade set up that agrees with my trading plan with a few notable exceptions.

1) If a candle is too large to do News or some unknown variant. My discretion on what "too large" is.

2) Starting a trade on Friday candle. Especially in today's political climate.

3) Trade triggered by a price gap.

I have read dozens of times about only take good set ups and avoid bad set ups. In all my years I have never understood that. You don't know if it was bad or good till after. But to each his own.

- Ric