Trend- what is it?

Nice job and waiting for you to tell us how to put it together to come up with a robust trading plan and I will assume it will include:-
1 A intraday and/or/ midterm and/or long-term plan.
2. An execution instructions as to how to trade those plan with regard to entry/sl/tp
I would not expect you to share a full range of the trading plan which I believe is too demanding of anyone but even just one of them will be more than enough. Most significant of all will be the execution order.
Sincerely looking forward to your unselfish act of wanting to share your good work at no costs.

Cheers

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Hi,
Thanks to Nut for what is already promising to be a very interesting thread.
After scouring FF for a suitable indie, I have found the attached MT5 ROI Alert. It allows time frame to be set (10,080 as Nut outlined earlier).
I am not that excited about the line style (asterisks) but when I change the line style input the change does not persist. Perhaps those more technically-minded might be able to figure out a way to do this or even offer up an alternative indie.
I guess since this is a weekly hi/lo line that is to be visible on the 1H, drawing the line manually would not be too onerous.
Looking forward to participating in the weeks ahead.
Cheers

Don't mean to be a killjoy but that "uptrend" picture you posted is not of the main trend but of a retracement to the main trend. Look at the weekly for the past 10 years and you will see that the GBP/USD has been in a downtrend.
Just to further prove my point look at how weak the "uptrend' was compared to the current downtrend. Look at the angles of the trends and you will see how much stronger the present downtrend is than the "uptrend" retracement. The strongest trends are such because they have the most money(big traders) behind them driving price which is why the "uptrend" and the "uptrend" breakouts were so weak. Look how much stronger the downtrend breakouts are.This is also why pros trade breakouts as opposed to retracements. The best breakouts don't retrace much which is why there was so much retracements to your breakout points during the "uptrend".

Retracements can and do last for weeks and months so the amateurs get confused trying to trade the "trend". When all the amateurs are confused and give up or go broke the trend then resumes in the original direction of the main trend.

Trend is the current direction of an instrument that may change at any moment due to any reason. Therefore, don't count on it despite all the guru advice telling you to follow it. But if you have the magic of knowing when this trend is going to change for good or you know how to remedy getting caught in a trend that reversed, then by all means, follow that trend.

That would mean the trend is an illusion?

Hi Nut

Interesting thread. Here is my opinion only.

Trends come in many forms but in any definition, you need to benchmark your interpretation of a trend relative to a price benchmark. In fact any measurement you take needs to be put into a relative context. So when you say a market is trending, you really need to say the market is trending 'relative to some chosen benchmark'. We however rarely mention the latter....hence it gets quite confusing and subjective.

In simplest terms a trend can be defined in terms of the relative movement of a data series from a stationery point such as a price point or price level taken at a particular time (t=0) where the average movement of price from that reference point at time t has an overall positive or negative trajectory defined in terms of momentum (where momentum is vertical distance moved/time). Your definition only is valid from the perspective of your chosen reference frame. If you change your reference frame then your definition ceases to have validity.

You can become more prescriptive in your definition to help further categorize your description, but this is more an arbitrary choice than a mandate.

So here is a trend in accordance to the prior simple definition.



The benchmark is price 0 at t=0 and you can see that the overall tendency of price movement is away from 0 with a positive general slope.

This particular trend however was derived from random data and is based on a series of random price movements that represent one possible outcome in a normal 'Gaussian' distribution. The definition makes no mention of the requirement for a trending dataset to be either random or non-random.....however as a trend trader, you could profit from this particular series of price movements. In fact this would be a profitable random outcome that would also be represented in your equity curve.

Now here is another trending series of data that has auto-correlation present in the series by virtue of a small bias being added to the prior random series of 2%.



Once again, a trend trader is likely to profit from this price series and the result represented in his/her equity curve.

They key point here is that the overall profitable equity curve of a successful trend trader comprises both random trends with no auto-correlation present and trends of forecasting potential with auto-correlation present. The latter actually comprises a small piece of the total profit pie but this is the component that is necessary to account for your edge and provide the necessary surplus to pay for 'noise' and frictional costs.

But where is the edge in the market data above (aka the 'true trend')? You can only visually discriminate the edge if you superimpose both data series together.



Now what a trend trader needs to understand is that the slight auto-correlation that may be present in the data is what translates to an edge over the very long term. Notice how the very small bias in the data early on in the series leads to progressively larger amplifications of bias later on in the series provided that autocorrelation is persistent. This effect is just like compound interest and relates to the non-linear power laws that serve to amplify price variations over the longer term. For example a small bias that is repeated (serial correlation) progressively leads to larger and larger longer term price variations.

You can never actually visually determine whether a price movement is actually a random movement or an auto-correlated one ....so that is why a trend trader needs to apply continued patience to catching all trends according to their subjective definition as they will never know if that trend they are riding is simply a random result with no future potential momentum or an auto-correlated one with future substance.

Cherry picking based on visual cues on the right hand side of the chart into a blank uncertain future is a fools errand. You can apply statistical tests such as Fuller-Dickey tests etc after the event, to assess the likely levels of autocorrelation present, but on visual cues alone and while riding these momentum signatures....as they say....'Tell i'm you're dreamin'.

The bread and butter made by the trend follower is based on the 'non-gaussian' nature of market returns. Namely, that for speculation to be successful over the long term, the market return distributions must not be normally distributed. The auto-correlation that may exist in an otherwise random data series is what creates these non-linear extreme variations to return distributions resulting in their leptokurtic nature and associated 'fat tails'.



The basics of trend following is that your system seeks to bias the return streams in your favour by preventing you from ever venturing out too far on the left tail of the distribution. You do this by 'cutting losses short' every time and never allowing a position to extend too far on the left of the distribution. Once this rule has been embedded, you then leave your profits 'unlimited' in nature. You need to keep the right side of the distribution 'unbounded' to allow for the very occasional 'extreme positive return' which happen occasionally but you can never predict with certainty. Profit targets actually prevent your ability from riding those market conditions that are the necessary accompaniment to the gruelling slog of keeping your head above water. Those that apply profit targets have a sense of psychological and short term success but the most important factor is to allow for the occasional white swan (or abnormality) that 'pays for em all' through the strategies unbounded open ended profit nature.

As the markets appear to be efficient and mostly random, you should find that most of your trades will end up in the centre of the distribution and the negative and positive returns around this central plot should effectively cancel out. Your overall success therefore is generated by 'extreme price movements' aka the 'fat tails'. For example the trade frequency distribution of returns in the chart below demonstrates the positive skew associated with typical trend following strategies. These extreme positive returns are referred to as 'anomalies', as they are the exception as opposed to the rule. You must be diversified to get as much access to these anomalies as possible as they are rare beasts.



But in addition to the application of general rules such as 'cutting losses short' and letting profits run, the simple application of this premise is not sufficient 'these days with more efficient markets' to guarantee long term results with trend following. Other variables that play a strong role in the success of trend following models include:

1. Market volatility (more volatile markets improve the overall results of trend following systems). Trend following models tend to reveal better results across major currency blocks with high market volatility. It appears that under high vol regimes, markets tend to become non-gaussian in nature.
2. A high trade frequency has a negative impact on trend model performance. What this infers is that you need to avoid the normal everyday churn. Your trend models are better placed to be active only during more 'extreme' times and you should avoid trading activity during more 'efficient market conditions'.

So how do you catch auto-correlation, market volatility and also avoid the everyday churn? The key ingredient here is to be diversified and to impose rules that only come into effect when price movement is approaching 'extreme' levels. In these more exotic extreme conditions, there is a greater probability that participant behaviour will become more coordinated and predictable as many are 'rushing for the exits' with only a handful remaining to take advantage of the less competitive environment.

So trend following in a nutshell is not about striving for profits through prediction, but in how you diversify and restrict your trading activities to more exotic market conditions in tandem with strictly managing your risk and leaving your self open for potential unlimited upside. We talk about 'following price' as opposed to predicting price as you simply let your rules dictate when to enter any possible trend which is more often a loser than a winner....However if the markets are non-Gaussian in nature, which we as speculators believe, then your profitability is simply a consequence of abnormal positive outliers associated with this market nature...rather than your predictive ability.

In this context you can have many types of trends that meet the conditions of your rules with an array of different morphologies...so the exactness of an approach to trend following is a bit of a misnomer. The techniques applied by technical analysis are not a great help here such as the requirements for a minimum of 2 consecutive higher highs and 2 consecutive lower lows to define a trend by the purists etc. It might look pretty....but that is about as useful as it is.

Once you have developed your broad rules to activate your strategy during extreme conditions, you then cannot afford to be selective in which trends you decide to take (whether real or not). You need to take them all as a true trend of substance can only ever be deciphered after the fact (a hind-site measure).

This is much theory.

Have you actually tried trend-following trading?

If only it were always easy. We get a sign of weakness at point A, so we expect a pullback that may give a short signal it is easy to get sucked into shorting the market. Yet the market explodes to the upside taking out B. Why? well if we take a broader view of the chart prices made a new high so we are expecting a pullback from those highs which we seem to have taken place and now the market is trying to move higher. I am looking for support in the area of B. Will I get support I don't know. It pays to look to the left on your chart where you can see the new high at C followed by the pullback.

The swing indicator is the daily trend. 60min chart * 24 Bar swing. The white line shows the new high and the start of the pull back.

I notice that there have been some some fairly long posts I shall try to get to these at some point today.

Thanks
Nut

what platform is this?

Ninja trader8

Hi, I have followed this thread and there are some quite interesting takes on the idea of a trending market. Some really nice graphs too.

I am definitely no math professor and my own approach would steer away from any strategy that relied on pure math. In the 10 years of facetime I have given the forex market charts, I have always tried to apply "gumption" or "common sense"

At the risk of sounding trite, Im going to challenge the premise of this idea. By the time you're sure that a trend definitely exists, it will be ending. See the negative space. You want to become an expert at identifying trend reversals, not trends.

IS -- IT -- REVERSING?

This is a question I have asked a million times of the market and at some point, the market started answering back. The guiding principal is has the price behaviour changed. You need the granularity of an m1 chart to see trade-able reverse opportunities.

For me, at some instant it just hits me that the trend is definitely reversing and meh...Im right enough times out of 10 for it to play out well.

It would be amazing to see a thread which works solely on the 1m chart. This will allow us to remove all bias that the higher tf create. Annyone with enough knowledge to create such thread?

Hi Guys if you want granularity at potential turning points fine you can use 1min better still one tick. Personally, I would trade neither 1min or 1 tick without a longer-term view. Why not give it a try and post your findings for the benefit of others.
Swing = 1 tick * 120 ticks(random number)
Cheers
Nut.

Thanks for the reply and for the time and effort you put into it. I agree with much of what you say but this thread is an attempt to help those just starting out or those who like myself posess limited mathematical/statistical knowledge they may, however, have great visual and imaginative skills. I have not read your own posts as yet but I shall do as time presents itself. Also, noted is your own favourite book I might obtain a copy please advise is it just a book of statistical formulas they would be wasted on me.
Once again thanks
Nut.

Thanks for the reply and for the time and effort you put into it. I agree with much of what you say but this thread is an attempt to help those just starting out or those who like myself posses limited mathematical/statistical knowledge they may, however, have great visual and imaginative skills. I have not read your own posts as yet but I shall do as time presents itself. Also, noted is your own favourite book I might obtain a copy please advise is it just a book of statistical formulas they would be wasted on me.
Once again thanks
Nut.

Hi Nut, yeah Im liking your charts, but how do those lines translate into actionable decisions. Are they support/resistance?

breakouts?

tickdata is pointless as h1 or m30

Nobody can predict where price is going next month or next week, but anyone can sure as hell predict:

A) what the minimum expected range is for TODAY

B) is it going up or down TODAY.

get good at predicting those 2 things and you're smashing 200 pips per week.

Hi there
Perhaps the attachment may help this was the method employed by Wykcoff though he mainly used point and figure charts it works just as well with candles. At a bottom, he called this price action a spring and at a top an upthrust. These are the points I look for. Also if it is to be a reversal it will probably be a part of a head and shoulders.

Hope this helps
Nut

My trading plan has always been very simple, don't get involved with trading plans focus on trading.
My money management is equally simple, use say 1% of the account and don't change it. When the account has grown sufficiently use 1% of your winnings only and don't change it.

Cheers
Nut

The lines are the highest/lowest swing in a given time period and can act as either support or resistance. For a 60min chart I like to know where the daily trend is sitting so I use 60 min * 24bars. If I use a 1min then I use 1min * 60, however I prefer a 5min so it is 5min*12. Should I feel brave I may use a 1 sec chart to time entries with swing settings 1* 60.

If I could give you the other information you require 200 pips per day * every pair * 5 days would put Goldman Sachs to shame.
Trade well
Nut

Morning N :-)

Andreas Clenow's book is a real eye opener and a game changer that is more a practical guide from an experienced professional fund manager to approaches that mimic the methods employed by fund managers in the diversified trend following space. No formulas or heavy theory.

He demonstrates how the Commodity Trading Advisers (CTA's) who trade the medium to long term timeframes employ very simple but robust trend following strategies under specific methods of diversification which allow them to generate 'deliberate' but 'different' return profiles that make them attractive to portfolio allocators and investors seeking alternative non-correlated return streams to the standard offering of equities and bonds.

His main point is that the specific tweaks used by each shop are only a small factor and that the bulk of the returns of the professional systematic trend following firms come from fairly simple models. Early on in this book he shows two basic strategies and how even these highly simplistic models are able to explain a large part of CTA returns, and then goes on to refine these two strategies into one strategy that can compete well with the big established futures funds.

While his examples relate to futures trading, the advice is sound for any trade-able liquid investment class. A large and growing number of CTA's include Forex in their investment universes.

Fantastic read mate with really valuable insights for anyone interested in the relatively unknown (previously hidden) space of diversified systematic trend following.

Cheers

C