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Attachments: Trend Trading
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Trend Trading

Quoting Nivad
As trend followers you have to deal with lots of small losses. Like Copernicus did today I also will cut my loser on FF. As some final thoughts....when a casino is putting in a new game or machine do you think they just make up a fair game and put it in and 'forward test' it without knowing that it has an edge through 'backtesting' it and over the course of a large number of plays makes money for sure? There's a reason they make so much money and it's just the same with trading. Does anybody open any successful business without doing research beforehand?...
Cheers. Backtest to your hearts content. I don't mind. We won't meet on the "battlefield", because there isn't one. This isn't a "war". There isn't an "enemy to fight". Same sort of ridiculous, psychological BS that gets spouted on this forum in thread after thread.

If anyone is concerned about their system (or their trading plan), they have the option of doing it on a demo. Alternatively, they can also do it on a small account.

I ended up doing a bit of both and then a fair bit of time 'learning' how I trade and how I react when I trade. I learned a hell of a lot about me and eventually settled on a process that seems to do fairly well. It's all you need to do. Learn what you need to do to make money when you trade. That's it.

---

This thread discusses a way of doing that, related to trends. So far, it's been a good discussion.
Wow, that was exciting. And I'd like to point out the entire lively discussion was carried out without personal insults or profanity. How very well mannered of the posters on this thread. I'll jump in to answer a few questions and point out some facts. First, as far as Forex being a "zero sum game", that is easily disproved. The vast majority of Forex trading is not speculation, it is hedging and commercial currency conversion. Most of those hedgers and corporations needing to make Forex transactions couldn't care less what the trend is. This quote is probably about correct.

"Retail Forex traders contribute a very small amount into nearly $5.3 trillion daily turnover of the global FX market.
As per the latest report retail trading accounted for 3.5% and 3.8% of total and spot turnover, respectively."

I think more recent numbers are available, but the point here is this is not a "zero sum game". We do not have to take money from other speculators to make a profit. In fact, as speculators we are providing a service to hedgers and commercial currency converters. We are providing market capital liquidity and we are buying some of their risk so they have to carry less risk in their business operations. If we make money, it's probably through the wise management of that risk we have taken on, and if we lose money it's probably from poor risk management. In any case, I think anyone who cares to can quickly dispense with the "zero sum game" myth. - G
Quoting Graviton
{quote} Thanks for the input Ren. I can't really disagree with much of what you said. Though trend following is a proven method to make significant returns, it comes with a drawback, or we should say many drawdowns. As the chart below indicates, a major stock trend following fund often considered one of the best, Dunn Capital, regularly experiences major drawdowns of 27 to 63%. This method is not for the faint of heart. Of course, with proper money management it's quite possible to weather those drawdowns and comeback to experience outsized returns....
Yeah if you have a big account, works fine. I remember a trend following approach I was using, it made 3600% over the course of 16months, about 400trades. But then it spent the next year going sideways. definitely not for me. I quit trading it during that period. Trading in a drawdown for more than a year and intraday trading of all. Requiring me to put in 80hours work week. I don't think any body can stomach that.
When you see it, BET big.
Quoting Rennaissance
{quote} Yeah if you have a big account, works fine. I remember a trend following approach I was using, it made 3600% over the course of 16months, about 400trades. But then it spent the next year going sideways. definitely not for me. I quit trading it during that period. Trading in a drawdown for more than a year and intraday trading of all. Requiring me to put in 80hours work week. I don't think any body can stomach that.
OK Ren, let's take a simple example. Let's suppose you were risking 2% of your account per trade and made 3600% in 400 trades. If you dropped your risk to 0.5% you'd probably reduce your 1st year profit to 900%. The next year you made nothing. So two years for 900% is an amazing return. Much better than I'm making. But of course, I'm not willing to work that hard. I probably put about 20 hours a week into my trading. That almost correlates perfectly with my return, about 1/4 of yours over a two year period. It's not that I'm lazy, I'm just old and enjoy spending time with my grandkids. I think AG talked about one trade earlier and was risking 0.3% on the trade. Considering we are really in the business of managing risk, biting off smaller bits of risk might be wise.

So, how big does an account have to be to take a 0.5% risk? Let's say you have a 100 pip sl. The minimum cash trade you can take is 0.01 std lot. That's about 10 cents a pip or a $10 risk for a 100 pip sl. If that $10 is 0.5% of your account, then you need $2000 in your account. Even if you lose 10 trades in a row, which is very possible, you still have $1900 in your account and that shouldn't be too nerve racking. My point isn't that you'd be happy with that lower profit amount. I'm just saying you really don't have to have a billion dollars to trade this method. Does that make sense? - G
Quoting Nivad
As trend followers you have to deal with lots of small losses. Like Copernicus did today I also will cut my loser on FF. As some final thoughts....when a casino is putting in a new game or machine do you think they just make up a fair game and put it in and 'forward test' it without knowing that it has an edge through 'backtesting' it and over the course of a large number of plays makes money for sure? There's a reason they make so much money and it's just the same with trading. Does anybody open any successful business without doing research beforehand?...
Nivad, you are correct. I'm currently running about 2 losses for every win, and I've gone long periods basically trading the same and generating 4 losses for every win. I like to win. I like to be right. Unfortunately this business isn't about me being right. It's about occasional big wins making up for the many small losses and compounding the remaining profits in my account. It's about taking on a small bit of risk and managing it wisely. Yes, it's about keeping the many losses small and cutting them quickly, so when the big win comes along it will overcome all those small losses.
The comparison with a casino gaming machine is inappropriate since the machine is programmed to provide an edge to the house. There is no such program operating in the markets and I challenge anyone to prove otherwise. Our edge, if we can find one, is provided by our system of trading. If it's back testing you want, I suggest you look carefully at the performance record of Dunn Capital which I've linked to elsewhere on this site. That's a 44 year record of real trading in a trend following system. Yes, most people would have quit at the first 25 or 65% drawdown, but those who are able to stay with their system would have made outsized returns.
By all means, do your research. I've probably spent more than 10,000 hours researching means and methods to trade for a living. Research is highly recommended. This is the way I've found to work for me. I can't say it works for everyone and I can't say there aren't other methods that work for some. If it doesn't work for you, I'd say move on, of course. But don't blame it on the market. The market doesn't care. It's just blindly and sometimes stupidly setting price and couldn't care less if you win or lose. It's not out to get you. It doesn't even know you exist. I find it best to not personify the market. It's just a chaotic background where I act out my small insignificant part. I wish you the best success and hope to run into you on a beach somewhere. I'll be the old guy standing next to the cute young blond girl (all natural, my latest wife) with a colorful drink in hand. - G
  • Post #286
  • Quote
  • Edited 11:02pm Sep 27, 2018 10:13pm | Edited 11:02pm
So while waiting for more discussion, I'll ramble on about risks and returns. We've all heard that something like 90% of retail traders in Forex lose money. It's probably going to surprise a few people that most of those people who lose in Forex actually win more than 50% of their trades. They lose overall because they are taking a few very big losses that greatly exceed their wins. Some people who can't seem to win at Forex have had many 200, 300 and even 500 pip losses, but rarely if ever had a win that big. Winning really has very little to do with one's entry method. I use the simplest method I know of, a moving average crossover, and I know other winning traders that use many other methods. Tom Basso showed he could enter and exit trades with the flip of a coin and make a profit with excellent money management. It's on YouTube.

I'd advise newbies to just pick a reasonable entry method that doesn't have anything to do with predicting the future (that's impossible) and start learning how to trade. Don't do like many of us did and spend years looking for the holy grail entry method. It's a waste of time. It doesn't exist. Instead, the first thing to do is learn how to make huge profits off a reasonable risk. If you use your favorite entry method and enter 10 trades with a reasonable 1 adr risk and risk no more than 0.5% of the balance of your account on each, you will lose most of those trades most of the time, but a few will go a long way. Lets say 2 go a long way and 8 lose. That means those two that don't lose need to average 4 to 1 profit to break even. Maybe one goes up to 6 to 1 but the other only goes up to 3 to 1. Taking profit off both yields 9 stop loss of profit for the 8 stop loss of losses. Pocket the 1 stop loss profit and go again.

I'm sure many would think, but I've never had a trade go 6 to 1, ever? There are probably 50 things a trader can do to improve that situation, but none of them include cutting profits shorter and letting losses run longer. Sure, an improvement in the entry method might make a little improvement, but it's not going to make much difference alone. Suppose we can use some method to reduce the risk so that less than 8 stop losses are needed to prevail? Suppose we can increase return on the very best trades? The fact is, if we never let a trade run into profit that far, we'll never get the returns we need to cover the risks we are assuming. How many newbies out there have lost hundreds or thousands or more and have never let a single trade run to 10 to 1 profit. If a trader has never made a 10 to 1 return on a trade, they aren't trading, they are giving their money away to people who don't need it and who would gladly pay the trader to assume a bit of their risk.

What are we really doing here? Not what many think. We are assuming a small bit of risk from someone else and if we manage that risk wisely, we get paid for our efforts. If we manage risk poorly, we are penalized by losing part of our trading account. Perhaps if looked at it from that angle, we'd find it easier to focus on risk management techniques than entry methods. Best success. - G
  • Post #287
  • Quote
  • Edited Sep 28, 2018 1:40am Sep 27, 2018 11:37pm | Edited Sep 28, 2018 1:40am
And another thing. Stops. Stops can be a pain. If we set them too close, we'll almost always get stopped out quickly by volatility. If we set them too wide we lose more than we need to on bad trades. So we try to start out with something in between, say 1 or 2 X ADR. Some people just leave the stop until it's hit or not, but in a trade running 300 pips up, the pips at risk if price reverses all the way back down to the stop are huge. Essentially the risk is increasing pip for pip as price increases. That's not a good situation. We always want to trade to reduce risk as the trade progresses. Others try to trail their stops, but the trailing stop always maintains the same stop, no matter how long the trade runs or how far it goes. Retracements are statistically distributed and the longer one is in a trade, the larger the retracements they will encounter. Eventually, no matter how far up price goes or how wide the stop they are trailing, a large enough retracement will come along to take out the trade. That prevents otherwise good traders from ever letting their profits run far enough to make the big profits needed to offset the many small losses most successful traders experience. I try to hit somewhere in the middle and manually trail my stops roughly 1/2 the pips price goes in my favor, with certain limits. So as price goes up, I'm experiencing less and less risk and getting more and more able to stay in a trade longer for a huge profit. Here I define risk as the total penalty to my account balance if I mishandle the trade. I said above there must be 50 ways a trader can improve her reward to risk ratio without wasting years trying to discover the holy grail entry. This is just one. - G
i want to initiate a discussion on risk and money management at some point, but that's a more generic subject. Really, risk and money management are probably the most important ingredients of successful trading. I don't know of a single trend trader who isn't an expert in risk and money management. But for the moment, I'm thinking that to trade a trend, one must first find one. So perhaps to take things in a reasonable order, we should first focus on trend hunting? Perhaps we can learn to hunt like the leopard. She's not the fastest or largest or strongest beast in the jungle, but very stealthy, patient and persistent. So, let's go hunting. I'll start with a real time chart with a real live trade running on it. We've been discussing this trade in my chat room. What do you see when you look at this chart?

Attached Image (click to enlarge)
Click to Enlarge Name: OOO UJ.PNG Size: 47 KB
First of all, I'll stipulate that every chart I post is live. I'm not cherry picking old charts to make a point. I'll post some other pairs going forward. Second, I'm not selling signals for others to follow. My goal isn't to feed my readers fish, it's to teach them to fish for themselves. If you wonder why I'd bother to do this, it's simply because I enjoy it. If I can help a single trader avoid any of the painful mistakes I've made in the past, it's a gift to us both.

One must look at the chart for this explanation to make any sense. When I look at that chart, I see a story with many different levels of plot. First, this is a 4 hour chart of the UJ. That means the trend has been running for about 3 weeks. We know the USD is very strong and getting stronger right now due to the booming US economy. Looking at this chart from across the room, it's obviously trending up right now. Looking at the 200 period MA of the 4 Hour chart at the far left around Aug 27th shows an almost flat moving average, indicating the chart starts with very little trend bias acting on the price. As we move to the right, trend starts to move up, sort of slowly at first and around the middle of the chart, about Sept 14th, it bends upward into an exponential rise toward the far right. Looking from far left to right, about 1/3rd of the chart, around Sept 6, we see price goes below the 200 MA for the last time. What happened there?

That dip in price around Sept 6th was the "shakeout". Short time frame sellers are selling at the first sign of a turndown, as they have done on previous short price cycles in the past, and taking their profits somewhere near the bottom of the price cycle. In that process, buyers who have already noticed the turn to the uptrend in the longer timeframe trend have entered in the previous price rise with tight stops, trying to catch a breakout early. As price drops, more and more of their tight stops are hit and that powers the down turn even further and faster. Eventually, about the next day, the fall slows as fewer stops are hit and the shorts start to buy back to take their profits. They will try to short again, just before price moves above the 200 MA for the last time, but no joy for the shorts. Price hangs up for a couple bars around Sept 7th on the 200 MA and moves on above it to stay above for the remainder of the chart.

Around Sept 12th sellers try again, but to no avail. Price bounces off the 200 MA and continues up as the 200 MA begins it's exponential climb upward. Sellers start to abandon their dreams of wealth and as we look left to right, price can't even go below the 50 period MA for long and steadily moves further above the 200 MA as time progresses.

So, one can see that trying to jump in and get the very beginning of a breakout is a very risky move for a trend trader. If it's a good trend, there will be many opportunities to enter it. If it's a bad trend, one doesn't want to enter it anyway. I count at least 5 good entries on this chart. Three excellent entry opportunities occur after price fails to close below the 200 MA on Sept 17th. Of course, these are all perfectly clear in hindsight. In real time there was no way I, or anyone, could have known the trend would last this long, so I traded in and out for profits once every week or so for some steady but rather small gains. My last two entries are shown on the chart and I'll discuss those and stop settings later. If more experienced traders find this all too boring, just let me know and I'll try to pick up the pace a bit. If anyone has questions or comments, please post them. This should be a discussion thread. -G
OK, I have a party to attend, so I'll wrap this up faster than intended. Looking at the same UJ 4 Hour chart above, note the almost straight line up on the 50 MA after Sept 12th. Note the steady increase in distance between the 50 MA and the 200 MA. These are clear indications that the trend is strong and getting stronger. The 50 X 200 MA is called the golden cross, but there's nothing predictive about it, or anything for that mater. We are just observing what has happened in hindsight. Note how the 9 period MA dips down to almost touch the 50 period MA several times. Each of those are good entry points, or if already in, a good place to stack on another trade. I'll pause now and wait for any questions or comments before continuing. Have a great weekend all. -G
Hi G.

On this thread you have not talked much about Momentum. In the past I recall that you liked 9 TF concurrence with an indicator of choice for Trend identification.

Do you still feel the same. I find the current market environment to be too erratic to wait for this alignment with, for example only, MTF RSI.

Best AG
Do not dwell in the past, do not dream of the future, concentrate the mind.
Hi again,

Do you have any specific thoughts about Trend smoothness. For example a pair could move 1000 pips over 6 weeks by any number of paths. Eg. Price tracking a 5ema with a tight ADR is different than Price oscillating between the 5 and 21emas or worse - dramatic Pull Backs and resurgences. The start and end points are the same. But the psychology, the (re)entry process and Risk Management might be different.

Or does it really matter.

AG
Do not dwell in the past, do not dream of the future, concentrate the mind.
to all,

just wanna hear your thoughts regarding simplifying the visualisation of our mtf trend trading. do you guys think that in order to plot 4h ma on 1h chart one can simply multiply current 1h ma with 4? for example, if we want to see the proxies of 5ma lines of 4h, 1d, and 1w on 1h chart, we can plot 20ma (5max4) to represent 4h, 120ma (20max6) to represent 1d, and 600ma (120max5) to represent 1w, and so on for monthly.
Quoting AlbinaGrande
Hi G. On this thread you have not talked much about Momentum. In the past I recall that you liked 9 TF concurrence with an indicator of choice for Trend identification. Do you still feel the same. I find the current market environment to be too erratic to wait for this alignment with, for example only, MTF RSI. Best AG
Hi AG. When I'm trying to identify a trend, I only usually look at 1Hr, 4Hr and Daily charts. I don't really trade the very short timeframe charts since they don't offer the big swings I need to make the big profits. I do occasionally check the weekly to confirm I'm not missing anything, but I'm not really trading off it. If I cant see clear trends on one of those 3 timeframes, H1, H4 or Daily, I generally move on. Of course this 4H UJ shown above chart is an extreme example. The trend practically jumps out at you. I just wanted everyone to see what I'm seeing before I moved on to more difficult examples. When it comes down to actual entry point, I'll zero in as much as I need to to try to make the best entry I can. At best I might be getting a good entry 50% of the time. Out of the rest, some really stink and some of my mistakes are fixed by a very strong trend sweeping price up enough to cover my impatience. If you zero in on the UJ chart on the 15 min You can see what I did to make these entries. I rarely get them this right.

Indicators of all sorts will show about the same thing. They are only indicating what price did in the past with no real predictive powers. I've just defaulted to MA's here because they are simple to read and don't take up much chart space. I will actually plot MACD, Stochastic and CCI indicators if I want a different viewpoint, but I don't monitor them consistently anymore. I have simplified my trading life and now concentrate on reducing risk and increasing reward.

Momentum would be defined as buying high and selling higher. It's usually referenced with respect to quick knee jerk moves, like after news events and such. My style is to seek out longer term trends where I can make several hundred pips off a winner. It seems I'm never watching at the very moment the quick move occurs, or I'm just too old and slow to move that fast, so that wouldn't work for me. I'm sure it works for some traders though, so cheers for them. I don't think markets are more erratic now than before but maybe they are. The H4 UJ trend displayed above is a fairly smooth increase of 300 pips over a few weeks. Other trends I'll post up might be a little harder to see, but I'll describe what I see to the best of my ability. Cheers. - G
Quoting Graviton
{quote} Hi AG. When I'm trying to identify a trend, I only usually look at 1Hr, 4Hr and Daily charts. I don't really trade the very short timeframe charts since they don't offer the big swings I need to make the big profits. I do occasionally check the weekly to confirm I'm not missing anything, but I'm not really trading off it. If I cant see clear trends on one of those 3 timeframes, H1, H4 or Daily, I generally move on. .... Cheers. - G
Many thanks G. Very clear as always. I also really appreciate your willingness to be so open about your evolution. So many authors get stuck being unwilling to modify their processes which frequently leads to food fights on other threads. Saw exactly the same in my former career. AG
Do not dwell in the past, do not dream of the future, concentrate the mind.
Quoting AlbinaGrande
Hi again, Do you have any specific thoughts about Trend smoothness. For example a pair could move 1000 pips over 6 weeks by any number of paths. Eg. Price tracking a 5ema with a tight ADR is different than Price oscillating between the 5 and 21emas or worse - dramatic Pull Backs and resurgences. The start and end points are the same. But the psychology, the (re)entry process and Risk Management might be different. Or does it really matter. AG
Hi again. Sure, there is a point where the pair is just so volatile that I cant take the trade. So for instance, if price is moving up 100 pips, then down 200 then up 200, it has totally moved up 100 pips, a decent move up, but if I were to take that trade, I'd probably get kicked out by the volatility before I could cash in a profit. I do look at the 10 period ADR for an idea of volatility before I take a trade to give me an idea of where my stop should be located. I use the simple chart I posted before, https://www.investing.com/tools/fore...ity-calculator but I also look at the chart and try to decide if I even want to try to trade that pair. So for instance, on the vol chart, the exotic USDRUB pair has a volatility of over 8,000 pips. It's unlikely I could follow a trend for 400 pips without getting kicked out by volatility unless I trade without a stop, and I consider that foolish. Thanks for the comment. - G
Quoting dscap
to all, just wanna hear your thoughts regarding simplifying the visualisation of our mtf trend trading. do you guys think that in order to plot 4h ma on 1h chart one can simply multiply current 1h ma with 4? for example, if we want to see the proxies of 5ma lines of 4h, 1d, and 1w on 1h chart, we can plot 20ma (5max4) to represent 4h, 120ma (20max6) to represent 1d, and 600ma (120max5) to represent 1w, and so on for monthly.
Personally, I now to strive for simpler trading. Even putting 3 moving averages on a chart seems a bit much for me, but by all means, do what works for you. Best success. - G
Another live example. This is the 1 Hour chart of the CadJpy. The last UJ chart I posted had a fairly smooth trend climb up with a few small retracements along the way. Here we see a fast thrust up, then a long period of consolidation, then another fast push up. It wouldn't surprise me if it continued this pattern. Of course, nothing surprises me. I wouldn't be surprised at all if it crashed and stopped out. Such is the nature of trading. I'm not trying to predict the future. That is impossible. I'm just observing what happened in the past and making decisions based on what I see. Comments? Questions?
Attached Image (click to enlarge)
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I guess I could continue posting these charts, but I think I've made my point. To trade a trend effectively, one must first spot the trend. That's actually fairly easy to do when you simplify your charts and get back to basics. Not all trends look alike. Some climb smoothly up (or down), and some move in fast jerks, really too fast for the buyer-seller balance to keep up, so consolidations occur between fast jerky moves. Of course we like the smooth ones, but they are fewer in number. Some overrun the buyer-seller balance so much that they must retrace a little or a lot to recover their balance before they can continue. If the overruns and retracements are just too great and I can't stand that much volatility, then I just can't trade it. Typically I'm looking for the 50 period MA to cross the 200 period MA to confirm what I see, but one can use anything that works well for them, any sort of indicator or price action, or nothing at all (bare naked trading) if that works best for them. I recommend keeping it simple, but maybe that's just because I'm a simple kind of guy. The more one studies the charts "hunting" for these trends, the more they will see. Be forewarned though, no method is perfect. Two out of three of my attempts to enter a trend fail with a small loss around 1 ADR or less. That means I need at least a 2 to 1 reward to risk ratio to break even and after all my mistakes and mishandled trades, I really need more like 3 to 1 to make any profit. It's a tough business, managing risk for a living. I'm anxious to get deeper into money and risk management, because I think it's really the most important aspect of this process, but I'll pause here a bit and allow discussion. Comments? Questions? - G
Well, I can hardly wait to get into money and risk management, so I'll post just a quick note on it. Please feel free to comment on trend spotting as you like. Suppose a trade looks good with a 50 pip ADR and you think it can probably run for 200 pips, or a 4 to 1 return to risk ratio. If the trade goes up 50 pips from entry, how is the easiest way to increase the potential return to 8 to 1 while simultaneously reducing the risk and increasing the probability of staying in the trade? Anyone who was paying attention earlier knows the answer to this question. Just moving the stop from 50 pips below the initial entry to 25 pips reduces the risk of the trade to 1/2 the original amount. That improves the reward to risk ratio to 8 to 1 if the trade does make it 200 pips up. It also leaves 75 pips between price and stop making it more likely the trade wont stop out before it climbs some more. Sure we are trading for profit, but more importantly, we are trading to reduce risk. Essentially, what we have done is assume a bit of risk from another entity, and we are managing that risk to try to get it to zero, or better turn it into guaranteed profit. Here's just such a live trade now. The UsdChf long. You'll see the familiar pattern of thrust up (which I missed), a long consolidation and another thrust up. It has an ADR of about 50 and I put it on with about a 43 pip stop, because I wanted to shave just a hair off the risk to begin with. So live, it's a 43 pip stop and it's up 44 pips and looks like this.
Attached Image (click to enlarge)
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