How to trade the trend?

Hello FF.

I've been thinking about the most common thing you hear when trying to learn how the Forex works. "The trend is your friend." Everyone says it, so there must be some level of truth behind it. Others say, "Follow the trend and you will see your pips grow." It all sounds so simple... but the trick is determining what a trend is, when it started, and when it will stop.

I've started at the basics... define what a trend is. From what I've read, an uptrend is higher lows over a set period of time. A downtrend is lower highs over a set period of time. Ok, sounds good.

I downloaded the daily prices for the EUR/USD on a 30min chart going back to the begining of 2002. I want to track trends and see if I can find some insight on which way to place my trade each day. My plan is to place my long/short order each morning around 7:30am... (it's the only consistant time I know I can be at my computer) then let the trade run until 7:30am the next day. At that point, either close out and reverse or modify my stop loss. At this point it's only backtesting, then to a demo account if I find favorable results.

My question to anyone reading this... For my style of trading as described above, what is a good time frame to look at to determine a trend. 5 days, 7 days, 20 days, 40 days? Maybe look at a number of time frames and see how they stack up? Should I place more value on short term trends or long term?

I'm not looking for someone to just, "show me the way." I realize that a lot of these things I need to work out and understand for myself. Even so, any advice would be greatly appreciated.

Tryad

it really depends on what timeframe you initiate your position. From 'come into my trading room' dr elder said you can multiply your timeframe by 5 to get the next higher timeframe you should look for a trend.

ex.
1 hr time frame trading - look at 4hr (approximate) trend
daily trading- look at weekly trend

and so on

make it simple. Trend trading is as old as the market itself.

Thanks Hilmy, much appreciated. I'll backtest using weekly trends and see how it works out.

I just agree with hilmy, look at the longer time frame and trade in its direction. you may not follow the crowd but never go against -- only long in uptrends and short in downtrends

http://www.dacharts.com/articles/Buf...ice_action.php

quote:

"While you may trade the trends on the smaller time frame, waiting for price action to show it is going to move in the same direction as the larger time frame is trading with the trend."

Thanks Peter. I'm printing out the arcticle you linked to study during smoke breaks at work. Thank you kindly for the help.

Check out the Vegas 4hr momentum tunnel method.

Moving averages are the simplest answer. Pick a moving average with a very HIGH period and if the price is above that MA, the trend is up. If the price is below that MA, the trend is down. In the daily systems that I have been testing, I have been using a 1000-period MA (yes, I said a THOUSAND) to determine the overall, (very) long-term trend.

My personal advice to you is to not simply trade the MA alone. Yes, the MA can show you that you are in an up-or-down market, but you still need intelligent entry points. Otherwise, you will get whipsawed mercilessly. Every "up" market will still be punctuated by (occasionally severe) corrections and retracements. Blindly trading in the direction of the MA every single day will probably lead to failure.

If the MA says that you are in an up market, then use another indicator/system, to look for signals. Only take the BUY signals from that system (because you are in an up market) and disregard the sell signals. Reverse the process when the price falls below the MA.

Hope this helps...

i think, there a basic fact in trading, that is: we are trading on "price"..not on ma, indicators whatever

so, if i want to trade off of price trends, the only thing im interested in is the q: is the "price action" on the timeframe i want to trade on showing a trend pattern ? ...so, i need a definition for trend that is based on price action exclusivly...this is what the article does

you can use a higher timeframe as a "filter" to increase the odds of trend continuation and detect a favorable "context"...means for example, if the daily timeframe is in an uptrend and the market has made a pullback and is ready to get into trend resumption, than this is a very good background or "context" to trade this market from the longside on the 15min e.o....that is to trade uptrends on the 5min or 15min timeframe

the rest is how to make the best use of your capital..

btw..heres a "shortcut"

1. just pull up a chart of your favorite timeframe

2. wait for the market to make a NEW high or a NEW low on the timeframe

3. wait for the pullback or rally

4. enter on trend resumption

btw..

here is a more advanced concept..it is about buying new momentum highs

https://www.lbrgroup.com/index.asp?p...stBreak_Apr_04

one nugget I gleaned from http://www.turtletrader.com is that you can never identify a trend until it's over. Which the first time I read it sounded pretty darn useless but it makes sense the more I hink about it. There is some pretty good articles on that site, and The Turtle Rules are there for free which is probably the most famous trend following system.

I'm trying to develop a trend following system myself, but have only come up with two rules so far.

Never risk more that 2%
Never sell a high/buy a low. (of couse easier said than done)

Also I've had some luck using a daily chart to determine a trend, S/L and T/P points with the 4 hr chart to find my entry points.

Best to you

Thanks to everyone for their informative replies. The level of professionalism and helpfulness on this forum is amazing.

So... I've done some backtesting, using the EUR/USD going back to early 2002. I charted 30 day trends and 5 day trends. I added some of my own filters to show me what I consider the strength of the trend, and proceeded to see how I would do if I had bought/sold according to my trending system over the last five years.

I'm at work now, so I don't have all the numbers in front of me, but the 5 day trend averaged out to show a profit of about 800 pips per year. The 30 day trend averaged out to about 600 pips per year. I guess that isn't so bad, though of course I was hoping for the, "Holy Grail" that would give me like 800 pips per month. The thing that troubles me though is the inconsistancy. If I break down the profits by year, some years (2002, 2003) performed really well. While other years, (2004, 2006) didn't perform that well at all.

I know that markets change, but I was hoping that a trending system would naturally account for changes in the market.

My next step is going to be to match up the 5 day and 30 day trending that I've done so far, and compare them against each other. In other words... only make the trade if my 5 day signal is in line with my 30 day signal. Hopefully the results will be better, but i'm not optimistic that they will be astoundingly better.

Thanks for reading, and thanks again for all of the advice.

An understanding of trendlines is likely the most important element to your success. Looks like you've got some good replies already.
Look at an uptrendline as a rising tide that lifts all boats. A downtrend is the opposite.
I believe you can be successful by trading the trendlines alone, however learning Fibonacci levels and a few indicators will increase your chances dramatically. Start with your trendline analysis. Find where things are headed on a longer term chart. Up, down, or flat--just that simple. Then drill down to a shorter term chart to determine your entry, exit and stoploss. If you see a potential entry, determine your stoploss location. Have a reason for putting it where you do--10 or 15 pips below support etc. Then determine if your account could handle the loss. If you have a $500 mini account and you're looking at a 50 pip stoploss, you should pass on the trade. Wait for a better setup. 10% of your account is way too much to risk. Don't tighten up your s/l just to make the trade look more appealing.
If the stoploss is reasonable look at the potential reward. Is it greater than the risk? Like 2 to 1? Then use whatever indicator you are partial to for confirmation. When price meets support or resistance and it happens within a few points of a fib level, and you're trading with the trend, you've got a high probability trade.
A lot of traders successfully trade against the trend and there are valid strategies for it, but I don't believe it is a good place to begin. Especially in your situation where you place orders and leave them on their own 'til the next day. I call that "letting go of the wheel." I know most folks have to trade that way in the beginning and it can be done, but not a good way to go if you're trying to trade against the trend.
Practice drawing trendlines, learn Fib levels and an indicator or two. After a while the setups will jump out at you if they are there. If you have to look too hard you're probably trying to create them rather than spot them.
You can get really lost looking for systems at first. The system you end up with will likely be way simpler than you think.
Happy Trading

Thanks billflet. I'm still very new to the forex and though I've been doing a lot of reading... I had subconsiously been staying away from fibonacci levels. I was trying to keep it as simple as possible. I like working with raw numbers in spreadsheets (it's what I do for work) so I thought I could just stay within myself and find a system. It's becoming increasingly clear to me, that to find a reliable and profitable system... I'm going to have to break down and learn some real technical analysis.

Anyone have some advice where I could find some sort of Fibonacci explanation for beginers? I understand MA's and EMA's, but I haven't done any work with Fibs yet.

I trade with forex.com. They have an excellent webinar on trendlines and fibonacci. About an hour long and very easy to digest. Fib levels are very easy to use. I believe you'd have to open a demo to view the webinar. Also read all posts on FF by Jacko. Trend trading reduced to the least common denominator.
If you're a spreadsheet guy check out Rob Booker's posts on this site. He'll send you a cool spreadsheet for money management, goal setting etc. Very enlightening.

Happy Trading