Hello all,
I am starting this thread to gather information on this age old saying, "Let your winners run and cut your losers off"
For those of us who are "trend traders" this can be a very frustrating mantra to take to heart. But I think I've found a way to implement this in a very real way. I'd really appreciate input from you all.
My Theory is this:
Unless you are a range trader, no matter what system you are using, it probably uses some form of trend following mechanism. Moving averages, MACD, even some oscillators diplay trend information. And we use that information (with regard to the trend) to place trades that we think have a high probability of success based on the idea that "the trend in your friend".
So the first question becomes, (1) How do we know when the trend is over? Of course we don't know. We can only use the information in front of us at the time and then allow the market to tell us if that direction was the correct one or not...if it was correct, we hold. If it was not correct...we exit.
So the next question becomes (2) When does a trend start? Again we don't know do we? Each trend no matter how big had to START somewhere. And that somewhere had to be on a small time frame...right? No matter how small, some movement started...gained momentum...and that momentum carried through to successively larger and larger time frames. With me so far?
If you're anything like me you've heard over and over...the smaller charts make up the big charts. This is the idea behind "embedded trends". And yes this is true to a large degree. But those who adhere to this idea can never say when a retracement actually becomes a reversal. They can't say because they don't know...and neither do you or I.
So with this understanding I put it to you all. Does this make sense? Enter a trade on a small time frame using whatever method you like best. My personal choice is 15 min time frame. I enter using a trend indicator to show direction and oscillators to time the entry. All fine and good. So what happens when my 15 min chart starts to show signs of trend exhaustion (on that time frame)?
Like all things the simplest answer is the best. Look at the next larger time frame. 15 --> 1 hr --> 4 hr --> day. From the 15 min chart I look at the 1 hr chart. If the 1 hr chart shows that the trend is moving the direction of my trade...I hold the trade out onto the 1 hr and watch for trend exhaustion. If the 1 hr chart is NOT going my direction...then I look for an exit signal on the 15 min chart and call it a day.
Think of it. A trade starts on a smaller time frame, the momentum builds and viola you have an hourly trade with a really great entry. Imagine that the momentum continues to build and now you have a trade on the 4 hr chart with a superb entry. Now momentum continues to build and you move the trade out onto the day chart and the entry looks like your were psychic. This kind of think happens all the time!!
On the other hand, your trade pooped out on the 1 hr chart before the 4 hr trend kicked in...so what! You gained a small profit for very little risk because your original entry was on the smaller time frame, so even if you have a loss it is very small compaired to the potential gains of carrying a trade out onto a 4 hr or day chart. This also give you a really GREAT risk-to-reward-ratio.
Well that is just my opinion. I'd really like to hear yours?
I am starting this thread to gather information on this age old saying, "Let your winners run and cut your losers off"
For those of us who are "trend traders" this can be a very frustrating mantra to take to heart. But I think I've found a way to implement this in a very real way. I'd really appreciate input from you all.
My Theory is this:
Unless you are a range trader, no matter what system you are using, it probably uses some form of trend following mechanism. Moving averages, MACD, even some oscillators diplay trend information. And we use that information (with regard to the trend) to place trades that we think have a high probability of success based on the idea that "the trend in your friend".
So the first question becomes, (1) How do we know when the trend is over? Of course we don't know. We can only use the information in front of us at the time and then allow the market to tell us if that direction was the correct one or not...if it was correct, we hold. If it was not correct...we exit.
So the next question becomes (2) When does a trend start? Again we don't know do we? Each trend no matter how big had to START somewhere. And that somewhere had to be on a small time frame...right? No matter how small, some movement started...gained momentum...and that momentum carried through to successively larger and larger time frames. With me so far?
If you're anything like me you've heard over and over...the smaller charts make up the big charts. This is the idea behind "embedded trends". And yes this is true to a large degree. But those who adhere to this idea can never say when a retracement actually becomes a reversal. They can't say because they don't know...and neither do you or I.
So with this understanding I put it to you all. Does this make sense? Enter a trade on a small time frame using whatever method you like best. My personal choice is 15 min time frame. I enter using a trend indicator to show direction and oscillators to time the entry. All fine and good. So what happens when my 15 min chart starts to show signs of trend exhaustion (on that time frame)?
Like all things the simplest answer is the best. Look at the next larger time frame. 15 --> 1 hr --> 4 hr --> day. From the 15 min chart I look at the 1 hr chart. If the 1 hr chart shows that the trend is moving the direction of my trade...I hold the trade out onto the 1 hr and watch for trend exhaustion. If the 1 hr chart is NOT going my direction...then I look for an exit signal on the 15 min chart and call it a day.
Think of it. A trade starts on a smaller time frame, the momentum builds and viola you have an hourly trade with a really great entry. Imagine that the momentum continues to build and now you have a trade on the 4 hr chart with a superb entry. Now momentum continues to build and you move the trade out onto the day chart and the entry looks like your were psychic. This kind of think happens all the time!!
On the other hand, your trade pooped out on the 1 hr chart before the 4 hr trend kicked in...so what! You gained a small profit for very little risk because your original entry was on the smaller time frame, so even if you have a loss it is very small compaired to the potential gains of carrying a trade out onto a 4 hr or day chart. This also give you a really GREAT risk-to-reward-ratio.
Well that is just my opinion. I'd really like to hear yours?
