Hi. My name is Dan and I am a futures/stock trader with a few months of experience, so I am no guru. I would like to present you a trend following system which I use.
I want to underline that I have only used this system in futures trading and have not tested it on FX, so I have no idea how well it will fare. If you want to trade based on this system, you will do so at your own risk.
The reason I am posting this system here is for you guys to take at look at it, test it and tell me your opinion and thoughts on it.
Basics
This system is designed to catch intermediate trends in the market (according to Dow theory - anything from 3 weeks to a few months). This works very well in stock and futures markets where such trends are fairly common but I have no idea how many of these trends appear on FX so I would love some feedback from you guys on this matter.
Let's look at a 4 hours chart with the following:
-Simple Mobile Average of a 1.5 weeks period (on a 4hr chart, that would be a 45 period MA) - for following the trend
-Bollinger Bands for 6 bars period (equivalent of one day) - for eliminating noise
-Stohastics with a 15 bars period (equivalent of half a week) - for spoting local overbought and oversold areas
The way I use these indicators is very simple:
I follow the SMA for going with the trend (price moves above, I go long and vice versa).
I eliminate the noise in short term fluctuations with the help of the Bollinger Bands. The thing is this: the bands will contain a big part of the price action, so instead of looking strictly at the price I will look at the bands and interpret them as a channel.
When this channel goes above or below the SMA (and only then) I will go long or short. So, in order to go long, you need both the price, the upper band and the lower band to go above the SMA. Take a look at image1. The yellow line is the SMA and Bollinger Bands are teal. You would go short on 20th March and stay short until the 27th when the signal changes to long.
Risk Management
Ok, now you need to take into consideration that you are trading on an intermediate time frame, so you will have wild price swings. I use a max leverage of 4:1 on futures and I would recommend you to go for the same ration on FX.
Second, your stop losses need to be miles away so that you won't get thrown out of a position. On EURUSD that means as much as 300 pips. I would go for a maximum of 3% loss per false signal, so do the maths so you get 300 pips = 3% of your trading equity.
Money Management (position sizing)
In this shape, my trading system is pretty rubbish. I usually get 50% false and 50% good signals on futures and on FX I reckon the ratio will be worse, so you will probably end up losing money trading on this system, but some clever money management can turn this into a winner.
This is the more complicated part of the system, but I consider it to be very logical so if you read carefully you will understand it easily.
In order to stick to a maximum 3% loss on false signals you can only open very few positions the first time a signal appears. But once the trend starts moving, you can add to your initial positions and increase your exposure, while moving the stop loss so that you are still on the 3% limit.
How do you do that? Well, simply put, you wait for the price action to move beyond the point at which you got into the trade. That is, wait for the trend to go in your favor. If it goes against you, it might be a false signal, so you need to wait and do nothing.
Take a look at image2. You go long at 1.4666 once the Bands move above the MA. Notice the light green horizontal line at that level. Once the price (plus Bollinger Bands for noise elimination) move beyond that level, you will add to your long positions (point 2). At that point, you will draw another horizontal line at the price you opened position 2 (the one at 4.715). Once price + Bollinger Bands move beyond that second line, you can add more and so on.
I usually go for 30% on the first position, 40% on the second and 30% on the third entrance ending with a 4:1 leverage but it is really up to you to decide ratios and number of entrance points. I think 3 to 5 entry points would work best.
Stohastics
So far the system works well for catching the trends but it fails to score at another very important aspect: retracements. This is where the Stohastics will help.
As I mentioned before, you use STS to catch overbought and oversold areas on the short term.
Let's assume that price + Bollingers just went above the SMA. At that point you closed all your shorts and opened the first longs. Then price retraces somewhere lower, catches its breath and then continues to rise.
The Stohastics will help you add positions on the retracement. The way I use the is this: after going long for the first time, I keep an eye on the STS. If they dip below 50 I will wait for it curve up again and then I will add more positions.
Let's take a look at image3. It is the same position as image2, just that this time we will take STS into consideration as well.
So, you opened first long positions at 1.4666, then price rose, you added more longs at point 2 (1.4715) and then price retraced. You waited for STS to go below 50 and once it went curved upwards you added more positions (at point 3).
Notice that you need to wait for price to go above the line at 1.4715 (which was point 2, not 3 which is lower) before adding more positions. Or at least that is how I do it.
Last Example
Image4 is a not so great situation. You go short at 1.4113, STS goes above 50, curves down so you open more positions at point 2. Once price action goes below 1.4113 you open more positions (point 3) but then prices start to rise and you get thrown out of all positions.
I wrote stop loss right where the long signal appeared but you should really move your stops to break even once you start adding to positions.
Phew, almost done.
Last Notes
There are a few minor issues I left aside because I don't consider them very important and you can really adapt these aspects to your liking.
So, this sums up my trading system. I hope you guys like it. I am looking forward to some feedback.
I want to underline that I have only used this system in futures trading and have not tested it on FX, so I have no idea how well it will fare. If you want to trade based on this system, you will do so at your own risk.
The reason I am posting this system here is for you guys to take at look at it, test it and tell me your opinion and thoughts on it.
Basics
This system is designed to catch intermediate trends in the market (according to Dow theory - anything from 3 weeks to a few months). This works very well in stock and futures markets where such trends are fairly common but I have no idea how many of these trends appear on FX so I would love some feedback from you guys on this matter.
Let's look at a 4 hours chart with the following:
-Simple Mobile Average of a 1.5 weeks period (on a 4hr chart, that would be a 45 period MA) - for following the trend
-Bollinger Bands for 6 bars period (equivalent of one day) - for eliminating noise
-Stohastics with a 15 bars period (equivalent of half a week) - for spoting local overbought and oversold areas
The way I use these indicators is very simple:
I follow the SMA for going with the trend (price moves above, I go long and vice versa).
I eliminate the noise in short term fluctuations with the help of the Bollinger Bands. The thing is this: the bands will contain a big part of the price action, so instead of looking strictly at the price I will look at the bands and interpret them as a channel.
When this channel goes above or below the SMA (and only then) I will go long or short. So, in order to go long, you need both the price, the upper band and the lower band to go above the SMA. Take a look at image1. The yellow line is the SMA and Bollinger Bands are teal. You would go short on 20th March and stay short until the 27th when the signal changes to long.
Risk Management
Ok, now you need to take into consideration that you are trading on an intermediate time frame, so you will have wild price swings. I use a max leverage of 4:1 on futures and I would recommend you to go for the same ration on FX.
Second, your stop losses need to be miles away so that you won't get thrown out of a position. On EURUSD that means as much as 300 pips. I would go for a maximum of 3% loss per false signal, so do the maths so you get 300 pips = 3% of your trading equity.
Money Management (position sizing)
In this shape, my trading system is pretty rubbish. I usually get 50% false and 50% good signals on futures and on FX I reckon the ratio will be worse, so you will probably end up losing money trading on this system, but some clever money management can turn this into a winner.
This is the more complicated part of the system, but I consider it to be very logical so if you read carefully you will understand it easily.
In order to stick to a maximum 3% loss on false signals you can only open very few positions the first time a signal appears. But once the trend starts moving, you can add to your initial positions and increase your exposure, while moving the stop loss so that you are still on the 3% limit.
How do you do that? Well, simply put, you wait for the price action to move beyond the point at which you got into the trade. That is, wait for the trend to go in your favor. If it goes against you, it might be a false signal, so you need to wait and do nothing.
Take a look at image2. You go long at 1.4666 once the Bands move above the MA. Notice the light green horizontal line at that level. Once the price (plus Bollinger Bands for noise elimination) move beyond that level, you will add to your long positions (point 2). At that point, you will draw another horizontal line at the price you opened position 2 (the one at 4.715). Once price + Bollinger Bands move beyond that second line, you can add more and so on.
I usually go for 30% on the first position, 40% on the second and 30% on the third entrance ending with a 4:1 leverage but it is really up to you to decide ratios and number of entrance points. I think 3 to 5 entry points would work best.
Stohastics
So far the system works well for catching the trends but it fails to score at another very important aspect: retracements. This is where the Stohastics will help.
As I mentioned before, you use STS to catch overbought and oversold areas on the short term.
Let's assume that price + Bollingers just went above the SMA. At that point you closed all your shorts and opened the first longs. Then price retraces somewhere lower, catches its breath and then continues to rise.
The Stohastics will help you add positions on the retracement. The way I use the is this: after going long for the first time, I keep an eye on the STS. If they dip below 50 I will wait for it curve up again and then I will add more positions.
Let's take a look at image3. It is the same position as image2, just that this time we will take STS into consideration as well.
So, you opened first long positions at 1.4666, then price rose, you added more longs at point 2 (1.4715) and then price retraced. You waited for STS to go below 50 and once it went curved upwards you added more positions (at point 3).
Notice that you need to wait for price to go above the line at 1.4715 (which was point 2, not 3 which is lower) before adding more positions. Or at least that is how I do it.
Last Example
Image4 is a not so great situation. You go short at 1.4113, STS goes above 50, curves down so you open more positions at point 2. Once price action goes below 1.4113 you open more positions (point 3) but then prices start to rise and you get thrown out of all positions.
I wrote stop loss right where the long signal appeared but you should really move your stops to break even once you start adding to positions.
Phew, almost done.
Last Notes
There are a few minor issues I left aside because I don't consider them very important and you can really adapt these aspects to your liking.
So, this sums up my trading system. I hope you guys like it. I am looking forward to some feedback.
Attached Image(s) (click to enlarge)
