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Trend trading is simple?

  • #1
  • First Post: May 6, 2010 3:17pm May 6, 2010 3:17pm
Earlier today I posted this in my journal thread Watch the rise (or fall) of a trader gone naked. I posted it in this forum to initiate a broader discussion about it.

Facts:
- Price moves up or down.
- Price moves more up than down in an uptrend.
- The direction of the trend can easlily be spotted on a chart. One can also use a Moving Average for indication.

OK, the above is clear to me. In an uptrend I take a long position, right?

What about stops (Money Management)? If I get stopped out, I should be able to get in again later at the same price when the trend direction resumes. The key problem here is the difference between the entry price and the stop. It should be small enough to protect my money if the price moves to far in the wrong direction, and large enough to keep me from getting stopped out too early. This discussion about stops also applies to exits. Just move the stop according to the "rules" above...

So it's really that simple? Place your stops at the right price and you will make it!

How can I calculate or estimate the correct stop size? The answer should have something to do with the markets normal variations around it's general direction. But the size of those variations changes constantly hand in hand with volatility. Some even might say that I've just described volatility itself...

Another obvious fact is that the farther away (in the direction opposite to the trend) from the actual market trend I enter, the smaller the stop has to be -> larger positions (MM).

Attached Image (click to enlarge)
Click to Enlarge Name: ma.png Size: 12 KB


On the above chart (1H) there's a Simple Moving Average calculated on 60 periods (half of a week). It has been pushed back 30 periods, therefore it's in the "center" of price variations. Pretty easy to see the variations around the trends main direction, huh? It's also pretty easy to extrapolate the last 30 periods, see the blue arrows. Then add the rule to trade only WITH the trend on the Daily. How about that?

I have now observed that the last few variations upwards where 50-60 pips away from the center line. So with a stop 100pips away from the extrapolated line, I would be ok, right? On a Daily chart that would be 300-400 pips above.

What do you think of all this? Please let us know!

beam
  • #2
  • May 6, 2010 8:05pm May 6, 2010 8:05pm
So, how you know where trend ends?
The more experience the closer to the reality
  • #3
  • May 6, 2010 9:17pm May 6, 2010 9:17pm
The key phrase here is:

"How much risk or loss is your money management able to take."

and the magic secret ingredient is:

"Adjusting STOP and finding the correct size of STOP is no different from 'Curve-Fitting' indicators. Big or small, it will get hit." ~ CrucialPoint

When you understand this, you will understand the importance of following the trend, letting your profits run and cutting your loss (correct money management).

It's about statistical edge of risk:reward ratio. The reward should compensate for the minimal loss you sustain. If the reward can't compensate for the loss, you will get a blown account.

If the risk is too great for my MM, I stay out... and guess what... the truth is that, then I would see a big move and I will beat myself for missing out on the opportunity. Those were my amateur days. Nowadays, I understand that if it is too risky, then no matter how big it moves, it wasn't worth my time. It's a gambler's/psychological trap. And me... I am no Gambler!


Attached Image (click to enlarge)
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  • #4
  • May 6, 2010 10:58pm May 6, 2010 10:58pm
Quoting Ivan
So, how you know where trend ends?
You don't. Follow the trend and don't try predict when it's going to end. IMHO that would be the same as if you were trying to hit absolute lows and highs.
  • #5
  • May 6, 2010 11:07pm May 6, 2010 11:07pm
Quoting CrucialPoint
The key phrase here is:

[center]"How much risk or loss is your money management able to take."

and the magic secret ingredient is:

"Adjusting STOP and finding the correct size of STOP is no different from 'Curve-Fitting' indicators. Big or small, it will get hit."...
Thanks a lot CrucialPoint, my journey can now continue from here. The rest of you, listen to CrucialPoint.

beam
  • #6
  • May 6, 2010 11:44pm May 6, 2010 11:44pm
Quoting Ivan
So, how you know where trend ends?
When its time to reverse your trade and go the other way.
Don't wish it were easier, wish you were better. ~ Jim Rohn
  • #7
  • Edited May 7, 2010 12:17am May 6, 2010 11:48pm | Edited May 7, 2010 12:17am
Quoting CrucialPoint
The key phrase here is:

[center]"How much risk or loss is your money management able to take."

and the magic secret ingredient is:

"Adjusting STOP and finding the correct size of STOP is no different from 'Curve-Fitting' indicators. Big or small, it will get hit."...
Hmm, I think I see where we're going... Below is a EURUSD 1H chart with two moving averages. Blue is 24 hours and green is 48 hours. When the price is below the moving averages the trend is down, and vice versa. In between theres no clear direction. We wait for the trend to change direction and then enter after a retrace, with the stop beyond previous high or low. Exit is when the market comes back into the no-clear-direction zone. I would however only take short trades at this time, because I can see that the trend is down on the daily chart.

I will go and test the "system" outlined above.

beam

Attached Image (click to enlarge)
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  • #8
  • May 7, 2010 1:23am May 7, 2010 1:23am
Quoting beam
Hmm, I think I see where we're going... Below is a EURUSD 1H chart with two moving averages. Blue is 24 hours and green is 48 hours. When the price is below the moving averages the trend is down, and vice versa. In between theres no clear direction. We wait for the trend to change direction and then enter after a retrace, with the stop beyond previous high or low. Exit is when the market comes back into the no-clear-direction zone. I would however only take short trades at this time, because I can see that the trend is down on the daily chart....
all these squigglies you got are pointles.. trends are simple higher high .. higher high.. higher low thats pretty much all you need to trade.. beginners use 1 entrance at the first breakout point and continue to adjust stops into profit as price trends under the lows.. under the lows mean if your stop is triggered trend has ended.. simple.. as long as trend continues higher highs and higher lows stop never gets triggered..

the money management of course is what makes this work anyways.. on random data .. a random entrance and chasing random trend with stops creates profits.. why? fat tail profit loss distributions..all you really need to do to make money is skew this distribution .. this is amature level.. when you got money and dont give a sht about when you trade you can time it with Divergent Interest rates.. this means that the longer you hold the trade.. the risk becomes lower.. so the longer it takes to stop the better and the longer you stay in the trade the more you make and the more efficient the system becomes.. also this is with the bank winds at your back and manipulation so trends are much longer.. this is semipro stuff.. profitable stuff

dont believe me track aud/usd or jpy back to the first rate increase recently while every other country is struggling..
  • #9
  • May 7, 2010 5:01am May 7, 2010 5:01am
Quoting domino
all these squigglies you got are pointles.. trends are simple higher high .. higher high.. higher low thats pretty much all you need to trade.. beginners use 1 entrance at the first breakout point and continue to adjust stops into profit as price trends under the lows.. under the lows mean if your stop is triggered trend has ended.. simple.. as long as trend continues higher highs and higher lows stop never gets triggered..
Thanks, domino
  • #10
  • May 7, 2010 8:57am May 7, 2010 8:57am
Quoting beam
When the price is below the moving averages the trend is down, and vice versa. In between theres no clear direction. We wait for the trend to change direction and then enter after a retrace, with the stop beyond previous high or low. Exit is when the market comes back into the no-clear-direction zone. I would however only take short trades at this time, because I can see that the trend is down on the daily chart.


You see, there is a difference if I say it (I already know it).

But... since it came out of your mouth, it means deep down something within you hit a home run.

Professional traders have been preaching the same message what you just wrote, word for word. Nobody listens. What you just wrote is a million dollar paragraph.

Add patience and discipline to follow through. You will be tested on consolidating and ranging times... that's when the money management will kick in and save your account.

  • #11
  • May 7, 2010 2:40pm May 7, 2010 2:40pm
Quoting CrucialPoint
The key phrase here is:

[center]"How much risk or loss is your money management able to take."

and the magic secret ingredient is:

"Adjusting STOP and finding the correct size of STOP is no different from 'Curve-Fitting' indicators. Big or small, it will get hit." ~ CrucialPoint

Why not just use %R? You always risk 1% (or whatever) regardless if the stop is 10 pips or 1000 pips. This way you can find the S/R level you want to place your stop at and then adjust the size of your position accordingly.
Don't wish it were easier, wish you were better. ~ Jim Rohn
  • #12
  • May 7, 2010 7:55pm May 7, 2010 7:55pm
Quoting LasVahGoose
Why not just use %R? You always risk 1% (or whatever) regardless if the stop is 10 pips or 1000 pips. This way you can find the S/R level you want to place your stop at and then adjust the size of your position accordingly.
Calculations: Standard lots $1 per pip

Scenario 1.
$1000 account risking 1% = 10 pips (1000 x .01 = 10)

Scenario 2.
$100,000 account risking 1% = 1000 pips (100,000 x .01 = 1000)

======================

I am a Scalper and I have a big account. Do you really think I'm going to put a 1000pip stop loss?

There is nothing wrong with calculating profits and risks with either pips or percentages. I just hope people calculate it right for the sake of their account. People are too busy arguing about pips or percentages... to me it doesn't matter as long as I get the right calculations not to blow my account
  • #13
  • May 8, 2010 9:22am May 8, 2010 9:22am
Quoting CrucialPoint
Calculations: Standard lots $1 per pip

Scenario 1.
$1000 account risking 1% = 10 pips (1000 x .01 = 10)

Scenario 2.
$100,000 account risking 1% = 1000 pips (100,000 x .01 = 1000)

======================

I am a Scalper and I have a big account. Do you really think I'm going to put a 1000pip stop loss? ...
I understand that you are a scalper and therefore small Sl are the norm for you.

But I don't believe that you even came close to understanding LVG's point.

Setting a SL based on %R

Determine SL in pips based on S/R. For this example and ease of calculation let us assume it is 200 pips away.

Determine %R. Let us assume it is 1% and that your account is $100,000. Therefore your max loss that you are willing to permit is 1% of $100,000 or $1000.

That $1000 at risk is now distributed over your SL size which is 200 pips. Therefore you are willing to risk $5 per pip. This equates to 0.5 standard lots.

So you enter the trade with 0.5 standard lots with a SL of 200 pips. Worse case scenario your SL is hit and you lose $1000 which is 1% of your account.

I don't understand your calculations at all and i am a card carrying member of Mensa.

The process is the same if you use %R and S/R no matter what trading technique you use for your entry/exit rules. This is nothing more then allocating your at risk capital across your SL and is the first step that a trader should understand.

There are traders that instead always enter with 1 standard lot no matter where their SL is placed. This will create asymmetrical leverage and inconsistent results.

As for your point about pips or percentages I actually measure my trades in R value. My Sl is always called 1R. It does not matter pips or percentage. I then evaluate my trades as something as a multiple or fraction of R. (hopefully multiple)

It is no good telling someone that you made 2% as you could have risked 1%, 2% or even 3% to get it. It is no good telling someone that you made 200 pips as you could have risked 50 pips, or even 500 pips to get it.

Also R value allows a scalping system to be compared with a trend trading system. The only other point that you may want to take into consideration is frequency of trades which a scalper will have a higher frequency of trades versus a typical trend trading system. And then you can get into the whole Expectation side of the concept.

I wrote this as there seemed to be some confusion on LVG's point. If I was mistaken then I apologize in advance.
  • #14
  • May 8, 2010 11:02am May 8, 2010 11:02am
Quoting LasVahGoose
Why not just use %R? You always risk 1% (or whatever) regardless if the stop is 10 pips or 1000 pips. This way you can find the S/R level you want to place your stop at and then adjust the size of your position accordingly.
A very viable solution. Scale up the winners. Losser will only be only 1% (or whatever)
  • #15
  • May 8, 2010 7:46pm May 8, 2010 7:46pm
Quoting beam
Earlier today I posted this in my journal thread Watch the rise (or fall) of a trader gone naked. I posted it in this forum to initiate a broader discussion about it.

Facts:
- Price moves up or down.
- Price moves more up than down in an uptrend.
- The direction of the trend can easlily be spotted on a chart. One can also use a Moving Average for indication.

OK, the above is clear to me. In an uptrend I take a long position, right?

What about stops (Money Management)? If...

Stops like any portion of your trading plan should be in accordance with the trade taken. I know nothing of your trading style. But a correct stop placement is more about where price is in realtionship to the swings. To many want a set value and yes you should have in your mind a max. that could be lost on any trade. But to just use a constant stop amount would be the same as taking profit at 20 pips every time.

Some people get through life trading this way fine as it then becomes a matter of the precentage of good entries verses bad. But the ultimate trader will take very small losses against very large gains constantly. Then if they should ever have a a losing streak one good trade makes up for them all.

the difference in stops two examples. 1. your at a retracement area you enter with the trend , Your stop here could be larger to take into account that if you entered at the 50% level price could travel to the 78% and still end up being a good trade. 2. You are at a strong S/R are you have plotted on your chart this is on the 4 hr we will say. but the weekly and daily show this to be a retracement area. So to use the same stop as above would require a major stop as the next levels could be 100's of pips on the daily or weekly. So in this case we are planning for this line to hold. so a tight stop is the play. just the other side of the line.

Again I don't know how you trade. But this is why we pick areas on the daily ,4hr. and 1 hr. then wait for entry signals on the 15 min. The smaller the time frame entry the tighter the stop. But you could be stopped more often. The trick is to become expert at spotting the correct entries. Plus to take 3 or 4, 15 or 20 pip loses which equals that many chances to get the entry correct for me anyway is better than one 100 pip stop for one chance.

Anway again it is dependent on trading style. But we have to be flexiable just to say I willl place a 50 pip stop because it fits money management is not the correct answer. To place your stop because that is the line in the sand or on the chart for you is a much better choice. I know traders that make thousands of pips a week that swear by a 15 pip stop and will close a losing trade even sooner. It isn't about how big it is. until you talk about profit targets that is where we should focus our energy.

He who loses the least wins in Forex. Ken
Good Trading To All ; Ken Lee
  • #16
  • May 8, 2010 8:18pm May 8, 2010 8:18pm
Quoting flyer415
...I wrote this as there seemed to be some confusion on LVG's point. If I was mistaken then I apologize in advance.
I totally agree with everything you said.

I gave an example, and I purposely chose a very basic example. I didn't want to include leverage within that example.

I specifically wrote "calculating in pips or percentages is ok, as long as people get their calculation rights".

Forgive me because I didn't elaborate on "as long as people get their calculations right". What I mean by that is balancing all of the leverage points when one put on a trade.

Forgive me again because I had no intention on going into the very detail in the first place. My point of view in answering things here are the very basic because we are in the "Rookie section" of the forum, if it were on the "Trading discussion section" of the forum it'll be a different story.
  • #17
  • May 8, 2010 8:27pm May 8, 2010 8:27pm
CP,

I assumed that you knew what you were talking about and I agree that we are in the Rookie section.. I just didn't want the OP to walk away with a different idea then perhaps you meant to imply.

Your points are valid as are ken's and LVG's when they say pick your stop based on S/R, swing high, swing lows etc. I was merely further explaining LVG's point when he said to pick your stop based on S/R and then allow that distance to determine the position size.

A lot of people pick position size first and then SL location which if you are using a %R MM model will only get you in trouble as to asymetrical leverage.

As it is in the Rookie section I thought it best to lay it out:

1. Pick SL based on S/R
2. Determine SL size in pips
3. Determine lot size based on %R and stop loss size
4. Enter trade
5. manage wisely
6. Exit profitably.
6. rinse and repeat.
  • #18
  • May 8, 2010 8:32pm May 8, 2010 8:32pm
Quoting flyer415
CP,

As it is in the Rookie section I thought it best to lay it out:

1. Pick SL based on S/R
2. Determine SL size in pips
3. Determine lot size based on %R and stop loss size
4. Enter trade
5. manage wisely
6. Exit profitably.
6. rinse and repeat.

I concur... I concur in all counts


Now you are speaking in English and not mathematical jibberish
  • #19
  • Last Post: May 9, 2010 4:39pm May 9, 2010 4:39pm
Quoting CrucialPoint
But... since it came out of your mouth, it means deep down something within you hit a home run.
Scary stuff... That's exactly what happened! I physically felt a "click", or something, in my head when I looked at the image you posted.

Actually, I was hoping for a confirmation from you, CrucialPoint.

For me, the purpose of this thread is now fulfilled. I hope someone else can benefit from it also.

For the rest of you, make sure to tune in on CrucialPoints Journal. Great stuff.

beam
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