Trend Following - A Complete Guide

I think you will have to analyse only one time per day if you are using daily chart and that should not take more than 2 hours per day for profitable pairs.I don`t think there is other method that is less stressful.Also I think having positions running for many days maybe boring but not stressful.

Few charts with example will be great!!! Merry Christmas!!!

MERRY CHRISTMAS EVERYONE!

Don't worry in the New Year I will post plenty of charts and setups, so that it becomes clear to everyone.

Have a great day everyone!

Looking foward to more Micardo. I have been trading for a little of 2 years and now use a trend trading method which I hope to post in my own thread at a future date.

First, I want to thank Micardo for this very informative thread. I hope he had a very merry Christmas. I wish him a happy and prosperous New Year; and we all hope to hear from him again soon; so that we can again soak up more of his trend-trading wisdom and experience.
Second, I confess I am not a trend follower. My first trend following some time ago ended in disaster. The USD/JPY had been trending down since 2007; so I shorted the market. That very day the Japanese Central Bank decided to intervene and dumped billions of Yen on the market; in order to drive down the price of Yen and support their export market. Awhile back I noticed EUR/CHF was trending down for quite some time. Again I shorted the market. Yes, that very same day the Swiss Central Bank hit the market with wave after wave of Francs! Yes, I became paranoid (Do the Central Banks watch my trades?)
I have tried scalping; but never mastered the art. The only thing I have found profitable is the "Carry Trade" (sell Yen and buy Audies, collect interest); but being greedy, I am looking for a greater profit margin in trend trading. (If you are not greedy; you should not be in forex). http://cdn.forexfactory.com/images/icons/icon6.gif
That said, I know the newbies here want the details of when to trade and when to exit; so I would now like to put in my 2 pips worth by laying out my trend-trading plan for 2011. This is just a suggestion, you can make up your own trading plan; but everyone should have a plan.
1. Draw the trend lines on the daily and weekly charts.
2. Trade the daily trend; but only when it is in the same direction as the weekly trend.
3. Open trades when price bounces off of the trend line; pulls back; or whenever a trading pattern appears such as a double top or bottom, head & shoulders, etc.
4. Use small lot sizes and add to position when trading opportunities appear.
5. Trade all major currency pairs; but no exotics.
6. Use a 250 pip trailing stop. Yes, it seems too big; but see #7. (Micardo uses 100 pips).
7. Check charts once or twice per day. Exit when trailing stop is hit; or when trend line is broken; or when a reversal candle pattern appears, i.e. shooting star, hammer, engulfing; or anytime it looks bad. Get out first, ask questions later. Also, watch the interest rates of the Central Banks. If the interest rate is moved against the trade, then exit. If the interest rate is moved in favor of the trade, then add to it.
Okay, so in general, trade when it looks good and get out when it looks bad. Trend followers are after hundreds to thousands of pips (everything the market will give); but they need to get out when the price reverses. Watch for signs of a reversal. It should show in the candle sticks, and/or a trend break. It is confirmed by a long candle in the direction of the reversal. This long candle eats up profit; so don't wait for confirmation. It is easy to get back in, if the trend resumes. Expect many small losses, and a few big pay days.
Make sure trend lines are drawn correctly. If it is confusing, google trend lines and study the subject.
Ignore swap. Shorting the Audie or the Kiwi will cost you about 1 pip per day. A trend can earn 5 to 50 pips per day.
The forex market is driven by interest rates, the "Carry Trade". When
traders are greedy they sell the low interest currencies and use the money to buy the high-interest currencies (sell Yen, Francs and
US Dollars; buy Audies, Kiwis and Euros, and collect interest). When traders are afraid they unwind these positions. This is good for trend followers; because it creates nice trends coming and going.
Happy New Year, and Happy Trading! http://cdn.forexfactory.com/images/icons/icon7.gif

Hi Micardo,

Many thanks for taking time to start and add to this thread. Due to my schedule I must trade the daily charts, but if I can learn to do it as you have described here, the dailies will be just fine, and with less stress. Do you trade one full contract per trade when you enter a trade? Are you trading multiple pairs each week? Are you using a set % of your account on each trade? Do you limit the total % of your account you trade on any given week?.

Sorry for all the questions here, I am just trying to get a feel for your genearal approach to trading the daily charts.

Happy New year to you and all on this thread.

Charles

Hi JerryCollie,

Thank you for your wishes and I hope the same for yourself and all others on this forum trying to improve themsleves and reach their ultimate goals.

Sorry to hear about your bad experiences with Trend trading, I know sometimes it can really feel like the markets know exactly when you are getting into the markets and trade against you because they know its you... It has happened to me on more than one occasion. In fact I used to joke with other traders that all they needed to be profitable was to fade me immediately when I enter a trade :-).

However I think you were particularly unfortunate to be on the wrong sidfe of two central bank interventions. Although if you take a look at the markets directly after both continued to trade lower after the intervention. To be fair the Japanese central bank intervention had been coming, although many thought it would be later and when the pair reached the 15 year low, but c'est la vie.

I think fundamentals are extremely important in the long term and sentiment is more important in the short to medium term. For example the anticipation of the second round of QE by the Fed led the dollar lower against everything, however when they eventually announced the plan, what happened? The dollar rallied. So although it wasn't great news, the markets expecatation of what was going to happen is what drove the prices and not the actual announcement itself. There are plenty of other examples on this and if people are interested in fundamentals I would be happy to add some of my thoughts here and there and help you guys learn that as well.

Having said that, you have to be careful about paying to much attention to fundamentals when trading technically. When trading technically in some respects you have to ignore the fundamentals and just trade the technical setups when they come about. A perfect example of this was the decline in the dollar against the JPY for much of this year. There is no real reason other than a trade surplus that the Yen should be strong. Japan faces Chronic deflation and hence isn't going to raise rates anytime soon, whereas we all know that once the Fed start to talk about withdrawing the stimulus and the markets anticipate a series of rate hikes the dollar will rally. Now having that information may have kept you away from shorting the USD/JPY, but when you look at the charts you can see very clear signals to short... so are you willing to give up those profits just because of the fundamentals? What I would say is to pay attention to fundamentals but don't let them keep you from entering trades. Maybe just enter smaller sizes.

I think your trade plan looks good! The one pointer I may give you if you don't mind is if you are trading dailies, pay attention to the weekly and monthly levels but don't constrain yourself to just trading in the direction of those timeframes. Trade the daily trend but be aware of the major levels on the bigger timeframes.

Sorry for quite a lengthy post but I hope that helps and sheds some light on my thinking.

Hi Charles,

Thanks for your questions.

It is indeed less stressful and I think you will enjoy it :-)

Ok regarding my risk, the account I trade is probably significantly larger than most so I trade a few more than just the one contract per trade. What is important is my risk, I generally take only 0.5% to a maximum of 1% risk per trade. This is also because I like to take more than just one trade at a time, I monitor maybe 30 pairs. However I would never be more than 3-4% exposed at any one time. I don't have weekly risk profiles, just simply an overall profile of not more than 3-4% at anyone time.

What determines whether I take 0.5% or 1% risk per trade is simply to do with what the setup look like. If we are not in a completely established trend I would only be taking 0.5% per trade where as if we were in an established trade with sentiment on our side I may be tempted to go for 1%.

What I do ensure though it that my risk:reward is at least 1:1.5 and more oftent 1:2 and above. This way you only need a strike rate of 50% to remain profitable.

Speak to you soon.

Hi JerryCollie,

Sorry just one more point. regarding your stoploss... 250 sounds quite generous and in some cases is completely necassary. However I wouldn't limit yourself to that, there will be times when you can bring the stop loss closer. For me it is most important to place it behind a significant level and adjust your position size accordingly.

My 2 further pips :-)

Enjoying these last several posts.

I take trades off the daily chart but use the 4 hour chart to enter. After a bounce off the daily trend line I enter on the open of the next 4 hour candle. I put a stop at the top/bottom of the 4 hour candle bounce. I avoid large losses with this type of stop. If PA continues to penetrate the daily trend line then I wait and evaluate.

I place 2 entries one with a fairly small profit target and the next I let run with a break even stop loss or sometimes a trailing stop loss.

To get back in the trend later I use the 1 hour chart with 14,3,3 stochastics to identify a pullback or retrace. If the daily trend is down I enter on the 1 hour chart after stochs have exited the overbought area. My stop is 5 to 10 pips above the swing high of the pullback.

I also monitor the 5,10 EMA on the 4 hour chart. If there is a cross against the daily trend then I start thinking about counter trend trades and really think hard about trades in the direction of the trend. If the 5,10 ema does not cross back into the direction of the daily trend then I'm probably waiting for another bounce off the daily trend line.

Well I couldn't help share my trend trading strategy and look foward to more great posts from Micardo and others on their strategies so that I can improve mine.

Hi Brenzaj42,

I hope that you will continue to post here about your method of trading the daily charts. I need some clarication on the parallel and inverse analysis thing. I guess I'm one of those who has to see it illustrated as charts being compared in order to get the big idea. Also, I'm not sure why an inverse analysis is needed of you are trying to guage the strength of a trend on a pair you are considereing for a trade. Just clueless...sorry. Hope you will be kind enough to educate me in this regard.

Also please post some more charts. I can see why you like the 5/12 EMA cross. I would appreciate knowing what angle of cross you consider sufficient to take a trade and what the trigger is. It appears to have something to do with momentum during the cross, that makes the trade worth taking.

I would also like to know how you use fibonacci in your trading.

Thanks so much for your willingness to share info here. I like the idea of trying to keep it simple, and this thread looks to be the right place to learn how.

Best regards,

Charles

First off, I do not use fibonacci. When you are using parallel and inverse analysis, you are trying to gauge the strength or weakness of BOTH sides of the pair. Lets say you want to short GBP/USD. I will use parallel analysis to determine how weak GBP pairs are where GBP is on the left and inverse to analyse GBP where GBP is on the right(basically EUR/GBP). I then do the same for the USD side. A trend in the forex market is something making higher highs and higher lows, yes but this market is unique in the regards that it is also a currency pair that is alternating between strong currency and weak currency or visa versa. I mainly trade off of the daily chart so I will flip between daily charts. It literally takes about 2 seconds.

As far as the crosses go, I could post charts all day but try this. Set up every daily chart that you have with 5/12 ema crosses. Now, make the candles or lines(whatever you use) the same color as the background so you cannot see them. Only the 5/12 ema should be visible. Now you tell me which crosses have the angle and separation to trade. Once you have an eye for it, it becomes second nature.

Hope that helps.

Great informative thread Micardo!

Can't wait for more..

Happy New Year 2011!!

Hi Brenzaj42,

Thanks for the helpful reply about parallel & inverse analysis and the 5/12 EMA angle for trade entry. I'll do as you recommend.

Can you tell me what your win/loss rate is with this method as well as the risk/reward ratio that you look for per trade?

I will need to trade the daily charts, and I'd like to make enough trades/income per week to be able to quit my day job. It looks like you have made it to that point and I would like to ASAP.

Thanks for your willingness to explain your trade method. I'm sure other questions will arise, so I hope you will continue to post.

Best regards,

C.

I would say about win% about 85%-90%, somewhere in there. The R:R ratio is great because I use 100 pip stop and the winners go anywhere from 200 pips to 2000 pips. You can just look at the charts to see that.

Nice info on the thread regarding pair strength gauging.
Surprising how little you see, or I guess that I notice, on
that here on the forums. Kind of crazy to not look at it!

Thanks again for the reply on the win% and the R:R Brenzaj42. The next thing I'd like to know is how you determine the exit of a trade. Appearantly it's not a set R:R ratio. Are you moving the stop loss as price moves along in you favor, keeping a 100 pip distance?

Thanks again,
C.

I agree, It has always baffled me on here as well why more people don't talk about it. This is the MAIN advantage to trading the forex in my opinion. You can't really do this with stocks, gold, or anything that trades as a single unit. I guess with stocks, you could look at sectors and stuff like that but this makes the forex a lot easier on the eyes.

I just exit the trade when the trend is over and for me that is when there is a fresh cross in the opposite direction.

Hi Brenzaj,

Once you are in a trade with an initial SL of 100 pips, do you even trail a SL? From your last reply it seems you don't, but that you exit on the next cross. If so, once your trade takes off, you won't be getting stopped out on whipsaws too often. Do you ever bring that initial stop to BE? If so, when?

Thanks,
C.