PTT Method (Profitable Trend Trading) in Forex

Greetings,

Introduction:

I have been a lurker on Forex Factory for many years, but just have not posted much as I’ve not wanted to dump a trading system on the forum, that may or may not be profitable, without being able to include all aspects of trading: philosophy, methodology, money management. All the while I have been reading, testing various systems, and learning all that I could.

In this thread I plan to share some things that I’ve learned over the years and then I will provide the system that I am just now starting to trade live. By the way, I only backtest and then trade live, I do not demo. There are two reasons for this; first, demo trading and live trading are different. There are emotions involved with real money that don’t exist on demo. Second, using Oanda I can trade “live” with literally 1 unit, which is one/one hundredth of a penny per pip. That means a loss of 1000 pips would be a loss of $1.00 (one dollar).

One final bit of housekeeping here in the introduction:

I have nothing to sell, nothing to promote and profit off of, absolutely no way to take your money in anything I post. While I do recommend some resources, these are simply books and threads that have helped me; I in no way profit off of any resource I recommend.

The above stems from my detestation of some threads that started out as helpful threads but over the months and years had to be moved to the commercial section because, as it turns out, the originator of the thread had something to sell or promote and profit from. I have neither. Nor will I ever. I simply do not believe in paying, or charging, for any kind of trading education. Others disagree with me, and that’s fine, but I’m simply saying that, for me, I will never attempt to sell or promote anything that I could profit off of, in any way.

So my posts will go as following:

Second Post: Overall philosophy.

This is the most important post. It is very important to understand the philosophy of trading before even examining the methodology (or system) of trading. The methodology of trading should flow out of your philosophy of trading.

Third Post: Methodology.

Just as the Apostle Paul set forth theology first and then the practical outworking, or the practical application of that theology, so my second post will provide a working methodology that meets the requirements of a good system, according to our philosophy set forth in the preceding post.

Fourth Post: Resources.

Here I will recommend the books that have changed my trading life, as well as various threads here on Forex Factory, and will even include one amazing You Tube video, from the greatest trend trader who has ever lived, that summarizes the philosophy and methodology of trading very well.

So let’s move on to the second post.

waiting 4 the second post and good trading to ya sir

Thank you Hollandpippin, will hopefully have the second post available later today.

All the best to you...

Overall Philosophy:

Are you a fundamental trader or a technical analysis trader (or both)? Are you a trend trader, a range trader (or both)? Are you a swing trader or scalper (or both)? Do you trade monthly, weekly, or daily charts (or all of the above)? Or do you prefer 4 hour, 1 hour, 15 minute or lower timeframes to trade? Do you like indicators or trading price action? Do you trade the news or stand aside?

The above questions attempt to approach the subject of the philosophy of trading, and the answers to them are the single most important aspect of your trading that you must define, even before considering a system.

I am a firm believer in trend trading. This stems from my worldview philosophy that trends come and go in this world, and to get on one is to profit greatly. Look into the world of fashion or cinema or theatre and the arts and you will see numerous trends come and go. Look into hair styling, clothing and jewelry and you’ll quickly see that trends come and trends go. The bell-bottom jeans of the late 70’s and 80’s were all the rage, and everybody wore them. Millions were made off of them. Similarly, look at any trend and notice that to follow the trend was to profit, and to go counter-trend was to lose.

It is the same with trading. Anything. Look at the stock market, commodities, futures, and forex, and if you look at enough charts you’ll see that every market trends. This is why professional trend traders often do not know what market they are trading, they are merely following whatever trend happens to be in place at the time.

It is extremely important that you be assured that your method of trading has a positive expectancy. This is especially true in trend trading, for in order to ride out the whip-saws we must be confident that the next trend is around the next bend, and when I get on the trend it will make up for all the losses and then some.

Therefore, the method we trade must be a sound trading methodology which flows out of our philosophy of trading. While I am a strong proponent of discipline in trading, too much is often made about being disciplined in trading when the real culprit of our trading losses can be that we do not have a trading methodology that is profitable long-term.

For a trend trading system to be profitable long term there must be some way to safely add on positions during the trend in order to compound profits. This is needed because whip-saw in trend trading is an inevitable, a given, and therefore in order for the trend to make up for the losses in whip-saw we have to be able to safely add on trades. Again, this requires a sound methodology when trend trading.

For instance, sometimes we read statements such as this: “the real secret to trading profitably is YOU! You are your own worst enemy in trading, or you are your own best friend. Depending on whether you are disciplined or not, whether you can stick with your method or not, YOU are the real key to successful trading.” And while there are elements of truth in this, if we have a trading method that is not sound we can be as disciplined as we want, and ultimately we will not profit in trading. The method must be sound.

Sound trading methodology plus disciplined traders equals profit in trading.

It is my opinion that a sound methodology is a trend-trading method.

Others may differ and prefer to try to pick tops and bottoms, using words such as “oversold” and “overbought” with indicators such as Stochastics, RSI and other oscillators. That is their right. That is their prerogative. Some are successful.

I believe in trend trading. This means that when their indicators say “overbought” I buy, and when their indicators say “oversold” I sell. While they buy at support, I sell, and while they sell at resistance I buy. To each his own. This is what makes a “market”.

One very important element in trading is to cut losses short and let profits run. The whip-saw effect of trend-trading will soon dissolve any account that does not do this.

Next, I only trade the daily time-frame. This is certainly just a personal preference. I check the charts once per day at 7:30 PM Eastern Time to see if there are any orders that I need to enter, enter them around 8:00 PM, then I don’t check at all until the next day at 7:30 PM Eastern. Obviously the exception to this is on Friday, when I will check around 3:30 PM Eastern. I also place alerts on my MT-4 platform to notify me if a stop loss was hit so that I can re-enter the original trade (more about this in the “method” post).

I do not give the news a second thought. Price action will tell me what the news is, and I can only make money on price action.

Finally, I use no indicators except the EMA 50 for trend direction determination. That’s it. This is due to my philosophy that simpler is better. All I want to know is what direction is the trend, and then how do I hop on the train.

Summary:

Think of the trend as a giant locomotive. Once this train starts it may take some time to get “up to steam”, to get really moving along. But don’t try to stand in front of it and stop it. It will bowl you over and then run you over. It is the same with a trading trend. Much better to hop on the trend and ride it until it stops, or until you decide to get off. Much safer.

In my “Resources” post I will recommend some books that have entirely changed the way I trade, made me a trend-trader for life, and will no doubt help you too if you’ve not already read them.

Next post: the method.

Love your post and Good Luck.

Looking for the "the method" post..

km, i can't wait to read your complete trading method. thx

I like what you are saying. And I am looking forward to your further explanation. Good Luck.

Nice thread, I think your methodology and overall philosophy of trading are both very, very similar to my own. My methods are explained in the thread "Long term breakout and trend following". I will be following this thread too, hopefully we can learn from each other

kelvin....just be carefull that this thread does not get kicked over to trading discussion ok?

The Method:

Here is the method that fits the requirements outlined in the Overall Philosophy post above. As with all trading systems, there are some good things about this method, and there are some not so good things, or things that need improvement.

What I needed to have in a trading method is the following:

 

1. A way to define the direction of the trend
2. A way to enter the trend
3. A stop loss
4. A way to add-on if the trend continues
5. A way to exit the trend

So here is a method that delivers on all of the above requirements. You may wish to change or tweak or add or remove portions to fit your own liking.

A way to define the direction of the trend:

I use the 50 EMA. If the price is above I only go long, if below I only take shorts. I tested a 200 SMA, and then a 100 SMA, but discovered both of those allow too much counter-trend movement such as when price gets a long way from the moving average and then returns. Both the 200 and the 100 have very strong counter-trend movements that the 50 would catch as a trend and allow the acquisition of pips.

A way to enter the trend.

I use Inside Bars. This includes Sunday bars, as I use IBFX for the signals (since the day candle closes at 8:00 PM Eastern) and place the actual trades on Oanda.

Let’s take an example: Say that we are in a downtrend (price is under the 50 EMA) and price then makes an Inside Bar. At the close of the day (shortly before 8:00 PM Eastern) I will place a sell stop order at the low of the present bar/candle.

A stop loss.

I use a 30 pip stop loss. This is one of the most important aspects to trend trading. We simply must keep our whip-saw losses to a minimum and let our profits run. If using a 30-pip stop loss our risk/reward can often be 1 to 10 as it is common to pick up 300 or more pips during a trend.

One important thing about the stop loss…if the stop loss is taken out we enter the original trade again (a sell stop or buy stop exactly as the original entry—at the same exact price). This is because if the market retraces back to our order entry price, after having taken out our original stop loss, the momentum will usually continue, and we absolutely do not want to miss this trade.

The above rule, along with the inevitable number of losses that come from trend trading, will most likely put this thread in the recycle bin. As soon as people start posting 30 pip losses here and there, along with not wanting to reset the trade once hitting the stop loss, will most likely make this thread not very popular.

Of course the profits from one trend pays for all the little losses, and then some. But because real trend trading has numerous losses it does not make for a popular thread, as most want a system where we are “right 80% of the time” (even if that means a losing system because the losses are bigger than the profits). Trend traders are only “right” approximately 20-30 % of the time.

A way to Add On if the Trend Continues.

We take every Inside Bar in every trend. Even the Sunday candles, which much of the time are indeed inside bars. We simply place a sell stop at the low (in a downtrend) and a buy stop at the high (in an uptrend) of every inside bar. Sometimes this provides literally thousands of positive pips in a trend.

A way to Exit the Trade.

I use the previous bars high (in a down trend) and the previous bars low (in an uptrend) to exit all the trades I have open in a particular run.

Money management is a personal decision based on risk tolerance. Since this method can be used on any pair, it is possible to have numerous positions open. Because of this I only risk a half of one percent on any one trade. If I happen to have open 10 trades my total risk will be 5%. Of those ten positions 2-3 will enter nice long trends which will far more than make up for the stop losses on the other 7-8.

By the way, from August to December of 2008 (not trading the holiday season) this method made 6845 pips, net (including spread of 2 pips per trade) on AUD/USD. Then from January to April it made 1097 pips, net.

Stay tuned for Post Number 4

Here are some resources that I have read that have literally changed my whole way of trading (and looking at society as a whole). If you are new to trading, read these books before you do anything else, and it will save you many lost pips.

1. Trend Following: How Great Traders Make Millions in Up or Down Markets by Michael Covel. Michael interviews great traders such as Ed Seykota to learn how they trade. This is the book that convinced me to be a trend trader and is a must read book. However, it does not contain any method or system for trend trading (at least none that could really be used in the currency market).

2. Attacking Currency Trends: How to Anticipate and Trade Big Moves in the Forex Market by Greg Michalowski. Greg sets forth a complete trading method. This book goes hand in hand with Michael Covel's book above.

3. Market Wizards: Interviews with Top Traders by Jack Schwager. This book will provide all the motivation you need to stick with it, despite loss after loss, or margined account after margined account. Jack interviews top traders and without exception they have all lost their first accounts and have learned the truth that Thomas Edison made popular, "just try one more time."

The following are some threads on Forex Factory that have influenced me greatly:

1. Building Your Equity Millipede. This is one of the best threads on Forex Factory and should be required reading by all. A risk to reward of 1 to 100,000? Now that is trend trading! However, this method, at least in my opinion, falls short of providing clear guidance on exits.

2. Inside Bar Trading Technique. This thread is in the commercial section, and I have no idea why, as Damon was not selling anything nor pointing readers to anything that cost money. This is an inspiring thread, yet it stopped dead in its tracks and nobody knows why. One of the last posts Damon points to another thread he started where he is trading an entirely different method.

3. Long-term Breakouts and Trend Following. "NumbNuts" has done an excellent job of taking the same philosophy I believe in and making it into a system. I see no downside to his method whatsoever, and may possibly become one of the best threads here.

And finally, if you want to skip all the above resources and just watch one song on YouTube which summarizes the trading philosophy of Trend Trading, just go here: .

Next posts will be screen shots of the method.

In this screenshot you'll see:

1. Red up arrow indicating the Inside Bar. Here we put a buy stop order at the high of the Inside Bar, with a 30 pip stop loss.

2. Red Thumbs Down. Two days later the stop loss is hit for a minus 30 pips. We re-enter the buy stop at the same price. The next day the second order triggered.

3. "Stop Loss Order". Here we are moving our stop loss order up to the low of each succeeding bar.

4. Green Thumbs Up. This is when we exit the trade for a plus 178 pips.

So we had positive 178 minus 30 for a total of 148 minus 4 pips for spreads equals 144 pips on this trade.

Notice we had no add on trades on this run.

I wanted to post a trade that had multiple add-on trades, because this is where the real money is made in trend trading.

On this screenshot you'll find (starting from the center of the shot):

1. 3 Inside Bars. Each one of them we place a sell stop at the low of each bar.

2. An Add-On trade about a week later.

3. The exit, for a little over 6000 pips.

how refreshing to see a thread which has tight stop losses and lets the profit run also you add to vtrades as you get inprofit i can not understand why most fx traders reduce the position size once they get into profit ????
Can you please tell me which pairs you have tested this on please

Hi Stumpy1,

I have only tested this on AUD/USD but am confident it would work on any market; not just currencies but futures, other commodities, stocks, oil, gold, etc.

We're just following the trend, cutting losses short, letting profits run, adding on when able.

Hi Kelvin,
How do you deal with areas where price is straddling your 50EMA?
Do you stop entering trades until price has moved away or just carry on regardless?
Regards,
Michael

Hi, Kelvin, great material for people trying to learn the long term trend trading methods. Like you I have been influenced by Covel and PipEasy on the equity millipede thread (I have'nt begun to read numnuts yet but surely will). A probably dumb question if I may, you say you set your stop loss at the high/low of the prior bar (depending on long or short of course) and exit all the current trades in that trend at that point. Often (on manual backtesting) this is just a relatively minor retracement in that trend which then turns and continues so I presume you just wait for another inside bar to form and set your sell/buy stop in the direction directed by the 50 EMA to begin again with your one position adding as the opportunity occurs in this "new" for want of a better term trend trade ? It's the patience that people need to learn, what Graeme in equity millipede thread is always emphasizing I seem to be finding the long term clue.
thanks for your reply.

did u take today's IB? on eurusd?

Kelvin,

Why a fixed stop loss of 30 pips? why not at the low of the inside bar or low of the previous bar? or why not in a logical location?

Hello Michael,

You ask a really good question. Because we have so many pairs we can trade I don't usually trade when price is bouncing around the EMA. I prefer to see a slope on the EMA (up for longs, down for shorts) and then a bounce off the EMA.

A good example is to look at EUR/CHF right now.

Thanks for the question Michael, may you be blessed in your trading.