The elements of Trend and some Rules

When people talk about trend trading, counter trend... Etc etc... They generally have no clear definitions. They just glance at a chart and can tell you if it's trending or ranging. Many people claim that there is no such thing as trend and other crap... Or say not to counter trend and other useless things that are supposed to be used as rules as thumb.

Here is what a trend is and what it's elements are...

Element 1: Velocity
People's minds are picking up something very simple. Velocity! People who are recognizing trends are detecting moving average slopes. There is nothing more to it. Simple.

Element 2: Acceleration/Deceleration
There are periods of acceleration and deceleration within a trend. A lot of traders trading on instinct... Their brain recognized how fast prices are currently moving vs how fast they were recently moving. With a trend moving at 15 pips per hour... A little deceleration is nothing to worry about. However, with a trend moving at 5 pips per hour reversals occur easily on deceleration!

Element 3: Volatility(Range)
Each trend has a certain amount of volatility to it. Generally the faster a trend is the smaller the volatility and range. When a trend slows range expands relative to the speed of the trend.


From these three elements I have created my trend and range trading rules.

On my proprietary Velocity MACD I have a few different numbers. I have them in a simple understandable format. Each number represents 10 bars. It doesn't matter what moving averages I am generating them off of. Each one represents one of the elements. Recent velocity over 10 bars, recent acceleration over 10 bars, and filtered averaged range over 10 bars. I like using the 20,30 EMA pair to generate the base velocity numbers.

Last night at the EU open we had a downtrend strength of -2 pips per 10 bars with a positive acceleration of +2 pips per 10 bars. Eg, the bottom indicator was projecting the downtrend to be confirmed over 10 bars past EU open.

We were working with a sub 0.20 Trend/Range ratio so it could really be traded either direction, but I only trade in the direction of a new trend when it's trying to be established.

So anyway... Last night I was happily trading euros long into the new trend then after a few cycles I took a breather to watch what would happen. Trend speed continued to pick up...

KEY RULE 1: Do not counter a trend with a combined velocity/acceleration over 10 pips per 10 bars with a trend/range ratio over 0.25. It's too hard to time tops perfectly enough to counter a trend over that speed.

Even though I was uncomfortable trading with trend this long into a trend it literally was the only trade that could be done! With this kind of trend speed the worst that could happen is things would go sideways for hours without some sort of unexpected news catalyst.

The later part of the trend I stopped trading and just sat out. The market just clocked and the indicator sat pegged at a trend speed of 15+ for THREE hours! Unbelievable...


I posted this so that those that want to understand and mathematically measure/quantify trends understand the different elements of a Trend. There is one more element which I have not mentioned. I also monitor trends for cyclic behavior. The degree of cyclic behavior also helps in estimation of when to buy the dip.

When it comes to pullbacks in trends what I generally have noticed in the EUR/USD is that the pullback can be calculated like this... If a trend is moving at a velocity of 10 pips per 10 bars, acceleration of 5 pips per 10 bars, and has a range of 20 pips per 10 bars on the 5m... The most pullback you can expect is around 5-8 pips if you want to enter a trend. If trend speed is real slow... Like around less than 5 pips per 10 bars(50 minutes on the 5m)... You need to use wave counts to most effectively trade as the market usually is continually reversing for 2-3 wave counts and not trending.

Pullbacks within trends have to be estimated by comparing recent range to trend speed and acceleration.

KEY RULE 2: When a trend loses acceleration... If the speed is around or under 10 pips per 10 bars(50 minutes on the 5m). Give the market a solid half hour to consolidate. If it doesn't break down during consolidation things are good to trade with trend again.

Anyway... I probably worded things kinda complex... Any questions just ask.

Things are simpler if I just do a little analysis.

Here is my analysis of the current daily situation on the EUR/USD...

Combining velocity and acceleration (34+64 = Rounded to 100) and subtracting them from the range... 300-100 = 200. I can say that holding any shorts lower than 200 pips from the highest highs is a bad idea.

The trend/range ratio is on the rise! If we reach our projected trend speed of 100 pips per 10 days at ten days from now I am actually going to be surprised. That is what the numbers say though...

That is quite a good amount of price strength forming up. Euro uptrend isn't going to collapse without a severe catalyst like a bad German court ruling on the 12th or something.

Bottom line... Try to catch uptrends after around a 150-200 pip drop from the recent highest highs. Best odds trading there is. If you do get caught short do realize the euro will probably move against you at 100 pips per 10 days so if the range drops down your truly STUCK short.

Short term things may be looking good on the daily... But if you step back and look at the longer term it shows a euro collapse again around a couple months away from now.

We need to get some SERIOUS momentum within the next month to turn this trend. Don't see what could make that happen... Highest we can go in the medium term is around 1.3 just looking at the numbers...

I am looking at the euro driving downward to parity within a year or so. Only wildcard that could really drive people into the euro is potentially US fiscal problems. With US fiscal problems, china buying a eurobond, and EU debt situation temporarily stabilized I could see a push up to around 1.45+ again... The euro is going to need a LOT of lucky things to come together to see that happen.


It's important that your technicals and analysis methods be very simple and easy to understand so you can leave your brainpower to focus on the important news and fundamental factors. You need to be able to make fast decisions!!! "Uptrend speed of 10 pips per 10 bars on the 5m and accelerating... Three bars down!!! BUY BUY BUY! Sell into volume spike when at resistance!"

KEEP IT SIMPLE!

Know whats kinda funny... 4/5 of the last times I broke my trend rules I made money. If you have all your numbers down you know what the stakes are..

So anyway I noticed this perfect Elliott wave forming up on the EUR/GBP and decided to take the short at the signal... There was a weekly resistance at 1.5854. By the time it had dropped a few bars it was only 11 pips from the highest high... Way too slow!!!

I realized that trade was retarded and took the position off there. Ever have those moments where you enter a trade then after a couple minutes you realize... Good lord that was a retarded low odds trade now that I look at the numbers!!!

I wonder how many people around here can pull pips short off a trend moving with a velocity of 10 pips per 10 bars and a range of 20 pips per 10 bars... Now that is skill... The problem with those kinda trades even though I can pull them off most the time is that if I were to have a computer problem or connection problems I would be stopped out for sure within 20 bars.

It was past 3.5 hours into trend... I generally start to counter past there... But, not with that kinda momentum!

It would have been a good idea to start shorting tops past the Bernanke speech. Too bad I wasn't awake... Those are the kind of end of trend numbers I like to see!

Thanks for sharing these "elements". I spent a couple hours contemplating and realised I liked the quantitative approach. I'm always stuck with qualitatives, that is, those without numbers. High, low, strong, weak: all relative. It can be accurate, but not too precise. Your approach seems to be much more precise.

Auto-scaling charts are very deceiving... I have to see my numbers to figure out exactly what is going on. The market behaves very differently when were trending at a slow speed vs a fast one... Or ranging large vs small.

There is a specific reason why I choose to use the 20,30 EMA's instead of say the 15,25 or 10,20, etc... I want the trend indicator to average out the trade cycles. The S&P for example generally has a trade cycle length of 5 days and under.


Want to know a interesting little fact about the S&P? The maximum bull run trend speed in that can be maintained for months in a row is 25 points per 10 days. That amounts to 2.5 points per day. Anything higher is parabolic and collapses within a certain amount of time.

Whats funny about markets in the last few years is that the range during bull market rallies with speeds above 10 points per 10 days are too low range/volatility to trade both directions... In the past things could easily be traded short after the initial 1-2 month acceleration phase and even fast rallies had enough range to be able to be able to get some good sells off new highs here and there...

The S&P could crack at any time because we have lost acceleration and the trend wasn't all that fast... Not too much latent price strength! Careful out there stock traders...


Notice that I don't care one bit about MACD crossovers...

I am just starting to heavily review long term EUR/USD data and write down some notes...

One interesting thing I see is that trend velocities as calculated off my filtered 20/30 pair when exceeding 150 pips per 10 days always are unsustainable and snap back shortly after.

Some interesting differences between Forex market behavior and equities...

Here is one thing I discovered long ago... On autoscaling charts you can't tell a 100 range from a 20 range...

DO NOT LOOK AT THE BOTTOM FIRST!

Each of the top charts with the distance between the MA's it would appear they were moving at the same rate? Look at the velocity numbers afterward and be shocked...

Each on is traveling around 2x slower than the last... That was one thing that mystified me about the pre-bernanke runup... Why was the euro so strong? Had to be something going on with the euro in order to keep it stronger than the other pairs most the night. The AUD was merely being dragged along kicking and screaming because it's in a daily corrective move.

Thank you for taking the time to share what you've learned. I have to say I really like this way of thinking and analyzing the market vs other ways to look at it.
Defiantly going to take the time to re-read through everything but I was wondering if in the meantime you could post your template/indicators.
It would help me visually to back test and study to try and learn everything your talking about

Thanks

Not sure if you're busy or if I should let the thread die but I'm still extremely interested in learning more about this. I've been over your charts 100 times but its hard to learn much from only a few snips of price action.
I hope you'd be kind enough to share or at least keep posting more information for me and others.

Thanks again,
Karatekid

Sorry man. No hand feeding... This is just to help out those who know math and how to code really.

You need to re-code MACD from the ground up with multipliers for the number of decimal places for the currency pair. You also need to multiply the MA crosses by 2 to get the proper trend velocity in pips.

I also have some custom proprietary filtering tweaks...

If you are working on recoding MACD and get stuck ill help you get past the block. No hand feeding. Sorry... Maybe someone else has a MACD coded similar to mine?

I can appreciate that.

Questions first then maybe a little help on the indicators at the end of this post

I keep re-reading the first post but I don't understand your definition of volatility and range and how it plays into your analysis. Is it simply the open of bar 1 to the close of bar 10? the pip amount = your range?

Unfortunately I have no idea how to code at all, but maybe now is when I need to figure out how.

First off i realized that your candlestick indicator is simply looking at the close of a candle past the open of another and that dictates whether the candle is bullish or bearish with a few more bells and whistles to show pips that price has moved and the number of cycle its on (I think; I could be wrong)
Searched around for this but couldn't find it so I'm sure you made it yourself and i'll have to do the same.

I have searched around and found a couple different coded MACD's because the MT4 macd isn't as accurate as from what I've gathered.

I've yet to have any luck after going through 100 different settings on them to match what you've got but I've attached a chart

indicator one(at the top) is the closets I've come to matching your velocity line

The rest are my attempts to recreate what you have. Any advice? Am I anywhere close? because honestly I just feel like I'm drowning in irrelevant stuff.

Thanks again,
Karatekid

I use 20,30,10 for MACD settings. It won't match exactly because of my filtering tweaks and how I set multipliers at different places different than the standard formulas.

Range/Volatility is simply the range of moment within a certain amount of time.

If the highest high/lowest low over 10 bars is 20 pips that is a range of 20.

I apply a ton of filtering passes to the range value. Rapid range expansion and reduction will require shifting your trading strategy fast!


Take a look at this price action... See how large of a range the price action has? But what about trend? Notice how it's a slight downtrend transitioning later into an uptrend?

Price action tends to change it's behavior slowly unless big news catalysts hit. Adjust your trading strategy to the range levels and the trend speed levels...

I removed the Trend/Range ratio because I realized it wasn't important. All I need is trend speed and range readings to make decisions on trade signals.

I only position in/out of the market at my signal candles. I have actually a couple different strategies depending upon market conditions.

Some trending strategies involve buying candle 1 and selling into candle 3-5. My range strategies involve fading the market at extremes back into or across median. I also have a different approach to trading news "runs".

Ill give you a little tip... Ranges generally expand toward EU open. It's best not to trade until a little bit after EU open if your expecting a range trade and indicators are confirming.

Odds are much better trading back toward the median in a already expanded or contracting range with little trend velocity. If conditions change or are not what you expected switch up your strategy and keep on trading!


Trading can be effectively done with just a few things...

A 20 or 30EMA(Monitor the EMA slope for trend speed)... A indicator that tells you the range of movement over 10 bars... Toss enough filtering passes on it to smooth it and create like 10 bars of lag, and engulfing candles for counts...

If your positioned high enough or low enough relative to the range and the trend starts to shift on you unexpectedly... You can usually adjust position on a bounce/dip back toward median and get out with a slight profit or breakeven.

I very rarely hit a hard stop... Once in a blue moon.

Alright I think I'm understanding what you're saying but id like to check.

So your saying; if range is high and trend is lets say.. above 10. we would expect in a retracement for there to be little deceleration (a smaller puller back in terms of pips)

If range is higher and trend is lets say 3. then the market is more so ranging(consolidating?)? in which case we should change our strategy to adjust

At the same time where range is higher and trend is low, this is also optimal time to look for reversals?
On a side note I noticed that in your example, range decreased significantly and the velocity line started to curve up before the reversal. Is that something typical or just what had happened in this example

Going back real quick to when range is higher and trend is lower (ranging/consolidating?) you said you put your system through a different set of filters. This is where I struggle in my system personally, any advice on filters? Personally if I could find these areas I would avoid them until I can trade them but the market doesn't trend perfectly everyday unfortunately.

Lots of questions sorry I'm just trying to soak up as much as I can

Thanks,
Karatekid

Things really have a lot to do with the different trading sessions IMO...

Starting at 9AM in Brussels(Green Highlight) going into the start of US time(Yellow Highlight), then off hours marked with a red highlight under it...

Notice how ranges are high and moves are rippy once EU markets all start to open up at 9AM Brussels time? Also, as EU markets head toward close and US markets open there is a flurry of activity. During US session Forex market activity declines all session.

This is the way things usually are most days...

I don't trade off hours. The market always has a small range and trends along slowly. (If it's moving at all.)

yeah I know market times have a lot of effect that's why I never like to trade past Noon on US open I feel that most of the moves happen between EU open and noon US eastern time. Some days although rarely I notice that if the market doesn't make up its mind during that day then there tends to be a good push after 1 pm eastern time.

You said that for all your trades the first thing you do is analyze trend speed compared to range which makes sense and also in your first post you said anything over .25 trend/range ratio is too hard to counter trend. and anything sub .20 can be traded in any direction.

My question is are you considering these numbers at the height of the move or are you looking at them as they happen inside a pullback/consolidation area of a move.
And if your looking at them inside the pullback are you looking to hold a .25 trend range ratio? Or is there a ratio or amount from the height of the move your considering would be too much of a pullback and considering it to be invalid to trade? Or is this where you use your other filters (I don't know if that made much sense)

On a side note I know I haven't picked up much on the trend/range aspect of your trading but I wanted to start reading on your cycle analysis as well;if you don't mind including those in your charts, just a little bit about your reasoning or what you saw at the moment in time as for trend cycles/pullback cycles what ever it is that you use.

Thanks,
Karatekid

I'm analyzing the range vs trend speed ratio as the market goes into a move.

If the market is under a combined momentum/acceleration of five pips per hour on the 5m after two upward wave cycles it tends to collapse immediately during EU session. Off hours session the market can trend through many wave cycles with very low momentum.

If the EUR/USD hits a range/acceleration rate of 10 pips into two wave cycles after EU open it's going to keep going for more counts.


I pretty much use Elliott wave counts except I just call each one an "impulse" and I don't really care about exact counts...

My wave counts are completely qualitative and non subjective and based upon engulfing candle counts.

One of my favorite trade setups is to counter trend a move that has very low momentum after three counts on the 5m. Eg... Three downward or upward waves without establishing a strong enough trend velocity for the market to keep trending without a retrace.