Diversified Trend Trading Approach

Thanks, to you too.
Go here see this and tell me what you think.

[quote=Copernicus;7984672 I deserve to get a flogging with this trade as reported in Post 183 but lady luck is being gentle with me so far[/quote]

http://www.forexfactory.com/showthre...86#post7973586

I have now had a good read of the article. It is excellent and gives a lot of food for thought for supercharging a trend following strategy, but also gives me great confidence in my approach.

I was particularly interested in the section on 'adding a profit target component for a portion of a position' and this has given me ideas in regards to a technique of adding to positions while in trend. I think I will investigate the option of taking an initial position that rides the entire trend, but supplementing this position over the course of the trend with additional (lower trade risk) positions that use a finite profit target to smooth the equity curve and reduce drawdowns. Gonna think about this a bit more but I like the idea.

I am also very, very interested in the Momentum Trailing Stops and will be closely looking at this for the approach.

The notes on portfolio allocation and correlation I am well aware of and will be looking at this in 2015. Also the section on considering Diversifying Trading Systems was definately something I need to look into before launching live for a living.

This info you are providing me is worth it's weight in gold and I really appreciate it.

C :-)

PS ....and more importantly, thanks for keeping me on track.

Thanks B, but I do need a spanking on this particular trade as my entry technique and SDC settings on H1 flew in the face of my own rules. :-)

SuperCharging Thoughts

Following on from Post 191 relating to an adjustment made to the rudimentary DDT approach and subsequent to considerations made in Posts 208 and Post 223, I am currently in the process of backtesting a variant to the approach according to the following assumptions.

Post 191 as discussed configures the H1 SDC to mimick the SDC on D1. The result is that position sizing has significantly decreased but the plus side is that trends of substance may have considerable lifetimes more aligned to long term trends on the D1 timeframe. The backtest will regard the trades undertaken on this basis as PRIMARY TRADES (associated with D1). Namely trades that are deliberately executed and managed to follow the long term primary trend. The risk per trade executed as PRIMARY TRADES will be 1.0% trade capital risk. The increase in trade capital risk from 0.5% on the rudimentary approach to 1.0% on this amended approach is considered prudent given that trade frequency on this longer term timeframe will be considerably less. Only one Primary Trade will be taken on the primary trend at any time. A 40 period H1 donchian breakout will be used as the entry signal.

SECONDARY TRADES with an open ended profit will also be undertaken on this primary trend in accordance with the following rules. Secondary trades will have a trade risk of 0.5% in line with the rudimentary approach. A secondary trade will be considered at any time price moves from the upper/lower SDC channel of the primary trend through the median channel (mid-range) of the primary trend on the H1 timeframe provided the mean retracement price move commenced in the upper/lower quartile of the primary trend. In drawing the SDC for Secondary Trades, the swing high/low within the upper/lower SDC channel of the primary trend will be the commencement point of the Secondary SDC channel and will be extended to the median channel to the bar preceding the H1 cross of the median channel. Note that there must be a significant mean reversion trend occurring prior to entry hence the need to ensure that price in the mean reversion move commenced in the upper/lower quartiles of the primary trend SDC. The Secondary SDC channel will assist in ensuring a valid mean reversion trend is in place before entry and the longer the better. The secondary SDC channel must have a steeper slope than the primary channel SDC to ensure that secondary trades are exited prior to the ending of the primary trend. Secondary trades will be exited when price touches the upper/lower channel of the secondary SDC.

Given these guidelines, not all primary trends will allow for secondary trades to be undertaken, but in those that do, significant supplemental income to that generated through PRIMARY TRADES is anticipated using the amended approach.

I will be back-testing this variant for a few weeks across the pairs and let you know the results and the conclusions. If favourable, I will then post chart examples to clearly outline graphically the intent of this post.

Also dependent on trade frequency using this amended approach the portfolio may also be increased in size to further diversify income streams.

Regards

C

The Bar of death on USDCHF

It pays to be risk averse :-(



It just still keeps plummeting. The bots must be working overtime given the announcement.

Note: Immediately prior to a significant announcement, if holding a live trade, it is worthwhile considering a guaranteed stop if your broker allows it.

The announcement for this move related to below.





Note: In trades like this where extreme volatility knocks out all stops for a considerable portion of the bar, if the close of the bar retracts significantly from the low (or high if a bull spike), then significant potential exists for a trend to emerge in the direction of the spike. I would never consider entering on a bar such as this, but it often creates a vacuum that indicates future direction and when volatility subsides creates great trend opportunities with lower risk.

PS: My thoughts go out to all those that may have been severely crippled by these moves. Such events are never pleasant and can catch both parties on either side of the spectrum (long or short) as orders often fail to be placed due to the rapidity of price movement and resultant slippages. This is the time when a brokers integrity are severely tested. :-(

More Info

http://www.forexfactory.com/showthre...92#post7994992
http://www.forexfactory.com/showthre...94#post7994794

Thanks B

They were some ugly movements :-)

Will have a read of the recommendations you posted on the Turtles thread.

Regards

C

PS Gold is having a good kick. That will be working for you B.

It's going to be a jittery night. Time to dig in.

Considering that the role of a central bank is primarily one of market regulation the move by the SNB was managed incredibly irresponsibly in my opinion. The impact on market participants, intermediaries and the insurance industry would have been significant.

While the intent was to remove the cap on the CHF, this could have been achieved in a staged manner over an extended timeframe to ensure markets could correspondingly adjust in a more ordered fashion. The ripple created by this shock move and the potential ramifications will add to economic uncertainty as markets attempt to equilibrate.

This is how my broker fared.

More here: http://leaprate.com/2015/01/ig-group...anc-fireworks/

Short Term Black swan, who could predicted this ?.

ENHANCED APPROACH (EDTT)

Given that we have now had 2 years of data reflecting the results of the Diversified Trend Trading (DTT) Approach, as mentioned in Post 225, I have been looking at ways to supercharge the strategy given that trade frequency has significantly reduced as trade entries are now configured using the SDC to be more representative of the D1 timeframe as opposed to the H1 timeframe. These trades now reflect D1 trends as opposed to H1 trends and henceforth are now referred to as primary trends (or trading in the direction of the primary trend).

Preliminary analysis reflects that this adjustment in trade execution means that by and large, trades will be of a considerably longer duration without the need to frequently re-enter substantial trends if whipsawed out of these trends by minor mean reversion events. But this also means that this approach will now be missing some shorter term price moves that can significantly supplement regularity of income, provided of course that positive expectancy on these shorter term price moves can still be maintained.

The result is that I have developed an amended technique to address these issues which still adopts a strict risk management approach yet provides opportunities, when presented, to trade mean reversions on the primary trend, or supplement trades in the direction of the primary trend that are experiencing significant positive momentum.

This supercharged variant of the basic strategy I now refer to as the Enhanced DTT Approach or EDTT approach. I will now be using this approach (commencing 12 Jan 2015) in my forward testing. While I have employed the DTT approach between 1 Jan 2015 and 11 Jan 2015, the results are not anticipated to materially affect the analysis of EDTT and hence will be included in the EDTT approach to enable comparative analysis to be undertaken between 1 Jan 2013 to 31 Dec 2014 using the DTT approach and from 1 Jan 2015 using the EDTT approach.

I started to backtest the EDTT approach but have decided that forward live testing is the most effective measure to assess system performance as it prevents human bias from interfering with the results. As a result, I will be forward testing for the 2015 year using EDTT and see how it goes. If results conclude that the EDTT does not achieve superior performance to the prior DTT approach, then I will let you all know when I revert back to the original method.

For the purposes of going forward until notified by me otherwise:

1. the DTT approach(the basic approach) is described from Post 1 to Post 230.
2. the EDTT approachis detailed from Posts 231 onward.

So, What’s Changed?

The Approach now refers to two types of trade:
A) Primary Trades
B) Secondary Trades


PRIMARY TRADES

The Primary Trade = Trades undertaken only in the direction of the D1 trend using the H1 timeframe for execution and trade management. The basis of entry is almost identical to that used in the DTT approach. Namely that trade risk is 0.5% of trade capital and the width of the SDC is 1.0 and at 2.5R is reduced to 0.5. We however do not need Donchian Channels to confirm a breakout as trades will only be taken when a breakout occurs to a new high or new low. This will clean up the chart a bit. You can still use Donchians to assist in entry but if you are familiar with this technique by now you will realise that you don’t actually need them. The Donchian channel was an overhang of mine from previous versions that adopted similar rules to the Turtles methodology.

What types of trades are examples of Primary Trades?

1. Entries taken on new highs on a D1 trend

The D1 chart below of XAUUSD highlights the emergence of an infant long trend on the D1 timeframe. Point Z on the chart reflects where the prior short trend was breached and new highs are forming that are consistent with the SDC channel which was drawn from the low at X. At this stage a new trend direction is emerging on D1 and I am looking for a long entry in the direction of the primary trend.

So now switch to the H1 timeframe to determine a long entry and redraw the primary trend commencing from the low of X on the D1 chart. The H1 chart below reflects the D1 primary trend on the H1 timeframe commencing at X. Note how at Z we had a breach of the prior short trend which we then waited for confirmation of the long trend breakout before entry. The SDC on the H1 timeframe has 1.0 width and will continue being redrawn when new highs emerge until a profit of 2.5R is reached where we then reduce the width of the SDC to 0.5.

 

1. Entries taken on new lows on a D1 trend

The D1 chart below of EURAUD clearly highlights a short trend commencing at A and extending to B on the D1 timeframe which we want to enter to catch a ride south hopefully on the strong momentum bar highlighted by B.

So now switch to the H1 timeframe to determine a short entry and redraw the primary trend. I will not go into the details as these are simply the reverse of the long trade and you should be getting familiar with them now but will show you the chart below on the H1 timeframe.

 

1. Entries taken on infant long or short trends following periods of congestion on the D1 timeframe.

Unfortunately I am yet to experience any instances of this type of trade this week so we will have a look at them when they arise in the future. For example a situation where this might arise is detailed in the chart below on the D1 timeframe of NZDUSD. We don’t know which way price is going to go whilst in congestion but what we do know is that there currently is no trend direction in place on the D1 timeframe. We may find however that following congestion breakout we may be onto a long or short infant trend on the D1 timeframe, and we want to be riding these.

SECONDARY TRADES

The Secondary Trade = Trades undertaken only in the direction of the H1 trend using the M30 timeframe for execution and trade management. A secondary trade represents a shorter term swing trading opportunity as opposed to the longer term D1 primary trend trading opportunity.

The basis of entry is similar to that used in the DTT approach however trade risk is 0.25% of trade capital. This is half the trade risk of the primary trade and recognises that secondary trades are of far shorter duration and have a lower Pwin ratio. As with all the approaches so far, the width of the SDC on the M30 timeframe is still 1.0 and at 2.5R is reduced to 0.5. Once again, we do not need to use the Donchian Channel here as it can confuse the issue when trading mean reversions.

What types of trades are examples of Secondary Trades?

The Secondary Trade is a catch all expression to define any trend of a shorter term timeframe that is not captured in the definition of primary trend.

Given the low frequency of primary trend trades, frequently there may be a clear mean reversion on the primary trend which you would like to participate in, or the ability to increase your position in a primary trend, or the opportunity to participate in an emerging trend that is yet to be defined as a primary trend.

A secondary trade may be in the direction of, or in the counter direction to a primary trend.

Those secondary trades in the direction of the primary trend for example may arise while waiting for a D1 primary setup to occur or emerge following a mean reversion when price then resumes with momentum back in trend. You may already be riding a D1 trend with a primary trade and a secondary trade represents a further opportunity to add to the position.

Obviously if you have a primary trade underway, you would only consider entering in the direction of the D1 trend with a secondary trade if sufficient profit has accrued already to not sacrifice your hard earned gains if a trend reversal occurs. As a general rule, I would leave the decision to enter a secondary trade if a primary trade is already underway until at least 2.5R has been reached.

There are a number of conditions that will arise providing opportunities for a secondary trade. Rather than outlining examples in this post we will be visiting these as they occur so we will have lots of examples to work with in the future to get the technique down pat.

....anyway enough of the blurb. I will be posting my regular weekly outlook this weekend and also going through the trades for the week which include a number of secondary trades so stay tuned.

Regards

C

The central bankers should have been able to predict it.

The chart below shows the impact of introducing the cap for USDCHF in September 2011 and the impact of taking it off.



Back in 2011 it was a big event that caused significant market distress. The SNB would have (or should have) been fully aware that a removal of the cap after 4 years of price restriction would be more dramatic. Four years of suppressing a strong currency? What were they thinking?

The bottom line is that the SNB is myopic and does not give a flying fig for the global impacts let alone the country's own balance of trade figures. They appear to be rank amateurs or worse still, had their snouts in the trough so deep that thay can have an extended Christmas vacation. Despite the distress it has caused in re-distributing wealth globally, being a zero sum game, who were the net beneficiaries.....now let me guess.

The cap was on the EURCHF and not the USDCHF, if we look beyond the move like i always do, i find that their strategy to boost exports by capping the CHF came back now to bite them in the ass, what would you do now if you were a swiss exporter making swiss watches for example, can ur customer buy a watch now with the USD @ parity with the Swissy ?.
I'm sure now that the swissy is so expensive that their exports will shrank by a significant amount, does that help an export driven Swiss economy, on the other hand they are the Central Bankers and not us so they must know better but they should have learned from the Japs instead.

Best,
B.R.

Yep but that didn't save the USDCHF *growls* :-(

I have always been suspicious of the Swiss. They always rip us off. Look at the holes in their cheese for example /tic




The top 10 list of Switzerland is now going to be reduced to say 4. Goodbye watches, choccies, cheese and of course yodelling (which was the sound I made as the USDCHF plummetted)......and they can shove the Large Hadron Collider so far up their sphincters and get sucked into their own black hole *sniggers*

.....and from the sponsor......we apologise for this brief intermission and will return to trading the EDTT shortly. :-)

Weekly Update and Outlook

Well what a week that was!!!!!! The prior posts in this thread dealing with the CHF move will hopefully serve as a continuous reminder to always be on your guard.

The CHF announcement was a game changer for some and a black swan event for the market. If you are on the wrong side of events such as these it certainly provides a timely reminder that RISK always lurks in the market and can raise it's ugly head at the most inopportune time .

Despite the market chaos caused, the silver lining behind these events is that they serve to test the risk management parameters of a trading strategy, and the HUGE plus of this approach is that it rides these calamities exceptionally well given the diversified nature of the approach and the small % risk per trade which defends against the excesses of over-leverage.

Before getting into the trade details of last week, let's look at some alternatives that could be employed to protect yourself from these tsunami events, Note that I don't discuss No Stops or Averaging Down......and that is because they are potential open ended nightmares which requires predictive ability. The more you use them and win with these techniques, the more you set yourself up for a potential blown account so be warned!!!!. What are the valid techniques from a prudent risk management perspective?:

1. The simple stop loss - Despite the fact that slippage can be intense even despite having a stop-loss in place, they still are a necessary evil. Slippages of up to 400 pips during this event certainly are pains in the ass but the bottom line is that you never, never know the nature of the black swan event. For those who trade without stops who are saying they wouldn't help you anyway, so why use them?...... the fact is that we can never predict with certainty how adverse the risk event will be. The impact on the USDCHF alone was a 30% devaluation on the pair in 5 minutes and this wasn't even the pegged currency pair. What would happen if we had a 70% adverse price move for those with no stops???? The stop loss will at least assist in limiting damage of a sustained and protracted adverse price move.
2. The Guaranteed Stop Loss - Some market maker models offer a guaranteed stop loss which is arranged by the MM through hedging positions in the market, however despite the name, you really need to read the fine print. For example IG Markets offers this ability with an associated cost of +/-3 pips on the normal spread. You need to note however that guaranteed stops can only be created on trade execution and cannot be established during the course of a trade plus they must be set 5% or more away from the entry price. The problem with these conditions is that you either have to engage them all the time or only in those times when you can predict with a degree of certainty that unusual price movement is possible. Unless you want to pay through the nose, their use can be problematic.
3. Hedging prior to announcements - As opposed to the guaranteed stop, an effective method to consider immediately prior to an announcement is to hedge your trade and wait until the dust settles before you cut one of the limbs and let it ride. This is less costly than the guaranteed stop and can be applied on the go and is my preferred tool of use in these instances but it takes a bit of extra trade management.
4. Diversification of instruments and low trade risk per trade - This is ultimately your most prudent and reliable method to reduce the impact of black swan events such as this. Remember that if you are on the right side of a black swan event, it might set you up for the future but being on the right side can sometimes be just plain luck. Without question, this is the most effective way to deal with events of this nature and we are fortunate that this is embedded in ths strategy.
5. Your choice of broker/s matters - In this instance the ECN brokers have borne the brunt of this adverse event as opposed to the market makers. Market makers act as counterparty to your trade so when you lose, they profit and vice versa. ECN brokers however simply take the brokerage and pass risk to the counterparties in the trade. You would think they would be safer wouldn't you?......well that's not the case and is a finger in the eye for those out there that harp on about the benefits of ECN brokerages, but it is not a fault of the ECN broker, but rather a fault of the poor ethics of the retail trader. The bottom line is that when the retail trader refuses to accept responsibility for their loss and default on paying their obligation, which they damn well knew in the first place when they accepted the contract, the default risk get's passed back to the ECN broker.....think about that the next time you have a crack at the brokers. So who pays the piper?.....well over the long term governments (via Nanny State mentality....which is actually necessary) are forced to regulate due to these unethical acts and good ol' honest guy finds he is paying for it when suddenly we find either costs are transferred to us via higher spreads and /or reduced margins, or we lose the ability to use high leverage, even though we may be responsible enough to handle it.

So what is a strategy for an asshole in this market who has absolutely no ethics?.....plonk 10% of your capital with an ECN broker and retain 90% in safe bank account, max out the leverage and prepare to default on your obligations by transferring your assets to a protected haven. VERY CLEVER, but the next time you have a crack at the big guys, just remember that there are parasites no matter what their size.

What can an ethical trader do in this instance to protect himself with respect to force majeur of a broker. Stick with solid brokers with a robust balance sheet and those that adhere to codes of conduct and have a strong track record of compliance, and where possible have multiple brokers accounts to spread the risk. Events like these are a test for the brokers and provide an opportunity to assess who are the stalwarts. The solid brokers may have in general higher costs that get transferred to the client due to enhanced compliance obligations and tend to avoid offerring riduclous leverage options, but these are a small price to play if you plan to stay in this market a long time.

.......Ok *rant over* so now onto last weeks trades.

CLOSED TRADES FOR THE WEEK

AUDJPY - SECONDARY TRADE - (R Multiple = -0.26)

So why did I have a secondary trade on this instrument. While in watch and wait mode on D1 it was clear that a mean reversion was occurring against the primary D1 trend and was forming a nice consistent minor trend that I wanted to jump on board of for a short but potentialy profitable ride.

The D1 chart below depicts how I now setup my watch and wait charts given the amendments to the approach. The green predictive line represents a predictive entry in the direction of the primary trend. The brown predictive entry represents a possible Secondary Trade entry point.



Clearly the trend retracement picked up my interest hence made me drill down to M30 to look for a valid entry short. Note that given it was a secondary trade we were using M30 to define the trend on the H1 timeframe. You can see that the M30 chart had a high at A and this represented the commencement point for the M30 SDC. As it turns out however the retracement was only short lived so I scraped through with a small loss.




USDCHF - PRIMARY TRADE - (R Multiple = -2.09 !!!!!!!!!!!!!!!!)

Note here that the loss of -2.09 R was primarily attributed to 500 pips slippage despite the fact that the actual stop on this trade was 0.7R. Unfortunately I did not hedge or have a guaranteed stop in place. This is the price you pay for a conventional stop in black swan events such as this. I have already dealt in detail with this event in prior posts so won't be discussing it further. Needless to say it hurt but as you can see, the actual loss represented 2% of trade capital so this is the benefit of having a diversified strategy without having to rely on high leverage.





That's it for closed trades for the week. My next post will deal with current open trades.

Regards

C

Current Open Trades

Given that now we are playing EDTT, trade frequency is on the up and up so there a quite a few trades open as we speak. While I will display all charts of open trades, I will only be focussing on describing secondary trades to enable the reader to get a handle on the secondary trade technique.

USDCAD - PRIMARY TRADE
Note that we are deep in profit here >2.5R so I have been waiting for the opportunity for a secondary trade to add to this position which is described later.




DJI - PRIMARY TRADE
This trade is still alive despite the very poor execution and has been discussed at length previously. We won't be taking a full loss here of 1.0R as time in trend has been our friend with the trailing stop on the SDC. I have also been watching to see if this presents a secondary trade opportunity in the reverse direction.




GBPUSD - PRIMARY TRADE
Slow and steady wins the race.




USDSGD - PRIMARY TRADE
I have survived by the hairs on my skinny chin chin. Given that I trade by charts you need an actual touch of the line to stops to activate and commissions are deducted. I am close to breakeven now.




EURJPY - PRIMARY TRADE
This has been a great ride south and I have also released a secondary trade to add to the position which will be discussed later but it looks like things are finally running out of puff.





.....more open trades to come in the next post.

C

Current Open Trades continued.....

GBPSGD - PRIMARY TRADE
Early days. Note the brown predictive entry for a secondary trade mean reversion if it occurs.



EURAUD - PRIMARY TRADE
Going well and almost at 2.5R where then I will be looking for Secondary Trade opportunities.



EURUSD - PRIMARY TRADE
This took a while to get cracking.




AUDCAD - SECONDARY TRADE
Now I have taken this secondary trade as it currently does not meet the strict definition of a primary trade. Before I commence a primary trade on this instrument on H1 which is imminent, an infant long trend needs to be confirmed and S/R needs to be breached as indicated in the D1 chart below with the ellipse. Note however that there was a clear retracement that has been defined by a defined trend which I would like to ride with lower risk.



So now let's look at the entry and the setup for the M30 secondary trade in the chart below. So far so good and if a primary trade is launched when the green predictive is reached, this secondary trade will supplement the position nicely.




....more open trades to come next post.

C

Current Open Trades continued......


CADJPY - SECONDARY TRADE
This is a secondary trade undertaken within a congestion channel on D1 as depicted on the chart below. I do not want to commit a 0.5% risk on this trade due to its likely finite nature on reaching the base of the congestion but would like to participate on the congestion retracement.



So now we look for an entry on M30 as detailed below.



It is proceeding well and hopefully will reach 2.5R shortly.


EURJPY - SECONDARY TRADE
This is a secondary trade which is adding to a primary trade position already underway (refer to previous post 236). The prior primary trade had reached 2.5 R and momentum short was increasing significantly providing an opportunity for a secondary trade entry as detailed below whih itself has already reached 2.5R as well hence the SDC width is set at 0.5.



Note that you treat this trade independently to the primary trade. The exit condition of the secondary trade is defined by it's own SDC. You do not use the SDC of the primary trade to exit both positions.


USDJPY - SECONDARY TRADE
This is a secondary trade arising while watching and waiting for confirmation of the primary trend direction as detailed in the D1 chart below. Given the price move on D1 towards the lower SDC, this may well be a trend reversal on D1 and I want to participate short.



So let's zoom into M30 to plan the setup.



Note how so far I have survived by a whisker.




.......more open trades to come next post.

Current Open Trades continued......


NZDCAD - SECONDARY TRADE
Another secondary trade taken while on watch and wait for confirmation of direction of the D1 trend. I will keep this short and sweet. Here is the M30 chart.




XAUUSD - PRIMARY TRADE
At last Spot Gold is giving signs of a clear trend direction with recent market uncertainty associated with CHF. Note that this is a primary trend trade.



EURCAD - PRIMARY TRADE
Another primary trend trade which is now confirming movement in the long term primary trend.




USDCAD - SECONDARY TRADE
Here is a secondary trade that will hopefully supplement an open primary trade (refer to prior posts). The primary trade reached 2.5R and momentum has picked up steam in the direction of the primary trend providing a short term trading opportunity.






Well that's it for last week guys.

Later this weekend I will be posting the regular Weekly Outlook so stay tuned.

Regards

C

Shocker was this week, with carefully designed risk management strategies i was maybe one from few who had a good week and rode the tsunami well, this black swan event was a God sent to me and i took advantage of every tick of it, my broker honored my SL's without any slippage on all 3 of my CHF trades which were deeply in profits as posted in my thread.

That being said, my main broker took a hit and i don't know if i can withdraw my money or not, until yesterday everything was working as usual so i will wait for next week to see what happens.

Thanks for the roundup, again.

Best,
B.R.