Containing the trend

Well lads I can't trade in the meantime so I might as well share some of my principles.

Containing the trend -

Q1. What do I mean by this?

Ans. Containing the trend mean literally containing it on a higher time frame so that the opportunity for an entry on the lower time frame is reduced considerably.

Q2. Wait, What?

Ans. Yes, containing a trend is important because forex has a bad habit of giving false signals. A trading system which is not successful on one time frame may(I said 'may' not 'will') not be successful on other timeframes. This is bad, very bad. We are doing the exact opposite of what most traders do i.e. reduce the number of opportunities but this increases the probably considerably. A very successful system works on all and yes I am also talking about 1 minute timeframe. The problem with 1 minute timeframe has always been the cost of doing business otherwise no other timeframe trends like it.

Q3. How is that?

When you contain a trend, it doesn't have enough space to more without trending in the opposite direction. Yes it could move in the opposite direction by being flat and creating a candlestick pattern famously known as doji or indecision or whatever but if the rules on the lower times frame are applied properly a fake signal becomes very unlikely.

Q4. But why do this?

Why not? Trend containment can help you filter you entries so much that it turns a losing system into a winning one. I have applied this philosophy to many many systems on Forex factory to turn them into highly profitable systems. Trading is about edge. If you don't have it, you are just running around like a headless chicken. Every system can be filtered using trend containment but many system then give very few entries for the system to be successful. You would be making peanuts. You could say that, "hey, we will invest huge money on those very few very high probability signals and make huge money" but that's just stupid money management. Trend containment contains a good trend and at the same time gets rid of flat markets. Flat markets, if your principles for trend containment are valid then they will be mostly eliminated. Every market can use trend containment.

Q5. OK, so how to do it?


To be continued.....

Continued
Ans 5. There are two methods I use for containing the trend. I use a 5 ema on a higher time frame that is at least 4-5 times my entry-exit timeframe. It's important to do so because 5 ema is not tight enough to contain the trend and below 5ema trend becomes something that resembles a range.

In the below picture you see what trend containment on a 1 min chart looks like using 5ema,





Containing the trend this way will give it enough space for retracement for entries on a lower time frame but not enough room for fake signals. Two type of false signals occur using this trend containment. One is a doji and other is a anomaly. Anomaly is something I have failed to recognize so far and give it a proper name. False signals are already low using this method but you will have to use very good delayed entry signals on lower timeframes to reduce them even more. This will certainly mean you missing out on some good trades but it will reduce the number of false doji signals a lot(the only pain in the ass). In the future if I'm able to figure out why the anomaly false signal happens(my theory is that it happens because of fundamentals because of the coincidences so far) I'll post it here.

Another method of trend containment is the color of the candles. However, such containment should only be performed on time frames higher than 1 hour chart. The perfect combo is 4 hours for entry and daily for trend containment. Green candle means uptread and red candle means downtrend. It's as simple as that. As long as the next candle does not close in the opposite color the trend is on.

Why?

Lower time frames will create way too many mini trends especially when it's ranging and that can be greatly reduced on daily and 4 hour charts(if you want to use 4 hour charts for trend containment, use 1 hour using a fast moving indicator or 30 minutes slow moving indicator for your entries).


The importance of retracement

My trading philosophy is grounded in movement of price. I do not believe that indicators can properly and accurately show price-action. I do believe however that it's easier to spot trend patters using them. This is why one of the methods I use for trend-containment is using 5ema to trap it.

Retracement is what made my system good enough, money management is what gave me edge. Money management will be discussed soon.

Open a chart, use the methods stated above to trap/contain a trend and then look at what happens on the smaller time frame. In the trapped trend retracement happens again and again. This is why my philosophy is time-tested. It's a philosophy and not a trading system. I do not believe in trading strategies or system because they seem to start failing after a while just like gambling and martingale(-ing). Philosophy is about understanding price-movement and how humans influence it.

Whether you like it or not, when a trader trades, noob or expert he makes mistakes. To be perfect in this market is impossible. You would need one hell of a algorithm that executes huge number of trades to take advantage of latency but brokers are coming up with measures to stop you from doing that. This is what I exploit, human mistakes. New traders obviously makes more mistakes than experts. They have a bad habit of looking for tops and bottoms. They think, "oh, this has gone up so much now it should come down so I'll sell". Ofcourse, there are many other reasons for retracement or correction of a trend but this is one of the first I figured out and an important one. I have discussed trading with a few of my friends and the first thing they say if is that I should buy or sell in the opposite direction of the trend because it is bound to come down.

Trapping or containing the trend will give you an opportunity to enter on a correction but if the correction is late then the trend will most likely escape the trend and if it's too much(a possible reversal) then it will again escape the containment. This is exactly why we trap the trend and this is also exactly why this philosophy works. It allows the right amount of correction to happen most of the time to give to an opportunity to enter the market to ride the trend.

You will have to figure your own way of entering a trapped/contained trend because I am not here to share any more details of my philosophy other than the foundation. This is why this thread is in the trading discussion area and not the trading system area.

The key is correction or retracement. Look at a lot of charts, look long and you will find a way to exploit it well.

Money Management

In my trading career I failed miserably in the beginning. I rarely used demo accounts so I lost a lot of money and it was very hard. After I developed this philosophy I still was making money much slower than expected because the number of signals were less because of the accuracy. Cleaning out false signals means letting go of some good trades because sometimes a trend corrects so much that it essentially forms a double bottom or double top before smashing the previous high or low but because of strict rules of trend containment, I obviously lose out on those type of trades. So I needed a way to make good money and be much more successful.

For this I tried martingales of real accounts. Horrible way to lose money is martingales but one way worked. The way that worked has formed the foundation of my Money management philosophy and just like my trading philosophy it has spawned many successful version based on your risk aversion.


My lot size manipulation that changed my trading forever,


1st lot - 2-5% of your account i.e. the first lot is such that the stop loss is in the 2-5% range. This is 1 lot.

The stop loss and take profit in below template is hypothetical.

1a. 10/40 --------------------> $100/$400 --------------------> 400
1b. 10/40 --------------------> $100/$400 --------------------> 800
2a. 10/40 --------------------> $200/$800 --------------------> 1600
2b. 10/40 --------------------> $200/$800 --------------------> 2400
3a. 10/40 --------------------> $300/$1200 --------------------> 3600
3b. 10/40 --------------------> $300/$1200 --------------------> 4800
4a. 10/40 --------------------> $400/$1600 --------------------> 6400
4b. 10/40 --------------------> $400/$1600 --------------------> 8000
5a. 10/40 --------------------> $500/$2000 --------------------> 10000
5b. 10/40 --------------------> $500/$2000 --------------------> 12000
6a. 10/40 --------------------> $600/$2400 --------------------> 14400
6b. 10/40 --------------------> $600/$2400 --------------------> 16800
7a. 10/40 --------------------> $700/$2800 --------------------> 19600
7b. 10/40 --------------------> $700/$2800 --------------------> 22400
8a. 10/40 --------------------> $800/$3200 --------------------> 25600
8b. 10/40 --------------------> $800/$3200 --------------------> 28800
9a. 10/40 --------------------> $900/$3600 --------------------> 32400
9b. 10/40 --------------------> $900/$3600 --------------------> 35000
10a. 10/40 --------------------> $1000/$4000 --------------------> 39000
10b. 10/40 --------------------> $1000/$4000 --------------------> 43000

The most important latest rule that has finally completed my money management philosophy. Never ever jump a level unless you have atleast a ratio of 1:8. So, you can't jump from 1 to 2 unless you have successfully gained 8 times the stop loss level. You are also not allowed to have more stop loss in terms of pips than previous step. In my case the stop loss is 4-5 pips more than the previous high or low. This latest rule was added to give me peace because I lost a lot of profit(not money but unrealised profit) because of my high risk to reward ratio. My current ratio is 1:3 or 1:2.5 depending upon which the time session(new york, Europe etc).

The fear of failure starts to take hold near the 7-10 level because of the money involved per loss. The greed also start at these level and this is why stop these iterations at 10b. However when I start trading again after running one complete circuit I plan to take the next circuit to 11b to and so on until 20b to learn to control my emotions. I have realized this is the only way to get over this fear and also not give into the greed.

As soon as you lost a trade you go back to the last level. I mean the level i.e. 1, 2, 3...... and not sub-levels. This is to stop you from spiraling out of control when a losing streak hits you. I recommend having 1:3 RR ratio and having 3 levels to make it even more safe.

Great post, currently kind of lost in the markets. I think this will help me clear up some things.