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Showing results for tags 'trend following'.
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Commodity Trading Advisors (CTA) that utilize trend following through managed futures accounts have long known that there is no Holy Grail in investing. When following trends, they know that anything can happen, so they have completely abandoned strategies involving fundamental analysis or buy-and-hold fallacies. Many successful trend followers and CTAs have developed trend following systems based on multiple time frames with the objective to harness the trend that herding generates in the market. In order to do that, their primary focus lies in managing risk so that the return would somehow take care of itself. Whenever they engage themselves in a trade, the potential loss is always known upfront. In perhaps no other industry, subjective misjudgments become so blatantly obvious as in the trading business. Trend following tries to circumvent this. Behavioral finance has documented some of the investor biases explaining the rationale for trend following: Anchoring bias: Tendency to rely too heavily on one piece of information, specifically the recent price history to estimate “fair-value”. Bandwagon effect and feedback trading: Tendency for traders to act as a group and jump on the bandwagon of a rising price trend (herding). Confirmation bias: People tend to look for information supporting their beliefs and consider recent price moves to be representative of future prices. This leads investors to over-allocate funds to markets having already risen and under-allocate to fallen markets. This behavior favors trend continuation. Overreaction: Market participants overreact to new information, creating larger- than-warranted effects on market price and stronger trends. The trend following industry prefers to analyze trends on a meta-level according to the Dow Theory: Higher highs and higher lows for an uptrend, or lower lows and lower highs for a downtrend. Practitioners understand that the crowd is always collectively smarter and therefore do not bother to predict or outsmart the market with discretionary analytical methods. Instead, their goal is to participate in the crowd’s wisdom and follow the path as it is given to them without judgment.
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I am basically a trend trader. I have been out of this market now for some time as it (the market) has been up a down and sideways now for months. We have been in a sideways pattern for weeks and now we have seen a parabolic up move that just looks like it might blow off at any time. The problem is that when I am out of the market I make no money - but don't lose any either. Is it better to sit back and do nothing when the market is like this or should I just look for setups and work them regardless of having no direction from the market?
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I'm excited, and it's because I have recently added another tool into my trader's toolbag. For quite some time now, I've been using wave trades using Fibonacci sequences for my primary entry technique. While this great trend following system typically gets me to my breakeven stop without too much problem, ( I trade crude futures and go to a breakeven stop when I'm 7 ticks up), the one thing that has always been missing is a way to have a much greater probability that I'm getting in at a place where the trade can rocket 50 to 100 ticks. Since that typically has been happening only 1 out of 7 times, I've been continually frustrated. How can I know when and where to use my wave patterns to get in? The dilemna has always been: If I hold for a big move, more often than not the trade will roll over at 10 ticks and stop me out at my point of entry. So, if I take 10 ticks off the table, that's great, but that's not very much profit, and then occasionally, i will see my trades rocket, but I'm already out with a small profit. And small profits don't make you rich, especially when you are a small account trader. So, what's a trader to do? I think that I've hit upon the answer, and it's pretty exciting. I've discovered floor trader pivots, and they are really powerful. My trade plan has evolved to include them in my methodology, and now I'm getting those 30, 40 and 50 tick moves much more regularly, moves that I've been dreaming of but not able to hold on to in the past. this has come about for a couple of reasons. First off, I'm in a new live trade room where these are shared. This probably would not have been enough by itself, because the pivots tend to be launch points and targets, but they really don't tell you direction. You have to calculate direction for yourself. But, that's ok, because my training has been in trend following methodologies. So when price approaches a pivot as part of a Fib Sequence wave (either a 13, 21,34 or 55 range wave pattern, it's easy to see the direction that price should be moving as it reaches the pivot. Finally, there's another factor, and that's a chronological power point. What I've also noticed is that these large sweeping moves almost always originate at one of the following: the oil pit opening at 9 AM Eastern The equities open at 9:30 AM Eastern the European open at 3:00 AM Eastern At Major News Events, which happen typically at 8:30 AM, 10:00Am, and various other times throughout the trading day, depending on the specific news event. So, the plan goes something like this: Keep a watchful eye at the key times, the first being the pit open at 9 AM As these pivotal times of day approach, look for a confluence of a wave pattern and a Floor Trader Pivot level (FTP) level. If all three match up, you have an awesome opportunity on your hands. For example, this morning, in crude, on Jan. 31, 2012, on of the key FTP levels was 100.06. The next one up was at 100.63, and another at 101.37. At precisely 8:59 and 55 seconds, the price moves up to 100.06. Big volume comes in. At 9:00 am sharp, as the oil pits open, price moves up to 100.09. On my charts are a 55 range wave pattern, a 34 range wave pattern, and a 21 range pattern in the formation stages, all pointing up. I didn't need anything else. I went long at 100.09. Within seconds price rockets up to 100.60. My trailing stop, which was set pretty tight once I am up 40 ticks, took me out at 100.55 for a 46 tick profit... ($460). That's one contract of profits. Two contracts would have given me $920, etc., etc... The most that was ever at risk was 10 ticks and i experienced zero heat on the trade. I was at break even within seconds and into substantial profit within a couple of minutes. Within a few more minutes, price reached 101.29, only 8 ticks off the next pivot. As I write this, price has totally collapsed, and rocketed down below the first pivot mentioned, But the point is, that was a 100 tick plus move. The next thing I did was very smart, at least for me. I called it a day. Up about $460, I simply took the rest of the day off, with one trade under my belt. That's all I needed. It was a very very high reward to risk ratio, because it had all three factors lining up. I only spent $5 on commission and would not need to generate anything else for my broker. Other trades quite possibly have come along since I left my trading screen, but I'm happy. I exceeded my daily goal of $350 and so no need to push it. I'm satisfied. It's not what you make, it's what you keep. Remember that. Anyhow, my excitement at discovering floor trading pivots and adding them to my aresenal of trend trading mixed with being highly selective as to the times I'll trade are really really helping me in the profitability dept. I highly suggest to any traders looking for a better reward to risk ratio to look into using confluence in this way.
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You've probably heard the saying “the trend is your friend until the end.” In this post I outline techniques for identifying the trend, getting in, and staying in until it fails. How do we Define a Trend? An uptrend can be defined as higher highs and higher lows, while a downtrend can be defined as lower highs and lower lows. As an exercise, each night print out a 5 or 15-min chart of the market you are trading and identify the key highs and lows of the day. After a few weeks you will become better able to define the trend during the day. Methods for Identifying the Trend 1. Moving Averages Regardless of the time frame you’re trading, moving averages are a great way to quickly identify the general trend of the market. I place more weight on larger time frames such as the daily and weekly and then look to trade with that trend on the smaller intraday time frames. A 20-period Exponential Moving Average is a great tool for intraday trading. 2. Candlestick Patterns As talked about in the book Japanese Candlestick Charting Techniques, candlestick charting is a great way to identify market sentiment and trends. The candlestick pattern is made up of an open, close, high, and low price. These candlestick patterns have a lot more to say as compared to a bar chart. To get an even clearer picture of the trend try switching to a Heikin Ashi chart. Methods for Entering the Trend 1. Fibonacci Retracements Buying on a retracement as opposed to chasing the market is a great way to enter a trend. This reduces the likelihood that your stop will take you out. Once you have identified a new trend try drawing from lows to highs (in an uptrend) and waiting for a pullback to the 50% of a Fibonacci retracement before going long. I outline specific rules for using Fibonacci retracements in my trading rules. Entering a trade at a 50% Fibonacci retracement is a low risk method of getting into the trend. This allows you to enter on a pullback rather than chasing the market. 2. The NYSE Tick This is by far my favorite tool for intraday trading. To learn more I will refer you to my prior post on the NYSE Tick. 3. Reversal Patterns Buying over the high of a low bar (in an uptrend) or shorting the low of a high bar in a down trend is a great way to get in the new trend close to a reversal. These patterns accompanied with a moving average or other momentum indicator can be a sound strategy with very good risk/reward ratio. Whether you’re an intraday trader or use a weekly chart, being able to identify the trend, get in, and stay in will yield the greatest return over time. If you'd like to read about my setups and how I trade the ES & 6E you can do so here. Do you have other methods for identifying the trend?
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We’ve all heard the saying… “The trend is your friend until the end” In this post I outline techniques for identifying the trend, getting in, and staying in until it fails. How do we Define a Trend? An uptrend can be defined as higher highs and higher lows, while a downtrend can be defined as lower highs and lower lows. As an exercise, each night print out a 5 or 15-min chart of the market you are trading and identify the key highs and lows of the day. After a few weeks you will become better able to define the trend during the day. Methods for Identifying the Trend Moving Averages Regardless of the time frame you’re trading, moving averages are a great way to quickly identify the general trend of the market. I place more weight on larger time frames such as the daily and weekly and then look to trade with that trend on the smaller intraday timeframes. A 20-period Exponential Moving Average is a great tool for intraday trading. A 20 Period Exponential Moving Average (in blue) helps quickly identify the larger trend. Using a 5-min chart, the 20-EMA keeps us aware of the larger trend. Candlestick Patterns As talked about in the book Japanese Candlestick Charting Techniques, candlestick charting is a great way to identify market sentiment and trends. The candlestick pattern is made up of an open, close, high, and low price. These candlestick patterns have a lot more to say as compared to a bar chart. To get an even clearer picture of the trend try switching to a Heikin Ashi chart. Methods for Entering the Trend Fibonacci Retracements Buying on a retracement as opposed to chasing the market is a great way to enter a trend. This reduces the likelihood that your stop will take you out. Once you have identified a new trend try drawing from lows to highs (in an uptrend) and waiting for a pullback to the 50% of a Fibonacci retracement before going long. Entering a trade at a 50% Fibonacci retracement is a low risk method of getting into the trend. This allows you to enter on a pullback rather than chasing the market. The NYSE Tick This is by far my favorite tool for intraday trading. To learn more I will refer you to my prior post on the NYSE Tick. Reversal Patterns Buying over the high of a low bar (in an uptrend) or shorting the low of a high bar in a down trend is a great way to get in the new trend close to a reversal. These patterns accompanied with a moving average or other momentum indicator can be a sound strategy with very good risk/reward ratio. Whether you’re an intraday trader or use a weekly chart, being able to identify the trend, get in, and stay in will yield the greatest return over time. Do you have other methods for identifying the trend? I’d love to hear from you.
