Walter`s Forex "Trend Trades"

[walterw 10]

Hello dear fellow traders ¡¡ time has come to start a new thread on what I will call it "Trend Trades"...

 

So far my forex research has been going thru lots of diferent process wich I decided not to make so public, in order to only share relevant and usefull information here at TL...

 

I had been interacting privately with Don on some very interesting technical issues for wich I am so greatfull... Thanks Don for such great contributions ¡¡

 

You will notice that this thread will present a pre-elaborated concept of what I want to do, and somehow it will still be open for more optimizations on a near future, but I believe that what I will present here will not be very diferent to the final product of this trade...

 

I want to trade in this occasion with the trend... I will not fool arround with counter trend trades, thought in futures I am addicted to them, but in this case I will only focus on the trend side... so this will make the overall aproach very clear and easy to follow...

 

What I am going to present here its nothing new... its not rocket science, it will not amaze you... I am just going to present diferent parts of analysis developed by other traders from other forums on diferent areas... Then I will optimize to my taste this diferent analyisis and later put them all together in a comprehensive and simple ecuation that I will call it "Trend Trades"...

 

Let me first start with a great issue that has been taking me some great deal of time doing some thinking and coming to a sustainable conclusion : Weekly $ Targets and I know some people here do not agree in limiting profits, and I think we made all our statements on this issue on some other threads, and I had clearly stated that I like to make an X fixed amount of $ per day scalping futures, well in forex I will aim to make a X fixed amount of $ per week... this has an impact in organizing my psychological setup and also the technical $ range frame of my aproach... its incredibly important for me to have this clear targets in mind and stick to them and trade arround this targets... So in this case the target its going to be $20 per contract week.... (low target) easy to make and promotimg a very relaxed way of aproaching trading...

 

The second issue was Timeframe interestingly Brownsfan took the topic the other day and really its so important on the entire ecuation, where it marks a lot of aspects on your favor or not like : range of moves, RRR in relation to your costs, volume, time to think, life style etc... you all know I am quite scalper in futures, well on this forex research I did even come down to 15 tick charts on ninjatrader... well very nice charts but not really the most conveniant to the bussiness, so I started to look on some higher timeframes and see the benefits of looking at this more longer charts and without going so long the 5 min time frame has made me more confortable in all this aspects.... so at this point you will notice I will be working arround this timeframe... (5 min )...

 

So let me go to the center of the topic here: what is a trend trade ?

 

A trend trade is a trade that takes a clear trend definition and trades the dips on an UP trend and trades the rallys on a DOWN trend.... simple, stupid, basic...

 

What you need for a trend trade is all this :

 

To open position :

 

_Trend Definition

 

_Pullback Definition (dips and rallys)

 

_Timing Entry Definition

 

To Close Position :

 

_Stop Definition

 

_Exit Definition

 

 

Well there are thousands of this definitions outthere, some work , some dont ? why ? well its all about simplicity and optimization

 

Why some traders have an edge over others even doing the same kind of concept trend trade ? well its because some are very complicated in the way they defne trend for example... they need 13 indicators to establish a trend , then to time their entry they use other 5 indicator that have to "allign" so at this point they DO have the trend trade structure in mind BUT they have a mambo on their head :crap:

 

So creating a trend trade its not rocket science from a structural point of view, because actually that structure you will find it on any TA textbook...

 

But the science here is coming to the point of having superb simplicity...

 

On the other hand Optimization has a great deal on giving a trend trader an edge over a diferent trend trader... optimization is taking this definitions and finding the BEST way to express them... the most unnoisy and at the same time leading timing method for example... thats where optimization can change your life...

 

So this trend trade I am about to present here has some of this ingredients...

 

I will post soon, have to make some coffee.... cheers Walter.

[Reaver 10]

Cool Walter. I am looking forward to seeing what you have to say.

[walterw 10]

Ok... so lets start with the first definition here : Trend Definition

 

We need to determine trend if we want to make trend trades, there are multiple ways of determining trend, but remember we are after simplicity and optimization...

 

Let me tell you a little bit of history now, how I came to the trend definition I am about to present... During this entire process I have been interacting a lot with Don, in some point Don has showed me some threads dealing with the topic "rainbow trading" if you would like to see some of this here I attach the links to this threads that deal with rainbows, one of the first developers on this aproach was GuppyMMA http://www.guppytraders.com/gup329.shtml you can get to see there some aspect on rainbows... after that a member called Linuxtroll develped something at here http://www.forexfactory.com/showthread.php?p=1494655&highlight=simple+scalping#post1494655 about rainbows too... now in this case he doesnt give any hint on timing letting the traders figure that out by themselfs, wich it may work for some it may not for others...

 

Now this rainbows are simply averages, no sofistication here, you could simply use the smallest and the largest one and get the final same output... but the interesting thing here is that plotting all this lines actually give some more information in terms of momentum of trend wich can tell us about the quality of the trend...

 

Now as I like to take things a little further I came up with something I believe outstanding... some guy called Bemac, who is a moderator from this forum http://www.visualtradingcharts.com/forum/index.php came up with a NEW kind of Rainbow wich I notice nobody really understanded much the value of this new indicator as it almost did not get much response the indicator is presented here http://www.visualtradingcharts.com/forum/showthread.php?t=2767 and works on the VT platform wich is a very nice performing platform as it is also free with streaming realtime forex data...

 

Now this new Rainbow indicator is based from a Variable Moving Average, as you should know VMA`s do adapt their input depending on the amount of volatilty... here is some definition http://www.fmlabs.com/reference/default.htm?url=VariableMA.htm in that definition you may notice that the Chande Momentum Oscillator (CMO) is normally used for volatilty calculation on this average, well Bemac aparently uses some form of ADX for his VMA and then creates the rainbow with emas from this VMA...

 

To make it simple, this rainbow looks formidable ¡¡

 

 

It has some properties that I will try to explain gradually to you, so you can get to value this powerfull indicator...

 

First should we talk about the normal problems trend indicators suffer.... next post... cheers Walter.

[Don4 10]

Very nice!!!!

[walterw 10]

The great "Dilema" of trend indicators is whipsaws when volatilty drops, they just start performing in a way that all your dreams of having a resting villa at Dubai goes thru the toilet :pc guru: and here many people if they where at some time succesfull, they just return all their gains back to this non friendly market :doh:

 

SO..... SO... what to do about that ? how this complicates the challenge of having some trend definition ? for our trend trades...

 

It certainly is a hard issue that has to be dwelt and has to be "optimized" thru some new modern indicators...

 

In this case VMA`s and particularly this VMA from Bemac have some properties that will help us reduce dramatically the whipsaw dilema...

 

Let me show you how this works, a normal sma has the same input thru the entire dataseries, an ema gives some more weight on last data, but the vma literally changes its inputs depending on volatilty... so this way if things get chopy... this lines will literally get "horizontal"... what is the advantage of that ? well horizontal lines normally dont have much opotunity of crossing with other lines... so things kinda halt and just dont give us false signals...

 

Let me see if I can explain with some graphs here :

 

 

 

I hope you get the idea here, because understanding this it may represent you a great change on your trading life...

 

This "horizontal performance" has the effect of bringing down noise and whipsaws in an unprecedent scale...

 

Now when we take this and create a rainbow, things start to rock... but let me first show you some real life examples of this horizontal effect :

 

 

On the above chart I mark with elipses the chop areas and with arrows the trending areas... notice how during the chop the VMA (black line) literally gets horizontal, and during trending she starts to follow...

 

With a regular average on this chops you would been chopped in various pieces :thumbs down: but with this one you are simply in one side of the rainbow... meditate on this... its simply powerfull yet so simple... cheers Walter.

[walterw 10]

Cool Walter. I am looking forward to seeing what you have to say.

 

Very nice!!!!

 

 

Thanks guys, I am so excited with this ¡¡ feel free to interact, I am posting gradually here, there is lots in front, I know the Tokyo gang will overperform the markets ¡¡ cheers Walter.

[Reaver 10]

You're one smart dude. I like the logical breakdown. I'm tracking.

[Don4 10]

Impressive walter!!!! I see you've been doing your homework!! Tokyo, here we come!!

[walterw 10]

I am glad you like it friends... I think it has a great potential because basicly it takes simple clasic concepts and takes them to the next level...

 

Let me continue here a little more...

 

So what will be our "trend definition" for this trend trades ? simple, we will take this black line (VMA) and the last Ema of the vma the Magenta line and say:

 

UP trend = Black > Magenta

 

DOWN trend = Black < Magenta

 

 

 

 

 

Woooow great reasoning ¡¡¡ jejejej.... but notice that thanks to the horizontal efect, the black line will have a smooth performance in relation to the magenta line and we will rarely see whipsaws going on between both...

 

The normal scenario on a chop situation being both average near looks like this :

 

 

 

Notice on the above chart how we have two chop areas going on (cyan rectangles), but look how they are in two clear trend definitions black above/below magenta... giving us some clear understanding of trend... even on this unclear (for other traders) scenario... we had a simple bias established...

 

So this is our trend definition, cant get more simple... and it has embeded the great advantages of noise reduction thru the "horizontal efect" of this great tool...

 

Tomorrow I will keep posting on momentum giving quality to our trend... (the rainbow in action ) cheers Walter.

[walterw 10]

And here a small description on video about this trend definition... cheers Walter. (hope you understand my english)

Trend Definition.swf

[brownsfan019 17]

Interesting thread here Walter!

 

I watched the video and the definition of the trend is clear.

 

I assume the next steps are to define when/how/where to enter and when/how/where to exit? How has this looked in real-time for you? I haven't done much in forex, but it is of interest to me occasionally.

[PYenner 10]

VT platform DL and demo account-

http://www.vtsystems.com/

 

13.8M PDF Manual-

http://vtsoftware.fxserver.com/VTtrader/stable/doc/VTtrader_Manual.pdf

[walterw 10]

Interesting thread here Walter!

 

I watched the video and the definition of the trend is clear.

 

I assume the next steps are to define when/how/where to enter and when/how/where to exit? How has this looked in real-time for you? I haven't done much in forex, but it is of interest to me occasionally.

 

 

Yeap, the thread will gradually explain all the classic trend trade structure... cheers Walter.

[walterw 10]

Ok... now that we have a basic trend definition with all the advantages that the VMA can give us, we are ready to introduce the Momentum definition into our ecuation... the momentum definition will tell us the "quality" of our trend... is it a strong or weak trend ?... so we dont only know our trend definition but we will also know the quality of our trend thru the momentum definition...

 

Here is where the "Rainbow" will show its edge to the trader...

 

Why the rainbow and not the first and last averages of the rainbow ? (black/ magenta)... well you will notice that the rainbow will graphically amplify the perception of momentum readings on the chart... so it will make more easy to perceive in what momentum condition we are...

 

At this point we will have Three basic Momentum readings :

 

_Contraction/Expansion

 

_Ladder Effect

 

_Complete Rainbow above/below Magenta line

 

lets start with _Contraction/Expansion :

 

To start making simple this momentum definition let me give you an ilustration of a real large highway (lots of lanes) ...

 

If there is small trafic you will notice there are some cars taking the 1rst and 2nd right lane (thin) as the rush hour comes in, you will notice 1rst to 6th lane get all filled with cars (thick).. so it looks thin with very few cars and it looks thick with lots of cars in it...

 

Same with the rainbow... it looks contracted when there is small momentum and it spreads out as momentum gets stronger...

 

 

 

on the example above you can see that we are in a basic downtrend as black < magenta... now during this downtrend we can notice there are diferent momentum definitions very clearly expressed thru the rainbow as it contracts and expands telling us the quality of our trend...

 

Knowing the quality of our trend its very important as to the context we will choose to make our trend trades... for example if we have a downtrend that is weak, taking shorts may become agressive... thought we have a downtrend by basic definition, the momentum definition its not strong, making this shorts agressive...

 

Now, if our momentum is healthy, the more confidence we will have on our trade...

 

_Ladder Effect:

 

One interesting way momentum builds up with our Vma rainbow its the "ladder effect" normally when the black line crosses the magenta it makes a horizontal pause and after that if there really gona be momentum, then we have the first ladder step that will form on the direction of the desired trend...

 

On the below graphs I try to explain how a trend may develop or not with the "ladder effect"

 

 

 

 

So this ladder can keep us out of this type of situations where we got a trend definition but without momentum buildup, and also give us confidence in the case momentum starts building with a positive ladder effect..

 

 

on the next post I talk about the third momentum definition _Complete Rainbow above/below Magenta line ... cheers Walter.

[walterw 10]

and the third momentum definition :

 

_Complete Rainbow above/below Magenta line

 

here is another definition wich is very interesting to gauge the health of our trend... is the entire rainbow above/below the magenta line ? remember that the magenta line is the most large average in the rainbow, and having all the rainbow in one side of this magenta line speeks good of our trend health, even in some cases when it is contracted...

 

let me show you some examples :

 

 

 

 

So with this third momentum definition you got quite an arsenal to establish a "complete trend definition" for our trend trades...

 

a trend definition that includes a cool basic trend definition thanks to the VMA performance in relation to the magenta line and a momentum definition of the trend with this three diferent readings of the VMA Rainbow...

 

So far I could say we have a simplified and optimized "trend definition"...

 

Now I move into some videos about this three momentum definitions... cheers Walter.

[Z_trade 10]

Walter, as always, very informative new strategy, thanks for sharing!

 

Interesting concept you demonstrating, on your last chart the longer term MAs are compressing, creating high density area that is clearly show market in consolidation/squeeze.

[walterw 10]

Here I attach videos explaining momentum definitions.... cheers Walter.

Contraction-Expansion.swf

Ladder Effect.swf

Complete Rainbow above-below Magenta.swf

[Armand 10]

Walter great thread (and videos) very helpful. Thanks for sharing. Is this indicator common or is it unique to the vtsystems site?

 

Thanks,

Armand

[Don4 10]

Hey walter, wow,great job!!! I tell you this is a very nice system:applaud:

Here was a trade that i took last week just to show you 1 way that im using it. (sorry its a zip file)

 

 

 

 

http://www.traderslaboratory.com/forums/attachment.php?attachmentid=2619&stc=1&d=1188679856

!st Trade.zip

[brownsfan019 17]

(sorry its a zip file)

 

Don,

If you turn your screenshots into PNG files, they should not need to be zipped up to save space, FYI. BMP are large files by nature, so that is probably why you had to zip up a single file.

[walterw 10]

Walter great thread (and videos) very helpful. Thanks for sharing. Is this indicator common or is it unique to the vtsystems site?

 

Thanks,

Armand

 

Armand : so far this indicator is coded in VT... it could be eventually coded on other platforms as well...

 

Hey walter, wow,great job!!! I tell you this is a very nice system:applaud:

Here was a trade that i took last week just to show you 1 way that im using it. (sorry its a zip file)

 

 

 

 

http://www.traderslaboratory.com/forums/attachment.php?attachmentid=2619&stc=1&d=1188679856

 

 

Hey Don, you got me on the rainbow ¡¡ nice trades there... cheers Walter.

[Don4 10]

brownsfan019, thanks I tried everything, I thought:doh:

[brownsfan019 17]

brownsfan019, thanks I tried everything, I thought:doh:

 

No prob!

 

I went ahead and created 2 png's of your zip file so those that are too lazy to unzip it can see your charts!

 

Screenshots from Don4's Zip file for your convenience:

 

[brownsfan019 17]

Don - my question for you is can you explain your trade here? I'm still going through walter's thread, but I am assuming you went short there with the MA's pointing up.

[Don4 10]

Hey,thanks for that brown. I entered short because of the 1min trend was down,the 5 sec is to time it.