Advantages in Trend Trading

[RichardCox 10]

Once we start to look at technical price analysis from an academic perspective, it can be difficult to remember some of the foundational aspects of the practice that got us started in the first place. The idea of what makes a trend creates a basis for most of the more “advanced” technical analysis techniques that follow. So, it is surprising that so many active forex traders dismiss trend analysis as overly simplistic and only worthy of limited attention. But the simplicity of any price analysis method is not something that should be immediately disregarded as a negative, and trend analysis is something that should be used by traders of all experience levels. The ability to understand what makes a trend can bail a trader out of a strategy that is imperfect and help prevent the excessive losses that can break a trading account.

 

“The Trend is Your Friend”

 

The most commonly used phrase in technical analysis is “the trend is your friend.” Whether your strategy agrees with it or not, the phrase has stood the test of time because it does form the building blocks for the way most people view price activity. There are many traders that use trends as an opportunity to work in reverse (using contrarian strategies), but even when thats the case, you will still need to have an understanding of how trends are defined in order to know what you are working against. Here, we will look at some of the benefits of trend-based strategies so that investors can use these ideas (for or against) when establishing new positions.

 

Trends and Imperfect Strategies

 

There will be many cases where an alternating strategy will fail against an uptrend or downtrend. When markets are bullish the majority of the price momentum is set in a clear direction and this is the main argument trend traders will use to base their positions. Trading in the direction of the majority of the market’s momentum allows you to focus on other aspects of your strategy (such as stop loss levels and profit targets).

 

This also allows you an added advantage when using a strategy that is less than perfect. When trend trading, the timing of your exact entry isn’t as important (when compared to contrarian or swing strategies). Of course, this does not mean that trend trading will result in gains in all cases. But when using these methods, you will gain some protection against the inherent flaw seen in any strategy and the exact time of exits and entries becomes less critical because most of the market is already on your side. In recent months, one of the stronger trend instances have been seen in the JPY pairs (as carry trades become more popular). The activity in these pairs has shown significant rebounds from long term lows, essentially suggesting that a new uptrend is in place.

 

Combining Trend Moves with Indicators

 

Once your underlying trend direction is identified (higher lows and higher highs vs. lower lows and lower highs), some of the less commonly used indicators can be added as a way of getting an edge on the rest of the trend trading market (where traders tend to focus on many of the same charting tools). One example of a less commonly used (yet effective) market indicator is the Commodity Channel Index (CCI). Helping remove some of the difficulty of timing entries in a trend, the CCI is an oscillator used to determine the strength or weakness in cyclical trends. The CCI helps traders identify price activity that has reached extreme points (become overbought or oversold) by quantifying the relationship between prices, moving averages, and deviations that are typically seen relative to the moving average. In the attached chart, we can see that rallies are expected once the indicator falls below -100, whereas declines are expected after the reading rises above +100.

 

The CCI cannot guarantee 100% success even used in conjunction with a forceful trend. But when, for example, a strong uptrend is in place, buyers are more likely to enter the market when prices have become oversold relative to their near term averages. One of the biggest problems seen when trend trading is the fact that it is difficult to “buy low and sell high.” Looking for oversold activity is one way of combating this problem as it gives you an opportunity to capitalize on short term reversals within the larger trend. When strong trends are seen, you will usually have multiple opportunities to enter and re-enter, and using the CCI is one way to find these opportunities.

 

Choosing Your Markets

 

If trends make up the majority of market price activity, we will need to take some trading opportunities while dismissing others. The main focus, at all times, should be in finding which price trend will allow you capture the most pips at any given time. If you are looking to implement a contrarian strategy, the argument can be made that there is greater opportunity in a reversal (became the previous trend made prices too expensive or cheap). But this is only the case when a trend has actually reached its end. When you align yourself with the direction of the trend (and choose your markets based on underlying strength), your positions are exposed to larger pip potential and reduced possibilities for losses.

 

Conclusion: Turn the Odds in Your Favor Until Reversals are Seen

 

When looking at trend-trading strategies, there are several advantages that allow traders to turn the odds in their favor and to protect against the flaws that are inevitably present in any trading system. As long as a trend is in place, there is an enhanced potential for gains as most of the market is in agreement with the positions you will be taking. The first step is to identify the main trend direction and, in many cases, this will not be immediately apparent. But when this is the case, it is better to look for other opportunities, as much more money can be made after the most obvious trending moves are seen.

 

The forex market has an impressive selection of available currency pairs to trade (even when using some of the smaller brokers), so there are always alternative options when your chosen pair is not expressing clear trend activity. For this reason, it is important to filter your signals in ways that allow you to only focus on those pairs with the strongest trends (and the best potential for gains). For positions that are already open, it is important to watch for counter-trend reversal signals to either stop out the position or to take profits.

 

At some stage, even the strongest trends will come to an end as uptrends turn into downtrends and vice versa. The best indication of these changes when an uptrend fails to proceed with higher highs and higher lows (momentum stalls too early when attempting new highs, or support levels break). In a downtrend, this would mean prices fails to proceed with lower highs and lower lows (downside momentum stalls too early when attempting to push to new lows, or resistance levels break). Other than this, trading rules can be altered but the central goal is to find the most obvious examples of a trend before any trades are placed.

[bobcollett 10]

Hi Richard

Nice post

The trend is the ONLY TRUE EDGE traders have.

The rest is confusion.

kind regards

bobc

[natureboy1618 10]

Trends. Its how to roll.

 

I just posted this in another thread - you may like it. Apparently trends are quite natural.

 

So how to best trade the trend once you have one?

 

My -- You mention buy low, sell high. Retracement patterns, my focus, help to do that. I just did a webinar for the MTA about that. Truly can help with trend trading. Not to schill my own stuff - other approaches work too - just seriously though, retracement patterns in trends can work.

 

Money management, Exits, Entries. So a big piece of the real work then, as always, is identifying when a trend is happening. Breakouts, Volume, Momentum patterns, Volatility measures, trend logic can all work - some of the time. Maximizing the return then can be achieved (in my view) from using multiple timeframes and automation...The exits can be trailing and targets (i think a mixture of exits is better than one, that's just me).. and money at risk history and now have to be followed keenly - current results can only deviate so much from the past to keep trading the concept... Have to find the balance that works for you and your own style....trend definitely can be your friend though. Nice post RC

[RichardCox 10]

I just did a webinar for the MTA about that. Truly can help with trend trading. Not to schill my own stuff - other approaches work too - just seriously though, retracement patterns in trends can work.

 

Don't worry about that. Feel free to post a link, I'm sure a lot of us will take a look.

[equtrader 10]

In the attached chart, we can see that rallies are expected once the indicator falls below -100, whereas declines are expected after the reading rises above +100.

 

I would prefer some backtesting results. Charts can be misleading.

[RichardCox 10]

I would prefer some backtesting results. Charts can be misleading.

 

The charts are used to illustrate the point. If you are interested in backtesting results, maybe you should post some.

[SunTrader 10]

Trends are where the real money is made.

[equtrader 10]

The charts are used to illustrate the point. If you are interested in backtesting results, maybe you should post some.

 

This is called reversing the burden of proof:)

 

I see however that many are turning to trend trading maybe because it is hard to compete with robots in hft domain.

[BRichard 10]

Many years ago an old market adage implored "never buck a trend." This means if the market trend is up you should never make trades that sell this market short. Of course, this also means if a market is in a downward trend you should never buy until it has bottomed out. They used to say that buying into a market when it is falling is like sticking your hand out to catch falling steak knives. This is a gruesome thought but then again, trading the Forex can end up giving you gruesome results.

[sergso 10]

This is an article that talks about adaptation in trend-following. Does anyone know of some adaptive trend following indicator that can match the results of this study? I guess the difficulty is in keeping a high return while reducing the historical drawdown.

[bobcollett 10]

This is an article that talks about adaptation in trend-following. Does anyone know of some adaptive trend following indicator that can match the results of this study? I guess the difficulty is in keeping a high return while reducing the historical drawdown.

 

Hi sergso

I think this adaptive system costs $5000.

Thats excessive

You can buy a book "Trend Following " by Michael Covel for about $20 that will do the job.

regards

bobc

[sergso 10]

Hi sergso

I think this adaptive system costs $5000.

Thats excessive

You can buy a book "Trend Following " by Michael Covel for about $20 that will do the job.

regards

bobc

 

Not for buy but it is good to see the general idea and performance.BTW Covel stuff is 30 years old ideas. I don't think anyone can now make money in the markets by reading a $20 book. :haha:

[SunTrader 10]

The joke is on you if you believe that.

 

Price doesn't always determine value.

[sergso 10]

The joke is on you if you believe that.

 

Price doesn't always determine value.

 

Sorry but anyone who thinks that publicly available information priced at $20 will make any returns is a joker: Better chance to play lottery.

[SunTrader 10]

Don't be sorry. Be educated.

 

About what does and doesn't work.

 

And don't worry about if the price is $20 or $2000 or believe it or not free.

 

I know of many traders who have wasted big money on books and systems probably because they thought they had to "pay up" to get something good.

[bobcollett 10]

Hi Sergio,

I see you come from Greece.

Smart people , the Greeks.All that bail out money and when they default in 3 years time, they'll get some more.

Do you trade for a living ?

kind regards

bobc

[SunTrader 10]

Ooooh good one. Some might call that abrasive.

 

:rofl:

[bobcollett 10]

Ooooh good one. Some might call that abrasive.

 

:rofl:

 

Wide awake , hey Sun Trader.!!!!

kind regards

bobc

[Rashedbgd 10]

Very useful post.....learning a lot...Thanks for posting such a nice and article.

[sergso 10]

Hi Sergio,

I see you come from Greece.

Smart people , the Greeks.All that bail out money and when they default in 3 years time, they'll get some more.

Do you trade for a living ?

kind regards

bobc

 

I am half-Italian living in Greece married to an Albanian. I trade for 15 years in front of the beach.Making a lot of money. Wait for Italy and France to default. Then America. But the beach will still be here. Ciao.

[SIUYA 11]

a better book IMHO can be found here. I have read and worked on a lot of the other gumpf and while they make good reading I wish i had this book right at the start.

Following the Trend

 

All the tricks, tips downfalls etc are revealed and you can choose to put the hard work in to trend trade of not. For the price of the book this will provide a very cheap education.....and afterwards - you wont need to spend money on a system or a course - the book explains why this is so - you may however choose to spend money on a system that helps you build your own unique system - but thats an entirely different proposition.

Key is that it requires a lot of money a portfolio approach and is not day trading.

[-TopstepTrader- 10]

This applies:

 

John Hoagland's Scouting Tip of the Week

 

Part of being a consistent trader is a constant and creative acceptance of the information the market is giving you. No matter what tools or charts you use, the price action has already happened. Through journaling, study, and repetition, traders can develop a sense or intuition for price action in the present tense as well as a recognition for when the other short time frame traders are on the wrong side. At times, catching these traders in a "one sided" position can be the main reason for taking trades, even counter trend. Pit traders always watched for conditions where the pit was "too long" or "too short" as this situation is a catalyst for some good market moves. It's a very popular question for off floor customers to ask their broker, "Is the pit long or short?"

[sergso 10]

a better book IMHO can be found here. I have read and worked on a lot of the other gumpf and while they make good reading I wish i had this book right at the start.

Following the Trend.

 

 

If these guys know anything about trends then why did they make a new forum in which they wonder what has happened to trends and why old trend trading methods do not work? Just check it out.

 

Try to backtest his rules:

 

"Enter long positions on a new 50 day high. Vice versa for shorts. Go with the breakout and ride the trend. Nothing else. Signals are generated on daily closing data and the trade taken on the open the following day

 

Exit on three average true range moves against the position from its peak reading. ."

 

These are like very old turtle rules and have not worked for a while other than on purposely selected cases on hindsight. I mean everyone writes a book when his trading method fails. It is irrational to write a book about a method that works. Think about it.

Edited June 18, 2013 by sergso

[SIUYA 11]

If these guys know anything about trends then why did they make a new forum in which they wonder what has happened to trends and why old trend trading methods do not work? Just check it out.

 

Try to backtest his rules:

 

"Enter long positions on a new 50 day high. Vice versa for shorts. Go with the breakout and ride the trend. Nothing else. Signals are generated on daily closing data and the trade taken on the open the following day

 

Exit on three average true range moves against the position from its peak reading. ."

 

These are like very old turtle rules and have not worked for a while other than on purposely selected cases on hindsight. I mean everyone writes a book when his trading method fails. It is irrational to write a book about a method that works. Think about it.

 

I know about the site, I know about the debate that continually occurs when trend following supposedly dies. Their site also discusses other things as well. If you know about trend following then you will also know that it is reasonably easily executed requires a portfolio and lots of money to get a reasonable return and not pie in the sky BS.

The long term trend following works its just that many dont understand - or choose to ignore - the downsides to it.....and forget its about long term, will have drawdowns and various other issues - and these are pointed out in the book unlike many other type books.

 

The Turtle system and like the one in the book is just an example, and its shown that many systems are reasonably easily built, offer much the same in terms of returns and can be likely reversed engineered.

One of the points made is that you dont need to think about it, and the book is written in a very open manner whereby its entirely rational to write a book such as that - there is no great secret and thats the point. It is not one revealing a 'secret' and that is why it is a good book.

 

And yes I have back tested similar rules, my own rules and all sorts of variations - it gives a particulalar type of returns - that are in no way similar to many who succeed or fail at day trading.....are you saying the turtle rules dont work, no longer work, or just have not worked recently?

 

If you want a cheap education the book is good, if you want a secret revealing book - save your money and give it to the market, if you think that everyone who writes a book only does so because the thing they are writing about does not work when then i would not know what to suggest - read a public forum maybe?

[BlueHorseshoe 10]

I know about the site, I know about the debate that continually occurs when trend following supposedly dies. Their site also discusses other things as well. If you know about trend following then you will also know that it is reasonably easily executed requires a portfolio and lots of money to get a reasonable return and not pie in the sky BS.

The long term trend following works its just that many dont understand - or choose to ignore - the downsides to it.....and forget its about long term, will have drawdowns and various other issues - and these are pointed out in the book unlike many other type books.

 

The Turtle system and like the one in the book is just an example, and its shown that many systems are reasonably easily built, offer much the same in terms of returns and can be likely reversed engineered.

One of the points made is that you dont need to think about it, and the book is written in a very open manner whereby its entirely rational to write a book such as that - there is no great secret and thats the point. It is not one revealing a 'secret' and that is why it is a good book.

 

And yes I have back tested similar rules, my own rules and all sorts of variations - it gives a particulalar type of returns - that are in no way similar to many who succeed or fail at day trading.....are you saying the turtle rules dont work, no longer work, or just have not worked recently?

 

If you want a cheap education the book is good, if you want a secret revealing book - save your money and give it to the market, if you think that everyone who writes a book only does so because the thing they are writing about does not work when then i would not know what to suggest - read a public forum maybe?

 

Hi SIUYA,

 

Some thoughts . . . I imagine that one of the difficulties that a lot of the trend following funds have faced (vs the turtle era, for instance) is as follows:

 

- To try and keep things the right side of breakeven when there's not much going on, greater diversification is used. Look at Winton, for example (although I know they're not the purest exponent of trend trading) - there's probably scarcely a single liquid market anywhere in the world that they don't trade. This is fine, generally seems to work, and makes good sense.

 

- When key markets begin to exhibit the more volatile and sustained trending behaviour that has the potential to generate the stellar 50% plus return years, this process is diluted by the extreme level of diversification at work. There's evidence of a slow slide to mediocrity specifically in the outlying returns that this trading style should produce. As an example, take a look at Dunn. They modified the markets they trade for greater diversification a few years back after a string of losses. The diversification seems to have achieved its aim. But then look at 2008, when there was plenty going on for trend trading to profit from - the return was far from outlying. I can only conclude they couldn't properly exploit moves in US equities etc because to much off the portfolio was tied up in obscure markets.

 

If the above is correct, then this would mean that the nature of the returns from this type of strategy have changed, rather than that "trend following is dead"?

 

Another interesting point is that the approach Sergso describes is arguably not trend following: it's breakout trading. Shouldn't a "true" trend follower be always long or short?

 

Finally, I imagine that there are some "secrets" to how such traders operate successfully, but they probably have less to do with knowing when to buy and sell and more to do with things like position sizing, and using interest rate products to generate returns from cash reserves (easier to do when you trade a leveraged/low margin derivative).

 

Kind regards,

 

BlueHorseshoe