Trend Setter Strategy - A Secret of Fund Managers
"Rather than maniacally trading volatile pairs multiple times in a single day, rule-based discretionary traders are now holding onto open positions longer, relying more on planning and patience rather than fast reflexes."
Rule-based discretionary traders are among the best traders on this planet. The trading strategy I want to explain here is a rule-based discretionary system. Every trader will face both winning and losing streaks alternatively, so the key to trading successfully is to make more money during a winning streak than you lose during a losing streak.
Itís very disturbing that so many traders find it difficult to survive in the markets. The issue is; even if youíre disciplined, itíll be difficult for you to survive with a worse expectancy system, i.e. a system whose risk is greater than the reward. Checking complex data ad infinitum isnít sensible for simple markets either. Before I give the rules of the system, Iíd like to make a mention that Iím doing this with the sanction of the head of my forex research group (a mad genius). This system has been with us for a long time and itís what we use for long-term investments. Tthe probability of winning in the long run is very high and you can benefit from this system too trading along with me as I take buy and sell signals.
Details Of The Trading System
Timeframe: Daily charts
Pairs: EURAUD, EURNZD, EURCAD, AUDUSD &NZDUSD
Indicators: SMA& ADX (customized)
Stop loss: 200 pips from the entry price (optional)
Take profit: A trend is ridden until it changes significantly
Trailing stop: 50-pip trailing stop for every 100 pips gained, applied from 200-pip profit onwards.
Position size: 0.01 lots for each $1000
Risk: 2% per trade (in a case of stop application)
Risk-to-reward: Risk limited, reward unlimited
Trading style: Position trading
Moving Average: The simplest way to spot a trend is to use the Moving Average. As the name suggests, this is simply the average closing price of a given pair over a specified period of time. Moving Averages are lagging indicators but theyíre still extremely useful for emphasizing the direction of the trend. The rule is that when the next price closes above its Moving Average it is in a positive trend and vice versa. A position should be maintained until the price closes back below/above the Moving Average.
Average Directional Movement Index: Moving Averages are good for identifying the trend, but they arenít so good for timing the entries and exits. One way to improve on the entries and exits is to combine the Moving Average with the Direction Movement Index. The DMI plots a positive DI line (+DI) measuring buying pressure and a negative DI line (-DI) measuring selling pressure. When the positive DI line is above the negative DI line it means the pair is in a positive trend and vice versa, with the crossover indicating a point of change. The simplest way of using this information is to take the cross as the signal to trade, so that when +DI goes above ĖDI traders should go long and when it drops back below they should switch to a short position. This type of analysis can be extended to include the Average Directional Index. The ADX is an oscillator calculated from two DI lines that show the strength as opposed to the direction of the current trend.
This system is effectively using the Moving Average to determine the direction of the trend and the DMI to get a good entry point by buying at the bottom of the chart or selling near the top. The combination of these 2 indicators helps to filter out some false signals. The 5 pairs we choose are more easily predictable than the major pairs. We donít need to fall in love with any pairs as our aim is to make profits from trading. The movements on EURAUD and EURCAD in particular are easily predictable with over 70% accuracy. Another advantage is that we have fewer signals and pay much less spreads.
Stop Loss Issue: This strategy doesnít primarily use stops, which increases the traderís responsibility and the chosen pairs are also safer if compared to the majors. It even appeared that in the case of stops in the back-tested mode, too many winning trades would be curtailed and closed with a loss. Without stops, the strategy has been used successfully, plus if you stick to the position sizing recommended for this trading technique, youíd be fine. The use of stops is optional, but advisable if you think itís against your psychology. A disciplined trader should exit a position as soon as itís clear a trade is no longer going in the forecasted direction, and thatís exactly whatís intended. The ADX shows where a position should be entered or exited. Extreme losses occur mostly when a trader falls in love with the direction of a market, yet many a trader would continue to run a position despite a protracted change in the trend. If you thought the NZDUSD would fall to 0.6535, then at the later price of 0.6868, your assumption was wrong.