Very simple trend-following set-up

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tomorton

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Feb 28, 2002
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#1
Happy to see T2W has offered a refuge for longer term traders – and happy to post up the current guidelines I’m using to set up trend-following trades.

I say current guidelines as they may never be perfect and complete – they are profitable but there’s always room to learn and improve.

However, I’m opposed to indicators that generate an additional chart.

My guidelines use only daily and weekly TF candlestick / bar charts, refer to daily EOD unless weekly is stated.

Some of the factors below might seem to replicate each other – but in practice they rotate at different points in the chart’s life cycle – so one of these will change before the others as a strong trend starts to decay, or as a ranging price starts to trend.

Comments below are given with reference to setting up to buy in an uptrend, just reverse the instructions for a short set-up in a downtrend.

1. last Close must be above 200EMA
2. vertical sequence on chart must read, from high to low – price, 50EMA, 100EMA and finally 200EMA
3. swing phase using 3-bar reversal chart must be bullish (i.e. last swing, low or high, is higher than previous)
4. Trend Strength Indicator must score 70 or more (my TSI is total weekly Closes + Highs + Lows above 50EMA in last 33 complete weeks)
5. how many consecutive weekly Closes are above 50EMA, counting back from the most recent? (the more the better)
6. is last full week’s bar completely above 50EMA? (caution if it straddles it or is completely below)
7. how many adjacent weekly bars overlap the last full week’s range? (caution if more than 3)

Once targets are graded using the above guidelines, entry is at EOD (London). The entry day can be selected using a variety of TA – I don’t find choice of entry trigger pattern is critical but it must indicate some confirmation of trend and point to a meaningful TA-based stop level.

Handling correlation, risk management, money management etc. are up to the individual. So is choice of market sector – I’m using this approach in forex but delighted to hear how it might work (or fail) elsewhere.

I hope this can be an alternative to day-trading for new traders.

But my main reason for posting would be to hear how this approach might work elsewhere / could be improved. Comments welcome.
 

barjon

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May 6, 2003
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#3
...........3. swing phase using 3-bar reversal chart must be bullish (i.e. last swing, low or high, is higher than previous)............
.
Good stuff, tomo. How do you define a swing high/low?

(deserted the equities, eh :D)

Cheers

jon
 

tomorton

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#4
Thanks NVP - (should be nothing controversial in a trend-following set-up.)

Hi jon - I had to get away from trading equities - far too many inputs, news and events unpredictably affecting price behaviour. And maybe too much choice. As for the FTSE100 index, its just schizophrenic.

Forex just has 8 main actors, almost no room for individual personalities amongst them or the supporting cast. Very few surprises. The trends can be like tended ski runs, beautifully smooth.

For a swing high/low, I'm taking almost exactly Marc Rivalland's definitions, so a swing low would be a day with a lower daily low, in a series of at least 3 such days: confirmed when followed by a day with a higher high and higher low, hopefully leading to a swing high which would itself be at least 3 such days subsequent. I know you're familiar with this but I've attached a little image to illustrate.
 

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Splitlink

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Nov 18, 2001
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#6
I think that I prefer schizophrenic to Swissophrenic. I can't look at FX these days without seeing Swiss cheese with big holes in it.
 
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barjon

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#7
I think that I prefer schizophrenic to Swissophrenic. I can't look at FX these days without seeing Swiss cheese with big holes in it.
:LOL: a touch of the Tate & Lyles then. Another 'orrible gap recently to go with the one that turned a few of your hairs grey some years ago. Was T&L wasn't it?
 

timsk

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Mar 18, 2002
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#8
This guy should be invited to join this thread. Great info. on trend analysis for longer term trading.

Maybe one of the Mods. would invite him to join ?
Hi neil,
No need to bother the Mods with this. To bring a specific thread to the attention of another member who's not (yet) subscribed to it, just add their username to your post, prefixed with the @ symbol. So, using the member you reference as an example, just type @isatrader - he'll then get e-mail notification.

I agree with your assessment by the way, isatrader's work on trend and contributions to T2W are outstanding.
(y)
Tim.
 

Splitlink

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#9
:LOL: a touch of the Tate & Lyles then. Another 'orrible gap recently to go with the one that turned a few of your hairs grey some years ago. Was T&L wasn't it?
No, I don't think that I have had the pleasure of that one. Can't remember.:cry: There've been so many.

But, hey, there've been some good ones, too. (y)
 

TWI

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Jan 22, 2004
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#10
The interesting set of rules you post should be back-testable, did you? I think these sorts of methods work best in fx in so far as trends tend to be long and sustained with relatively modest corrections compared to the rapid on-trend moves but what proportion of a move do you miss before the signal fires ? The set-up requires quite some confirmation.
 

barjon

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May 6, 2003
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#11
The interesting set of rules you post should be back-testable, did you? I think these sorts of methods work best in fx in so far as trends tend to be long and sustained with relatively modest corrections compared to the rapid on-trend moves but what proportion of a move do you miss before the signal fires ? The set-up requires quite some confirmation.
Hey, if this thread is bringing the old stars back into the fray then more power to it. Nice to see you :LOL:
 
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tomorton

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Feb 28, 2002
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#12
The interesting set of rules you post should be back-testable, did you? I think these sorts of methods work best in fx in so far as trends tend to be long and sustained with relatively modest corrections compared to the rapid on-trend moves but what proportion of a move do you miss before the signal fires ? The set-up requires quite some confirmation.

Hi TWI - You're no doubt correct on both counts - I was being a bit optimistic thinking that these guidelines could simply be transferred across verbatim into e.g. equities - which I have found nothing like as trend-friendly as most major forex pairs. Maybe the principles would apply but some variation might be needed to customise the approach per market sector.

I absolutely accept the loss of a major chunk of price change at the start of a trend - it probably takes about 2 months for enough of my "traffic lights" to go green before I would even look at entering a position. And that can be quite a quite a significant % move. But, hey, this is trend-following, so if there's no trend, I would simply move on to another chart where there is a viable trend, or wait for one to print. Maybe one day I'll have to work on or steal a break-out strategy but this isn't the time. Cheerio!
 

Splitlink

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#13
Hi TWI - You're no doubt correct on both counts - I was being a bit optimistic thinking that these guidelines could simply be transferred across verbatim into e.g. equities - which I have found nothing like as trend-friendly as most major forex pairs. Maybe the principles would apply but some variation might be needed to customise the approach per market sector.

I absolutely accept the loss of a major chunk of price change at the start of a trend - it probably takes about 2 months for enough of my "traffic lights" to go green before I would even look at entering a position. And that can be quite a quite a significant % move. But, hey, this is trend-following, so if there's no trend, I would simply move on to another chart where there is a viable trend, or wait for one to print. Maybe one day I'll have to work on or steal a break-out strategy but this isn't the time. Cheerio!
Hi, Tom,

I've, always, followed you since the Big Ben days. What prevents me from being more than an interested reader, here, is the 2 month wait! Ouch! My patience is limited more to the time I have left at my disposal. I am 83 in April! :D
 
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tomorton

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#14
Well done Split, I had no idea!

Actually, the 2 month wait is obviously only per chart - at the moment I am watching the 16 major currency pairs offered by the SB company I use, plus 16 minors, plus 4 what they call 'exotics',plus Gold. I am currently short on 2 majors but I have entry set-ups on another 6, plus 2 minors plus 3 exotics: I won't be taking that many entries of course as 5 of the potential set-ups are well correlated USD pairs, but that still leaves me quite a few good options.

Yes, a break-out strategy to sit alongside trend-following would capture the earlier moves, but they just don't suit my trading personality - at the moment.

I am very fond of systems like Big Ben, thanks for remembering it - I well remember a 2-week period when I got 8 out of 10. Then of course I lost the next 12...... So it goes. But I am sure the basis of Big Ben could be revived when I have the chance.
 

tomorton

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#16
Trend-following in tricky market conditions -

Have to report I have only taken 4 trades so far this month - 2 winners, 2 losers, none still open, slightly neg outcome to date. But absence of trend-following entry signals right now in forex, while the EUR/Greece crisis still overhangs the markets is not necessarily a bad thing. For illustration, most of the pairs marked out as strongest-trending up or down by my system delivered counter-trend performances last week, so finding some way to enter them would have automatically been low probability trades.

The exception is the USD pairs which mostly continue to rise, perhaps as a safe haven against rising EUR surprise risk.
 
Jan 1, 2006
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#17
Hi Tomorton, thank you so much for sharing some of your techniques here.

Can I ask something about your trend-following in fx and other markets? I presume that your trades end up being open for a long time, say several weeks or even months. If that is the case, do you find that the daily rollover/financing charges really end up eating into your trading profits?

That's a question that has always been at the back of my mind for EOD-based trend-following strategies?

Many thanks in advance!

G
 

Jason101

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Oct 9, 2008
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#18
Trend-following in tricky market conditions -

Have to report I have only taken 4 trades so far this month - 2 winners, 2 losers, none still open, slightly neg outcome to date. But absence of trend-following entry signals right now in forex, while the EUR/Greece crisis still overhangs the markets is not necessarily a bad thing. For illustration, most of the pairs marked out as strongest-trending up or down by my system delivered counter-trend performances last week, so finding some way to enter them would have automatically been low probability trades.

The exception is the USD pairs which mostly continue to rise, perhaps as a safe haven against rising EUR surprise risk.
Hi tomorton,
My system is very similar to yours (my ma's are 200, 50, 20 and 10, (10 being an ema.)) Just in response to your post about Greek uncertainty . In the last few days I have switched all my open trend following positions to swing trade exits (no doubt I will soon regret this as the trend picks up again!)
Conventional trading wisdom says not to switch time frames once in open trades, but I have found it has often served me well.
 
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tomorton

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#19
Hi Tomorton, thank you so much for sharing some of your techniques here.

Can I ask something about your trend-following in fx and other markets? I presume that your trades end up being open for a long time, say several weeks or even months. If that is the case, do you find that the daily rollover/financing charges really end up eating into your trading profits?

That's a question that has always been at the back of my mind for EOD-based trend-following strategies?

Many thanks in advance!

G

Hi options-george -

Actually, I think my longest running trades using trend-following tend to about 10 sessions only, more often in the 2-5 session range, and there are several reasons for that.

Firstly, I trail my stop higher based on intra-day range values so don't ever leave the stop further and further behind. Although I also push the target forward, I don't increase the reward factor against risk after entry.

Secondly, if the trend starts to weaken as identified by worsening results from my trend criteria, I will seek a manual exit. I don't want to run trend-following trades through ranges. I will never expect to see one of these trades run for 3 weeks, the loss of trending in the price would make it pointless to my mind and such a parabolic price momentum is bound to hit my exit target in that time.

I don't closely monitor overnight costs - and that might not be comparable to anyone else's trading anyway - position size, SB company, broker, account type etc. all make this a moving target. I manually closed a winning trade this month after 9 sessions as price had flattened and find I took a 7% hit on overnight costs - your call if that's acceptable to you but for me that's a bad bad outcome. It was a longish trade duration and the trade lost pace so badly I had to exit. The original profit target if hit would have been double what I actually made and under more normal conditions would have been hit quickly.

Of course, its fun to speculate on what might have been...