A Simple & Effective Method to Ride a Trend

Beginner Questions
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Edit Jul 31, 2019 - Changed the heading from “Observations of a Recent Noob” to “A Simple & Effective Method to Ride a Trend”

– Original Post –

I’ve recently graduated from Noob Academy and so I thought I’d write this up for aspiring traders in the hope that it might give them a different perspective on their journey ahead.

I have nothing to sell to you and I make no claims to having generated large returns on my trading account. I’m still developing as a trader and I have much to learn. The following are just some thoughts that I wish someone had shared with me when I first considered learning how to trade.

The information most often dished out to noobs is that trading is difficult and that profits are elusive, conferred upon a very small fraction of the community. 90% will fail to make profits and perhaps 1-2% will ever see phenomenal success. If you make 2% per month on your account you are doing very well.

All of that might be true, but this is also true of any other profession that requires the development of a skill. If everyone entering a certain skill-based profession limited themselves to average achievements, we would never have anyone excel or raise the achievement bar in that profession. We would still be running the 100 meters in 10 seconds at best.

You will need to put in the time and effort to develop your trading skill. There is no way around that. Consistent practice is required to build any skill. However, once you have done that and you have learned the mechanics of trading and absorbed some of the nuances of order execution and price movement in the markets, at a neural level, you will being to develop an intuition and your trading ability will move to the next level. This can only happen with elapsing time.

Mere practice is not enough. You should log every trade in a journal and analyze every completed trade to figure out what you could be doing to improve your performance. Your performance is evidence based, given by averaging out long term data (3 - 6 months). It’s a tedious process and a continuous one throughout your trading career but it is necessary if you want to improve your trading skills.

But what are you looking for when you analyze your trading performance? That depends on the analysis methodology that you’ve chosen. As far as I know there are the following 3 (Please let me know if you know of others):

  1. Fundamental Analysis (news, events, etc)
  2. Quantitative Analysis (statistical)
  3. Technical Analysis (price action, chart patterns, etc)

There is no right or wrong methodology. There are traders who are wildly successful utilizing one or more of the above methodologies. Pick one (or a combination) that resonates with you. Learn everything you can about the one you’ve picked and experiment with it in the markets.

There are three things, listed in order of importance below, that I believe are the most important factors in trading success. When analyzing your trades these are what you are looking to improve in your trading. If you can master these then trading will become stress free and almost mechanical to a large extent.

  1. Account Risk Management (Preservation of capital is the primary mandate)
  2. Predicting the Direction of the market
  3. Trade Management (Drawdowns, Stop Management, Exits - to improve profitability and minimize risk)

Trade multiple time frames - scalping, day trading, swing trading. You will naturally gravitate to one of these as you gain experience. Later you may want to explore longer term trades too.

Once you enter the market and price is moving in your favor, in order to know where you should take profit, ask yourself where you would enter the market if you were to take a trade in the opposite direction. That opposing entry point is where you should take profit. Don’t insist on reaching a fixed RR. After all, your analysis is what gave you the entry in the first place. Why not analyze where to get out too? You should do this analysis before taking the trade. Monitor the trade as it progresses and adjust your stop loss as needed.

If you start with a demo account make sure to move to a live account as soon as you get comfortable with the mechanics of trading. Use a very small amount of capital in your first live account and be prepared to blow the account as you learn and practice. Risk no more than 1/8% of your account per trade while you are learning. This will allow you to extend your learning period. Maximizing profits is not the goal at this stage. The idea is to improve your win to lose ratio on trades and to being consistently profitable. Don’t get cocky if you happen to have a string of lucky wins. Concentrate on the process and not on profit goals. Once you are able to grow your account balance month over month for at least 6 months in a row, you can look to adding additional funds into the account slowly over time and to slowly increase the risk percentage and profit goals.

In order to have wild success in trading you need a dogged determination to do so. Then and only then will you be able to achieve your goals. Reach for the stars and don’t settle for anything less.

Take a look at Larry Williams. Here’s what his Wikipedia page states:

“Williams won the 1987 World Cup Championship of Futures Trading from the Robbins Trading Company, where he turned $10,000 to over $1,100,000 (11,300%) in a 12-month competition with real money.”

That’s 11,300% per year!!! If he can do it, so can you. If 2% a month does not seem like a satisfactory return then you know someone else out there has made much more than that and therefore it is not out of the realm of possibilities for you to aim higher.

Was Larry Williams an anomaly? Perhaps. But 10 years later his daughter achieved 1,000% in the same competition. I’ve pasted below a partial list of winners. Most of them made well over 100% per year.

Believe that this is possible for you and work hard and smart to achieve your goals. Look to make small but continuous improvements. This adds up over time. Remove psychological barriers by starting off with a tiny account. Gain confidence in your ability with evidence you have collected over time and then scale up as high as you want to go. Think of your time learning as being in a self-taught Ivy League college. Once you graduate you will make mucho dinero. In the meantime be patient and persistent and you will be rewarded.

Wishing you all the best in your trading journey!

“Whether you think you can, or you think you can’t–you’re right.”

  • Henry Ford

World Cup Championship of Futures Trading
Top Overall Performance - All Divisions
2008: Andrea Unger 672%
2007: Michael Cook 250%
2006: Kevin Davey 107%
2005: Ed Twardus 278%
2004: Kurt Sakaeda 929%
2003: Int’l. Capital Mngt. 88%
2002: John Holsinger 608%
2001: David Cash 53%
2000: Kurt Sakaeda 595%
1999: Chuck Hughes 315%
1998: Jason Park 99%
1997: Michelle Williams 1,000%
1996: Reinhart Rentsch 95%
1995: Dennis Minogue 219%
1994: Frank Suler 85%
1993: Richard Hedreen 173%
1992: Mike Lundgren 212%
1991: Thomas Kobara 200%
1990: Mike Lundgren 244%
1989: Mike Lundgren 176%
1988: David Kline 148%
1987: Larry Williams 11,376%
1986: Henry Thayer 231%
1985: Ralph Casazzone 1,283%
1984: Ralph Casazzone 264%

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Just exiting on a reverse entry signal may not be an optimal way of exiting trades. This approach is typical of MA crossover systems that most people agree are not even profitable at all in the long run.

You are right that exit strategies are of prime importance, but there are other approaches which can be more profitable over time than just waiting until the method throws up a reverse signal.

Otherwise, good points. I could say that it is basically only stating the obvious, but, unfortunately, stating (and repeating) the obvious is rather necessary in many cases! :smiley::+1:

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Thanks for your comments Manxx. My intention with this post was to convey to newbies that one should not fear taking on trading. That it can be done safely and with minimal risk if one concentrates on the process alone while in learning mode. Most new traders (myself included) come to the table with great trepidation and fear. These can be easily mitigated as I’ve outlined. I wanted to provide a possible path forward. I had to discover the path after much trial and error.

MA crossovers are known not to work, however, if you qualify that by saying that one should only take trades at MA crossovers in the direction of the greater trend then that works very well indeed.

As mentioned, I have a lot to learn and I’d be very interested to know about the other exit approaches you mentioned. If you would please list some of them I would appreciate that very much.

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Sorry, but I would have to qualify your qualification there! Any MA crossover method requires the same thing to succeed, i.e. a sufficiently large move between the entry and the exit crossovers in order to leave a slice in the middle as the profit. Naturally, by definition alone, MA crossovers will always work when there is a long enough trend.

But, unfortunately, we never know at the start how long a trend will end up being until it has occured. So at the entry crossover you have to enter the trade regardless of not knowing whether that trend will continue or not - and since markets only trend about 20% of the time then the same crossover system will often give back some, or all, or even more profits from a large trend during the interim ranging periods.

Regarding exit strategies, there are many specific tools for these but they can be perhaps classified into at least five different categories of tools, and I’m sure others can add a few more:

  1. a fixed number of pips per trade, depending on the TF being used, combined with a stoploss.

  2. a variable number of pips based on a mathematical formula built on prior data, e.g. Pivot levels

  3. a trailing indicator that stops the trade on a pre-defined pullback or manually adjusted level, e.g. trailing stops, previous high/lows, etc

  4. a prediction of a likely ultimate high/low e.g. S/R levels, Fib ratios, etc

  5. a stop-and-reverse strategy such as you mention in your OP

Some people may opt for a combination of these, such as closing a half position at a fixed interval and then the other half with a trailing stop. All of them work best in some markets and worse in others! :slight_smile:

Maybe others will have some more thoughts here since exiting is a very underdeveloped, but hugely important topic! :smiley:

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If you’re looking at the greater trend then you’re looking at a course grain chart. Then, executing on a finer grain chart will yield stellar results. Typically, your analysis chart is course grained and your execution chart is fine grained.

So, for example, if you observe a down trend on say the 1h chart and if you take shorts on the 15m chart when the fast MA cross below the slow MA then you have an extremely high probability of success.

Could the trend on the 1h change before you anticipate it to? Sure. And in that case you may make less profit or suffer a loss. But that is true of any trade that you take. It is a matter of probabilities.

I ride trends all the time in the manner explained above and I have an over 95% success rate doing so. :slight_smile: This is one of my tried and true bread and butter strategies that is simple and easy to execute and very predictable.

I don’t use MAs however since I’m a pure price action technical trader and as such I don’t typically use indicators. But I’m sure that my entries will correspond closely with an MA crossover.

Perhaps, if I find time, I’ll write up my trend following strategy using MAs in the free strategy section if it has not already been written up by someone.

Thanks for those. My comments below are not intended to be argumentative. I’m honestly just trying to gain more knowledge from experienced traders. Hopefully, I have not misunderstood anything. If so, please do correct me.

#1, #2, #3 are too arbitrary. I look for more precise exits so as to not leave too much on the table. That was the whole point in suggesting that some other system other than a fixed risk-reward system be used.

#4 suits a price action trader and he/she should have been able to determine that in advance through analysis and therefore conforms to what I said in my OP.

#5 I did not suggest a reversal strategy, only an exit strategy based on a hypothetical reversal.

Scaling in and out is a more advanced topic so I won’t address that in this thread.

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Not true at all. Sure, sometimes it might have a slightly better chance of success, but on a 1H/15m TF there is actual trend, just short movements up and down - and this is very often Precisely where MA crossovers do NOT work consistently!!!

And since you say you do not even use MA crossovers then you already know it does not work with a high probability of success!!

Maybe you should do that. It would be more tangible for others to work with than these general textbook “truths”.

They are categories of types of exits, not specific strategies. You asked for more details and I just offered you some alternative approaches that people use. They are not ranked or recommended - just groupings.

But then as usual, the Noob Knows Best.

I’ll leave you to it.

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I highlight the elephant in the room.

Furthermore: Larry Williams made those gains by trading purely technical trading systems of his own design (as did his daughter). Fundamental Analysis, Quantative Analysis,and Technical Analysis and the like did not factor into the equation(s) ever. In addition: Larry Williams’ risk management techniques and position sizes were a major factor in those gains.

Now you don’t know me. And I really like your initial post. But I think that you and anybody else is fooling themselves into thinking that any of that is possible trading retail spot FOREX (and needless to say I’m an Equities and Commodities trader and a profitable one, daily, at that).

So I commend you on your initial post. And I’d even go so far as to thank you for it. But just bear the above in mind is all.

But and so as to not totally rain on your parade:

Pretty consistent and substantial gains are indeed possible (caveat mentioned above aside). For instance: the likes of John F. Carter have no problem in turning a 10K account into a 50K account in a matter of months. So decent gains are possible. And no need to settle for a pittance nor think that it cannot be done. But again: these guys trade Futures (and mainly the @ES i.e. S&P Futures). This being said: there is no reason for those that cannot afford to open a Futures trading account to not trade CFDs that track the underlying Futures market.

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@anon46773462 Take a look at the AUD/USD pair. On 7/22 on the 1h it became clear that it was trending down. It is also confirmed on the 15m. I’ve pasted a screen shot of the 15m with samples of short opportunities. Several more short opportunities exist further down too which I have not marked up.

I did one better than mere MA xover. To make it simpler for inexperienced traders, I add an 11 period Weighted MA and an RSI indicator. When the RSI goes above 80 and then comes back down below 80 you place your short order. For additional confirmation make sure you have 2 closes below the WMA. Short at the close of the bar when you get this signal.

Now, for the exit, price action analysis suggests that you take profit at or before 0.6861. I would close the trade at 0.6865. Or you can choose to trail your stop and see what price does after 0.6861.

If the trade works out you have about 180 PIPs of profit. If you were going short at the first short point indicated then you would already be in profit.

EDIT: On the chart, it should say RSI “Overbought” not oversold.

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A very fresh trading chart but I am missing only support/resistant level on this chart!

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@dpaterso Thanks for your comments.

I have never traded anything other than FX. I would love to branch out to other markets, especially index funds and ETFS but I don’t know anything about them.

The reason I chose to start with FX is because it allows me to trade with a very small account and I can trade in either direction without requiring a huge capital outlay.

When I’m ready to look at other markets may I rely on your assistance to help me get started?

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Have you changed your rsi settings? Because I dont get an overbought on my charts.

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@Rickster99 I forget that the settings that I use on indicators are not available on all platforms. I smooth out the RSI by using a WMA 7 period as input rather than the “close” value. Unless you are using Multicharts this is probably not something that your platform allows you to do.

I placed a simple RSI using the “close” as input but it was too erratic and if I increased the period over 4 then it never got to the 80 mark. And fiddling with the values to give me what I want did not seem like the right thing to do.
Too much curve fitting is no good.

So, let me show you how you can place your entry orders using pure price action, without any indicators. Indicators lag in any case and you will get in at better prices without using them. I’ve pasted a screen shot below outlining the process. It’s really simple.

Basically, once we determine that a downtrend has formed or is highly probable to continue, we look for price to go above a previous high and then place our sell limit order 1 pip below a previous low. If a new higher low is formed we moved our order to 1 pip below that and so on, until we get filled. Order 1 and 2 are both depicted on the chart. Just follow the sequence numbers. Let me know if you have any questions.

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Gold, Manxx. Thanks again!

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Following along, excellent discussion.

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Are you a recent noob to posting in forums or trading, or both? Thanks for sharing!

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Recent noob in trading. I’ve been trading for just over 2 years and the more I learn the more I realize that I have so much more to learn. My goal is to become a pip perfect trader.

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Our trade has concluded. We got 180 virtual PIPs out of it. Yay! :slight_smile:

New traders following this thread should take away the following:

  1. How to spot a price action setup for a developing trend
  2. How to enter the market using price action
  3. Use price action analysis to exit (this will take time to learn)

If you were to exit at 2x or 3x even, you would leave too much on the table. Let’s say that your stop was at 20 pips or even 30 pips. You would exit with 90 pips at 3x when you could have had twice that number. If you’re unsure about where price will reach then scale out of the position but do this using price action analysis too.

So, get away from using arbitrary methods of exiting. If you trail your stops then make sure that you set your stops based on the chart used to analyze the trade (in our example, the 1H). Don’t set your trailing stops based on the execution chart (the 15m). If you do then chances are higher that you will get stopped out. Placing stops is a different topic and I have not covered that at any length here.

It was not my intension, with this post, to walk you through how to trade a trend as it was unfolding but as it turns out that’s exactly what I’ve ended up doing, so please take note and practice this method on your demo account before you go live with it. Lose those lagging indicators. Gain some confidence with a pure price chart. This single method will help your account a lot.

You can do it! Believe it! Good luck and Happy Trading all!

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With pleasure. Anytime when you’re ready.

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Thank you kind sir! Most appreciated!

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Thanks a lot for this piece. Can you pls explain how does price action tell you to exit at 0.6861. I don’t see it on the chart pls