Trend Following All Markets With Unlimited Upside And Limited Dowside

Beginner Questions
1

Hey everyone, my name is Rayner and have been a long time patron on babypips. I used to go by the monika ‘fartist’ but created another account here to start things off on a clean slate.

I’ve started trading since 2010 and had my share of ups and downs. Started toying with indicators (Bollinger was the first!) to candlestick patterns, harmonic patterns, you name it and I probably tried it.

And none of them seem to work for me, till I came across trend following which made me a profitable trader.

My trading philosophy is trading with the trend with limited downside and unlimited upside. It is similar approach used by top trend following hedge funds like Dunn Capital, Chesapeake Capital and Man AHL etc.

If you like more information on how institutions trade with the trend successfully, I recommend reading “Trend following” by by Michael W Covel
“The complete turtle trader” by Michael W Covel
“Following the trend” by Andreas Clenow

[U]But wait, why am I here?[/U]

I’m here because trend following works for me and I hope it can shed some light to those who are interested to learn how to trade with the trend. Also it is a way of giving back to the Babypips community which helped me grow as a trader.

[U]Who’s this thread for?[/U]
If you’re an action junkie who wants to scalp or day trade the markets, then this thread is not meant for you.
If you currently hold a day job, have an hour to spare each day and want to make money consistently, then this approach could be suited for you.

Moving on…

2

Trend following is one of the oldest approach to trading the markets. It has been adopted by famous speculators from the likes of Jesse Livermore(1920s), Richard Donchian(1960s) and Richard Dennis(1980s).

Now in modern day finance it’s still used by the biggest hedge funds in the world like Man AHL, Dunn Capital and Chesapeake Capital. And some of these funds have 20 year track record averaging 20% a year!

So what do trend followers do that makes them so profitable?

[B]Zero Prediction[/B]

Trend followers do not know when there will be a trend and will not try to predict one, we simply follow prices. We remain long as price goes up and short as price comes down.With that said, we never short at the highs or long at the low because we simply do not know where is the turning point, we don’t predict remember?

[B]Low Winning %[/B]

Trend followers typically win about 30% of the time. Yes we lose more than half the time. The reason being we are willing to let our profits run as much as possible, at the expense of a lower winning ratio. Once we catch a trend, it will easily pay for our small losses and provide a good return.

[B]No Profit Targets[/B]

No profit targets?! Yes. Because trend followers ride the trend till it ends. By having profit targets we are limiting what the markets give us. It makes sense to limit your losses but to limit your profit sounds foolish, why would we want that? In a sense trend following is similar to going long a call option. We have limited downside but unlimited upside.

However by having no profit targets it doesn’t mean we have no exit strategy. We will trail out stops accordingly and let the market eventually take us out. The market decides when we get out of the trade, not us.

[B]Trade All Markets[/B]

At any point in time, trend followers do not know which markets will start to trend. This is why we trade all markets to increase the probability of capturing a trend be it in the indices, bonds, agriculture, energy, currencies etc. We trade them all.

If we limit ourselves to only a handful of markets, we will not be able to exploit the trends in the rest of the markets. And what if the markets we selected are not trending? A double whammy for us. This is why we trade all markets to reduce the possibility of missing a trend.

[B]Buy High and Sell Low[/B]

You read it right, buy high and sell low. Trend followers buy markets which are rising and sell markets which are falling. In anticipation that the trend will continue once in motion.

Even if an instrument has doubled over the last 3 months, trend followers will still look to long. Thus breakout strategy is something that trend followers execute most of the time. What’s high can go higher and what’s low can go lower.

[B]Conclusion[/B]

I hope I have shed some light what trend following is all about. By now you would realize that trend following is vastly different from most trading strategies out there, and contradict most school of thought.

This should come as no surprise as 95% of traders fail to make money consistently over time. In order to be the 5%, you have to think different from the rest.

3

I am a trend follower myself and have a couple of strategies that are doing quite well too. I look forward to exchanging ideas with you about ways to follow the trend, manage risk and view the market.

4

Hi Philip,

Glad to have you on board, I have some material that I would like to get posted out. We can have a great discussion as we go along.

Rayner

5

How much money do you need for this ? With the kind of diversification they use, investing in over 30 markets, I think it’s out of reach for most retailers.

6

The interesting thing about trading is that no 2 human beings will trade exactly the same way. We are made up of different psychological make up, beliefs, risk tolerance etc.

I can share the same system with 1000 people and probably no one will trade identically to one another.

Thus I don’t believe in sharing a specific system, but rather to share the core principles of what makes a system profitable.

In this thread, my aim is to share with you the core principles of trend following and guide you to developing your own trend following system.

Moving on…

7

That’s a good question Burger, but if you have access to CFDs that covers most futures market it is definitely not out of reach as it allows you to trade a fraction of the futures market size.

There are brokers out there that offers it, like Oanda, plus500, IGmarkets etc. I’m not recommending them but just a suggestion for you to research on.

Rayner

8

Before we take this further, there are few questions we need to define.

  1. How do you define a trend?
    Often we hear traders talk about trading with the trend, but how do we know when a trend is a trend? Is there something objective that can help us define it?

  2. How do you enter a trade?
    Would you want to trade breakouts or wait for a retracement?

  3. How do you exit a trade?
    A plan for exit when it goes against you and a plan for exit when it goes in your favour.

  4. Trade management
    Will you take partial profits? Will you ride the entire lot? Will you scale in and out?
    There’s pros and cons for each of them and it will depend on the trader’s psychology.

  5. Position sizing?
    How much are you willing to lose each trade? Would you be able to withstand consecutive losses in a row?

  6. Markets traded?
    How many different types of markets will you trade?

If you can answer each of these questions then you have a robust trend following system.
Moving on…

9

I do have detailed answers to all these questions. However I feel I can improve point 3 and 4. Hopefully we can talk in more details about those two points further on.

10

Yes Philip, that’s something I would like to discuss and get traders to develop trading own trend following trading system

Rayner

11

You can find answers to all your questions in BabyPips School. :wink:

12

《----Drank the trend following kool-aid years ago. Never looked back. It is my life.

Who else here is a trend following trader?

Anyone can trade trends in forex with a minimum deposit with a dealer. Just start with fewer pairs.

13

Defining a Trend

It’s a common to see a trend in one time frame and going the opposite direction in another time frame. And that get many new traders confused thinking what the heck is going on?

This ‘problem’ can be solved by looking at multiple time frames to understand the big picture.

But then again, how do we define a higher time frame? Here’s how i quantify them and aid in my understanding of the different time frames.

I have 3 time frames always and they are the long term, medium term and short term.

  1. Long term - Here i look at what price is doing on the grand scheme of things. Basically the strongest trend of them all and likely to stay in motion for the longest period of time. I typically look at weekly or monthly chart for this.

  2. Medium term - Here is where i see what price is doing on the medium term. Because price could be trending higher on the longer term chart BUT doing a retracement right now. Thus this is where the medium term chart comes into play. It helps me gauge when price will resume it’s long term trend. I typically look at daily or weekly chart for this.

  3. Short term - Here is where I look for my entries to hop onto the trend. Only if the long and medium term trend are pointing in the same direction, then i will look for trades here. If both long & medium are not in sync, i wait for better setups.

For starters, you can consider use a moving average to help filter the trend.
E.g. if price is trading above X MA on the weekly then the trend is up.
If price is trading above X MA on daily then the trend is also up. (Similar to the 3 ducks approach)

Now that we have both pointing in the same direction, we only look for longs on our entry time frame.

Factor of 4 to 6

I tend to use a factor 4 to 6 when differentiating my long, medium and short term trend.

If my long term trend is a monthly chart, my medium term trend will be on a daily chart. 4 weeks in a month, so a factor of 4 here.
If my medium term trend is on a daily chart, my short term trend will be on a 4 hour chart. We have 6 blocks of 4 hours session in a day, so a factor of 6 here.

Now basically you can play with those factors and identify your very own long, medium and short term charts. But keep it within the factor of 4 to 6 would be ideal.

Let me know if you have any questions, I’ll be glad to answer :slight_smile:

Rayner

14

Most new traders are caught up with solely this aspect of trading, but you would soon realize that it’s simply a part of the trading equation.

There are a few ways to enter a trade and here i share with you what are their pros and cons of each of them.

  1. Candlestick patterns - Alot of traders would be familiar with this due to their popularity. The main candlestick patterns being the “Pinbar” and “Engulfing”.

Pros:
They’re easy to spot and give you a predefined stoploss which is usually at the tail end of the candles
Gives good risk reward as the stoploss is usually tight

Cons:
Often price may not give you such signals and still trade in your intended direction, thus missing out the move
The location of the Stoploss may not be logical. E.g. you may be cutting into the support area which you should be intending to long
Possibility of a huge candlestick pattern (due to news release) which leads to a large stoploss

  1. Breakouts - Turtle traders traded the 55 day breakout with many hedge funds using similar entry approach

Pros:
They never miss a move in the market because you’re always participating in every breakout
Mechanical in their entries with no subjectivity

Cons:
Psychologically harder to implement

  1. Retracements - The buying “value” approach. Usually trading from Support Resistance or MAs.

Pros:
Good chance of having your positions in the wicks of the candles
Easy to know when you’re wrong as stoploss is usually a fixed ATR away from your zone

Cons:
Always against short term momentum
May miss out a move if price doesn’t come to your zones and eventually trade into your intended direction

These are some of the ways you can enter the markets and as you can see there’s nothing “magical” about these entries.

The Magic only begins when you get the entire equation right and not just part of it.

Moving on i will discuss about exits and some of the approach you can consider.

15

“It never was my thinking that made the big money for me. It always was my sitting” — Jesse Livermore

Entries are not going to earn you a single dime or cause your downfall but your exits will.

The importance of exits are usually neglected and left to the last or entirely forgotten which should not be the case.

So let’s get started…

Here are some of the exits one could consider in your trend trading approach.

  1. A fixed ATR

This exit basically takes you out of a trade when price retrace X ATR against you. This is a mechanical approach to manage your stops and no guess work involved. Most commonly used by hedge funds or funds that trade mechanically.

  1. Moving Average - Price trades against

This exit would take you out of a trade when price trades against your MA. You will be riding the trend as long as price is above your MA. When price trades below, you exit. Vice Versa for shorts

  1. Moving Average - Crossover

This exit would take you out of a trade when your Fast MA crosses the Slow MA. You will be riding the trend as long as the Fast MA is above your Slow MA.

  1. Price Action

This exit is more discretionary by nature as you will be watching the ebbs and flow of the market. If you are long you will stay in the trade as long as price makes higher lows. If the previous low is broken, then you exit the trade.

Lastly another point to consider is whether you exit your trade only if price closed against you or when it simply trades a particular level.

These are some of the exiting strategy you could consider for your trading plan.

Feel free to ask me any questions if any.

Rayner

16

After you’re in a trade, what next?

Well you could be one of those trader who adopt a ‘set and forget’ approach and leave the market to either hit your SL or TP.

Or be more pro active because markets are never static. The ebb and flow is moving everyday and chances are there are ways to manage your trade more efficiently. Here are some key aspects of trade management I would like to discuss.

  1. Trailing Stops

If you’re a trend trader, chances are you need to trail your stops at one point or another. You’re not a typical swing trader with a fix risk reward.
Rather your profits is unlimited and you should manage your stops in such a way you give it enough breathing room to move. You’re not going to be too tight with your stops here because the one thing you hate to see is watch a trade go in your direction after stopping you out.

So get comfortable giving back a large chunk of profits, it’s the ‘cost’ of being a trend trader. Because you have to be confident at the back of your mind, that 1 trade is going to pay for all the small losses.

E.g. If you’re trailing with higher lows in an uptrend, don’t simply place your stops 1 pip below the low. Give it 2 ATR at least to provide some buffer because chances are price could form into a range before breaking out higher.

  1. Scaling out

Scaling out means taking off a portion of your position or ‘realizing profits’.

Scaling out is very much dependent on your individual psychology.

Also scaling out helps smooth out your equity curve over time. You’d have some winners to replace your losers resulting in both cancelling out one another. And the only thing left are your monstrous wins.

So how do you scale out? For starters, you could consider taking off 50% of your position at a swing area.
E.g. You went long on a pullback and take half off at the swing high. Again, there’s no hard and fast rules here. Perhaps you could choose to take off 30% instead and let the other 70% run. Or perhaps you believe price would face resistance at 127 extension instead and you choose to take some off at that level.

  1. Scaling in

Scaling in means adding on to positions you are already in.

So there are trades that you take and boom you are very in the money. A short while later, you get a setup that allows you to trade in the same direction.
Do you scale in? How much do you risk? Will your stoploss on the different position be managed together or as separate trades?

I’m sure you can see now that scaling in has a lot to consider and it should all be planned for. Furthermore, it is very possible to both scale in & out of trades. Woah!

Scaling in is an entire topic that could be discuss and we can touch on that if there’s enough interest on it.

But for now i believe i have left a lot on your plate to digest and please take time to understand the material presented.

Next up… I will talk about position sizing in trend trading to fix the last piece of the equation.

17

Walk me through one of your live trades. I am in 14 pairs right now, chances are we have some of the same trades going on.

18

This is what interests me most.

19

I like long term trading that’s for sure more like investing. I started a thread called ema crossover working well. It was a great little system. I’ve been trading price action for a while now though. I’ve recently started to trade my old style system as it worked very well. I’m going to start to blend price action and my other method together. I believe in catching those long trends as the profits are massive and if you scale in and out theyd be even better. Are you going to be posting setups on here?

20

Hi Acid,

I would be glad to post setups here, but allow me to finish up presenting the material.

Then we can go about discussing setups, that alright?

Rayner