Trend trading: 4 things you should remember


Let’s talk about trends! I’m going to share my experience and to speak about the common mistakes of beginner traders. I hope this read will provide you with a deeper understanding of what a trend is, how to work with it and what market entry and exit points are.

Just like many of those who are at an early stage of their trading career, I’d been reading various books devoted to the technical analysis of price charts. I read quite a lot of those, and only a few skipped a concept of “trend trading”. “Follow the trend”, “the trend is your friend”, “buy if the price grows and sell if it falls” – these were the most popular tips by the authors of those books. However, when trying to use the tips, I inevitably got disappointed (blink twice if you’ve recognized yourself): as soon as I entered the market on the trend, I got kicked out by Stop Loss. But once I got kicked out by Stop Loss, the trend immediately re-established itself in the direction I had bet on. Knowledge is good but is not enough for profitable trading. Practice, practice and practice – that will improve your trading skills. Start practising and developing your trading strategy right after reading the article.

What’s the matter then? Are all these trading and investment best-sellers really useless when learning how to trade at Forex? Such was my next conclusion, but in reality, all was much deeper and more complicated.

The article covers the following subjects:

Trend and flat

It is often said that a flat is a “killer” of deposits of the traders who trade on trend. This is indeed the case. If your trading system demonstrates good results in case of strong trend in the market, it will not work well in case of flat market.

Experienced traders know that after sideways movement the price often moves in trend. Long-term flat can be used as a signal of the following up long-term trend, although this is not always true.

A period of the flat – is a period of uncertainty, when it is difficult to make any forecasts. When the price moves in a narrow range with no directional movement, it is almost impossible to determine future movement direction.

Trend is a directional movement of the price. There is a bullish trend – in the financial markets it is the rise in the asset price. This trend is associated with a bull that tosses up a prey on the horns. There is also a bearish trend when the price of the asset goes down. This trend is associated with a bear that paws its prey from top down to the bottom. A trader shall always consider current trend and trade in accordance with it. In case of the uptrend a trader shall buy, in case of the downward a trader shall sell.

Trend is a trader’s friend.

Sideways movement is also called a flat. I determine flat as a sideways trend. It helps to understand reversal patterns at Forex. Price movement can not only change from uptrend to downtrend, it can also go sideways as well! This is the fact, which is often overlooked by many traders, who lose money. Flat at Forex is a time period when the strength of the bulls and the bears are equal, which makes the formation of a certain trend difficult; therefore the price has no definite trend, moving in a certain price range.

Flat is a trap for inexperienced traders.

1. Start of the route and traders’ main mistake

This article deals with a Forex trader’s typical mistake called “market opinion”.

When a beginner Forex trader reads that “a probability of trend continuation is higher that a probability of trend change”, he/she gets an oversimplified idea of what is going on because of lack of experience. He/she starts thinking that if the trend is upward, the price will continue rising, and if the trend is downward, the price will continue falling. The word “probability” is slightly ignored at the beginning, and then it’s just completely forgotten as useless.

Why?

Just because we are all looking for the wrong thing: we’re looking for a final answer, the truth, or, as they say, the Grail of the Forex market that will tell us what the price will do next. We feel that we don’t know much about the subject and therefore we strive for more certainty. A typical thought that appears after a series of loss-making trades sounds like “If I enter on the trend and get kicked out by Stop Loss, I don’t define the trend correctly”. Familiar thought, isn’t it? It is, of course. At this very moment, 2 erroneous assumptions are inevitable made: “I cannot earn because I don’t understand where the price will be moving to” and, consequently, “I have to learn to understand where it will be moving to”.

At first, we are all looking for the wrong thing: we’re looking for a final answer, the truth, or, as they say, the Grail of the Forex market that will tell us what the price will do next.

2. What a trader really wants

Some choose to create an indicator strategy (like me some time ago) and to adjust indicator parameters so that they predict the price behaviour based on the trade history. When I succeeded in that, trading became more comfortable, but only until the first series of loss-making trades. Some can get interested in Forex market analyses or even may want to have training in the foreign exchange market with various traders in the hope of learning to define price directions. Unfortunately, nothing of the things above can offer what a beginner trader is looking for: there’s no only correct approach to analysis, or magic price pattern after which the price will certainly move in the right direction, or a perfect and faultless trading strategy with 100% profit probability and 9999% profitability per day. Just because it’s impossible.

Now let’s go more concrete. To predict a price direction, it’s necessary to get to know neither more nor less than all trading decisions by all market participants for the nearest future. Without even mentioning force majeure events, such as hurricanes, earthquakes or unexpected political decisions (for instance, recent Brexit) that can immediately change the intentions of recently surveyed traders. However, the Forex market if too big and there are too many participants, while sudden political decisions or natural calamities are simply unpredictable.

To predict a price direction, it’s necessary to get to know neither more nor less than all trading decisions by all market participants for the nearest future.

So, one may wonder how indicators, price charts, analytical forecasts or anything else can help a trader define where the price will go. How can we suppose that indicators, price charts, or forecasts can inform us about ALL traders’ intentions for the nearest instant (remembering about hurricanes and earthquakes)? What can prevent market participants from considering GBP/USD 1.50000 to be too high for the currency of the country that decided to leave the EU in June 2016? An upward trend?

This article contains more questions than answers. The faster a trader asks them, the shorter his/her development way to a Forex professional will be.

It is important to master a kind of a “trading intuition” as well. You develop it after a long time trading, as you become more experienced. You start to understand the chart, see the patterns that will work and the patterns that won’t. Nothing extraordinary – you’ve seen so many of them you recognize them instantly. Just use the signals and analytics to translate the price chart into “buy/sell” chart and earn in the Forex market.

3. Identity of patterns or why the price went the wrong way

So, what shall we be looking for then and how to earn from Forex? I was extremely enraged when other traders said things like “no one knows where the price will move” and, what’s more, “one does not need to know where the price will move in order to earn”. I thought they were kidding and didn’t want to share their secrets 🙂 But I got it in due course.

The most important knowledge any beginner trader has to accept as soon as possible is that the price can move anywhere at any moment: any trend can change in a second, any strong support/resistance level can be broken, any market conditions can change in a moment. However, this doesn’t mean we must always fear to get kicked out of a trade 😉 We simply have to accept the fact there is no and there cannot be any certainty about price directions. The same price pattern can bring about an upward movement today and a downward movement tomorrow.

But in the first case, it’s “Wow, Head and Shoulders, I’m a super trader”, and in the second case  – “damn! Head and Shoulders…I must have defined it wrong”. And our mind refuses to think the pattern is the same and different price directions are normal.

We simply have to accept the fact there is no and there cannot be any certainty about price directions. The same price pattern can bring about an upward movement today and a downward movement tomorrow.

If we understand there is no and there cannot be any certainty about price directions, the next important conclusion suggests itself: there’s no only correct true approach, “ultimate trading strategy”, or “ideal method” because any of those will give rise to loss-making trades under market conditions of uncertainty (which is normal as well).

4. Entry point vs. Exit point

There was one more phrase disturbing me: “An entry point does not have any importance, an exit point does”. What?? Sounds crazy, right?

Because we instantly imagine a situation where a trader buys in any place, without understanding why and what for, and waits till his/her position grows profitable (if it does). What does it have to do with profitable trading? Nothing, of course. The phrase means something absolutely different.

The unimportance of an entry point and the importance of an exit point mean that both me and you, reading this article, can enter opposite trades at the same price and make a profit.  How? We can trade on different time-frames:

The unimportance of an entry point and the importance of an exit point mean that both me and you can enter opposite trades at the same price and make a profit just because we trade on different time-frames.

A green triangle marks the place where we entered a trade: for example, you bought and I sold. You bought because you entered from the demand zone, from where the price had grown earlier.  If the price drops below this zone, the zone will no longer be active and your scenario won’t prove to be correct. That’s why your Stop Loss is placed exactly under this zone (lower red line). Your objective is the opposite zone (marked with a blue line above), and we see that your position has been closed with a profit and the trade correlation is 3/1. Congratulations!

I sold because I had seen a false level breakout: the price attempted to rise further but didn’t manage to. Fearing that an upward retracement may not happen, I sold with a market order (right to you). At the same time, I understand that “something” pushed the price back to the level and my Stop Loss will be right beyond the point from which the price reversed down (the red line above). If the price moves higher, I’ll understand that market conditions have changed. At the same time, my profit goal is near the source of the global upward movement (lower blue line) – right from where the price was pushed upwards, and exactly there increased demand may occur again. As we can see, my position is closed with a profit too and the correlation is almost the same: 3/1.

So, which of us is right in this case at the moment of entering a trade? =) Did the price move up or down?

If we summarize the messages set out in this article, we’ll understand that a desire to know where the price will go will only lead us to deadlock as we will always lack some information for the above reasons. We only need to know how acceptable current trade conditions are in terms of risk and potential according to our vision of the market, which, alas, needs to be developed independently.

Methods of determining market conditions

I use three methods of determining conditions of the market: indicator, graphic and session. Let’s take a closer look at them:

Indicator method of determining market conditions

A trader can use various volume indicators, such as: ADX, Pulse flat, Parabolic SAR, Bollinger Bands, Trend Filter, Xaser FV and others.

Volume indicators can be used to confirm a flat. Usually, during the period of flat they show lower values than at other times. However, if the trading channel has a wide range, a trader shall use some other tools to determine market conditions.

Example:

The figure above shows daily chart of the currency pair EUR/USD with the indicator iVAR or “the Index of variations”, which looks like a zigzag in below the chart. This line is around the levelof 0.5, which is has been set in the default.

The indicator is based on the theory of financial time series, which represent fractal time functions.

The use of the indicator in trade:

  • If an indicator is less than 0.5, it shows a trend. Low value shows that a trend is getting weak or that a correction can begin;   
  • If an indicator is more than 0.5, it shows a flat. Very high value shows the development of the trend;    
  • If an indicator is around 0.5, it shows uncertainty and it is better not to trade in this case.

Indicator iVAR can be used as an additional signal confirming signals of the other indicators. It shows the formation of a trend, but it does not show movement direction.

Note!

While using indicators to determine market conditions a trader shall always remember the following rules:

  • Different tools have different advantages and disadvantages depending on market conditions and volatility. Therefore, a trader shall learn all the information about the indicators and test them many times.
  • Consider your indicators only as an additional tool of the market analysis.
  • Pay close attention to the original indicators. Especially to those, principle of work of which is not clear.

Graphic method of determining a flat or a trend

One of the effective method of determining a flat is to find their upper and lower lines then allocate there the support and resistance levels. Support and resistance levels is the most important factor of prices. If disbalance between sales and buys is appear on this levels, the price movement will be stopped or reversed. After the price breaks any of the flat borders, just start to search for trading opportunities.

The alternative possibility is the trading inside the channel, but you need to consider that the distance from the upper to the lower lines should be sufficiently large.

Example:

The figure above shows a five- minute chart of the currency pair EUR/USD.

  1. In the area 1 the price is moving sideways
  2. Upper limit of the flat
  3. Lower limit of the flat
  4. The price breaks the flat upward
  5. The price is in trend

A lot depends on the timeframe selected by a trader.

The range of the price channel can be either of 10 points or 100 points, depending on the timeframe. A trader should clearly understand that the flat on a daily or hourly timeframe does not exclude ascending or descending trend on say, five-minute chart.

Note!

Sometimes, a shape of a candlestick helps to determine market conditions. If the body of a candlestick is unusually short, while the shade is very long, it tells that neither buyers nor sellers have an advantage in the market.

Session method of determining a flat

This method is especially useful for intraday trading. Forex trading is available 24 hours a day, but in reality, trading day consists of several trading sessions.

This method is based on consideration of each trading session separately; as a rule, after a period of price consolidation, the price starts to move strongly to either direction.

If during one trading session the price was in flat, during the next session the price may move in trend, and Vice versa.

Example:

The figure above shows the main trading sessions and the five-minute chart of the currency pair EUR/USD.

Meaning of the symbols on the chart:

Ao – opening of the Asian session;

Lo – opening of the London session;

Ny – opening of New York and American sessions;

Lc – closure of the London and European sessions.

In the area 1, which is the Asian trading session, the price moves in a narrow channel (about 30 points); with the opening of London session (area 2) the price moves in a strong trend.

Note!

  • A trader shall always take into account important economic news, as the news often is the main driver of strong trend movement.
  • Activity of different trading instruments varies during trading sessions. For example, volatility of the major currency pairs increases significantly after the opening of the London and American markets.

Remember

A trader shall learn well all information about the indicators he/she is going to use for determining market conditions; indicators are used only as additional tools of market analysis.

If you use a graphical method of determining a flat, do not forget to look higher timeframes. Different time intervals may show different market conditions.

Take into account important macro-economic statistics and economic news, as they affect movement direction.

Try not to trade in flat, as it can be very risky.

I am really excited about 2 articles on the same theme from my forex blog colleges and i wish to recommend it for reading for everyone:

1.  “Trend is your friend….but for how long?” – read here (recommended for the beginners).

2. “Where will the trend end? TD Trend Factor and TD Propulsion”   – read here (recommended for the professionals)

What is trend following strategy?

The trend following strategy is a strategy of opening positions in the direction of the market price movement according to the trend indicator signal.

This means we enter the market with a buy position when the indicator gives a signal of a price increasing. We sell when we get a signal of the price falling. If the asset (the selected trading instrument, for example, a currency pair, stock, oil, etc.) grows, you assume that a growing trend has formed, and open a buy position expecting further growth. If the price of the trading instrument has begun to decline, you open a sell position, because you assume a downtrend has formed. Trend trader always acts in accordance with the trend movement.

Today we will learn about the classic trend following forex trading strategy for novice traders and learn how to use the Trend Filter indicator. This trend following indicator shows the beginning of the trend and flats with efficiency of at least 80% and a target profit of at least 20 points. In this review you will find the indicator template and detailed instructions for how to use it. You will also learn how to start making money with this indicator.

Would you like to learn about a simple and profitable strategy based on a single indicator, which will allow you to open at least 80% of profitable positions under strict conditions?

In this review you will:

  • Learn what the Trend Filter indicator is and how to add it to MT4.
  • Read about the Trend Filter trading strategy details: initial conditions, signals for entry, rules for exiting the market, risk management rules.
  • Look at the analysis of individual situations and learn about the peculiarities of the trend following strategy.

You are always welcome to ask your questions in the comments!

Trend Filter Indicator

Trend Filter is a trend and flat indicator that gives fairly accurate and easily interpreted signals. You can use the MA as a confirmation tool.

Trend Filter is not one of the classic trend following indicator MT4, so it’s not used by everyone yet and its signals are quite effective. It is possible that in the future its formula will need to be corrected. The essence of the strategy is to follow the classic trading rule – follow the trend and squeeze what you can out of it. To do this, you need to find its beginning and have time to open a position before the trend reverses.

The Trend Filter is quite good at this and is the best trend following indicator. The indicator opens in a separate window below the chart. It shows the presence of a trend or flat on the market, and in the presence of a trending price movement, it shows its direction.

The main parameters of this trend following strategy:

  • Time Frame – H4. I recommend learning to work with the indicator on this interval, and then experimenting with H1 or D1. The indicator will lag on time frames below H1.
  • Currency pair – EURUSD.
  • Additional indicator – MA (simple or exponential Moving Average). This indicator is auxiliary and is needed only for certain situations, which will be discussed below.

The target profit level is 20-30 points. This is the intraday trend following strategy, but there may be situations when trades are opened at the crossing of trading days, so do not forget about swaps.

Please note: the indicated figures of the target profit and stop orders are for 4-digit quotes!

1. Installing the Trend Filter Indicator and setting up the trend following strategy

The Trend Filter indicator is not pre-installed in MT4. So you need to follow these steps:

Restart MT4. In MT4, click “File / New Chart” and select the EURUSD currency pair. Additionally, display the data window in the chart (Data Window on the toolbar; this is not required but it can come in handy), choose the candlestick chart and the H4 timeframe.

The chart is ready, all you need to do now is add the indicators and set them up. Click “Insert / Indicators / Custom” and find the indicator you downloaded earlier.

Trend Filter settings:

By default, the Nbars parameter is at 89, this value needs to be changed to 59. You can leave the remaining parameters, including information in other tabs, as they are. If you wish, you can change the colors of the indicator lines. Then we add moving averages (MA) to the chart in the same way. The indicator period is 16, the offset is 2.

2. Entry and exit conditions. Peculiarities of using Trend Filter

Conditions for opening a long position:

  • Trend Filter has been below the level of -0.9 for at least 7-10 candles, but no more than three weeks. The indicator drew a long horizontal red line at the bottom of the range.
  • Trend Filter came out of the -0.9 range by drawing a yellow line.

After the indicator has changed color, open a position at the next candle. Set the stop loss behind the nearest local low or at a distance of 30 points.

Exit the market:

  • Upon reaching a profit of 20-30 points, we close 50% of the position, set the stop loss at the breakeven level (opening level).
  • The remaining 50% is insured with a trailing stop of 30 points. To set the trailing stop, right-click on the order and select “30 points” in the “Trailing stop” submenu.

Conditions for opening a short position:

  • Trend Filter has been above 0.9 for at least 7-10 candles, but no more than three weeks. The indicator drew a long horizontal green line at the top of the range.
  • Trend Filter came out of the 0.9 range by drawing a yellow line.

The entry and exit  conditions are similar: on the next candle after the indicator changes color, we open a position with a target level of 20-30 points and a stop order at a distance of 30 points. Exit 50% of the position upon reaching the target, another 50% – by trailing stop.

Peculiarities of opening positions that you should pay attention to:

1. Do not open positions one candle before and one candle after the release of important news (3 stars on the economic calendar).

2. Ignore signals (or enter with caution and constantly monitor the price movement) if it is middle or end of Friday. First, you lose on a triple swap, second, there’s a risk of getting into the gap, third, most of the positions are closed before the weekend – volumes and trend strength are falling.

3. The larger the angle of the Trend Filter at the moment of exit from the border zones (ideally as close as possible to 90°), the stronger the signal. If the angle is less than 45°, ignore the signal.

4. The signal is considered weak (carries great risks) if the signal candle, on which the color of the indicator changes, has a large body relative to the previous ones.

5. The moving average can help when in doubt: it should be completely under the candles for a long position, and above the candles for a short one. Doubtful situations include the following:

  • Trend Filter angle of 45° or less.
  • Trend Filter shows a clear signal (angle close to 90°), but the signal candle or candle after it goes in the opposite direction.

6. Close the trade ahead of schedule in the following cases:

  • Trend Filter reached the opposite end of the range and changed color from yellow to red / green, although a profit of 20-30 points has not yet been achieved.
  • The price went in the opposite direction and drew a relatively large candle.
  • For more than 3 candles in a row there is no directional movement.

This trend following trading strategy needs not only periodic, but also constant monitoring. With an interval of H4, you should look at the formation of a candle at least twice (once every 2 hours). As practice shows, Trend Filter catches the beginning of a strong trend perfectly.

Therefore, to get a profit target of 20-30 points, it is enough to wait for 1-3 candles. If after 3 candles it is clear that there is no trend, it is better to close the position manually ahead of schedule, without waiting for the stop order to be triggered. Or insure it with a trailing stop at the breakeven level.

Important! A trailing stop is a type of stop loss that follows the price at a predetermined distance, but does not move when it reverses. It is placed in the terminal itself, while trades are opened on the broker’s server. In the event of Internet connection failure, the trailing stop will not work and the trade might empty your entire deposit. If unsure of your connection stability,  use the VPS server rental service.

3. Practical examples of applying the trend trading strategy with the Trend Filter indicator

Example 1

We see three trading signals in this chart: Trend Filter moved horizontally and the edges of the range (green and red colors) for more than 7 candles, then changed color and went up / down at an angle close to 90°. Blue vertical lines show the moment of the color change and a signal candle, after which a position should be opened. Red arrows show candles for opening positions (the first and third – sell, the second – buy).

None of the signals turned out to be false and no position would have been closed by stop order., You can see how much you could earn on them on the right scale or if you open this chart in MT4. If you do not use a trailing stop and monitor each candle, you could make a profit of at least 150 points from all three trades.

Pay attention to the frequency of signals in this trading system. For example, in this case, only 3-4 signals appeared in 1 month. This can be considered a disadvantage, but on the other hand, you will agree it is better to have several strategies with rare signals but low risk and stable profit, than a strategy with many risky signals and a minimum of profit.

Example 2

Unfortunately, there are no ideal strategies and indicators, and this is no exception. All the conditions must be met: Trend Filter stayed at the bottom for a long time, changed color at a steep angle, confirming MA is below the price, indicator color changed after the weekend, there are no large candles.

Despite all conditions being exactly right, the uptrend was very weak. The trade did not close by stop order, but do not forget about the swaps that will eat up the potential profit. In this case, the position would have to be closed when the indicator reaches the opposite edge of the range (blue arrow). And even in this case, it would not be closed at a loss (see information in the Data Window).

Example 3

Do not enter in conditions like these. First, the indicator did not reach the edge of the range. Second, it was not horizontal for at least 7 candles. And third, the behavior of the MA is very ambiguous – on the signal candlestick it only crosses the price instead of being above it.

Example 4

This is an example of a high risk trade that I would recommend avoiding. Remember the peculiarity No. 3: the indicator line should be horizontal and come out at an angle as close as possible to 90°.

In this case, the indicator began an arc-like movement without changing color, which is evidence of ambiguity. These are fluctuations between the bulls and bears that have not yet made a decision (blue rectangle). If you look closely at the chart, you could still open a position (yellow arrow). You could even earn within 50 points in 4 hours, as we see by the Open/Close price (red rectangle). But the question is: are you willing to take that risk? This is what a demo account is for. Use it to perfect your strategy, learn to see signals and evaluate risks.

Example 5

Here we see two interesting situations that are worth considering.

5.1. The first signal gives absolutely accurate signals to enter the market (red arrow). But if you closed it ahead of schedule based on the Trend Filter signal, which changed color after a couple of candles, you would not have received all the profit you could. This shows there can be no templates on Forex. Remember the basic rules, but also improvise and observe the chart at least 2-3 times per candle.

5.2. The second and third situations are examples of the peculiarity No. 4. Here the signal candle has an abnormal body. I do not recommend entering in such situations!

4. Brief summary

To start making money with the Trend Filter trend strategy, you need to:

  • Open a demo account with LiteFinance and install the MT4 platform. You can download it from the broker’s website.
  • Download the LiteFinance indicator template. I have given the link above.
  • Carefully study the input parameters, the entry/exit conditions, and the peculiarities of the indicator.
  • Look at the screenshots in this review to better understand the essence of the indicator.
  • Launch the indicator on a demo account and try to get a performance of at least 80% by opening a several dozen positions.

If you have questions, please ask them in the comments!

In conclusion, I would like to add that LiteFinance is one of the best brokers for training and perfecting your skills in this strategy:

  • Opening a demo account takes two minutes, and you can test the strategy at one. No verification is needed.
  • In LiteFinance MT4, you can open any number of demo accounts within a minute by setting up the required starting deposit and leverage.This is convenient for stress testing the risk management system. You will also learn when and how to open trades, what is leverage, etc.
  • Order processing speed is among the best on the market – execution up to 100 ms.

Conclusion

Trend Filter is a pretty rare and effective trend following indicator for intraday and also for medium-term strategies. The above example with EUR/USD and the H4 timeframe is just one of the options. It can be tested on other liquid instruments. If you have experience with Trend Filter, tell us about it in the comments! Also I would like to recommend you to check out the trend trading strategy based on Thomas DeMark indicator. It is an original and also noteworthy trend following trading strategy that combines Thomas DeMark’s technical tools.


P.S. Did you like my article? Share it in social networks: it will be the best “thank you” 🙂

Ask me questions and comment below. I’ll be glad to answer your questions and give necessary explanations.

Useful links:

  • I recommend trying to trade with a reliable broker here. The system allows you to trade by yourself or copy successful traders from all across the globe.
  • Use my promo-code BLOG for getting deposit bonus 50% on LiteFinance platform. Just enter this code in the appropriate field while depositing your trading account.
  • Telegram chat for traders: https://t.me/liteforexengchat. We are sharing the signals and trading experience
  • Telegram channel with high-quality analytics, Forex reviews, training articles, and other useful things for traders https://t.me/liteforex

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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