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Trend Following by TrendFollower

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some good points in this post. to summarize... 

  • make sure you have a trading / investment plan
  • use discipline and stick to it
  • losses can happen, but you just need to make sure the profit on your winners outweighs the losses on the losers
  • aim to capture the middle of the trend
  • your losses can assist in coming up with sound risk management principles 
  • be ruthless and trade both long and short depending on price movements
  • have entry and exit rules which you stick to
  • maybe use trailing stops

correct me if I'm wrong! 

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@PandaFace, commented on my recent Carbon Emissions post. I think if you look back at my commodity posts then you will see the likes of Lumber, Orange Juice and Cotton. If they are showing a stronger trend than say Oil, Gold, Corn, etc. then that is what one should consider trading ahead of the more well known 'sexy' commodities. 

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@TrendFollower firstly thanks for the post.

What asset classes do you find trend better than others? My thought is that stocks are often impacted by earnings and fed decisions etc where as commodities may be a little less volatile as they should be based on global demand/global economy performance?

Any thoughts on this?

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@AbDXB1345, from my experience I have found commodities as one of the better asset classes to trade from a trend following perspective. When I first started on such a journey many years ago it was commodities that I started trading using trend following principles. Initially, I  was not always successful. In fact, I made some big losses on Natural Gas whilst trying to grapple with the concept of taking emotions out of any trades. My success came when I started trading oil, corn, cocoa, etc and beginning to make profits by holding on to my positions until the trend changed. I began being more patient and holding on to my winners rather than exiting too quickly and at the same time I began exiting my losing positions much quicker thus reducing the amount of losses. Yes, there will be plenty of losses using such a strategy. The key is to ensure that your winners make you more profits than the losses with your losers.

I find mid cap, small cap and nano cap companies also trend rather well. With nano cap companies only a small amount of them so it is a case of identifying them and those trends can be more shorter than the small cap and mid cap companies.

Crypto's are also very interesting as long as you are willing to hold your positions longer to catch those long term trends. These are just my thoughts but you may identify trends that I have not even considered or come across.

I would not worry too much about the asset class. There are some funds which show great trends. Have a look at robotics, automation and artificial intelligence funds. You will see beautiful looking charts based on price action. The returns on some of these funds even after any fund management fees are still better than say large cap shares listed on the FTSE 100 over a 12 month period. As they say 'Elephants Don't Gallop'. I tend to stay away from large cap stocks when it comes to trend following. The only time I bought FTSE 100 companies was after the credit crunch when bank shares tanked and I could not resist though I used more value investing principles at this point. 

Trend following is not the only answer and one must keep an open mind. It does not guarantee success but it can assist in improving the probability of success. 

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Trend following explained at a very simple level is to buy an asset when the price goes up and to sell an asset when its price goes down. This enables the trader / investor to make money when markets are trending upwards and downwards.

One important factor to appreciate is that different trend followers can adopt different techniques to identify trends using differing time periods. As trends can be short term, medium term and long term it enables you to trade using trend following principles in all of these time frames.

I once read that trading using trend following principles is 'trading with a positive edge'. I am sure some of you will have differing opinions on this but it is an interesting statement nevertheless. 

When you establish trending markets there is something important to understand which relates behavioural biases that can lead to trends to be over exaggerated. Some of you will be familiar with herding. This is when after the markets have trended you will get traders / investors jumping late into the party to make what they think is quick and easy money. This ends up making the trends last longer than perhaps they otherwise would have.

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Some of you who follow my posts will know that I mainly trade commodities and cryptos. I am getting asked a lot of questions about how do I know when to enter a trade. The answer is I don't so I have to make the most effective decision I can. Fundamental analysis is very important even in trading. However, when it comes to actually making a trading decision for someone who follows trend following principles then Technical Analysis comes to the fore.

I always look at a 'Information Basket' which I use to make decisions. 

Bollinger Bands can be very useful when looking at idenfying trends and any breakouts which would go into my 'Information Basket'. For those who do not know, Bollinger Bands, can be used to measure volatility in the markets. Volatility can be important when looking to trade trends, especially if they are short term to medium term trends. 

Relative Strength Index (RSI) can also be worth looking at as this will give you an idea on whether something is overbought or oversold. 

Moving Average Convergence Divergence (MACD) can be used to identify trends and spot trend reversals. It may be a good idea for those who are interested but not familiar with some of these to maybe use the internet to research them. I always think when one researches themselves with passion and enthusiasm then they are more likely to gain than someone simply just telling them.

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A few people have asked me why am I even looking at weird things like Carbon Emissions, etc. If one follows trend following principles then it does not matter what the asset is. If there is a trend then I am interested, full stop! It could be Oil, Corn, Bitcoin, a UK Small Cap, etc. It does not matter what it is. The key question is whether there is trend that could be traded to make profits either on the long side or short side. 

Those who do not short miss out on a big opportunity to try and make profits. As we all know markets go both up and down. Therefore one must be comfortable shorting. If you look at commodities in general and their price action over the past 12 months then there have been more shorting opportunities over that time period of 12 months than going long opportunities. 

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Right now Cryptos are trending upwards. They are volatile and high risk. However it does not matter what the asset class is. If there are potential trends emerging then one must consider trading them as well as monitoring and following the price behaviour.

It is important to establish how prices react to market sentiment and online media 'news'. From a trend following perspective it does not matter if your believe in cryptocurrencies or not. It does not even matter if you think Bitcoin is a fraud and going to zero. Right now if there is a trend to trade then one must simply consider it based solely on price action rather than own opinions.

It is long term investment decisions where one may use their own opinions to make decisions on whether to invest in cryptocurrencies for the long term or not.

From a trend following perspective:

  • Never fight the trend
  • Never trade against the trend
  • Try not to use personal opinions or emotions to make trading decisions
  • Try to use price action and volume as the main indicators when making trading decisions

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A very important factor that traders sometimes do not consider is 'Volume'

I look at volume especially when trading shares. Volume indicators will display the number of shares that have been traded during a particular time period. Conducting analysis on volume can be an important tool because it can reflect not just the opinions of traders out there but the real trading behaviour of traders in the market and can provide a second piece of information rather than just simply analysing price behaviour. 

A volume indicator can provide information to support a confirmation of a price trend and could be used to identify any trend reversals. Volume can give you an idea of the true strength behind the trend. However, just because the volume is high does not necessarily mean a stronger trend. 

There are two main indicator signals that one could use which are 'Convergence' and 'Divergence'. For those who are new to trading or are not sure what this means I will try and be explain it as simple as I can. Convergence is when the volume moves in the same direction as the price. Divergence is when the volume moves in the opposite direction of the price.

When an uptrend is supported by volume convergence then it can show that there is greater interest / enthusiasm for the share which could lead to more buying and and thus possibly higher prices. There is no guarantee of this though. I use it when trying to increase the odds in my favour for a share trade. I do not trade shares that often but will when the right opportunity presents itself. 

 

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Just an addition to @TrendFollower's points on the importance of volume above, if you google 'anna coulling volume price analysis pdf' there is a free pdf version online of Anna Couling's 'A Complete Guide to Volume Price Analysis'.

 

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I totally agree that volume is very important but it can also be very confusing. Increasing volume with a trend that go up/down indicates good strength but sometimes that increasing volume is the volume that stops the move upward or downward. Uninformed traders rush in not to miss the move while the real informed traders are the ones selling/buying from them. Volume can therefor indicate the continuation or reversal of a move. One only know afterwards when it is too late. 

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I agree @FGJB, it is important not to get too hung up on a single factor but take the information in the context of your overall assessments.  A high volume move away from a congestion zone in the direction expected would support that breakout.  A low volume move might in the same direction might suggest a fake breakout (all too common these days).  Similarly if the breakout was in a direct you did not expect a high volume move would make you reconsider your overall assessment, whereas a low volume would most likely turn out to be a fakeout.  Context is king!

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I am getting a lot of messages from IG Community members asking for help, guidance and suggestions. I try and respond to as many as I can but I just simply at times to do not have the time. 

I thought it was a good moment to add to this thread. I cannot advise someone what to trade and nor would I want to as they could try and copy me and make a loss and then blame me. I am happy to share what assets and specific trades I am looking at or trading and why. It is then up to others what they do. 

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I my personal experience Commodities as an asset class is very good in identifying trends to trade.

In the past 12 months:

  • Oil has seen a downward trend followed by a recent upward trend
  • Natural Gas has seen a monumental upward trend followed by a quick and sharp downward trend
  • Carbon Emissions has seen a strong upward trend
  • Precious Metals have seen strong upward price movement especially Palladium and now Gold / Silver
  • Iron Ore has seen a recent 'rocket' surge
  • Orange Juice has seen a downward trend
  • Lumber (my personal favourite) has seen a strong upward, then strong downward and now followed by upward trend
  • Live Cattle has seen a strong upward trend

These are just some of the trends (above) from memory I have listed. I am sure there are many more. Focussing on and concentrating on a specific asset class can help obtain the necessary knowledge, experience and specialism in trading that market rather than focussing on many different assets. This is especially important for new and inexperienced traders. As more experience and success is gained then one can branch out and apply trend following into various different asset classes.

The key for trend following is to make profits on markets which are trending both upwards and downwards.

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On 30/08/2018 at 08:28, TrendFollower said:

@AbDXB1345, from my experience I have found commodities as one of the better asset classes to trade from a trend following perspective. When I first started on such a journey many years ago it was commodities that I started trading using trend following principles. Initially, I  was not always successful. In fact, I made some big losses on Natural Gas whilst trying to grapple with the concept of taking emotions out of any trades. My success came when I started trading oil, corn, cocoa, etc and beginning to make profits by holding on to my positions until the trend changed. I began being more patient and holding on to my winners rather than exiting too quickly and at the same time I began exiting my losing positions much quicker thus reducing the amount of losses. Yes, there will be plenty of losses using such a strategy. The key is to ensure that your winners make you more profits than the losses with your losers.

I find mid cap, small cap and nano cap companies also trend rather well. With nano cap companies only a small amount of them so it is a case of identifying them and those trends can be more shorter than the small cap and mid cap companies.

Crypto's are also very interesting as long as you are willing to hold your positions longer to catch those long term trends. These are just my thoughts but you may identify trends that I have not even considered or come across.

I would not worry too much about the asset class. There are some funds which show great trends. Have a look at robotics, automation and artificial intelligence funds. You will see beautiful looking charts based on price action. The returns on some of these funds even after any fund management fees are still better than say large cap shares listed on the FTSE 100 over a 12 month period. As they say 'Elephants Don't Gallop'. I tend to stay away from large cap stocks when it comes to trend following. The only time I bought FTSE 100 companies was after the credit crunch when bank shares tanked and I could not resist though I used more value investing principles at this point. 

Trend following is not the only answer and one must keep an open mind. It does not guarantee success but it can assist in improving the probability of success. 

Thanks. This is very useful info. What sort of annual returns do you aim  for with a trend following approach? Thanks.

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Thanks. This is very useful info. What sort of annual returns do you aim  for with a trend following approach? Thanks.

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@pkaz,

I do not have any aim for annual returns. I try and get the highest annual returns I can per annum after taking my losses and charges (costs) into account. 

I do make losses as that is the nature of 'trend following'. I could end up catching a false breakout or there may be a sharp and unexpected trend reversal's. These are variables which make 'trend following' difficult. It is not as easy as it sounds! If it was then all traders following 'trend following' would always be successful and wealthy. This is not the case. It requires a lot of hard work and discipline. The most effective and profitable trend followers will identify the right trends to trade. There are trends everywhere in all asset classes.

One must identify the most profitable trend to trade at the right time. It could be Lumber. It could be Gold. It maybe an FX pair or it could be a Cryptocurrency. 

I have given this example before but if you have 10 trades and 3 of them are profitable and 7 of them are not then it seems that you have a 30% win percentage and a 70% losing percentage. Now if your 30% winners are more profitable than the 70% losers then overall you have been profitable. If we reverse this example and 70% of your trades were profitable and 30% were losing trades. It is possible that your losses on the 30% losing trades were so big (as you did not cut your losses quickly) that they were bigger than the 70% winning trades as you exited too early and did not let your winners run. Or even that you did not identify the most strongest and profitable trends to trade.

Do not worry about targets for annual returns. Ensure you have a strategy that enables you to identify the trends to trade. 

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What sort of time scales are you using to look for trends? I have noticed that using a daily then there are a lot on an upwards trend yet when going down to say 5 min the trends are either harder to spot or are very short.

or is that the answer, if you are looking to go long choose the longer period or for day trading stick to the short time scales?

Also notes you would need massive funds to allow for big drops short term although in a long term uptrend.

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@Dantro,

My personal basis is to start with the daily and then compare it to the weekly and monthly. Only then do I look at lower timeframes and primarily 4 hour to 1 hour timeframes to establish if in sync with direction of trend. I only use lower timeframes for day trading or short term trades. When I am trend following then I am looking at the longer timeframes more as I am going to keep the position open until the trend changes. 

If there are any big drops and the trade has clearly gone against me then my stop loss should have triggered and executed an exit from the trade.

I always know my exit price before I enter the trade. This is a key part of my trading strategy. When I am in profit then I switch to a trialing stop so I know I cannot make a loss in that trade. 

I have no issues re entering that trade should trend confirmation take place. I am comfortable entering the trade as many times as I need to but at the same time I am happy to move on to the next trend should any trend confirmation not be established. I try not to trade against the trend.

 

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US Indices are showing a remarkably resilient trend in the face of 'so called experts' predicting doom and gloom. This may still happen but from a purely trading perspective the 'Trend is your Friend' is of paramount importance when applying trend following principles. 

The price action has been very positive and since the low of Christmas 2018 any long trade would have been very profitable over the past two months. Using leverage effectively would have increased profits over this two month period. Even after all the daily charges going 'long' on US indices over this two month period would have been an excellent trade.

Trend following needs to take personal views, personal bias, personal opinions and 'noise' out of the equation and trade based on current price action. There is no room for emotions! Looking too much into history and what happened historically can also be dangerous as it causes one to have an expectation that does not materialise. The market is not there to satisfy what some think should happen.

New trends can emerge and a new future can replace historical trends and if one does not follow the price action then one can miss out in the participation of some of the greatest trends.

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15 hours ago, TrendFollower said:

@Dantro & @Dantro,

May I ask what assets you are trading or looking to trade?

At present I’m mainly losing money on FX and commodities (Oil).

 

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@Dantro & @Dantro,

I would suggest you concentrate on just one specific asset first whether that be FX or Commodities. Within that concentrate on one FX pair or one commodity which has the strongest price action and trend. Use technical indicators to help you establish this.

For example if you look at the chart of Gold and Oil then Gold is the stronger trending commodity. Look at the charts for Live Cattle and Oil and Live Cattle is the stronger trending commodity. Look at the chart for Palladium and Oil and Palladium is the stronger trending commodity. So I am not sure how you are selecting your commodity trades but I would suggest selecting one specific commodity and trading with the trend rather than against it. 

 

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Reading some other posts from your good self I believe the just a few of the reasons I am failing at present include leaving the trend too early on a small down turn due to not leaving enough leverage for margin drops, reading too many so called experts on which way the market will go and come out too early, not setting losses at a realistic risk level or a combination of all!

i have picked up on few tips (palladium, live cattle), gone in at a lower level and will stick with these till I see the trend change.

thanks for all your advice @TrendFollower it is very much appreciated.

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@Dantro & @Dantro,

One of the key principles of trend following is letting your winners run. So not to take profits too early as otherwise you may miss the big profitable move of the trade and trend.

Stop loss management is all about effective risk management. It is about cutting your losses early so that they do not get too big but at the same time if the asset you are trading is extremely volatile then to ensure you do not get stopped out too early either. It is a difficult one. 

Try and ignore the so called experts (market noise) and especially the TV News, Newspapers and Online Media. Let the price action determine your trade.

I am not suggesting or tipping Palladium or Live Cattle though I trade both. I am highlighting the trend from a 'chartist perspective' in terms of strength and length compared to Oil which is what you are trading. 

I think an important factor for you is which trading strategy you wish to adopt? Do you want to be a swing trader? Do you want to be a momentum trader? Do you want to be a scalper? Do you want to be a trend follower? Do you want to be a contrarian trader? Do you want to be a day trader? 

You must have a trading plan, trading strategy and a trading system to have any chance of being profitable over a longer period of time. 

Failing to plan is simply a plan to fail.

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