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Trend Following by TrendFollower

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@JamesIG,

Thank you very much for your prompt response and I agree with your sentiments. Also arguing on the internet is not professional and it does not help either one of us. It affects both our credibility. There is no positive outcome. 

Thanks again, much appreciated.

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I just came across this which I found very interesting. 

Trend Following Strategies: Examining The Whipsaw

https://seekingalpha.com/article/4249240-trend-following-strategies-examining-whipsaw

This articles explains rather well the difficulties faced by trend followers:

Commentary: Is short the new long?

https://www.pionline.com/article/20190320/ONLINE/190329999/commentary-is-short-the-new-long

The following article offers a differing view and presents a more balanced view on trend following. 

One of Wall Street’s Most Popular Trading Strategies Is Now Failing

https://www.bloomberg.com/news/articles/2019-03-01/one-of-wall-street-s-most-popular-trading-strategies-is-now-failing

Please do bear in mind that the article above is referring to Trend Following Quants using automated systems. 

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thanks @ TrendFollower for all your helpful info about this subject. A lot of funds seem to be slowly allocating less funds to TF - like the well known Winton, as your link says.

Out of curiosity as you are a specialist in the TF field, what approximately (I don't need exact figures) have been your TF % annual returns after the costs of Spread-betting over say the last 5 years? Do you feel that these returns are better / worse than other strategies like buy & hold or even discretionary day trading, which I read you sometimes partake in. Thanks. 

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@OSCARDAX,

Trend Following tends to have its cycles of use when it comes to Hedge Funds and Institutional investors. No doubt in the future there will be an improved method of trend following which some of them may adopt. Right now it does not seem to be the go to strategy. One must remember they use automated trend following strategies where as we can add a human touch to the trading which machines cannot. 

I would not say I am a specialist in the Trend Following field. I merely follow Trend Following principles and tweak them to suit my personality and trading style. I am afraid I would not disclose my personal returns over five years on a forum. Also, I do not just use spread betting completely for my trend following strategy. Spread Betting is only a mere small element to my overall investment / trading portfolio. I am an investor first and that forms the majority of my portfolio. Trading is a very small part of it.

I do not know if my returns are better or worse than other strategies like buy and hold even discretionary day trading. If someone buys near the lows and sells near the highs then I can see this being a far more profitable strategy than Trend Following. However it is far more difficult to execute than Trend Following. It is also requires far more time, dedicated research and a higher level of fundamental and technical analysis to even have a chance of buying low and selling high. A lot of buy and hold investors do just that, buy and hold. They never sell or don't want to sell and therefore miss out on optimum times to sell to have maximised their profit from their capital investment. 

Trend Following as its flaws and one of them being that you will incur a greater number of losses due to false trend breakouts, quick, sharp and hard trend reversals and price not behaving according to indicators and conforming to technical analysis, etc. Trend Followers in general are likely to make more losing trades than winning trades. The key element is that the winning trades must make them a larger profit than the losses on their losing trades. 

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I am aware of all of the above but you will not disclose the 'lolly' will you - why not ?

So you make 5, 7.4, 15.2  or 29.8% I do not care. I want to know your returns per annum. Come on now. I will tell you mine : 12.3%. YOUR TURN. I mean you giving the figure is not gong to 'effect' you is it ? ! 

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@OSCARDAX,

First of all, I have no idea who you are. I could give you any made up figure, what does that mean? How can you confirm any accuracy or credibility of any figures I give? You cannot. The 12.3% figure you have given is totally meaningless as there is no way I can quantify that you make that per annum. Therefore it is utterly pointless. I do not wish to disclose that material not just to you but anyone here on the IG Community. That is my personal decision. I have never asked anyone what returns they make per annum as that is a personal question and personal information. 

Also your 12.3% returns are relating to which investment or trading strategy? Does it relate to trend following, scalping, swing trading, etc? Over how many years? Are you making 12.3% every year for the last twenty years or is that over the past one or two years?

Why do you want to know my returns per annum? I don't want to know your returns or anyone else returns on the IG Community. If it makes you feel better, my returns per annum are 0.1% per annum. That is the best answer you will get from me. Or better still my returns are (minus) -99.9% per annum.

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From a Trend Following perspective, Cryptocurrencies, are providing an excellent short term to possibly medium term trading opportunity. I mainly trade Commodities and Cryptocurrencies using such trading principles.

One must be able to adapt and trade based on price action alone. There will be many who think Cryptocurrencies like Bitcoin are junk and are going to fail and go down to zero. They may be right. I do not know at this stage. Psychologically they will not be able to trade Cryptocurrencies based on their bias and emotion. One must put fundamentals to one side when using Trend Following principles and trade purely based on price action. This will ensure that opportunities are not missed. They provide a platform for quick returns though one must not take their eye off the ball as they can come crashing down at any stage so risk management and effective stop losses is a must.

If Cryptocurrencies come crashing down then one must be confident enough to 'short' them based on the same Trend Following principles used to go 'long'. If indicators indicate a trend reversal and the price action is bearish and you think Cryptocurrencies are going make a new 'lower low' then one must be ready to go 'short'. Right now the only trade is 'long'. 

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I am getting messages asking me how I decide which trends to trade?

It takes a lot of time and price monitoring first and foremost.

Then one must apply indicators to establish if certain parameters and criteria are met for further consideration.

After this a look at the volume and strength of the trend along with momentum.

One could also have a look at the fundamental outlook and see if the technical narrative is in line with the fundamental narrative. There are many occasions when you will see a distinct disconnect between the two. Ideally and this is especially true for Commodities when the fundamental narrative connects with the technical narrative then it can produce some of the best and strongest trends to trade both on the long and short side.

Even after all of the above the trade can fail so there simply is not a magic answer. One is merely trying to put the odds and probability of a successful trade in their favour that is all. I do use my feelings and gut instincts based on my experience too. I am not always right of course but there are many factors, information and data one can use to make an informed trading decision. I do not have the perfect answer to this question. I ask myself are the odds and probability in my favour if I place this trade on the  'long' or 'short' side. If the answer is no then I simply do not trade it. Even when the answer has been yes I have failed such as trying to short the S&P 500 though I was initially successful then we witnessed a massive rally and it is back to where it was before the huge drop. 

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A few of you have messaged me stating you find it difficult to go long when something is continually rising in price. I accept this is difficult and not easy. I have never suggested following 'Trend Following' principles is easy. In fact it tends to go against our normal emotions and psychology. As humans we want to buy something that is reducing in price. Here a trend follower would look too short. When something is rising in price a trend follower would look to go long. If it was easy then all traders try to trend follow would be profitable and this is simply not the case. There is huge 'Execution Risk'

There can be a lot of technical analysis overkill. I tend to keep my trading strategy and system very simple. I do not believe in trying to complicate things as if I cannot understand a trading strategy or system then how can I use it to trade? One must understand their own trading strategy and system and how it works. This is fundamental and where a lot of traders go wrong. They do lots of reading and listen to lots of experts but then simply cannot apply if affectively due to:

  • lack of knowledge
  • lack of experience
  • lack of understanding
  • lack of capital

When I am looking to identify trends I never think the prices are going up so I must not go long or the prices have been declining for a while now so I must not go short. Of course ideally one would want to identify the breakouts and trends as early as possible. There is really only one way of doing this.

That is to follow the price action and treat it like a religion. Follow the price action of the assets you are interested in and apply time, effort, passion, enthusiasm and dedication, which should lead you to identify potential trends to trade at an earlier stage. I always tell myself the price is never to high to go long and never to low to go short. Those that do find themselves missing some of the best, strongest and profitable trading opportunities both on the long and short side.

I remember reading somewhere and I cannot remember where that:

Follow the price action and you will be on the path of least resistance

Another important thing that I always do is not to set profit targets. I want the highest profits I can achieve and do not want to exit early and make less profit on a strong long term trend than I would have if I had merely stayed and potentially added to my position. I want to stay in the trend for as long as possible. Once I am in a winning position then I set a 'trailing stop' and will exit when this is executed meaning I will always exit a winning position with a profit. 

I always try to trade the trend rather than any specific asset. So it could be Cryptocurrencies, Commodities, Bonds, Indices, etc. It does not matter what the asset is. It is the trend that is important and that is what I am trying to trade. This will also help me increase my odds of finding more stronger trends to trade rather than concentrating on just say indices or FX. 

Trend Following is not easy and not every trade will be profitable. In fact it is possible that more trades using this methodology make losses. There are many different ways to trade and many trading styles and principles one could follow. Trend Following suits my personality but if it does not suit your personality then you must find another trading style that does. One must not force a trading style that one does not appreciate, understand or can apply.

Trend Following is not for everyone but I think subconsciously everyone is some form of trend follower as you want to make money when the price moves in the direction of your trade and this in its simplicity is trend following whether one accepts it or not. It may be short term trend following but many will be applying some of the principles of trend following without realising. 

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One of the issues that is brought to my attention is when traders set themselves profit targets. Now I am not suggesting there is anything wrong with this. However, from a 'trend following' perspective there is no place for profit targets in my personal opinion.

The reason why I think this is because profit targets are merely predictions. They are nothing more. None of us have a crystal ball. So when one sets a profit target then from a 'trend following' perspective one is likely to miss some of the gains from the trends by exiting too early. This is one of the cardinal sins when trend following. One must let their winners run and not exit too early.

Now as far as I am concerned there is no trading style or trading methodology that can predict the direction the market is going to take in the future. As we cannot tell the future, we simply cannot map out the direction of the trend and the direction the price is going to move going forwards. Even if we had some canny ability to map out the price direction going forwards or even map out the direction of the trend in the future then the asset in question is not obliged to move the way we think it will / should move. 

One of the most important concepts in trading regardless of trading style is understanding 'Odds and Probability' and how one can increase the odds / probability in their favour when placing a trade. 

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I am getting a lot of messages asking which markets I think are trending. Well all three of the major US indices are trending upwards - Dow Jones, S&P and Nasdaq. Bitcoin is trending upwards. Lumber and Orange Juice are trending downwards. I could go on and on. This is where you must conduct your own research, dedicate some serious time to identify trends and put some effort in. There is no easy or magic solution to making profits. 

When assets within specific markets are trending strongly then they can provide the best returns whether that be going 'Long' or going 'Short'. 

Rather than respond to many messages I have received recently, I find it easier to post a generic message here which saves me a lot of time as I know that many of you are following this and my other threads.

Now people are asking me should they go 'Long' on the S&P 500. Well if it is making new higher highs then why not? Yes it would be risky but at least you would be trading with the trend rather than against it. You could patiently wait for the next drop before entering. The S&P could continue just to go higher and higher making new highs, though I do not know this will in fact happen.

In terms of Bitcoin all I would say to those who have messaged me is to look at the price action, look at the trend, look back at this thread and some of the trend following principles included and use it amongst other things such as your own research, trading plan, own thinking, etc. to make an informed trading decision.

What I will not do is tell anyone on the IG Community what to trade and when. I do not have a crystal ball and nor can I tell the future. Yes, I will have ideas, gut feelings / instincts, thoughts but I will not advise anyone else what to trade, how to trade and when to trade. I will merely share potential trading ideas or my own trades and others will have to make up their own minds. 

Trend Following as been around for many years. It has died many times. It has re-emerged many times. I have no doubt that it will die and reappear again going forwards. Trading with the trend rather than against it makes sense to me. It is as simple as we want to make it. 

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Trend Following has died many times in the past. It will continue dying according to media reports in the future. Some of the comments made by the media are based on statistical analysis. Now statistical analysis is brilliant at telling us about the past but it is less useful in telling us about the future. 

The reason why in my personal opinion trend following is not dead is because it relies on trending markets and they existed many hundred of years ago and exist now and will probably exist going forwards. Trend following also relies on volatility and this still exists and will exist going forwards. The beauty of trend following is that is can adapt and change with market conditions. 

I keep on stating this but no amount of charts, lines and arrows can help to predict the future. None of us can predict the future. If we could then trading would be so much easier. If we could merely look at past price action, historical charts and then make future price predictions then wouldn't trading and making money be easy?

One important thing to remember is the prices can only move:

  • Upwards
  • Downwards
  • Sideways

Once a trader understands how the price action fits in with above then it can make a trading decision as to whether to go 'Long', 'Short' or simply do nothing (especially in sideways markets). 

A key concept of Trend Following is not trying to predict the future price (as we cannot) but to react to price action and trends that manifest by our trading decisions. 

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One of the key components of 'Trend Following' is to identify trends using price action. Historically this was used more for Commodities and the Futures market. However, there is no reason (that I am aware of) why this cannot be used for all different asset classes.

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I personally started using 'Trend Following' principles trading Commodities. One may ask why Commodities? Commodities show nice clear trends. They are volatile which offer large price movements and the potential for higher returns based on risk/reward.

One can apply:

  • Demand / Supply principles to Commodities to better understand the extent of any price movement
  • Leverage as it is available to help maximise any returns
  • News and see how it is affecting the price behaviour 
  • Technical indicators like Volume, Moving Averages, RSI, Momentum, etc

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Take this article with a 'pinch of salt' but it does make some good points. 

Don’t sell in May this year – the market is telling you it’s time to be long

https://moneyweek.com/506020/dont-sell-in-may-this-year-the-market-says-be-long/

I have never been an advocate of this selling in May and buying in September theory. If you just trade the trends based on price action then quite frankly and bluntly it does not matter what month it is!

 

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Overview on Trend Following by TrendFollower:

I wanted to take this opportunity discuss my thoughts on following 'Trend Following' principles. Trend Following is primarily trading based on price action and where an asset is trending either upwards or downwards. I personally want to try and identify the strongest trending assets and trade with the trend thus increasing the odds and probability in my favour for a successful and profitable trade. So which asset is trending strongly at the moment? In my personal opinion it is Cryptocurrencies. It is the newest asset class but it is also one of the strongest trending asset classes right now.

When I started following 'Trend Following' principles, I started using them trading Commodities. From my personal experience, I find that Commodities can provide strong trends both upwards and downwards thus allowing you to go 'Long' and 'Short'. This enables you to trade an asset within Commodities when it is either trending upwards or downwards. So it does not matter if you are in a bull market or bear market for Commodities. I have also found in my time trading Commodities that there is always a trading opportunity present and the stronger trends tend to last a longer time. Trend Following allows you to trade when markets are going up and when they are going down. So it does not matter which direction the markets are trading in. You are going to trade in that same direction whether it be 'Long' or 'Short'. 

Another important factor that people tend to forget for 'Trend Following' is that its aim to to cut losses quickly. Therefore drawdowns are going to be kept to a minimum on any trade. This can be an important factor when markets are bearish when compared to other strategies. Also you may well be 'Shorting' in a bearish market to increase your returns as these moves seem to be quick and sharp. 

I am not suggesting that 'Trend Following' is the best strategy or the most effective strategy when it comes to maximising profits. It is a trading style and philosophy that suits my personality and mindset. It is also suits the time I have available to trade.

Some of the key points I want to highlight in successful and profitable Trend Following are:

  • Identify the strongest trending assets (it does not matter which asset class it is)
  • The stronger the trend, the greater the profit potential
  • Always trade with the trend and never against the trend (increases odds and probability in your favour)
  • Try and get in as early as possible once trend has been identified
  • Do not exit until there is a clear trend reversal
  • Do not worry about losses and learn to accept and embrace them. They are part of trading. Of course the aim is to minimise losses and to keep them to a minimum so exit early when trade goes against you.

There will be other trading strategies that others adopt which may be more successful and profitable than Trend Following. I do not doubt that but that is for others to highlight and bring to the attention of the IG Community. I am merely discussing the trading style and philosophy I have adopted. 

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Bitcoin et all are the strongest trending assets since the start of 2019. Those who did not trade due to 'ego', 'personal views', 'emotions', etc. have missed the greatest profit potential so far in this year. A trader must put emotion and personal views to one side when making effective and efficient trading decisions. I try to make decisions based on price action and try and use leverage to maximise the profit performance. 

You can have an intelligent trader (1) with lots of experience who can conduct the most complex of technical analysis. They are also consistently profitable but they do not trade the strongest trending assets whether that be Cryptocurrencies or Commodities. Commodities have some of the best shorting opportunities and they can trend very strongly on the short side too. These traders can be outperformed by a trader (2) who is less intelligent, has less experience, who conducts only basic or very simple technical analysis but allocates their capital to the strongest trending assets (trading with the trend rather than against it). They let the trend and price action do the work for them and can achieve higher profits and returns in the year. So it is possible that trader (2) can end up with a bigger profit than trader (1).

The above is just a mere example for illustration purposes to make a point on the significance of trading the strongest trending assets and how important it can be to a traders portfolio performance. It is the traders portfolio performance and the amount of profit it is generating and achieving which is the key metric to judge a traders success on. Not how complex their technical analysis is or how intelligent or how wealthy they are. I know both wealthy and intelligence people who could not trade to save their lives. The traders that use more complex technical analysis or conduct overkill technical analysis may not achieve greater profits than a trader who does not. 

When one begins to understand the 'Odds and Probability' and trading with the trend and not against it along with trading the strongest trending assets then it will become clear that these factors are key to enhancing the performance in a positive way to a traders portfolio. 

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On 11/05/2019 at 14:45, TrendFollower said:

Take this article with a 'pinch of salt' but it does make some good points. 

Don’t sell in May this year – the market is telling you it’s time to be long

https://moneyweek.com/506020/dont-sell-in-may-this-year-the-market-says-be-long/

I have never been an advocate of this selling in May and buying in September theory. If you just trade the trends based on price action then quite frankly and bluntly it does not matter what month it is!

 

Dominic Frisby - don't trust him as far as you can throw him.  Hahahahaha

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One could argue that you do the opposite of what MoneyWeek and the likes of Dominic Frisby recommends / suggests or / tips!

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When you look at a traders overall portfolio performance for the year if they have profits from the likes of Litecoin, Bitcoin Cash, Bitcoin et all then it really supercharges the performance and results of the portfolio. I have said this before but for me it is all about trading the strongest trending assets whatever that may be. It is about allocating my capital to those trends (efficient allocation of capital for profit maximisation).

You could have a trader who has mastered technical analysis, who is extremely knowledgeable about markets and trading. However, they do not trade the strongest trending assets. Their performance can be blown to pieces by someone who adopts a simple strategy and yes will be wrong on many occasions with their trades but can outperform  them. I would expect everyone to conduct a risk assessment of trading Cryptocurrencies as they are in my personal opinion one of the riskiest if not the riskiest assets to trade. One must look at the RISK / REWARD for trading Cryptocurrencies and make an assessment based on their own risk tolerance and risk management strategies. I would expect competent traders to apply strict risk management rules on trading Cryptocurrencies and then it really is no different to trading a volatile Commodity or a volatile and high risk nano, micro or small cap share. 

When one applies strict trading rules and applies trading discipline then it really does not matter if Cryptocurrencies are junk, garbage or rubbish! Just trade the price action and trends based on strict rules and apply discipline and risk management and enjoy the ride. 

What makes a great trader is trading the strongest and best opportunities to make profits. When a trader cannot identify such opportunities and take advantage or refuses to based on ego, emotion, personal views and opinions then even if they have mastered technical analysis and have an immense amount of trading knowledge they just simply cannot be great traders. The most important figure is your profit / loss figure for your trading portfolio at the end of the financial year. With great risk comes reward. One must learn to embrace the risk, manage the risk, control the risk and then try and enjoy the reward. 

To offer a balanced view on my own comments above, one must ensure they preserve their trading capital at all costs. It is not about trading the riskiest assets incorrectly and then losing your capital. Capital preservation is one of the most crucial parts to trading successfully. If you lose your capital then you lose, it is as simple as that. Which is why traders should really have a strong risk management strategy which they apply to their trading. I cannot stress the importance of this. 

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It is no secret that right now in my personal opinion the 'Strongest Trending Assets' (STA) are Cryptocurrencies and the likes of Bitcoin et al. 

Remember that the trend is your friend until the bend.

The key is that the bend has to be a significant one which shifts the direction of the longer term trend. Short bends can be mistaken for corrections which are not necessarily trend reversals. 

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One of the key skills when following 'Trend Following' principles is actually identifying the trends to trade in the first place.

The asset class is not important. It is the asset which is trending the strongest which will give you the best chance of a successful trade. It is about identifying the strongest trending assets and then trading them.

What happens is that traders get stuck in trading just certain FX pairs or only specific commodities or indices. This means they face a higher probability in missing some of the biggest trends and strongest trends from a trading perspective. The stronger the trend, the higher probability of greater profit potential. Risk Management is crucial and if one is applying technical analysis then it can assist when considering a trade which is slightly high risk. 

It could be a specific set of commodities that are trending strongly. If one is only willing to say trade Gold or Oil then they may miss bigger opportunities in say Corn, Coffee, Cocoa, etc. If one is only willing to trade Bitcoin then they may miss a bigger opportunity in Litecoin. If one is only willing to trade US Treasuries they they may miss an opportunity in the German Bund. If one is only willing to trade the FX Pair US/GBP then they may miss a bigger opportunity in say another FX pair which is trending stronger. 

When someone applies 'Trend Following' principles, following of the strongest and biggest trends is more important than following only specific assets. This is an important factor when it comes to 'Trading Portfolio Profit Performance'. Now I accept the risk is greater when trading certain assets which are slightly more illiquid or volatile. However, if robust risk management is applied and trading rules are followed with discipline in terms of entry/exit execution, one can learn to control and manage the risk to their advantage.

Of course there are no guarantees in trend following and losses will occur following such a trading style but losses will occur using any trading style as no trading style exists where losses simply cannot occur. This is where identifying trends early and entering trades as early as possible makes a big difference. I tend to 'anticipate' and make 'assumptions' which I allow the price action to test if I am right or wrong. If I am wrong then my stop loss will allow me to exit early and quickly. If I am right then my trialing stop will allow me to exit with a profit. 

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    • I am kicking myself for not trading the breakout of gold now My thinking now is that I'd like to see 1346 established as support and go long from there.  It's pretty obvious (now, with benefit of hindsight) that the May selloff on the indices was a relatively shallow retracement of an uptrend, so gold will probably be stuck in the doldrums again for some time.
    • 👍🏾Yes let us see and it will certainly be interesting as from a trading perspective It could start to get rather tricky with all the potential uncertainty floating around. This may benefit the price of Gold and Bonds but if the Fed lowers interest rates then you could be right.
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