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Trend Following by TrendFollower

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The one point I would like to make is that different conditions sometimes require different strategies.

Primarily I apply trend following principles. There are times when I will apply scalping, swing trading and even day trade. It depends on the market conditions.

My main weapon is trend following for trading but one must have an armoury of weapons at their disposable and trend following is merely one of the weapons that can be used. 

My investing philosophy is totally different and I apply a 'Pound Cost Averaging' strategy with lump sum investments on major corrections and drops when there are recessions, financial crisis or market turmoil. 

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This is a beautiful trend :)

Ticker : BFAM

Sector: Services

Time frame : Monthly

 

BFAM trend.png

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In my personal opinion, trend following, is better suited to 'daily' timeframes. That is not to say it cannot be applied to short timeframes but my personal preference is to use the 'daily' chart structure and using moving averages based on the 'daily' charts. Now that is just my personal preference based on my trading style.

I just want to make a point that trend following is not a 100% win strategy or anywhere near. You are likely to make lots of losses but it is about keeping those losses to a minimum and making sure you actively participate in the strongest trends and these winners though they may be few should outweigh a larger number of losses. Now I accept this is not for everyone as it means you have to accept losses and no trader will enjoy that. If a trader cannot accept losses then trend following is not for them. 

Commodities in my view and experience are a good asset class to use when testing potential trend following strategies. An important factor is the ability to be able to go 'short' as well as 'long' depending on the trends presented. If a trader does not go short when the asset class in general is showing bearish price action then it reduces the ability to make profits in all market conditions. The only time I tend to sit on the side lines is when the markets are trending sideways. This is where trend following struggles in my opinion and as a result I struggle during such periods in the chosen asset class I trade which tend to be Commodities and Cryptocurrencies.

Some of the important indicators and signals one may wish to consider are the use of moving averages, volume, momentum and trend strength. What I have learnt over the years is that market sentiment is just as important if not more when trading based on price action than fundamentals. There are times when a trend manifests itself based on strong sentiment which is disconnected to fundamentals. A trader has to be aware of this. An example of this one could argue are US indices. There is clearly strong sentiment present which is manifesting itself into a strong trend. The fundamentals if they are to be believed do not always support the trend strength. 

Trend Following can be very easy but it is very difficult as one has to show discipline in following their own rules and stick to them in difficult periods. However, there is no reason (I have) why you cannot adapt your trading rules to certain market conditions which may appear which warrant a change of strategy. Your trading plan should be flexible and fluid and you should be able to make adjustments should the need to arise. 

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I think an important part of 'Trend Following' is 'Risk Management and Position Sizing'. I see a lot of comments on the IG Community by traders who have no real sense of position sizing and risk management. 

So for example when do I increase my position? Normally if the signal I am getting is that the trend is strong or getting stronger. Otherwise, I will not increase my position. If the trend still exists whilst I am in a trade but it is not getting stronger then I will not necessary 'pyramid' and add to my position. This is a part of my risk management strategy. 

Yes of course I want to maximise my profits but more importantly if the trade goes against me then I want to ensure I lose the minimum amount possible based on my trading strategy. So risk management is a crucial part of not just 'Trend Following' but any serious and credible trading strategy. 

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The general theory on Trend Following is that you do not need to conduct any fundamental analysis. You simple trade based on price action.

I must admit I have my own trading plan which requires me to conduct some fundamental analysis. I want to trade the strongest trending assets whatever they are. I believe that by conducting fundamental analysis on the strongest trending assets it can help me to select those which also are supported by the strongest narratives. 

So I find conducting fundamental analysis useful in my journey to get from trend identification to trend / trade selection. Now this tends to go against the grain and theory written about in relation to Trend Following. However, I want to create a trading environment and trading strategy which suits my personality, needs and goals. I find this approach very helpful and useful when trading the strongest trending commodities. If there is a strong narrative and reason why the price action is behaving the way it is then it really helps me in my decision making. 

 

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One of the key concepts is to make trading decisions based on data rather than emotions. One must put their emotions and personal beliefs to one side. Use the data which is being generated by price action and use it along with other indicators / signals to make an informed decision. 

Now different traders will have and use different risk/reward ratios. This is true between different trend followers. Some of the aggressive trend followers will take on far more risk than some of the more less riskier trend followers. 

Another point I want to make is that you do not have to be exact with trade entries and trade exits. This is something that traders who do not believe in trend following or think trend following does not work will pick on. They will state that your trade entry / exit was wrong based on their own personal trading principles. The beauty of trend following is that the entry and exit points can be far more relaxed and flexible than other trading strategies. 

Trend Following can be used across most other assets. So it can be used to Commodities, Cryptocurrencies, FX, Bonds, Equities, ETF's, etc.

I personally like to see 'Higher Highs' and 'Higher Lows' being formed in an upward trend and 'Lower Highs' and 'Lower Lows' being formed in downward trends.

Looking for breakouts is a key area and the earlier one can identify a potential trend to trade the better. The reason why I use technical indicators / signals is because it takes my emotions out of the decision making process. I am not emotionally attached to any specific asset and nor do I hold any loyalty to any specific asset. I want to trade the strongest trending assets what ever they are.

Having entry and exit rules which are determined by technical indicators / signals removes emotional decision making. It allows you to trade the strongest trending assets. Those traders who are allowing their personal emotions, ego and personal beliefs cloud their judgement cannot trade Bitcoin, Litecoin or any other top performing Cryptocurrencies which from a performance perspective have trounced other more traditional assets. 

 

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If anyone wants to share the 'Strongest Trending Assets' in this thread then please feel free to do so. 

For me 2019 has been all about Litecoin and Bitcoin. They have been the two strongest trending assets I have been trading along with Bitcoin Cash in third place. 

 

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What sort of time period you will be looking at ?

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@MYK1,

You should use a trading strategy and philosophy that you:

  • Understand
  • Can apply and execute
  • More important believe in

I am not suggesting you must apply trend following principles. I am sure I will be accused of that by others. I can only discuss things from a trend following perspective as that is what I have chosen to use after looking at all the possible trading methodologies available to me. 

I find it easier though it takes a lot of discipline and one must follow the rules which they set as otherwise totally pointless. 

Some of the important technical signals / indicators that you may wish to look at are:

  • Price Action
  • Volume
  • Moving Averages

There are others but I am keeping it very simple right now. You need to write down rules which you will follow in order for you to enter a trade and exit a trade. You need to write down rules in terms of how much of your trading capital you will allocate to each trade. You need to write down rules for which specific assets you will trade and more importantly why. For example trading FX is not in my trading plan so I go no where near trading them. You must write down your rules for setting stop losses. When will you switch to trailing stops? What will be your stop loss distance? Why?

Most importantly you must accept losses as none of us have a crystal ball and the media are not always right so you cannot believe everything you read. None of us can predict the future. What we must try and do is ensure that there as many positive conditions in our favour based on the direction we are favouring for our trade. We must increase the odds and probability in our favour as much as possible. Even then there is no guarantee that we will succeed or profit but that is what we must try and do on every trade. 

You must have a plan on how you are going to enter and exit a trade. Without this you are merely speculating, gambling, betting, etc. 

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17 hours ago, TrendFollower said:

@MYK1,

You should use a trading strategy and philosophy that you:

  • Understand
  • Can apply and execute
  • More important believe in

I am not suggesting you must apply trend following principles. I am sure I will be accused of that by others. I can only discuss things from a trend following perspective as that is what I have chosen to use after looking at all the possible trading methodologies available to me. 

I find it easier though it takes a lot of discipline and one must follow the rules which they set as otherwise totally pointless. 

Some of the important technical signals / indicators that you may wish to look at are:

  • Price Action
  • Volume
  • Moving Averages

There are others but I am keeping it very simple right now. You need to write down rules which you will follow in order for you to enter a trade and exit a trade. You need to write down rules in terms of how much of your trading capital you will allocate to each trade. You need to write down rules for which specific assets you will trade and more importantly why. For example trading FX is not in my trading plan so I go no where near trading them. You must write down your rules for setting stop losses. When will you switch to trailing stops? What will be your stop loss distance? Why?

Most importantly you must accept losses as none of us have a crystal ball and the media are not always right so you cannot believe everything you read. None of us can predict the future. What we must try and do is ensure that there as many positive conditions in our favour based on the direction we are favouring for our trade. We must increase the odds and probability in our favour as much as possible. Even then there is no guarantee that we will succeed or profit but that is what we must try and do on every trade. 

You must have a plan on how you are going to enter and exit a trade. Without this you are merely speculating, gambling, betting, etc. 

Hi as you were saying to begin with commodities so I did gone through few need your input Please 

  So first thing I came across was Rice as it suppose to go up as it is a very small sort of  uptrend and its also supported by report which  was published on 25 june that this year due to some environmental  issue the growth is less than average and when I see the previous year data shows the price is around 1000 ticks more  than this year July so hard decision and amazingly after 25 june when the report was released don't see any major price action.

Second thing which I came across and find quite potential was Live Cattle but it might be against your trend following principle but Please have a look at it so its usually at its lowest price in July and it is indeed because its been on the lower ten from quite some time but the Good thing is if you buy now and sit over it for couple of months there is a huge potential but the price below this level was back in 2016 so ideally it should go lower than this price but you never know think i will say to keep monitoring it until one makes sure that now its going for uptrend and than buy it but again on one hand trends can change and on the other hand if you wait too much as you say "will be late to join the party "

Please have a look and shed some light and also if you see any commodity you think is of potential please update 

Many Thanks

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@MYK1,

You first need to decide what your trading philosophy is. What trading methodology are you going to apply? You must decide upon this first as otherwise it really does not matter what I suggest (and I can be wrong) you will find it extremely difficult. 

If you want to try trend following then that must be your personal choice. You must identify those commodities (if that is where you want to start) that have strong trending price action either upwards or downwards. This means you need to go through the charts and have a look at what they are showing you. Trend following requires trading based on price action not fundamentals. Yes I will look at fundamentals to help understand why the price is moving but my trading decisions are based on price action alone. 

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