Trade with the Trend

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Trade with the Trend

Postby George FXtrades » Mon Sep 14, 2009 9:38 pm

Hello Edward,

I check the different period charts daily to ascertain the prevailing market trends and determine trading approach for the day. The conclusion is from the indicators of the EMAs (10, 25, 50 and 200), Parabolic SAR (default), and MACD (default) on respective charts.

The current EUR/USD overall picture displays the positive uptrend in the longer time frames (weekly, daily, 4 hours and 1 hour). Those < one hour charts, especially the 5 mins and 1 min. periods, show more erratic (unpredictable) candlestick movements, but also moving towards the positive uptrend direction.

However, as an intraday trader using the 1-hour chart as guidepost, and trade on the 5 mins chart with entry and exit orders, my difficulty is to obtain winning trades successfully. On many occasions, the BUY Orders were forced to close prematurely due to trend reversals resulting with reduction of the usable margin quickly.

Now at a dilemma assessing my past inexcusable trading performances, and would appreciate your professional advice to the following:

1. Should I trade according to the “big” picture trend and discard the erratic and inconsistent candlestick movements on the < one hour charts despite the attraction of earning some pips by chasing the erratic trades, and later end up the net loser.
2. Should I wait and concentrate for the right trend emerging from the breakouts of ranging situations and then make an entry position? That is to trade when the circumstances and time are right.
3. Should I neglect the short-lived opposing trend reversals and whipsaws, knowing that the future market performance moves towards the “big” picture positive trend direction as indicated by the weekly, daily and 4-hour charts?
4. Should this be the adopted approach, what is the possibility of gaining more winning trades after discounting the lost trades?
5. Should the take profit position be left opened until the opportune time necessary to close the position, or pre-set a profit target as LIMIT while making the Entry position. Alternatively, is there a method to determine the take profit position from the continuing market trend?

There is an explicit meaning towards THE TREND IS YOUR FRIEND, and is left to the traders' interpretation.

After going through all these trading uncertainties and nightmares, it has come to my understanding that Forex trading is not so easy as A, B, C, that has been advocated by many marketing companies promoting their state-of-the art forex trading systems or trading techniques able to win in the Forex market successfully.

If so, I need not have to learn forex trading strategies diligently to trade with the trend.

Thank you.

Regards.
George FXtrades.
George FXtrades
 
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Re: Trade with the Trend

Postby Edward Revy » Sun Sep 27, 2009 7:45 pm

Hi George,

It is a very familiar feeling - after trying few strategies, getting few hits from the market, trying again to realize there is more to it than just effortlessly entering and exiting, even after reading books, following advices and rules. I had the same frustration about Forex trading when I grew up from being a complete beginner to a knowledgeable experimenter.

A trend is your friend, you've got this right. But there is a bit more to it. Knowing which trend to follow is important. If you take a daily trend, let it be an uptrend, and decide to go for Buy orders only, it will work for you on 4 hour time frame, on 1 hour with additional filters, but if you choose to go to 5 min charts, the daily trend there become totally irrelevant.
This means, you will be buying with 5 min charts and there will be no expected rewards, because 5 min charts are trading most of the time based on own trends + 15 min to 30 min trends, all the way up to 1 hour, but not higher.

Therefore, the goal is to pick the right trend, which is usually done as follows:
First, you choose the time frame which you'll be watching all the time, for example, let it be 1 hour time frame.
Then pick a larger time frame to identify the main trend. Here you'll be looking at larger time frame: 4 hour or daily.
Then pick a smaller time frame, which we'll use to select the best entries for the signals we receive on 1 hour charts.

Analysis goes as follows:

Daily + 4 hour charts = main trend identified.
1 hour chart - look for entry signals which go with the main trend. Once a signal is there, either start trading OR don't rush in and instead go to 5 min chart and pick the best entry from there; oftentimes you'll need to wait for some time, for 15-30 minutes (could be more), before a good entry opportunity comes in. Once entered with 5 min, go back to 1 hour and manage your trade from there.

1. Should I trade according to the “big” picture trend and discard the erratic and inconsistent candlestick movements on the < one hour charts despite the attraction of earning some pips by chasing the erratic trades, and later end up the net loser.


Yes, you should. As I said, trends on daily charts will be irrelevant for 1 min, 5 min charts. Same as trends on 4 hour, 1 hour and even 30 min charts will be irrelevant for 1 min charts. Same as trends on monthly and weekly charts will have little to do with 1 hour charts (in certain points they'll be relevant, but most of the time very distant).

If you look to pick trends with weekly charts, use them to trade daily charts.
If you pick daily chart trends, use them for 4 hour and 1 hour trading.
1 hour trends - for 15 min trading, possibly for 5 min, but with some filters/indicators.
30 min trends - 5 min trading.
5 min trends - 1 min trading.

2. Should I wait and concentrate for the right trend emerging from the breakouts of ranging situations and then make an entry position? That is to trade when the circumstances and time are right.


Yes, breakout trading is very popular. Also, I've wrote a post today about "Level Up" entry during range bound markets here:
consolidation-trading-can-profitable-t122.html

3. Should I neglect the short-lived opposing trend reversals and whipsaws, knowing that the future market performance moves towards the “big” picture positive trend direction as indicated by the weekly, daily and 4-hour charts?


No. Again, picking relevant trends and time frames will help you to make a choice. Don't forget that your primary time frame also has its own trend :D

4. Should this be the adopted approach, what is the possibility of gaining more winning trades after discounting the lost trades?


Yes, knowledge about trends on larger time frames keep you one step ahead of other traders who don't check larger trends. Trading in the direction of the main trend gives you a huge advantage.
Have you also tried simple indicator - 200 EMA? If you place it on any chart, be it 1 min or 1 day, you'll be able to visualize trends at a glance: above 200 EMA - uptrend (buying only), below - downtrend (selling only).

5. Should the take profit position be left opened until the opportune time necessary to close the position, or pre-set a profit target as LIMIT while making the Entry position. Alternatively, is there a method to determine the take profit position from the continuing market trend?


Preset profit targets should be placed at most obvious Support/Resistance levels: pivots, fibs, levels of previous price U-turns, especially those from superior time frames, meaningful moving averages, such as 200 EMA, trend lines, channels, large round price numbers (1.500, 2.000 etc) and so on.. Basically, your goal is to see how far your new trade can go before it'll
trip up. At such points, you set your profit target with the goal to close 1/2 or 2/3 of your trading order. The rest is left to continue running assuming that you have a trend following system/indicator that shows a trend and gets you out once this trend is over.

Setting correct profit goals comes with studying and experience, keeping a trade open while the trend permits so can be achieved with trend following indicators.
Just don't demand a lot from them, trend following indicators cannot capture entire trends from top to bottom each time - it is a big mistake/false expectations that keep novice traders away from focusing on major things.

I've uploaded an example of trend-following indicator, which we discussed with traders earlier in this forum.

Regards,
Edward
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