Most traders use the 1-percent or 2-percent rule. That means that you do not risk more than 1% or 2% or any given trade. I know of some traders that only risk just.
Table of contents
- A Simple Trend Following System | New Trader U
- Keep It Simple and Trade With the Trend
- Subscribe now and watch my free trend following VIDEO.
- Trend trading is a long-term approach to trading.
- A Simple Trend Following System
They can be used in uptrends , downtrends and even in ranging markets. If the bands are very far away from the current price, it can indicate that the market is very volatile. If they are very close to the current price, it means the opposite. Many traders , particularly beginners, should be advised to keep away from either of those two.
You can use Bollinger bands as part of your trend trading strategy by buying when the price reaches the lower band and selling when the price hits the upper band. You can read more about Bollinger bands here. Moving averages are an excellent way to see the underlying trend behind an instrument and can be viewed on most charts.
There are many different moving averages , though many trend traders choose to use a slow moving average. They are a great way to focus on the real price and direction of a trend and can help traders avoid mistaking temporary changes in price for trends. You can use moving averages in your trend trading strategy by buying when the current price dips below the moving average and then selling when the current price meets the moving average or peaks above it.
An important thing to remember about moving averages is that they cannot highlight if a trend will end or not. They can only show you past movements. So you cannot solely rely on them. They can be made when you apply a channel pattern over them more on channel patterns below. The lower part of the movement represents the flag pole and the channel lines represent the flag itself.
When they appear, they symbolise that a trend was momentarily interrupted. In a bull flag, the market is on the rise. In a bear flag, the market is on the decline. You can incorporate bull and bear flags to your trend trading strategy by entering the market and getting and riding a trend. Many different types of triangle patterns and some people refer to them as wedge patterns. Typically, what happens with a triangle pattern is the price gets narrower and narrower and then eventually breaks out into an uptrend or a downtrend.
Here are a few common triangle patterns you can look into:. For example, if the length of the triangle is 50 pips, aim to buy or sell when the price reaches 50 pips after breaking. Relative strength index or RSI, is an oscillator indicator and has been around since the s and is very popular.
Typically, what will happen is when the price of an instrument reaches overbought levels, a trend will reverse and prices will start to decline. The opposite is true when the price reaches underbought levels; it will start to increase in price.
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To use this indicator properly, it is best to stick to daily or larger charts otherwise you may receive too many signals to buy or sell. RSI can also show if a trend is about to end too. This can act as a signal to sell before the downtrend starts. Like all indicators and patterns in trading , you cannot solely rely upon it.
This is especially true if big news breaks out and the price of the instrument takes a dive down or soars up. The head and shoulders pattern is very common and symbolises that a trend has come to an end and a new one has emerged. They also work upside down as well. They are called head and shoulders because the shape they make looks like a persons head and shoulders as you could probably guess!
A Simple Trend Following System | New Trader U
The shoulders represent either two high or two low points with the head being the highest or lowest price the instrument reached. In the upright position, when this pattern emerges, it means an uptrend has come to an end and a downtrend will now begin. If you have a position open, now is the time to close it. When upside down, a downtrend has finished and an uptrend has emerged.
This is a perfect opportunity to buy. Channel patterns are highly useful and can be used in uptrends , downtrends and in ranging markets. They are made with the channel pattern tool on your charting software and used to pinpoint highs and lows in market price. You can use them in your trend trading strategy by selling when they reach higher points and buying when they reach the lower points while a trend is in motion.
Much in the same way as Bollinger bands, mentioned above. Be warned though, it can be hard to spot when a trend ends. When this happens, you need to redraw your channel pattern.
Keep It Simple and Trade With the Trend
Make sure you look out for break out moments to avoid this happening. Curtis released the rules a long time ago and you can download them for free. Run a backtest on this model for the past few decades. Check how many times over you would have lost all your money. That was a long time ago though and now research has come much further. My advise is that you listen to ideas from all kinds of sources, but trust none. That includes mine. Then you do your own research. Test them. The latter is about targeting a yearly std. Would you say that scaling into positions as they did was a flaw i.
Clearly they forgot the jet engine. These guys, and other lesser known people, laid the ground work. Study it and learn from it. The original turtle system uses extreme risk. It was traded at a time when this system worked really well.
Subscribe now and watch my free trend following VIDEO.
Much of the core ideas from those days are used today, but in a very different way. Just as the ideas of the Wright brothers are still incorporated in airplanes. The business has evolved and matured though. I used EMA, but forgot to mention that in the book. Indicators are never important. The simplified model I showed in the book can be made much more simple. Try a simple X Months Momentum model for instance, where you go long if the price is above X months ago, else short. Amazingly simple, but it captures the bulk of trend following performance.
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Classic discussion. Thanks Clay for right questions and Andreas for great answers. Exactly had similar questions but Clay put it way better here.
Trend trading is a long-term approach to trading.
First of all, thank you. I am very impressed by the materials on your website, I plan to buy your book, and I am very greateful for the information you shared. I am searching for a mechanical end-of-day trading system that I could follow with confidence and discipline. I tested it from January to July , with end-of-day historical data for all the markets listed above.
I would like to present the results of my research and I hope you will be willing to answer my three questions. However, based on the optimization, it seems better parameters for my markets choice were EMA and EMA , and entry on days high or low.
A Simple Trend Following System
I estimated a quite conservative spread and comissions. Is this good enough? Does it look like acceptable result to you? The equity curve had a almost 5-year long drawdown period, from to I know this was not the best time for any trend following system, but I anticipate it will be very hard to stick to this system should a new drawdown like this happen.
Here is the link to my backtesting report with equity curve screenshots. I understand I should not curve fit EMAs and channel and ATRs for each market… I know… but maybe it is valid to have separate rules for stock indices and rates and separate for commodities and forex? So I excluded these markets from portfolio. Shall I trade it on commodities and forex with my paramaters? Or should I keep searching for a system that makes money on ALL markets?
Did it make money on ALL markets in your backtest? I enabled comments on the file I shared abouve, so you can comment it as you review it.