But for speculators, a weekly chart can be accepted as the "long-term. With a weekly chart as the initial reference, we can then go about determining the long-term trend for a speculative trader. To do this we will resort to two very useful tools that will help us determine the trend. These two tools are the simple moving average and the exponential moving average. Source: Netdania. In the weekly chart above, you can see that for the period of May until July the blue 20 interval period exponential moving average is above the red 55 simple moving average and both are sloping upward.
This indicates the trend is showing a rise of the euro and therefore a weakening dollar. In August , the short-term moving average blue on the chart below turned down, indicating a potential change in trend although the long-term average red had not yet done so. In October, the day moving average crossed over the day moving average. Both were then sloping downward. At this point, the trend has changed to the downside and short positions against the euro would be successful. Still looking at Chart 2, we notice that the short-term moving average goes relatively flat in December and starts to turn up, now indicating a potential change in trend to the upside.
But a closer look at the day moving average, as of December , shows that the long-term moving average has remained downward sloping. The second arrow indicates where a new short position could have been successfully taken once the price had traded back to the down sloping moving average. The goal here is to determine the trend direction, not when to enter or exit a trade.
Of course, this is not to say that there were no trading opportunities in the shorter time frames such as the daily and hourly charts. But for those traders who want to trade with the trend, rather than trading the correction, one could wait for the trend to resume and again trade in the direction of the trend. Let's switch to Chart 3 and see what happens as the day exponential moving average trades down to a double bottom.
Given that a double bottom on a chart suggests support at the bottom, we can watch the price action daily to give us an advance clue. The arrow indicates where the short-term moving average is turning up. Once again, the moving averages are not used as trading signals but only for trend direction purposes. By setting up a short-term exponential moving average and a longer term simple moving average, on a weekly and a daily chart , it is possible to gauge the direction of the trend.
Knowing the trend does help in taking positions but bear in mind that the markets move in waves. These waves are called impulse waves when in the direction of the trend and corrective waves when contrary to the trend. By counting the waves or pivots in each wave, one can attempt to anticipate whether a trading opportunity will be against the trend or with the trend. According to Elliot wave theory, an impulse wave usually consists of five swings and a corrective wave usually consists of 3 swings.
A full wave move would consist of five swings with two of the swings being counter-trend. Source: Investopedia. The image above gives an example of an Elliot wave. Because Elliot wave theory can be very subjective, we prefer to use a pivot count to help me determine wave exhaustion. This usually translates into a minimum of seven pivots when going with the trend, followed by five pivots during a correction.
Sometimes the market will not cooperate with these technical assumptions but it can occur often enough to provide some very lucrative trading opportunities. Below is an example of the wave in action blue arrows mark the direction. By combining the moving average diagnosis with the pivot count and then fine-tuning the analysis with an observation of candle patterns, a trader can stack the odds of making a successful trade in their favor.
Remember trading is a craft, which means that it is both art and science and requires practice to develop consistency and profitability. Technical Analysis. These are direct profits that they are giving back to the market. This can place a heavy burden on the overall profitability of the short term trading strategy.
The costs associated with a trend trading strategy is often very nominal in comparison. Reduced Time Commitment — Most trend following methodologies are built with a longer-term time horizon in mind. As such, most entry and exit signals for these long term trend following systems are generated using daily or weekly price bars.
Because of this, the time required to manage a trend following portfolio is quite minimal. Typically, all that is required of a trend trader is possibly an hour or so a day for finding the best trending markets, executing new orders, and managing existing positions. This frees up a lot more time to devote to other work and life activities.
There are a host of different technical studies that can be used for building a trend following system. Some of functions that these technical indicators can serve include trend identification, entry signal, trade management, exit signal, and more. We will take a look at three common trend following indicators that can be used in various capacities within a trend following model. The one that were going to look at is the Simple period moving average, or SMA The most common application of the SMA is in forming a directional bias for a market.
For example, if the price is trading above the SMA, then we will only look to take long trade signals, and conversely when the price is trading below the SMA then we will only look to take short trade signals. Take a look at the price chart below which illustrates the period SMA as a trend filter:.
The Donchain channel is a popular support and resistance based channel indicator that can be used to enter a market based on a breakout signal. The upper line of the Donchain channel represents the high of the last X bars, while the lower line of the Donchain channel represents the low of the last X bars.
The middle line within the Donchain channel represents the average price between the resistance and support line. An entry signal to go long would occur at a break above the upper channel line , and an entry signal to go short would occur at the break below the lower channel line. This type of X bar breakout entry is a very simple but effective breakout strategy incorporated within many different types of trend following systems.
Below you will see an example of the Donchain channel drawn on the price chart:. This particular trading indicator is called the Parabolic SAR. It was created by J. Welles Wilder, the famous technician that is also credited with the creation of the RSI indicator. The Parabolic SAR study is less well-known indicator even within technical circles.
However, it is a study that can be applied effectively as a trailing stop within a trend following system. The Parabolic SAR appears on the price chart as a series of dots below the price candles in an up trending market, and as a series of dots above the price candles in a down trending market. As a trend gets underway the Parabolic SAR allows much more room between the price and the indicator.
As the trend matures, the Parabolic SAR indicator begins to tighten, which serves to protect profits in case of a potential reversal after a mature trend move. We briefly discussed a few technical indicators that could be utilized within a trend following framework. Our primary goal will be to trade with the longer-term trend. So for the purposes of identifying a trend, and confirming the trend direction, we will incorporate the SMA into our strategy.
Next, we will require an entry mechanism for initiating new trades. As we learned in our previous section, the Donchain channel is a support and resistance based channel based on an X bar look back. So for our example trading strategy we will use the 20 bar lookback within the Donchain channel for our trade entry component. This default 20 bar lookback has proven to be good signal when attempting to follow longer term market trends.
What else do we need to incorporate into the methodology? Well, for one, we will need a way to limit our losses after our entry has been triggered. I like to use a recent minor or major swing for the purposes of placing a stoploss order. As such, once a trade entry has executed, we will refer to the price chart and manually place the stop loss order based on the recent price swing.
Building further on our trend following system, we need to have an exit plan. Our exit plan should allow us to maximize the gain on the trade while minimizing the chance of giving back too much open profit. The Parabolic SAR indicator can serve our purpose well in this goal. As mentioned, it allows more breathing room at the earlier point in a trend, while tightening the trailing stop as the trend matures. This helps protect our open profits in the event the trend reverses.
And so now with just three widely available out-of-the-box trading indicators, we have been able to create a fairly simple yet robust trend following strategy for trading the market. The beauty of most trend following systems is that they are pretty simple in their construction, with just a relatively few number of variables.
Enter into a long position when the following three conditions are met:. Stop loss to be placed at a recent swing low. Exit long position when the Parabolic SAR indicator switches from long to short. Enter into a short position when the following three conditions are met:. Stop loss to be placed at a recent swing high. Exit short position when the parabolic SAR indicator switches from short to long. Below you will find a price chart of the British Pound US dollar based on the daily timeframe.
On the chart we plotted the three primary indicators that we will use with this trend following strategy. These include the day simple moving average, which is shown as a solid blue line, the 20 period Donchain channel, which is shown by the upper red line of the channel and the lower green line of the channel, and finally the Parabolic SAR indicator which is shown as the series of dots above and below the price action.
Looking at the far left of this price chart, we can see that the British Pound US dollar has been trading below the Simple moving average line. Additionally as we move forward in time, we can notice that the Donchain channel formed a support line which was soon followed by a breakout and close below it. When this occurred, we can also see that the Parabolic SAR indicator is short.
We know that our trading strategy calls for an entry signal to sell when the price is trading below the SMA, the Parabolic SAR is short, and price closes below the Donchain channel support line. All of these conditions were met at the close of the candle circled in green. As such we would open up a short position at the start of the following bar. Now that our short entry has been triggered, we need to refer to the chart to find a suitable location for our stop placement. Based on the rules of our trend following strategy, the stop loss should be placed at a recent swing high above the short entry.
Notice the yellow line marked which shows a recent swing high prior to the short signal. This would be an ideal location to place our stop loss for this trade. Now that we have taken care to limit our risk on this position in the event that prices continue to trade higher, will want to shift our focus to trade management. The trade management technique that we will employ for this particular strategy is based on the Parabolic SAR indicator.
More specifically, we can see that the time of entry the dots that compose parabolic SAR indicator are above the recent price action. What this tells us is that the parabolic SAR is confirming the short signal, and we will need to wait until such time as the indicator reverses direction.
Risk control: Cut losses is the rule. This means that during periods of higher market volatility, the trading size is reduced. During losing periods, positions are reduced and trade size is cut back. The main objective is to preserve capital until more positive price trends reappear. Rules: Trend following should be systematic. Price and time are pivotal at all times. This technique is not based on an analysis of fundamental supplly and demand factors.
Forexstrategiesresources offers an great collection di trading systems trend following. Happy trading. Forex Trend Following Strategies. Trend Following Forex Strategies. Wikipedia Forexstrategiesresources offers an great collection di trading systems trend following.
Log out Edit. Follow us on Instagram. It works on the 1 hour chart with the 15 minute chart entry. Or you can use the 4 hour chart with the 1 hour chart entry. This forex system is a pip making machine on several pairs. Hello Arun, I have sent several emails to you but have not received a response. I am very interested in learning trend trading techniques from you. Please send me an email so that we can communicate directly. Thanks and kind regards, Larry K.
I sincerely appreciate your help. Regards, Samuel. Save my name, email, and website in this browser for the next time I comment. Trend Following System's goal is to share as many Forex trading systems, strategies as possible to the retail traders so that you can make real money.
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Visit Exness. Visit XM. Share on:. People are also reading Arun Lama I have been actively trading the financial markets since April Thank you for your kind words! Thanks Reply. Thank you very much for your genorosity Reply. Fernando Reply. Regards, Samuel Reply. About Trend Following System Trend Following System's goal is to share as many Forex trading systems, strategies as possible to the retail traders so that you can make real money.
Risk Warning : Trading in the forex market is very risky. Thus, it is may not be for everyone. A highly leveraged position can work against the trader when the trade does not work as expected. Trading in the forex market can cause to lose a significant portion of the capital or all of the capital. It is crucial to learn about the trading and gain enough experience in the demo account before trading with real money.
is a simple forex strategy used by many traders of all experience levels. Trend trading attempts to yield positive returns by exploiting a markets directional momentum. Length of trade: Trend trading generally takes place over the medium to long-term time horizon as trends themselves fluctuate in length. firehousehouston.com › education › find-your-trading-style › top-forex-tradin. Knowing the trend does help in taking positions but bear in mind that the markets move in waves.