Help with trend following techniques

Hi all

I have been trying to trade using the classic Higher Low + Higher High followed by retracement and price strength for long trades and Lower High + Lower Low followed by retracement and price weakness for short trades.

One of the premises of this simple system is not to use any indicators at all, just follow price.

However, my success has been very poor, to the point where Im even having crazy ideas like doing the exact opposite of what the system tells me? (or at least the opposite of what I see!)

Most days I end up chasing price.

I attach a picture of today for instance. There you can see 4 trades (two longs, two shorts), where I drew trend lines and waited for a pullback followed by price strength or weakness. All trades where losing trades, since as you can see in the picture, when I go long the price goes down and when I go short price goes up!

Thank you all
J

 

All you need to do is apply the "Costanza Principle" to your strategy and you are in business. Seriously, you can't expect every market to trend well at any given time. You have to expect that you will have lots of losses before a big win and if you cannot trade that way then don't use a trend following strategy. Also, some markets do not work well with trend following. S&P 500 is not one that is typically good for long-term (or even short-term) trend following in my opinion. The results you posted are very typical for trend following setups so just beware.

 

The curse of the "Rising M" and the "Falling W." Study them well.

 

In a nut shell, this is the tricky part about trading....

Once you identify a HH or LL situation, sometimes the trend will continue and other times it will reverse course.

How do you identify which time it will continue and which times it will reverse???? I have no clue.

Solve this question and you never have to worry about money again.

 

This type of price action trading requires fairly decent size swings to make decent money. This hasn't been available much in the last month or so. Of course, the last week of trading opportunity has been better, but has had a heavy upward bias.

One thing you'll notice is that your four trades don't vary much by price (if I'm reading it correctly). Good indication of signifcant congestion/lack of good price structure.

Point is, your first long was right into significant resistance, so the upside potential was potentially limited. This was a better setup for range traders to the downside (which I personally shorted because it was high-odds). Then once you see price test the resistance and fall, there was a higher probability that price needed to resolve itself before it would simply plunge back downward. (V-turns are not as common as most think = hope.)

And that's what it did while you tried to take your next two trades. It's moving sideways more than anything. There aren't any higher-highs or lower-lows really.

With the upward heavy bias, any shorting should have been less often and/or with smaller targets and less room to breathe. Your second long wasn't such a bad idea - hopefully it was at least a scratch for you - nothing wrong with that. I went long sooner given that price was bouncing off a higher timeframe up trendline (which it appears you noted as well).

Your second short was straight into trendline support, so it's tough to imagine the risk/reward being much in your favor. Personally, I was looking long, not short, for a couple of reasons - 1) upward bias 2) trendline support 3) second failed test of major HOD resistance - I believe the chance of a breakthrough resistance is better the third time 4) pivot point of a forming triangle.

I have a similar approach as you, but it's interesting how I still saw things differently. Granted, I flubbed two trades in the afternoon when it got even more floppy-choppy.

Basic explanation for the difference is perhaps more focus for me on an anchor chart or higher timeframe for reference. Pivot points on a higher timeframe are more powerful than pivots closer in. With those in mind, it helps you make sure that your target (ie, reward) has enough opportunity to be hit. It also help you see that the market is moving significantly in one direction in the other.

Other difference is I like clearer HHs/LLs, otherwise I'm playing some osciallations.

Just my two cents. Hang in there.

Keep trading.

JS

 

jr, it looks like you're definitely chasing the trades, and possibly overtrading instead of watching for the best setups.

SSO has been in a steady uptrend for days and opened gapped down from yesterday's close. Normally you'd expect a pullback to the trend line off that gap. The open gave a very small red candle, and the next bar retraced it 100%, showing continued strength and giving you a long signal with a very safe stop zone below the opening low. Now you're in a nice move up and can expect a test of yesterday's close and possibly yesterday's high. Those areas could be your initial profit targets.

When price fails to hit yesterday's high and each following attempt leaves slightly lower highs, you have an early short signal around 28.16. By getting in early you again limit your risk with a stop above the day's high.

The range starts to tighten with higher lows and lower highs, forming a pennant and whichever trend line gets broken first should give you momentum in that direction. Price breaks through the lower high of 28.12 around 12:24 p.m. and your long entry should be just above that price. You could even have a buy stop at 28.13, putting you long at the breakout and a tight stop protects you against a false breakout. The breakout is solid, moving above yesterday's high and giving you several areas to take profits.

At the right edge of your attached chart, you see the red shooting star off the new high, which after a strong multi-day run to a new high is a strong short signal. Watch for the lower high when price pulls back from 28.38 and go short with a stop above the new high.

This technique puts you in the trades earlier, gives you much closer stops where the trade would be invalidated, lowering your risk and increasing your profits.

Let me be the first to say it's not always easy to see the setups in real time, but over time you get better at it, especially if you're trading just a few stocks/etfs that you get to know well.

Now if you really want to follow a trend, look for the higher lows, lower highs on the daily chart. SSO on 7/10 left a higher low from 7/8's low near a solid support level in an oversold condition. THAT was the long signal for the full trend which has lasted 8 days so far.

Best of trading to you!

 

I'm impressed, surprised and happy

This is the first time I post something here and I get good, honest, useful replies.

many thanks to all.

One thing on the S&P, would it be fair to say that 'the market' or any instrument that tracks it is perhaps not the best instrument to trade since it is probably the most vivid representation of the tug of war between bulls and bears? It just struck me yesterday after reading the first reply to my post.

Is it possible that the best path is to trade individual stocks? continue to polish the same system, skills, but instead of using 'the market' use a couple of high volume/very liquid individual shares.

Does this make sense?

J

 

computers that Goldman Sachs uses only use indicators.

indicators works for me.

chasing price is momemtum trading .

momentum is an indicator.

don't trade on price targets.

 

Correct. Essentially the OP is playing for reversion to the mean.

So generally, there are two choices. (1) Wait for the few opportunities where there is extreme price movement that will set up a signficant opportunity, or (2) Try to take a lot of trades on a short timeframe and be prepared for many small losses.

Good opportunities are more rare that average opportunities. This just makes sense. Patience is key.

 

My advice? Trade stocks but carefully monitor the S&P during trading and backtesting, which has a big impact on setting up opportunities in the individual components.

If you're out sailing and you want to get from point A to B, the wind direction is going to have a lot to do with your success and how you plan to get there.

What did the S&P do the day before a setup? Is the market trending up or down? Are you fighting the wind or sailing with it? All these and more are important considerations in how and when you enter.