My objective in this last part of the Trend Trading Report is
to provide some ideas on how to form your own trend trading system. 100 trading
experts could write this section and they'd all provide different
recommendations on how to develop your own system. So, the material here is an
example from which you can start to think how you would like your system to
look.
However, a trend trading system also requires some amount of
trade management thinking to maximize your chances of becoming profitable. So,
I'll add some comments in on trade money management as well. And I'll start
with that.
As a Trader, you need to think about the amount of money
you're going to put into your trading account, your investment portfolio. Make
sure that you're being realistic in the amount of money you're going to put
into your portfolio. Don't assume that you're going to double your money. If
you're not yet an expert trader, keep in mind that you could lose that money.
Don't invest more than you can afford to lose.
If you're a stock trader, once you're determined the amount
of money you're going to invest in your online trading account (your portfolio)
follow these guidelines:
- Limit the percentage of the
portfolio you're willing to invest
in each stock.
- Limit the amount of risk
you will accept as a percentage of your portfolio.
- Only buy stocks that
have considerably more reward than risk.
- Protect your gains as
the stock price moves higher.
- Never increase your risk
in any one trade if the stock price begins to fall.
To
help you in evaluating each trade, before the trade is entered, use the
onlineInvestment calculator. Just enter your guidelines in the chart and it will tell
you whether you need to reduce the number of shares to achieve your
guidelines.
If you're a Forex trader, follow these guidelines:
- Determine the amount of money
you're going to transfer into your online trading account.
- Determine the percentage of your portfolio that you're willing to risk in each trade. If you're a beginner you might want to start with a "micro account" and limit your risk to 1% of the total account. For example, if you have $10,000 in your account, a 1% risk indicates you're willing to risk $100 with each trade.
- Before entering your trade, determine the number of pips between the entry price and your stop loss.
- Calculate the lot size for this trade using the following formula
Lot size = ((Maximum risk $)/(stop loss pips))/10
Spreadsheet formula: lot size = ((INT(maxrisk$*10/#pips))/100
System
We've
been studying trends. How can we determine the trend?
You
will recall: If we mark the highs and lows in the price action:
- An
upward trend will have successively higher highs and higher lows,
- A
downward trend will have successively lower highs and lower lows
A
more convenient option might be to add the following moving averages to your
chart using different colors so they are clearly identified.:
- 5
period simple moving average
- 15
period simple moving average
- 50
period simple moving average
The
50 period moving average will be a representation of the longer term trend. We
want to trade with the trend.
Consider
the following four options you might consider in your trend trading system:
Option
1
- Assume
the 50 period moving average is sloping upward indicating an upward trend
- When
the 5 period moving average moves above the 15 period moving average and closes
above the 15 period moving average, place a buy order. Make sure the 5 period
moving average remains above the 15 period moving average, as indicated by the
closing of that candle, before you place your buy order. Some Traders prefer to
wait until two candles close before placing the buy order.
- For
information on buying your shares, follow the guidelines found at http://www.winning-stock-trading-fundamentals.com/buying-stocks.html.
The simplest way to place a buy order is to enter a Buy Market Order. In the
Forex market it is called a Market Execution Buy by Market order.
- For
information on selling your shares, follow the guidelines found at http://www.winning-stock-trading-fundamentals.com/sell-order.html.
The simplest way to place a sell order is to enter a Sell Market Order. In the
Forex market it is called a Market Execution Sell by Market order.
- Listed
under the above information on selling your shares, you'll find information on
stop loss. I recommend setting your stop loss 3% below the nearest support
level.
Option 2
- Assume
the 50 period moving average is sloping upward indicating an upward trend
- When
the price action moves from below the 50 period moving average and closes above
the 50 period moving average, place a buy order. This is an indication of an
upward trend in the price action. Make sure you wait until the candle closes
above the 50 period moving average before placing your buy order. Some Traders
prefer to wait until two candles close before placing the buy order.
- For
information on buying your shares of stock, follow the guidelines found at http://www.winning-stock-trading-fundamentals.com/buying-stocks.html.
The simplest way to place a buy order is to enter a Buy Market Order. In the
Forex market it is called a Market Execution Buy by Market order.
- For
information on selling your shares of stock, follow the guidelines found at http://www.winning-stock-trading-fundamentals.com/sell-order.html.
The simplest way to place a sell order is to enter a Sell Market Order. In the
Forex market it is called a Market Execution Sell by Market order.
- Listed
under the above information on selling your shares, you'll find information on
stop loss. I recommend setting your stop loss 3% below the nearest support
level. For Forex Traders, I recommend setting your stop loss 2 pips below the
nearest support level, or the nearest low price (also known as a "swing
low").
Option 3
Both of the above options
represent "trading with the trend". Following is an option that
confirms the existence of a trend, with temporary dips in price (but still
trending) before continuation of the trend.
Consider the following chart image:
- Note the position of the moving average lines during the trending periods on the above chart. The 5MA is above the 10MA which is above the 20MA which is also above the 50MA. That is an example of an upward trend.
- An upward trend will have times when the upward trend stops. This is the case during the two trending periods when the moving averages are no longer aligned.
- The upward trend will also exhibit dips where the price drops as seen by the red candles exhibiting DIPS in the price. These are excellent opportunities to place a buy order before the trend continues.
Option 4
The challenge in option 3 is to know when to place a buy order when the price retraces when trending. A retracement is the dip shown in 3 places in the chart image above. The depth of the retracement can be deep enough to cause a misalignment of the moving averages indicating the trend has come to an end. But then, in many cases, the price corrects and the trend continues. One of the ways to overcome this challenge is provided in this Option 4.
1. Use a higher timeframe. For example:
- If you're trading stocks and prefer to make buying decisions on a 15 minute chart, start with a 1 hour chart
- If you're a Forex trader and prefer to make buying decisions on a 5 minute chart, start with a 15 minute chart.
- The key issue is that the higher timeframe should be at least 3 to 4 times longer.
2, Look for a trending condition such as seen in the chart image above.
3. When the price action dips (retraces) switch to the shorter timeframe chart. Look for the moving averages on the shorter timeframe chart to align indicating that trending has been reinstated on the shorter timeframe.
4. The key point here is that the trending condition will show up on the shorter timeframe chart before it shows up on the longer timeframe chart.
5. When the trending condition is present on the shorter timeframe chart, place the buy order.
The buy orders, sell orders, and stop loss are the same for options 3 and 4 as they were discussed for options 1 and 2.
Summary
All
of the examples above are options you could consider in developing your trend
trading system. As you learn more about trading, you may want to add more
indicators to use in your system. However, sometimes the simple systems as
shown above are easy to use and very effective.
I
wish you all the best in your future trades.
End of Part Ten
This is the final report in this 10 Part Trend Trading
Report. I hope you've enjoyed it. Your comments are welcome.
