Trend Trading Report Part Ten - Developing Your Own Trend Trading System

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:

1. Limit the percentage of the portfolio you're willing to  invest in each stock.
2. Limit the amount of risk you will accept as a percentage of your portfolio.
3. Only buy stocks that have considerably more reward than risk.
4. Protect your gains as the stock price moves higher.
5. 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:

1. Determine the amount of money you're going to transfer into your online trading account.
2. 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.
3. Before entering your trade, determine the number of pips between the entry price and your stop loss.
4. 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.