I Want to Catch Big Trends!
Recently in our System Development Workshop, a student illustrated his intent: to build a system that catches big trends! We would all love to have such a system, but the truth is that we really never know when they will appear.
So the best we can do is have a very clear idea of how to play a trend once it starts, when to stay away, and when to re-engage. Here is one way to do it.
Select Your Trend
The issue that traps most aspiring traders that haven’t found their footing yet, is the fact that they look at their charts and say “that’s what I want!”. Then, they try to find “Holy Grail Indicator” that will tell them when that condition is appearing.
To make a long story short, and to help you avoid wasting time searching for the pot of gold at the end of the rainbow, here is the cold hard truth:
- you cannot know in advance when a large trend will start – so that is not a good objetive to pursue;
- you cannot use hindsight bias to justify catching turning points from which trends start – usually that turns into fading rallies and catching falling knives;
- nothing works all the time, and almost anything will work sometimes – which means that you can study something that worked well in the past 3 months but in reality it is a statistical fluke and is not robust.
So what is the solution?
If you want to trade trends, go back to the basics and identify a trending market type. We also have an indicator for MT4 and TradingView that will do it for you.
Most people have day jobs and need to fit their trading into their work schedule. It is perfectly logical to use robust daily charts as primary timeframes from which to identify the trend, so your trend won’t change very often. Now here are the rules for using Market Types:
- if the market type is bullish, only look for LONGS;
- if the market type is bearish, only look for SHORTS;
- if the market type is sideways, LOOK ELSEWHERE! Don’t make life complicated by trying to trade choppy markets. Specialize in one thing only: trading trends. Let others mess with range-bound conditions.
So now we have a market type filter that tells us whether the market is best left alone (sideways) or what direction to trade (Long or Short). The next component is to make sure we have near-term momentum on our side. What does this look like on the charts? It could be:
- a particular candle formation (doji, spinning top, hanging man, etc);
- price closing back in the right direction, after a pullback.
Basically we’re making sure that:
- the broad market movement is directional;
- the near-term market movement is directional.
This is often called self-similarity, and it is aligning various timeframes together, which makes trading easier.
So once you have the first two pieces of the puzzle in order, you can drill down to a sub-daily chart (this is the 1H chart) because you get more opportunities to enter the daily trend, and you can get keener risk placement. In the charts that follow, we have simply used pullbacks to support or to supply areas as our trigger on NZDUSD.
As you can see, the daily market type never shifts to neutral; it remains locked in the bear market type, but the market has leeway to retrace. This is where the self-similarity concept helps. It makes sure you are not entering the market in a retracement. So from April 25th all the way to May 1st, you’re sitting waiting for the market to close back in the direction of the trend, before re-engaging.
Simple and Subtle
These 3 steps shown above are truely sufficient to trade trends with a robust structure. And I’m not the first person to talk about this! This is common knowledge that is spread across the internet. So the question becomes: why do we not see more profitable traders? Why do most retail traders continue to fade trends and look to catch turning points? Here are my thoughts, after a number of years helping traders:
- pressure to perform: the moment traders focus on the money and not the process, progress is derailed;
- discipline: most people cannot stick to a predefined set of rules for any length of time. It is very much the same reason why most people cannot lose weight, or keep the weight off;
- being too clever: as humans we tend to overcomplicate things. Sticking to a simple, uncluttered structure seems to be a challenge for most people;
- confidence: the markets always throw curve balls at us and a season of poor trading conditions (such as the first months of 2019!) can undermine the confidence of a trader who is just starting out on his journey, even if the model he is using is sound. Naturally what happens is that he tweaks the model or goes on a tangent. And never finds his way back;
- trying to fit a square peg into a round hole: sometimes people just are not cut out for this business and need to be honest with themselves about this.
Over to You
Trading trends is simple, but not easy. We have given you the ingredients but it’s up to you to bake the cake. Take what I’ve shown you, study it, apply it (on demo initially) and take detailed notes (perhaps also latch it up to MyFXBook or some other trade recording platform). Learn the model, gain a feeling for it. I’m confident good things will happen – but you can always shoot us an email if you get stuck somewhere.
And don’t forget to let us know how it goes!
About the Author
Justin is a Forex trader and Coach. He is co-owner of www.fxrenew.com, a provider of Forex signals and Education from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.
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