5 trend trading steps that would have made you 20% in a month

5 trend trading steps that would have made you 20% in a month

How would you have liked to have made 20% in the past month?

You could have, and it would have taken no more than an hour a day to maintain. That’s trend trading.

But wait there’s more. Those earnings were on one instrument, and on one time frame while eating jelly beans off a Panda.

Ok maybe not a Panda.

I love the Aussie dollar. Not in a weird, obsessive/compulsive kind of way. More in a warm cuddles and rainbows kind of way. And who doesn’t love rainbows?!

I love it because it trends like a trooper, doesn’t care about the global financial crisis, or war in Iraq, or anything else for that matter. In fact there is a good case it draws inspiration from my six year old.

Trend trading

The spot Forex market gets it’s fair dose of critisism, and some of it rightly so. Day trading the Forex market certainly comes with its unique challenges and sanity testing price action.

What they do fantastically well though is trend.

They trend especially well the further from the intra-day movements you go. Why I continued to subject myself to the intra-day madness time and again, I am not sure. Perhaps it is the returns, or the action, or the groupies.

I have shown previously in my 100 trade experiment the returns you can get on longer term charts with poor win/loss ratios.

This months AUDUSD uses those same methods, but with a better win/loss due to those rainbow inducing Aussie trends.

Let me share those methods.

Here is this months AUDUSD as I have been watching it:

The entry

The methodology is simple and well known:

  • Find the trend.
  • Buy on weakness.
  • Gloat and brag to all.

The trend since mid July has been up.

I know it is up, because price on the left of the screen is lower than that on the right. Don’t laugh, it can be that simple.

If you want to get more objective than that, you can use the two line method to determine the trend.

If the trend is up, all we need to do now is find a place to buy either when price represents value (while keeping the trend in tact), or selling energy shows exhaustion.

… when you follow a trend, you should only be wrong once …

Remember Elliot, that chap that has sent more traders to the brink of insanity with his wave theory than Julia Gillard has with her policy speeches? The core of his principal is simple, 5 waves in the direction of the trend, 3 waves against it.

The entry then is simple. Buy on price confirmation of the third wave against the trend.

Now don’t go trying to predict the end of the third wave. That is trying to predict the future. Catching the knife. Jumping in front of the bus. Playing silly buggers.

When the third wave is in play, wait for a bullish candlestick pattern, perhaps a close above the previous high (my favourite), or any one of those fancy candlestick patterns so extensively written about.

Whatever it is, wait for it, and when you see it jump in without a seconds thought. No waiting for a pips move here or there, get in before it leaves.

The odds are on your side. You have the crowd behind you and a signal they may be on the move.

When you follow a trend, you should only be wrong once. I am happy to be wrong once per trend.

The entries in the chart above are marked with the circled arrows. The numbers represent the three waves of the retracements.

I am aware the 3 wave pattern to the left seems to omit some sub-waves. It doesn’t, but unfortunately I can’t show the context of that wave to the left.

Have a look yourself though and comment below if you still think I have lost my objectivity.

The risk

The risk parameters are up to you. Mine are 2% per trade, which is calculated based on the stop size that is needed and my account size (you are using stops right?).

Use what makes sense to you.

The stop is below the bullish candle/formation that triggered the entry. This is something that needs to be understood.

Trying to guess an entry usually means wider stops “just in case”.

Wider stops, means greater moves needed to gain a good reward for the risk taken on.

A confirmed entry with a defined stop almost always is a better risk/reward than a predicted entry with a wider stop. Trust me, I predicted entries for 6 years.

The exit

The exit should be as objective and simple as the entry. For the sake of this method, the exit is a bearish trigger after the previous high has been broken. The bearish trigger is simply the mirror of what you consider a bullish trigger to be.

Remember though, this is a trend following method. You must let price move through the previous high. Once it has, wait for it to hint at slowing and jump off before the rush.

Untold riches in 5 steps

  1. Determine the trend
  2. Wait for the third wave of a retracement
  3. Buy on confirmation with 2% risk
  4. Stop below the formation that provided the confirmation
  5. Exit on signs of weakness, but only after the previous major pivot has been broken

This month, this simple method netted around 20% on a 2% risk parameter for entries. Runaway months it nets more, choppy months it nets less, but stick to these basics and you will not be able to blame your system any more and be able to get onto working on you, the trader.

This may seem over-simplified, but it really is as in depth as I go with longer term trading.

*note As I write this, the AUDUSD is again forming a third wave, but be wary, the two line method tells me we may be heading more sideways. A quick read of Dow’s accumulation/distribution theory will hint at the same thing.. Chart below:

Happy trading.

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