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Trading 101

Trading 101: Trend Following Trading – A Strategy Revealed

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Trend following trading is a concept we have covered previously here on Hacked, and even revealed specific trend following strategies you can use. In this article, I will go through some more specifics on how you can profit from trends with the help of technical indicators.

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My first introduction to trend trading was through Michael Covel’s book Trend Following. Although Covel is a strong proponent for longer term trend following, the same principles can be applied to shorter term trading as well. The book is a great introduction to a whole new philosophy of trading and investing where you learn to be humble, put your ego aside, and follow the underlying currents of the almighty market.

As a purely technical trading strategy, trend following does not take into account fundamentals, or news that might impact the price, nor does it seek to predict where the price is going. Instead, trend following traders simply react to what is happening with the only variable they care about – price. In fact, trend followers may actually be wise to stay away from the market during major news events, and instead enter again after the new trend has established itself.

Wave Theory

Trends always move in waves, which is something many shorter term trend traders are trying to take advantage of. Just as Elliot Wave Theory attempts to do, if you can find a way to identify these waves, buying near the dip of the wave and selling near the top, you can potentially earn lots of money.

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The same concept can also be explained as buying in an area of value on the chart, as shown with red circles on the chart below.

In this specific example, you can see that the MA20 line is acting as a support line for the price. Buying in an area of value simply means buying at a point along the trend where you are near the dip of the trend wave, instead of at the top of the wave. Following this principle dramatically increases your chances of success in trend following trading.

The MA-CCI Strategy

This is exactly what the strategy I am going to show you attempts to do with the help of technical indicators. I have named it the MA-CCI Strategy, and this is a strategy that I myself have traded profitably in the past. As you may have guessed, this strategy uses a combination of two technical indicators, the Moving Average indicator and the Commodity Channel Index, to generate buy or sell signals.

What you need to do:

  • Choose the instrument you want to trade and select the timeframe you trade on. I usually trade on the 4H for forex and 1H for stocks, but the strategy can really be applied to any timeframe.
  • Use a candlestick chart.
  • Apply the 20 and 40 Simple Moving Average (SMA) indicator to the chart
  • Apply the Commodity Channel Index indicator (CCI) to the chart, with the ‘Length’ setting set to 5.

Strategy conditions for buy (long entry):

  1. Both 20 and 40 SMA is sloping upwards
  2. 20 SMA is above 40 SMA
  3. CCI < -100
  4. The low of the candlestick touches or goes below 20 SMA
  5. The close of the candlestick is above 40 SMA.
  • BUY TRIGGER: Buy when price is 1 pip above prior candlestick high.
  • INITIAL STOP-LOSS: 1 pip below prior candlestick low
  • TRAILING STOP: 1.5 Average True Range (ATR)*

*You can experiment with different parameters for your ATR trailing stop, but I like to use 1.5. 1 or 2 ATR may also work well for you. The period setting should be set to 14. TradingView has a built-in indicator called ’Average True Range Trailing Stops’, which can be helpful for this.

Staying true to the trend following mindset, I always hold the trade until I get stopped out by the trailing stop, simply because I have no idea when the trend is going to end. I therefore choose to hold on to the trade until the market tells me that the trend has ended, as per my pre-determined definition (1.5 ATR).

Here is an example of a trade in Palladium / US Dollar (XPDUSD) that I just spotted with this strategy. The green vertical line is my buy and the red vertical line is my sell.

As you can see, we had a situation where price was below the 20 SMA while the CCI indicator was below -100. I then waited for the price to break above the high of the previous candle before I placed my buy order. That was a nice 5.50% gain in 4 trading days.

Do visual back-testing

Instead of buying expensive software or hiring a coder to run back-tests for you, I recommend going over the charts of the instruments you trade frequently and see for yourself if this set-up works for you or not. The MA-CCI setup is easy to spot in most instruments, and you can quickly get a feel for whether this strategy is something you want try for yourself.

One final piece of advice for any kind of trend following strategy is to seek to avoid range-bound markets, and instead always look out for markets that are clearly trending, for example following major news announcements or other stories that can be expected to impact prices over a longer period of time.

Featured image from Pixabay.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.2 stars on average, based on 21 rated postsFredrik Vold is an entrepreneur, financial writer, and technical analysis enthusiast. He has been working and traveling in Asia for several years, and is currently based out of Beijing, China. He mainly follows the stock and forex markets, and is always looking for the next great alternative investment opportunity.




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10 Comments

10 Comments

  1. Dji127

    July 18, 2017 at 11:56 am

    Thank you for posting this! I am struggling to find suitable methods to pick my trades and find myself randomly entering the market only to have price do the complete opposite to what I had expected. Perhaps I will have some luck with this.

    Thanks again

    • Dag Fredrik Vold

      July 18, 2017 at 12:46 pm

      Hi! Great to hear you liked it. Let me know how it worked out for you.

  2. misson1682

    July 18, 2017 at 6:23 pm

    Very very interesting.
    Thank you very much to share this.
    I have a 2 questions :
    1. Time frame :
    There is really no impact on results? Cause I see really different entry point depends on time frame?
    I mean, logically the more the timeframe is, the more it will show LT direction no?

    2. what you call range-bound markets ?

    Thank you again for your post.
    Regards.

    • Dag Fredrik Vold

      July 19, 2017 at 1:49 am

      Hi,
      Glad to hear you liked it!

      1. I recommend choose one timeframe and stick with that timeframe. You will get different entries and exits, but you also have to remember that trends are different on different
      timeframes. There can be many shorter-term trends inside one long-term trend!

      2. Do a visual check of the chart. If price is trending per your definition it should be trading above your chosen moving averages, and sloping from the lower left corner to the upper right corner of your screen. If it is ranging then price keeps staying around the moving averages.

  3. [email protected]

    July 21, 2017 at 11:09 am

    can you explain can I use CCI instead of RSI? Both are indicators for overbuying or overselling conditions, but CCI is not available in most of the cryptocurrency tools.

    • Fredrik Vold

      February 4, 2018 at 2:04 pm

      RSI and CCI are slightly different. I haven’t tested with the RSI, but feel free to apply it to your chart and do some visual back-testing.

  4. Tommy328i

    September 1, 2017 at 3:35 pm

    Hello, this is very useful, thanks. Going back on my charts I can see that this strategy would have worked many times over. Have you written an article on how to spot the best strategy conditions to sell? I would be really interested to know if you can apply the same but in reverse.Thanks

    • Fredrik Vold

      February 4, 2018 at 2:07 pm

      Hi Tommy, I know that some traders are indeed using the inverse of this strategy for shorting. I haven’t tested it myself, but I believe it would work just as well.

  5. JReal

    February 22, 2018 at 11:26 am

    Thank you for the insight. I was trying to back view some of the activity of Ripple (XRP)/ USD on Trading view using 4 hour chart. It seemed to work well; although, there seemed to be more opportunities for smaller trades in the lower timeframe because of pricing activity. I was wondering if you had any tips for using this method with crypto and in short time frames, say an hour? thanks in advance. Cheers.

    • Fredrik Vold

      February 22, 2018 at 11:49 am

      Hey JReal, I have only traded it in forex on the 4H for myself, but I believe it has potential in other markets and timeframes as well. Definitely best to use on something that as a tendency to trend more, whatever that may be…

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Trading 101

A Long-term Investment Strategy with the 200-Day Moving Average

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Moving average

If you are looking for a way to be invested in the stock market during good times, but at the same time have some protection in place for when the next crisis hits, then look no further. Trend-following strategies should then be your friend, and I will here share a simple yet very effective such strategy designed for long-term capital growth with low volatility.

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Aside from my crypto investments, I have long been looking for a low-maintenance investment strategy for the stock market. As I don’t have much time for short-term trading anymore, I am mainly looking to make long-term investments that I can simply buy and forget about.

However, I still want to be protected in case we hit another crisis or enter into a larger bear market. In my opinion, there are lots of risks on the horizon for the financial market. Still, a bull market is a bull market and any good trend-following investor should be invested in it regardless of his own feelings or opinions about where the market should be heading.

The 200-day moving average

The 200-day moving average is one of the most used technical indicators out there, and possibly the most popular moving average, particularly among US stock market investors.

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Because of its popularity, as well as being featured in the media whenever the market crosses it, it works in many ways as a self-fulfilling prophecy. The 200-day moving average has also been in the headlines over the last few weeks after the plunge we saw in global stock markets in the beginning of February. The line then acted as support for the S&P, but a break below it would have been a significant event that many investors would take as the beginning of a larger bear market.

To illustrate this point, let’s take a look at the table below from Bloomberg. It shows six bear markets where losses exceed 20%, broken down by the loss before the market came down through the 200-day moving average and after it crossed the line.

200-day moving average

The question now becomes if you can use the 200-day moving average as an indicator to follow in your own trading. You would buy when the market closes above the 200-day moving average and sell when it closes below.

The answer to that is that it definitely could be used to ensure you stay invested during prolonged bull markets, while avoiding deep corrections and market crashes. However, a problem with all trend-following strategies is what’s known as whipsaws – those times when the trend appears to start in one direction just as it turns again into the opposite direction. This is what kills the profitability of most trend-following trading systems.

Dealing with whipsaws

One strategy for overcoming the problem with whipsaws is to wait a certain number of days after the moving average line has been crossed before you enter your trade. This way, you would filter out a lot of the choppy price movements during times when the market is not showing any clear direction.

For example, one strategy that often is proposed is to buy only when the market has closed above the 200-day moving average line for 5 consecutive days. Similarly, you would sell when the market has closed below the same line for 5 consecutive days. 5 days seems to be a popular choice as it filters out most of the choppy price movements that are happening right around the moving average line.

Depending on what market you test this strategy on, you may find that the absolute returns would have been higher with a simple buy-and-hold system. However, pay attention to what happened during market crashes like the one we had in 2008. If you apply it to the SPY ETF (the ETF that tracks the S&P500), you will see that the strategy then went to cash and you would have been protected against further downside. In addition, keep in mind that nobody knows how deep the next crash will be, all we know is that sooner or later it will come.

Personally, I would rather sacrifice a little bit of my returns for an insurance against a completely unknown risk to the downside. In my view, this strategy is perfect for long-term capital growth while keeping volatility very low and giving peace of mind to the investor during times of market turmoil.

Featured image from Pixabay.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.2 stars on average, based on 21 rated postsFredrik Vold is an entrepreneur, financial writer, and technical analysis enthusiast. He has been working and traveling in Asia for several years, and is currently based out of Beijing, China. He mainly follows the stock and forex markets, and is always looking for the next great alternative investment opportunity.




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Trading 101

How to Find Good Swing Trading Set-Ups

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swing trading

Swing trading is often the starting point for those who are looking to venture into trading, and perhaps make the move from being an investor to becoming an active trader. The reasons for this are simple; it involves trading on a medium timeframe which means it is possible to do it while you still have a day job, and it can complement other trading styles like day trading, trend trading, or scalping.

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According to Investopdia, typical holding time for a swing trader is 1-4 days. In forex, we would typically hold our trade for no more than 5 days in order to eliminate the risk of holding a position while the markets are closed over the weekend. For cryptocurrencies however, which trade 24/7, we can adapt our rules and we no longer need to be so strict about the holding period. In crypto, as long as the conditions for holding the trade are still valid, we should hold on to it.

What is a swing in a market?

The market price of a cryptocurrency can be defined as the equilibrium between supply and demand at any given time. It is the price where a buyer and a seller agree to make a trade. Over time, these equilibrium prices can move in uptrends or downtrends or even sideways in a range.

A typical market pattern is for prices to move from contracting ranges to expanding ranges. The shift between these two is called a “break-out,” and this is where we see strong and quick price movements to a new area on the chart.

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One way to look at it is to compare range contraction to a spring that is being compressed. The break-out occurs when all the energy from the spring is released, which may happen either to the upside or the downside. We now have the beginning of a “swing” in the market.

If this break-out is followed by a series of higher tops and higher bottoms in “wave movements,” the market has formed an uptrend. If the inverse is true, we have a downtrend. Each wave is considered its own swing in the market.

As swing traders, our job is to catch the most violent part of this move – the break-out. Some traders choose to hold on to the trade through several swings and thus ride the trend, while others prefer to sell once a pre-determined price target has been reached.

How to spot good potential swings?

For the majority of the time, prices of any tradable instrument move within a certain range. In the stock market, it is often said that the market is ranging as much as 80% of the time.

To scan for potential trading opportunities, one approach is to first look at your charts in one of the higher timeframes, for example the daily or the 4-hour timeframe. Once you spot a promising set-up, switch to a lower timeframe like the 1-hour to look for specific entry opportunities.

Generally speaking, there are three important factors you need to take into consideration when looking for an entry as a swing trader:

  1. Swings should happen in the same general direction as the trend that is playing out on the higher timeframes.
  2. If trading crypto, look for momentum in coins that share similar characteristics as the one you are trading. For example, if you are considering to trade a privacy-oriented coin like Dash, how are other privacy coins like Monero or Zcash doing? In the stock market, look for stocks in the same industry.
  3. Carefully evaluate the trend. Is it getting stronger or weaker? A weakening trend could mean that it is about to change direction, while a strengthening trend could mean the opposite. Is trading volume supporting the trend? Uptrends with gradually increasing volume are considered the most robust.

Timing and win rate

The best instrument to trade is the one that is exhibiting the strongest behavior in its class. So, to use the privacy coins as an example again, pick the one that is trending up in the strongest way among them. This is the coin where you want to place your trade.

In addition to this, don’t forget to adjust and tweak your strategy to the prevailing market conditions. Remember that the win rate of any trading strategy can change dramatically under changing market conditions, and make you go from being a profitable trader to a losing trader.

As swing traders, we need to be aggressive when we spot good opportunities. You cannot afford to pass on good trading opportunities. Make sure that you earn enough on your good trades to make up for the inevitable losses that will come.

Similarly, a swing trader also need to know when to stay away from the market altogether. It is equally important to recognize the conditions you should stay away from, as it is to be aggressive under the right conditions.

Lastly, remember the words of the legendary trader Jesse Livermore: “There is a time to go long, a time to go short, and a time to go fishing.” These are wise words that we all should remind ourselves of from time to time.

Good luck on your swing trading journey.

Featured image from Pixabay.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.2 stars on average, based on 21 rated postsFredrik Vold is an entrepreneur, financial writer, and technical analysis enthusiast. He has been working and traveling in Asia for several years, and is currently based out of Beijing, China. He mainly follows the stock and forex markets, and is always looking for the next great alternative investment opportunity.




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Jonas Borchgrevink

A New Trading Strategy? Using RSI and Stoch to find Entry Points

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I started my CFD Journey on Thursday using a few rules that I created for myself. I’m now interested in trying to see if I can use RSI and Stoch in combination to create an even better trading strategy for myself. My previous rules were:

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  1. Only risk max 2% of my bank roll per trade.
  2. Have 0 active positions during the night (first of all, I lose sleep, second; you are charged an interest fee for leaving a leveraged product overnight.)
  3. Always trade on last month’s trend including the previous day(s). If they do not correlate, I will not trade.
  4. If one position is lost, I’ll double the amount (martingale) and do a second trade. I’ll only stop doubling after 3 consecutive losses.
  5. Do not think about lost trade opportunities.
  6. Markets to trade: Dax & Dow (minimum spread).
  7. Stay updated on economic releases prior to entering a trade.
  8. Do not have emotional ties to the money. I like to call them “points”.

Trend following has proven (historically) to be the most sound way to trade any asset. It’s indisputable. However, for CFD trading I never want to leave a trade overnight due to interest fees and sleep. It can be hard to do trend following when you have to be in and out of a trade quick. I got an idea today to try and use RSI and Stoch in combination to find the best entry points for my CFD trading. And my ultimate strategy would be to include it with my number 3 rule:

Always trade on last month’s trend including the previous day(s). If they do not correlate, I will not trade.

In combination with my new RSI and Stoch rule:

Only enter a position when an asset is overbought or oversold shown by both RSI & Stoch at the same time.

What is RSI and Stoch?

The relative strength index (RSI) is a momentum indicator developed by noted technical analyst Welles Wilder, that compares the magnitude of recent gains and losses over a specified time period to measure speed and change of price movements of a security. It is primarily used to attempt to identify overbought or oversold conditions in the trading of an asset.

Many say that an asset with an RSI above 70 is overbought (and should be sold) or if the RSI is below 30 it’s oversold (and should be bought).

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The stochastic oscillator is a momentum indicator comparing the closing price of a security to the range of its prices over a certain period of time. The sensitivity of the oscillator to market movements is reducible by adjusting that time period or by taking a moving average of the result.

Asset with a stoch showing above 80 is considered overbought, and if the asset is showing less than 20 it’s considered oversold.

My mini experiment with the Dax 30 Minute Timeframe

Below is the first crossover I found where RSI and Stoch is correlating going back a few days on the Dax index. Both give a buy signal when the indicators cross their lowest horizontal lines. Then I found out that if I were to sell when either one of the indicators crosses the overbought territory I would be able to Take Profit.

Looking at the Dax index back to January 17th, I would have won six trades and lost two trades based on this strategy alone (RSI and Stoch with a 30 min timeframe). If I were to implement it with my trade following rule, I would have initiated 0 trades during this period (where both the intraday trend and the monthly trend is correlating.) I’m not sure if I’m going to follow these rules by the book, but I’m definitely going to experiment with them the following week and give you an update in my posts.

Have you tried this before? Submit a comment below and let me know how it worked for you.

My trading rules are now updated to:

  1. Only risk max 2% of my bank roll per trade.
  2. Have 0 active positions during the night (first of all, I lose sleep, second; you are charged an interest fee for leaving a leveraged product overnight.)
  3. Always trade on last month’s trend including the previous day(s). If they do not correlate, I will not trade.
  4. If one position is lost, I’ll double the amount (martingale) and do a second trade. I’ll only stop doubling after 3 consecutive losses.
  5. Do not think about lost trade opportunities.
  6. Markets to trade: Dax & Dow (minimum spread).
  7. Stay updated on economic releases prior to entering a trade.
  8. Do not have emotional ties to the money. I like to call them “points”.
  9. Only enter a position when an asset is overbought or oversold shown by both RSI & Stoch at the same time.
Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.2 stars on average, based on 50 rated postsFounder of Hacked.com and CryptoCoinsNews




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