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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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4.3 stars on average, based on 32 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 closely follows stocks, forex and cryptocurrencies, 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

Managing the Safety of Your Cryptocurrency

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The fact that Coinbase and other companies have made it possible for nearly anyone to invest in cryptocurrencies is almost unilaterally a good thing, but it has led to many people buying cryptocurrencies without understanding the ecosystem. Bitcoin and other cryptocurrencies are only seen as risky investments because of their future worth, when there is also the risk of theft in the present.

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Many investors focus their time on the idea of maximizing the returns on their investments, but protection against downside is equally important. We’ve all heard the oft-cited thought experiment where when you lose 50% of your investment, you now need 100% returns to get back to even. Avoiding negative returns is an equal priority to achieving high ones.

There are some steps a newbie cryptocurrency investor can take to make sure they are as protected as they can be. From wallets to basic security and diversification, the points below are a few quick changes you can make that will maximize your security.

The Basics

The two most basic steps are not keeping your money in an exchange wallet, and using a 2-factor authentication application. Many people new to the ecosystem will go with the path of least resistance, and that results in only having a password protecting their assets.

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Exchanges are considered to be secure, but there have been many breaches in the past, so it is not impossible your funds could be compromised in the future. In the case of a hack, hopefully your exchange would cover you, but the best thing you can do is move your funds into an offline wallet (e.g. desktop, mobile, or hardware). By splitting your money off from the giant “honeypot” that exchanges serve as, the incentive for hackers is greatly reduced.

Additionally, by enabling 2-factor authentication and using an application, you mitigate for the risk that your password or phone number are compromised. This may sound crazy, but it is possible for a SIM card to get hijacked and a hacker to use your phone number to gain access to your funds. Authly and Google Authenticator make it possible to prevent that from happening.

Wallet Management

Once you have made sure your money is on a wallet, there are still risks you need to understand. At this point, the biggest risk is that you might forget the passcode or PIN to your wallet. Or you could lose the device with the private keys on it. Both of these situations can be handled easily by taking careful note of your memetic passcode and backing up your wallets onto a second device.

It might help to back up a bit for a second. Your private key is what verifies your ownership of a public key, which can be thought of as being similar to a bank account. When you moved your coins into an offline wallet, you “took ownership” of your private keys. This is an essential part of forming a decentralized network, because if you hadn’t done that, all the keys would still be managed by a centralized source. Another way to look at it as if you are making sure no one else knows your ATM code.

Something fewer people in the ecosystem realize is they are not assigned a single set of keys, but actually many pairs. These pairs of keys are generated from a “seed root”, which is a 16 word sequence of seemingly random words (see this list for more about this). By having this seed root, you are can prove you are the rightful owner of the cryptocurrency in question. It is considered to be the password of passwords, and should be guarded as such.

Knowing all of this, the best way for you to carry on with your security is to write down your 16-word seed root, file it away in a separate area from your wallet, and then back up the data onto an offline hard drive that can be recovered in the case of emergency. All of this may sound like a paranoid hassle now, but the small time investment will make the difference.

Protect Your Crypto

By learning to manage your money well, you will be able to increase the protection of your cryptocurrency. The final thing you should consider is spreading out your funds between several different wallets. There is always the risk that a company gets compromised, and by diversifying where you hold your securities, you can reduce the effect this may have.

Featured image courtesy of Shutterstock.

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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3.8 stars on average, based on 10 rated posts




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Trading 101

Trading 101: Managing Trading Emotions And The Fear of Missing Out (FOMO)

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Fear of missing out

At any given moment of the day, there are thousands of markets waiting for you. All those charts are moving 24 hours a day, 5 days a week, and every tick means that you could make money.

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Dealing with missed trades can be a major challenge for traders. Thinking of all of the money that never made its way to your trading account is tough, and it often leads traders to make some of the worst mistakes in the market.

Things FOMO traders say…

“I knew it!” – This usually comes from a trader who were following his planned set-up but ended up not taking the trade

“I could have made so much money today.” – Everyone would be a millionaire in hindsight.

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“I waited so long for this trade.” – A trader with a trigger-happy finger who is stalking a market as it is setting up for a good trade.

“It still has room to go…” – A trader who gets in late after first being too scared to enter.

“I have a feeling…” – A trader who is not following a plan with strict rules and criteria for entry.

“I’ll just enter with a small position.” – A trader who is justifying breaking his rules.

Reasons for FOMO trading

The problem with trading is that it can often be perceived as an activity with no clear beginning or end. Basically, a trader is always in the middle of his game – a game that never stops. And when there is no beginning or end to it, you could – in theory – always enter a new trade that has the potential to make you money.

We could for example compare this to gambling at a casino. When people sit down to play blackjack, everyone understands when the game begins and when it ends. After the game is over, you can’t change anything anymore. You have either lost or you have won.

In trading, however, the game never really ends. Even after you have closed a trade, you can always get back in. Every tick in the market is a potential opportunity for you to make more profit. When we are thinking like this, missing a trade feels like leaving money on the table!

Entering early in fear of missing out

This is one of the most common situations among FOMO traders. They see a set-up falling into place in front of them, and then decide to enter their order early since the price is already moving with such strong momentum. They get worried that the price will continue to surge without them.

The problem with this is that you enter your order before the set-up satisfies all your trading rules, meaning your risk management and your planned risk:reward ratio will be completely off. What often happens later is that the price turns before it reaches your planned entry point, and you end up sitting in a losing trade that never even met your entry criteria in the first place.

Price moved too fast and you missed your entry

It happens that you have a near-perfect set-up with only one minor criteria on your trading plan not being satisfied. You then see price move strongly in the direction that you expected, while you are still sitting on the sidelines.

This is obviously painful, and it is exactly in situations like this that traders tend to commit FOMO trading like chasing the price or enter their next trade too early as in the previous example.

Instead, be patient and move when the time is right

This is the correct way to approach trading and the only way to fight FOMO. In order to do this successfully, you must have a trading plan and a checklist with all your entry criteria written down. Many active traders like to have this physically printed out on a piece of paper so that they always see it before entering a new trade.

When you have your trading rules written down, experience shows that violating them becomes much more difficult, and you will end up as a much happier and more successful trader!

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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4.3 stars on average, based on 32 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 closely follows stocks, forex and cryptocurrencies, and is always looking for the next great alternative investment opportunity.




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Trading 101

Trading 101: How to Choose the Right Chart Type

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Chart types

Chart reading and pattern trading is something we have talked a lot about in this section in the past. Still, a question many new traders may have is perhaps what type of chart is the best to use in their daily trading. Do some charts work better with technical analysis than others?

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Japanese candlestick charts

The Japanese candlestick chart is probably the most common chart type to use among those who have at least some experience with trading (not investing).

Japanese candlesticksJapanese candlestick charts were, as the name implies, developed by the Japanese back in the 18th century for trading with rice futures. Today, this chart type has gained recognition among traders around the world for all the data that it represents in a visual and easily understandable way.

 

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The way the candlesticks work is that each bar in the chart represents four pieces of price information for the chosen timeframe: opening price, closing price, highest price, and lowest price.

CandlesticksRed (bearish) candles means that the closing price is lower than the opening price, and green (bullish) candles candles means that the closing price is higher than the opening price.

The lines above and below the “body” of the candles are called wicks. Generally, candles with long wicks signals indecision by the market, and candles with longer body’s signals more decisive movements by the market.

OHLC/bar charts

OHLC is short for open, high, low, close, and consists of vertical bars with horizontal lines sticking out on the sides. They represent the same information as Japanese candlesticks, but in a slightly different way.

OHLC chart

The straight vertical lines in this chart type represents the distance between lowest and highest price during the chosen timeframe. Again, a green line means that the closing price was higher than the opening price, and red lines vice versa. Opening (left side) and closing prices (right side) are indicated by the short horizontal lines sticking out on the sides.

Line charts

A line chart is the simplest of all types of charts, and is often preferred by long-term investors, financial media outlets, and people who have little to no experience with trading and investing.

Line chart

Line charts are usually not used by traders because they only represent a small piece of the available price data, namely the closing prices for each time period that we have set the chart to. In other words, we will not find out anything about opening prices, highs and lows within each time period when looking at a line chart.

Despite this, there are cases where even advanced traders choose to use line charts because they can provide more clarity to the market. For example, certain chart patterns such as the ABC (aka. 123) pattern stands out much more clearly when using a line chart. If you try it out, you may also find that other well-known patterns like the head & shoulder stand out very clearly on line charts.

Renko charts

Lastly, we’ll go over the least common of these chart types: the renko chart. As with the classic Japanese candlestick chart, this chart type was also developed by the Japanese.

Renko chart

Renko charts are designed to filter out smaller price movements in order to focus on the bigger picture in the market. The first thing to understand about this chart is that each “box” or candle represents a certain price movement rather than a time period, as for other chart types.

When the trader sets up the chart, he can define how large of a price movement each box in the chart should represent, and the chart will print new boxes, either red or green, as the price moves beyond the chosen parameters. This means that when prices consolidate and move only sideways, no new boxes will be printed on the chart.

The main use for renko charts is in identifying important support and resistance zones when you need to filter out all other less important things in the market. It can also be an effective tool for spotting trends and reversals in the market, but usually in combination with Japanese candlestick charts to ensure you are not missing out on important price information.

Japanese candlesticks best for all-round use

In summary, use line charts whenever you need a clearer view of the price action and to “unclutter” the charts. For most other uses, Japanese candlesticks will give you the best and most accurate representation of the price. Other chart types should be used only if you have specific trading strategies that require the use of those chart types.

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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4.3 stars on average, based on 32 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 closely follows stocks, forex and cryptocurrencies, and is always looking for the next great alternative investment opportunity.




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