trend following & dealing with retracements

[vita]

I am looking for some suggestions on how to deal with retracements in a trend following setup? Lets assume you're long the market which is trending up in your favor until it reaches a swing high. What do you do next? You could do one of followings (among others):

a) take profit immediately. Wait to see if the retracement resumes back to a continuation of the original uptrend after closing above its swing low. Then take a new long position.
b) stay long, take the heat through the retracement periods while checking by e.g. Fibonacci levels, etc. for any sign of trend continuation or reversal to continue or exit.

Any insight is appreciated. To keep things simple assume you're not using a pyramid or other scaling techniques and simply trading one car.

 

[jack hershey]

This illustration will add several items to your knowledge for trend trading.

 

[Buy1Sell2]

Quote from vita:

I am looking for some suggestions on how to deal with retracements in a trend following setup? Lets assume you're long the market which is trending up in your favor until it reaches a swing high. What do you do next? You could do one of followings (among others):

a) take profit immediately. Wait to see if the retracement resumes back to a continuation of the original uptrend after closing above its swing low. Then take a new long position.
b) stay long, take the heat through the retracement periods while checking by e.g. Fibonacci levels, etc. for any sign of trend continuation or reversal to continue or exit.

Any insight is appreciated. To keep things simple assume you're not using a pyramid or other scaling techniques and simply trading one car.

Keep your position size small from the beginning and let it ride through the retracements. Thank you for your time.

 

[vita]

Thanks guys. Based on your suggestions, exiting a winning trade immediately after a swing high is not a good practice and one should take the retracement pain and watch if the order flow resumes after profit takers are done.

 

[Humpy]

Taking Jack's picture I would suggest
1.placing your stop just below the lower trendline. So it either bounces and you are still in the trade or you are out with a profit
2. taking your profit and waiting to see if it breaks the trendline for a pullback or a reversion and in again

 

[pneuma]

Quote from vita:

I am looking for some suggestions on how to deal with retracements in a trend following setup? Lets assume you're long the market which is trending up in your favor until it reaches a swing high. What do you do next? You could do one of followings (among others):

a) take profit immediately. Wait to see if the retracement resumes back to a continuation of the original uptrend after closing above its swing low. Then take a new long position.
b) stay long, take the heat through the retracement periods while checking by e.g. Fibonacci levels, etc. for any sign of trend continuation or reversal to continue or exit.

Any insight is appreciated. To keep things simple assume you're not using a pyramid or other scaling techniques and simply trading one car.

Vita,

I would suggest that if you are using a TF strategy you should calculate your profit from the stop loss value NOT the open equity of the position. The "retracements" therefore don't mean too much because you sell at your stop loss (whatever that may be), and there will always be ups and downs in any TF approach. This is a psychological issue because is is concerned with how you calculate value and has nothing to do with your strategy.

Secondly, if you are concerned that you will miss future advancements, use a entry strategy that looks for mean reversions within the current trend. Then you will: 1. get in before a breakout strategy, 2. reenter if you stop loss is too tight and continue following the trend.

pneuma

 

[Cutten]

Personally I only exit if I think the trend has ended, or I feel I can identify with high probability a significant blowoff top (or panic bottom, in a bear trend) where the market has gone parabolic and speculative sentiment has reached extreme levels.

For run of the mill retracements, I will just ride them out in most cases. The exception is if I have a very large position, I will use possible swing highs to take some profits and go back to normal position size.

With trend-following, the key is to hold for the big swings, and make sure you fully capture those moves. Your goal is not to try and avoid every little bitty pullback. If you try to do the latter you will usually fail at the former.

 

[makloda]

Quote from vita:Any insight is appreciated. To keep things simple assume you're not using a pyramid or other scaling techniques and simply trading one car.

Backtest it. See if exiting and going to cash when a retracement occurs enhances your risk adjusted returns or if it doesn't.

In my backtesting, it doesn't. I tested multiple variations of trying to determine if price is "turning around" in long and short term moving averages (i.e. is the retracement "for real"). Doing so for me lowered returns and increased volatility.

Once in a blue moon, one of those big retracements is just that - a pause before the longer term trend stays in place.

P.S. you didn't mention the timeframe you're interested in. There's a big difference between analyzing retracements of positions held for a couple of weeks or positions held for a 2 hours since intraday standard deviations of say 5 minute candle returns are subject to more fat tail "outlier returns" than longer term returns, i.e. you get more whipsaws in intraday commodity future data.

All this not scientific fact, just my personal experience. Your mileage may vary.

 

[Albert Cibiades]

Ah, would that it were as simple as Jack would have you believe. For some bizarre reason of cerebral oversight it has never occurred to him to wonder WHY his beloved channels form, fail and dissolve. Peaks and troughs in all time frames tend to occur at confluences of price support and resistance. You will not learn such things from a pseudo-forum like ET. Go buy yourself a classic book, like Schabacker or Murphy.

 

[jack hershey]

Quote from Albert Cibiades:

Ah, would that it were as simple as Jack would have you believe. For some bizarre reason of cerebral oversight it has never occurred to him to wonder WHY his beloved channels form, fail and dissolve. Peaks and troughs in all time frames tend to occur at confluences of price support and resistance. You will not learn such things from a pseudo-forum like ET. Go buy yourself a classic book, like Schabacker or Murphy.

I'll step my comment up a notch.

The OP didn't get it to do a reversal at the top of the long where a new max price value occurred. (Where he was in his post)

Had he done that he could have collected the profits of the long diagonal I drew. (thin light green line)

Then he would have made profits down to the TL where a significant decision was called for. At that point, either way he would have continued to make another profit segment.

So I took him to the next decision point which was Identical to what got him into his original trade. I completed a cycle of trading a trend in other words. He had already shown that he missed a retrace in the trend and held through it.

Doing the reading you suggest, at best, will put him where you are.

This attachment gets him acquainted with material that is not found on your book shelf if those references are the best you can do.