Quote from marketsurfer:
if these guys, with the most money of all time in their trend programs can't find the trend--- how can the average trader?
Trend following works. One only needs to apply it 'correctly'.
What I mean by 'correct':
1) Determine context. Trends exist in all time frames. Longer term trends (monthly, weekly) supercede shorter term trends (daily, hourly, min) in importance.
Or, another way of saying it - shorter term trends only exist INSIDE longer term trends as pullbacks, rallies etc. The monthly/weekly trend is the MASTER trend. All shorter time frame trends occur within this MASTER context.
2) Draw correct trendlines. Trends are drawn using the point 1-2-3 technique.
Point 1 is the highest/lowest point in old trend.
Point 2 forms the first V - opposite of point#1.
Point 3 forms the second V on the same side as point#1.
Check out one of Jack Hersheys thread for an explaination. Or here:
http://www.elitetrader.com/vb/showt...\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\&pagenumber=1
A line drawn through Point 1 to 3 represents your trendline.
A parallel trend line from 1 to 3 is drawn through point 2. This is your channel line.
In the above example, the trend is down. Price will often move up to the trendline (right-most line) and bounce back down. The right trendline is where very low risk entries are placed in the direction of the trend.
This is how trendlines are drawn.
Most et'ers cringe at the 1-2-3 technique because its championed by the much lamented Jack Hershey/Grob.
However, those need to keep in mind the 1-2-3 technique isn't the invention of Jack Hershey. Rather its the traditional trend charting tool of technical analysts everywhere.
Take a look at John Murphys' seminal work "Technical analysis of the Financial Markets' and you'll find the 1-2-3 technique explained in chapter two.
Nothing new under the sun.
3) Putting it all together.
The market HONORS and OBEYS longer term trendlines far more than short term trendlines.
Use this to your advantage.
Identify the long term trend using the 1-2-3 method. Identify areas of support and resistance.
When price approaches the long term trendline (right line/hard resistance), switch down to a lower time frame. Wait for a 1-2-3 trend in the direction of a confirmation bounce. Take the next trade off that trendline = low risk/high reward entry.
This is what is often referred to by chartists/technical analysts when they, 'look for trades off the higher time frame and enter on the lower time frame'.
Explained above represents one of the easiest and least confusing ways to apply trend following.
More complexity (read: trading opportunities) can be accessed if one chooses to trade the subtrends occurring WITHIN the master long term trend.
This is done by:
1) drawing 1-2-3 trendlines on each relevant time frame. What is relevant? The market places precedence on higher time frame trendlines over shorter term trendlines. So higher time 'fractals' should be drawn first, followed by the next logical smaller time fractal etc. Lastly, trendlines in the desired trading fractal should be drawn.
The purpose is to generate a chart that projects higher fractal trendlines on the lower time frame chart you intend to trade off.
What we ultimately arrive at is a chart which is superimposed by all higher fractal trendlines that essentially serve to *bound* or provide *context* for the tradeable area.
Again, this is nothing new. John Murphy and countless other TA books suggest an identical method - using multi-fractal trendlines to identify short term trading opportunities.
Of course, theres more. Volume is usually used as a confirmation indicator (volume should move in the direction of trend - ie increases on rallies and declining during pullbacks during uptrend.
Others. Failure to traverse and trendlines breaks signal exits.
Its all pretty simple. Just have to take a leap a faith and invest the time to make it work. Because it does.
