When people talk about trend trading, counter trend... Etc etc... They generally have no clear definitions. They just glance at a chart and can tell you if it's trending or ranging. Many people claim that there is no such thing as trend and other crap... Or say not to counter trend and other useless things that are supposed to be used as rules as thumb.
Here is what a trend is and what it's elements are...
Element 1: Velocity
People's minds are picking up something very simple. Velocity! People who are recognizing trends are detecting moving average slopes. There is nothing more to it. Simple.
Element 2: Acceleration/Deceleration
There are periods of acceleration and deceleration within a trend. A lot of traders trading on instinct... Their brain recognized how fast prices are currently moving vs how fast they were recently moving. With a trend moving at 15 pips per hour... A little deceleration is nothing to worry about. However, with a trend moving at 5 pips per hour reversals occur easily on deceleration!
Element 3: Volatility(Range)
Each trend has a certain amount of volatility to it. Generally the faster a trend is the smaller the volatility and range. When a trend slows range expands relative to the speed of the trend.
From these three elements I have created my trend and range trading rules.
On my proprietary Velocity MACD I have a few different numbers. I have them in a simple understandable format. Each number represents 10 bars. It doesn't matter what moving averages I am generating them off of. Each one represents one of the elements. Recent velocity over 10 bars, recent acceleration over 10 bars, and filtered averaged range over 10 bars. I like using the 20,30 EMA pair to generate the base velocity numbers.
Last night at the EU open we had a downtrend strength of -2 pips per 10 bars with a positive acceleration of +2 pips per 10 bars. Eg, the bottom indicator was projecting the downtrend to be confirmed over 10 bars past EU open.
We were working with a sub 0.20 Trend/Range ratio so it could really be traded either direction, but I only trade in the direction of a new trend when it's trying to be established.
So anyway... Last night I was happily trading euros long into the new trend then after a few cycles I took a breather to watch what would happen. Trend speed continued to pick up...
KEY RULE 1: Do not counter a trend with a combined velocity/acceleration over 10 pips per 10 bars with a trend/range ratio over 0.25. It's too hard to time tops perfectly enough to counter a trend over that speed.
Even though I was uncomfortable trading with trend this long into a trend it literally was the only trade that could be done! With this kind of trend speed the worst that could happen is things would go sideways for hours without some sort of unexpected news catalyst.
The later part of the trend I stopped trading and just sat out. The market just clocked and the indicator sat pegged at a trend speed of 15+ for THREE hours! Unbelievable...
I posted this so that those that want to understand and mathematically measure/quantify trends understand the different elements of a Trend. There is one more element which I have not mentioned. I also monitor trends for cyclic behavior. The degree of cyclic behavior also helps in estimation of when to buy the dip.
When it comes to pullbacks in trends what I generally have noticed in the EUR/USD is that the pullback can be calculated like this... If a trend is moving at a velocity of 10 pips per 10 bars, acceleration of 5 pips per 10 bars, and has a range of 20 pips per 10 bars on the 5m... The most pullback you can expect is around 5-8 pips if you want to enter a trend. If trend speed is real slow... Like around less than 5 pips per 10 bars(50 minutes on the 5m)... You need to use wave counts to most effectively trade as the market usually is continually reversing for 2-3 wave counts and not trending.
Pullbacks within trends have to be estimated by comparing recent range to trend speed and acceleration.
KEY RULE 2: When a trend loses acceleration... If the speed is around or under 10 pips per 10 bars(50 minutes on the 5m). Give the market a solid half hour to consolidate. If it doesn't break down during consolidation things are good to trade with trend again.
Anyway... I probably worded things kinda complex... Any questions just ask.
Here is what a trend is and what it's elements are...
Element 1: Velocity
People's minds are picking up something very simple. Velocity! People who are recognizing trends are detecting moving average slopes. There is nothing more to it. Simple.
Element 2: Acceleration/Deceleration
There are periods of acceleration and deceleration within a trend. A lot of traders trading on instinct... Their brain recognized how fast prices are currently moving vs how fast they were recently moving. With a trend moving at 15 pips per hour... A little deceleration is nothing to worry about. However, with a trend moving at 5 pips per hour reversals occur easily on deceleration!
Element 3: Volatility(Range)
Each trend has a certain amount of volatility to it. Generally the faster a trend is the smaller the volatility and range. When a trend slows range expands relative to the speed of the trend.
From these three elements I have created my trend and range trading rules.
On my proprietary Velocity MACD I have a few different numbers. I have them in a simple understandable format. Each number represents 10 bars. It doesn't matter what moving averages I am generating them off of. Each one represents one of the elements. Recent velocity over 10 bars, recent acceleration over 10 bars, and filtered averaged range over 10 bars. I like using the 20,30 EMA pair to generate the base velocity numbers.
Last night at the EU open we had a downtrend strength of -2 pips per 10 bars with a positive acceleration of +2 pips per 10 bars. Eg, the bottom indicator was projecting the downtrend to be confirmed over 10 bars past EU open.
We were working with a sub 0.20 Trend/Range ratio so it could really be traded either direction, but I only trade in the direction of a new trend when it's trying to be established.
So anyway... Last night I was happily trading euros long into the new trend then after a few cycles I took a breather to watch what would happen. Trend speed continued to pick up...
KEY RULE 1: Do not counter a trend with a combined velocity/acceleration over 10 pips per 10 bars with a trend/range ratio over 0.25. It's too hard to time tops perfectly enough to counter a trend over that speed.
Even though I was uncomfortable trading with trend this long into a trend it literally was the only trade that could be done! With this kind of trend speed the worst that could happen is things would go sideways for hours without some sort of unexpected news catalyst.
The later part of the trend I stopped trading and just sat out. The market just clocked and the indicator sat pegged at a trend speed of 15+ for THREE hours! Unbelievable...
I posted this so that those that want to understand and mathematically measure/quantify trends understand the different elements of a Trend. There is one more element which I have not mentioned. I also monitor trends for cyclic behavior. The degree of cyclic behavior also helps in estimation of when to buy the dip.
When it comes to pullbacks in trends what I generally have noticed in the EUR/USD is that the pullback can be calculated like this... If a trend is moving at a velocity of 10 pips per 10 bars, acceleration of 5 pips per 10 bars, and has a range of 20 pips per 10 bars on the 5m... The most pullback you can expect is around 5-8 pips if you want to enter a trend. If trend speed is real slow... Like around less than 5 pips per 10 bars(50 minutes on the 5m)... You need to use wave counts to most effectively trade as the market usually is continually reversing for 2-3 wave counts and not trending.
Pullbacks within trends have to be estimated by comparing recent range to trend speed and acceleration.
KEY RULE 2: When a trend loses acceleration... If the speed is around or under 10 pips per 10 bars(50 minutes on the 5m). Give the market a solid half hour to consolidate. If it doesn't break down during consolidation things are good to trade with trend again.
Anyway... I probably worded things kinda complex... Any questions just ask.