There is a method out there which made million in fact billions for fund managers which subscribe to it. In fact it was the method which made millions in the recent 2008 market crash. It is the method which Ed Seykota, Richard Dennis to name a few subscribe to. This method is known as trend trading.
What is trend trading? Ed Seykota summed it up perfectly in the book Trend Following by Michael W. Covel.
In Bermuda, a new trader wanted to learn the “secrets” of trading from Ed. He said” Seykota, just give me the quick and dirty version of your magical trading secrets”. “What’s your point?” Seykota said, “Go down to the shoreline where the waves break against the shoreline. Now begin to time them. Run out with the waves as they recede and run in as the waves come in. Can you see how you could get into the rhythm with the waves? You follow the waves out and you follow them in. You just follow their lead.”
We are not in the business to predict nor forecast the market but we base our trading on pure price action. As long we price action still shows our trend is intact, we just follow the wave.
Mechanics of trend trading:
1. You would not be able to catch the absolute bottom or the absolute top of the trend
Absolute low or high here means from your entry till the low or high is like a few pips away. Trying to predict the absolute low or high of the market is what I call as ego trading. I have met many aspiring traders during my years of trading and whenever I hear people bragging about catching the absolute low or high, that person almost never make profit later on. Unless you own the market or manipulate it, forget about it. If you somehow manage to get it, just put on your big smile and not dwell on it. What you do is wait for the market to tell you it is bottoming. Use historical price as your reference to find the bottom. If there is no historical price, then you will have to wait for the market to form a bottom / top and retrace near the recent bottom / top before you attempt an entry.
2. Know where the price is trading
Knowing where the price is trading does help one to decide if the trade is going to go through a trending phase. You need to know where is the one year high, the two year high, the five year high, the ten year high and so on.
The diagram above shows the GBPUSD weekly chart. GBPUSD made a low around March of this year and the low was again tested in July this year. As you can see since the low was tested in July, price fail to close below the low of March and this was the start of the bull trending period of the GBPUSD. Where did this trend end then. No surprises as it ended around the high of year 2102. Last year’s high. As you can see countries which has economic ties has a range which they will allow their currency to fluctuate around. Thus trend trading could be executed when price are trading near those extreme ends All it take is patience.
3. Risk Management
Risk management is top priority. You must have a defined exit protocol to control injury to your account. Using the example of the diagram earlier, if price in July manage to close below the low of March 2103, I would exit my buy GBPUSD with a loss and protect my account.