To The Moon

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If you have been following my article, I have managed price action a couple of time, and also briefly mentioned about looking at previous day price and volume. This is a form of trend following.

Normally when we look at a number of charts when we trade. It is quite common that we find prices tend to move in a particular directions.

It can be either up or down, and it is for an extended periods of time.

But there is no reason that can be used to explain why it occurred in this way. These are called trends, and many successful traders have been able to generate significant profits by identifying and following the trend.

If you were to search for Trend Following Strategy, you will find that it is based on Technical Analysis (TA).

Appreciate if you could share your thoughts in the comment section on what are your thoughts on using trend following strategy.

I personally feel that part of it is from TA.

Technical Analysis (TA) can include any kind of chart analysis and pattern recognition.

Trend Following is different, as it is more systematic and methodical. It uses simple mathematics to identify trends, then follow them for a suitable period of time.

A Trend practitioner would believe that trends exist across multiple markets and industries and they exist for a reason.

Practitioner also believe that price of a stock is the most important thing to understand. How we see or ascertain a market can be derived from its price action.

Importance of Price (Price Action)

To fully understand and use Trend Following, it is necessary to understand the importance of price. Trend practitioners would use technical analysis to identify trends and plan the entry point to the market.

Price is used to plan and work out their exit strategy.

The key tenet of Trend Analysis (or rather something that Trend Practitioner hold dear) is price could tell investors everything they need to know.

By looking at past trading day, it can tell how stock have performed in the past and where the price is now. Hence let us know what the future price might be.

This is why Trend Practitioner focus on Price Movement(Action). Normally fundamental factors like economic data, business details or geopolitical events would be ignored.

Trend Practitioner would tell you that analysing fundamentals does not bear any fruits. What we need to know about the market could be reflected from its price.

The price is all you need to know. A market that is going up should be bought, while a market that is going down, then it should be sold.

If you consider all the available data and information in the financial markets you might realize that predicting what causes a market to move in a certain way is near impossible.

Therefore focusing on price brings benefits of simplification.

It is NOT Just Technical Analysis (TA)

Trend Practitioner would claim that what they are doing is not just technical analysis.

They would use the existence of trends across many domains – economic, political, fashion, technological to prove that trends does occur in these areas.

It is important that we do remember that trends are also related to investor behavior.

For example, investor enthusiasm can drive stocks to extremes without any fundamental underpinning. This can ultimately make investors susceptible to painful reversals but a trend practitioner would know when to get out of the move before the market drops fully.

One good example would be PTPI during last night trading (14 Apr 23).

PTPI is a good example as there was a period when prices went really high up, and there are quite a heavy BUY volume. So investors might have taken Trend Following too extreme, thought that it could go higher.

But it did not break Day’s High of $8.20 anymore at the second half of the session.

Hence, it is also important to apply trend following properly so a proper trend practitioner would know when to get out.

Basics of Trend Following Strategy

Trend Practitioner basically adopt a simple and straightforward strategy. They buy when the market is rising, and sell when price start to drop down.

By doing this, they are trying to enter at the start of the trend and exit when the trend is over. Basically they are unbiased and can make profits on both sides because they do not care what is driving the trend.

Do take note that not all trends are having a long-tail distribution, some trend can be very short and disappear very early.

These are small ripple movement, but there are also big waves and the occasional storm, this is where the trend practitioner can make their profits.

In order to really find a good big waves, trend traders normally start off with smaller ripple movement, but these smaller ripple movement could bring them to fall off when it start to move in wrong direction.

As Trend Practitioner, they need to find a pattern which look hopeful, and prepared themselves if it does move in the wrong direction. To do that, a proper exit strategy, cut losses need to be practised and followed diligently to avoid any heavy losses.

So the end goal is to have many small wins who is large enough to shoulder any losses that will bound to happen.

So this is the reason why I decided to incorporate this into A.I. so that it can adjust itself accordingly to detect a BIG wave coming, while moving in as a smaller wave first.

HOW TO FIND A TREND

Traders who actually use Trends will use TA or rather than raw price charts.

This is the same reason why traders are now using systems to have formulas build in because formulas provide an objective way of establishing when a trend is underway.

It is relatively straight forward to program such rules into a trend following trading system.

But there is also some traders who do rely on price action to find trends. I would rather say a combination of both would make it much better.

Using Moving Averages to find the Trend

One of the most popular indicators for identifying trends is a moving average.

It is actually the average of the price for the previous trading interval period. When a smaller number of interval period is used, this is known as a fast moving average, since the moving average line reacts quickly to changes in price.

When a larger number of period is used, it is considered a slow moving average, then this will tend to change much slower.

The benefits of using a moving average are that it helps to eliminate any short-term fluctuations in the market, taking out some noise from the overall market direction.

Traders use moving averages to determine whether or not a trend is developing. Normally, both the fast one and slow one is used together.

When the fast moving average crosses over the slow one, this is an indication that an upward trend is underway and is usually a strong buy signal. If the fast moving average then falls below the slow moving average, a downward trend is underway and the trend trader will sell.

The moving average crossover is the ultimate example of a simple trend following strategy.

Here we see a clear example of a 20/50 day moving average crossover in Apple:

Fast moving average (MA20) then falls below the slow moving average (MA50), a downward trend is underway and the trend trader will sell.

Other Method of Trend Following

There are no hard rules that Trend Practitioner would stick to Moving Averages (MA). There are many hundreds of other indicators that the traders can use.

Many traders now uses trading system who can easily help to choose the suitable indicators for each different trades, these trader normally have an extra edge.

But if the system does a bad job in managing so many rules, this could lead to an overfitting and what works in back test might not work well in real life.

So it would be advisable to understand the basics and fundamental of any strategy before we really study into it and use them.

There are some traders who use some of the most popular indicators like Bollinger Bands and moving average convergence/divergence (MACD).

There are some who also uses the relative strength index (RSI), which measures how strongly the market is moving up or down.

These types of indicators can be used both to determine when the trend is strong, and when likely to continue. This is what I have mentioned in my previous article (Bull/Bear Strength) is one of them.

This would help us to determine if the market may become overbought or oversold. Buying when the market is overbought does not work as it suggests that the trend is nearing its end.

Summary

At the end of the day, it is important to stay focused on your end goal, which is to capitalize on long term trends.

So spend more time on risk management and issue selection rather than entry rules. Adopting a simple strategies might actually work better than complex models.

I shall share more on risk management and issue selection in another article.

Appreciate if you could share your thoughts in the comment section on what are your thoughts on the trend following strategy, do you use them in your trading?

Do like, share and comment on this article if you find this trading thought useful.

@TigerStars appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.