Source: Huishang Media
Original link: https://mp.weixin.qq.com/s/YZwSqfC1PNVfvPb4bzPfOA
Many technical strategies are the result of extensive reverse testing and data mining. Some are real and effective, while others seem to be effective only when certain conditions are met. In this article, Sofien Kaabar, an overseas big V trader, will introduce one of his favorite trend following strategies. Before that, let us clarify the definition of trend tracking as a type of transaction:
-
Look for buying opportunities in rising markets
-
Looking for selling opportunities during market downturns
The tools required for this strategy are:
200-period index or simple moving average (optional).
A short-term stochastic indicator with a lookback period of 5.
The interim stochastic indicator is set to the lookback period of 14.
Fibonacci extension tool, used to measure goals and potential.
Note that in the last step, we mentioned expansion rather than retracement. The difference between the Fibonacci extension tool and the traditional retracement tool is that it can help us predict the amplitude. Therefore, we can use Fibonacci retracements to determine until what level the price will react, and then use the extended tool to see until the trend can continue. The commonly used Fibonacci extension levels are 61.8%, 100% and 161.8%. The 200-period EMA is only used to determine whether the trend has a direction, because we only need to initiate a buy order during an uptrend, and vice versa.
1. Trend detection method
The first step is to find trends through moving averages or through visual interpretation. I tend to use long-term moving averages, such as 100 and 200-day moving averages, to ensure a pre-established trend. With good luck, the moving average can provide additional support/resistance at the point where we activate the trigger. Below is an example on USDCAD, we can clearly see that the trend is bullish.
In such a bullish trend, we will focus on looking for bullish opportunities and do not recommend shorting.
2. Find the trigger interval
The next step is to find correction/integration points by establishing intervals. how should I do it? Very simple, by using two stochastic indicators, we will find points where both indicators show extreme values. Here is a clear example:
Every two consecutive extreme values form an interval, which we will use to initiate our orders, calculate potential targets, and measure risks (stop loss points).
Now that we have found two consecutive extreme values that give us bullish signals (remember: we are only looking for bullish signals in this bullish trend), let us move on to the next step.
3. Calculate potential
This is where the Fibonacci extension tool comes in. How to calculate profit potential? We can use the interval, starting from the low of the first candle, and projecting it to the high of the highest candle in the interval by using the low of the last candle in the interval. Below is a chart that clearly explains its principle.
The bullish trend will make the low of the first candle coincide with the first oversold area of the Stochastic indicator, and the last part of the extended tool will also coincide with the low of the last candle of the second oversold area. The middle part is the highest point in the entire Fibonacci expansion pattern.
The 61.8% forecast can be used as the first target. The first goal can be that we choose to close 50% of the position to get some profit.
4. Calculate the risk
I like the simple basic risk management principle, which is not to take risks beyond expectations, so I like to use a 2:1 risk-reward ratio. This means that if I hope to get 2 dollars, I may lose 1 dollar.
Now, let's try an example of how to look for bearish opportunities. The operation we took is the same as the above figure, but in a way that conforms to the downward trend. Also look for trends and intervals.
Calculate profit potential
Measure risk and participate in transactions
in conclusion
The best word to describe this strategy is "improvisation." It can be understood that a purely technical strategy that combines two or more indicators into artificial rules does not make much sense. In investment and trading, all of us are looking for a way that is not only feasible, but also must have a profitable effect. The strategy of real-time trading can provide good returns for the trend tracking system and can be used as a supporting strategy.