TRENDING

                                                                                     


  TRENDING – Here is when “going Sailing” can get fun, as successfully catching a nice trend that can last for weeks, or sometimes months, can mean

racking up hundreds or even thousands of pips. Obviously this will positively affect your account balance as well as your confidence levels. If you look at any chart over the past 10 years you’ll see that every year there are a few significant trends… always following a “bunch”. What this should mean to you is that this isn’t something you can expect to happen every day (or even every month), but if you wait patiently sooner or later a good opportunity will come around (meanwhile trade other strategies). Here is a chart that shows a trend that has developed after a “bunch”. Looking at this chart the first thing you’ll notice is that your lines separated (became un-bunched). Though they started to un-bunch you still need to wait until the market moves beyond a technical price point. Like I said before, you don’t just use the S.E.X. lines alone to form trading decisions, but rather you use them in conjunction with other techniques. Here I drew a horizontal line (as you can see on the chart) at 1.1083, which is at that previous high. Until it crosses over I don’t go long as the market may turn around before that as it may still be in a consolidation pattern. Basically you’d enter similarly to “Surfing” by waiting for a nice small wave (which always happens) once it crosses this technical level. In this case you happen to have a nice wave

(circled) that happened right at that technical level (actually it was 1.1076, but close enough) that you could enter in on either using a big surf (having a stop set at the low of 1.0932 = 144 pips after you got in), or if you were to be bolder you could have tried catching a tiny surf (using more lots thus ultimately getting more potential profits) the following day by stalking a micro trend that happened after the breakout. Soon after entering the trade, once your assessment would indicate that it would be relatively safe to do so (so as not to get stopped out prematurely before the trade has any chance to go profitably) you’d set your stop at a break even point. If you were to look at the chart again you’ll notice that I also drew a trend line. What is more interesting is that the 20 S.E.X. line acts kind of like a moving trend line in itself. Here are a few interesting characteristics of the 20 S.E.X. line as a trend line. In this chart the 20 SMA is black, and the 20 EMA is purple (remember, on your charts it doesn’t matter what colors you choose). Notice that as the market has started to trend upwards the purple line crossed over and stays above the black line. This shows you that the market is now trending up. The farther apart these lines get shows how strongly the market is trending. The closer they get can show a slow down in the momentum of the trend, or if they start colliding towards each other it may mean that the market has begun reversing. (Those of you who are familiar with MACD will notice the apparent similarity, and hopefully will recognize the benefit of using S.E.X. over just using MACD – they work well together too). Looking at the chart you’ll see that near the beginning of this trend the purple line was strongly above the black line showing that it was trending strongly. Near the middle of the trend there was a retracement down, and notice how all of a sudden there the purple line got closer to the black. After that they got narrower and narrower unto (poof) they crossed over, yet the candles are still well above the 20 S.E.X. lines. This doesn’t necessarily mean that your trend has ended, as it could simple be the equivalent of a trend line bounce, as it may pick up steam again soon, however you do need to pay attention to what happens next. Notice on the chart that in this case the money (green/yellow 5 period S.E.X. lines) dipped down and touched the 20 period purple/black S.E.X. lines. You pay attention to whenever your 5 and 20 period S.E.X. lines touch or cross as this is to be interpreted somewhat like a trend line bounce or cross, especially when the actual candles strongly penetrate the 20 line (in this case the candles just touched the 20 line). Looking at the bigger picture you notice that we’ve seen a few tweezer tops

(for those of you who are familiar with candle stick techniques), we’re getting close to our trend line, our 5 and 20 S.E.X. lines appear to be bunching, and it formed a double top (a potential trend break pattern). Needless to say, when you start seeing things (such as the stuff mentioned above) you start to get antsy, and you bring in your stop loss tight. In this example I’ve drawn a line at the bottom near the top that would be the obvious choice to place your stop at (1.1629). Soon afterwards your candles plunged through the trend line and the 20 S.E.X. line, getting you stopped out at that level. What would have been the P/L of this trade? Let’s say you got in at 1.1076 and got stopped at 1.1629 then you would have captured 553 pips total, then take away the interest (almost two months worth). Let’s just round it to say that your total net profit would have been equal to roughly 500 pips. Each lot you could have traded (using proper equity management) would have gotten you about $5,000. Not bad for a trade lasting under 2 months, especially considering that this example is more or less just an average example and by no means one of the more impressive ones that happen quite often. Also keep in mind, if you noticed the suggestion mentioned earlier that you enter this opportunity by finding a suitable “Surf” on a suitable micro trend after the key technical entry levels, that by using proper equity management principles you could have entered this trade with 5 or more times the amount of lots you would normally enter with by the bigger method (but would of course require more precision timing on your part), thus such a trade could have easily gotten you $25,000+ starting with the same amount of account equity. This reinforces why I like to use the techniques taught in “Forex Surfing” as a way to enter in on trades that would normally require significantly larger stops – smaller stops mean I can trade more lots for the same ultimate risks (keep in mind that it’s not a completely balanced trade off as a smaller stop also makes it more likely that you could get stopped out by simple market noise, however the extra profit potential justifies the additional risks in my opinion). To illustrate that the above example is by no means exceptional take a look at the past year (at time of writing) of the following chart of EUR/USD between 06/28/2004 and today 07/11/2005.

The huge uptrend on the left is basically a replay of the example we just discussed in detail. This one could have yielded between 700 to 1000 pips (depending on how conservatively or boldly you played it) within 2 to 3 months (you do the math of approximately how much this could have profited you by the size of your actual account using proper equity management principles). The huge downtrend on the right that is still in progress to date would yield, so far around 800 pips. What is interesting to notice is how near the bottom there it has been rebounding off of the 20 S.E.X. line as though it was some kind of a trend line. Sooner or later this down trend shall end, and we’ll see how far it ultimately goes. ENDED – This was touched on in the previous section (Trending) as all trends eventually end but I’ll try to elaborate some more here. You know the cliché, “what goes up must come down”, well for S.E.X. I think of them as being magnetic, hence “what separates must come together” (Conversely, when bunched I think “when together it’ll separate”). All goodtrend cycles sooner or later come to an end, and then the whole cycle repeats itself. So how do you recognize when your profitable run is coming close to an end, and more importantly when to tighten up those stops to maximize what you’ll exit with? This is what we’ll attempt to look at here. First of all realize that trading isn’t an exact science, it’s more of an art. That said, however, you do have specific trading rules to follow so you don’t just leave it to chance. Sometimes by following the rules you score perfectly, getting stopped out near the peak of the profit potential, and sometime you cut yourself short from the maximum profits. Generally speaking, by following the “rules” unemotionally you’ll “win” most of the time. Take a look at the following chart of GBP/USD: Near the top you have a nice triangle formation and inside (especially near the apex of the triangle) your S.E.X. lines have bunched up perfectly. Soon after the breakout you would have been trying to find a suitable place to jump in using any of several entry techniques as you have established that some kind

of trend has begun (also noticing that your S.E.X. lines have spread apart nicely). You had a strong down trend for several days, and then it weakened but continued to down trend. So far so good. What happened next? (look inside the circle) Well, as the trend began to loose steam you notice that the 20 period S.E.X. lines (in this chart purple is the 20 EMA and black is the 20 SMA) began to converge together… and then they crossed. Two days after they crossed they got penetrated by the candles. At this point you would be justified in feeling somewhat nervous and wanting to exit to preserve your gains. But hold on. What you do is you start tightening up your stops. Don’t manually exit the market UNLESS the market has started to make a dramatic reversal and the candles have made a severe punch through the 20 S.E.X. lines. In this chart example they haven’t, so we don’t panic. It is common that as a trend nears it’s end that the market will approach or even poke through those lines. This is usually your first clue that the trend is likely to soon end, but as you’ll see in this example it isn’t necessarily the case. Next the market kept on moving down (whew). You would now set your stop to be at that high to protect the profits you have made thus far. Then the market moved back up and consolidated. Your green money line (5 period S.E.X.) has crossed over your black 20 SMA, but surprisingly not the purple 20 EMA. Usually when the 5 crosses the 20 S.E.X. lines it’s pretty much game over for the trend and you tighten up your stops just waiting to exit. That second red candle that formed a high would be your obvious choice to reset your stop at after the market moved down a bit a couple days later. Well, most often this would have been the end, but surprise surprise you got lucky! Your 5 & 20 S.E.X. lines got bunched inside what appears to be a little triangle formation (a pause in the market), and then it continued to trend again! Having followed the proper rules of trailing your stops in this case didn’t result in getting stopped but allowed you to remain in the trade going for more profits (I was quite pleased when this happened). As you can see, this chart is in real time and the trading opportunity is still in progress (trade isn’t over yet). So far this one trade is well over 1000 pips in just 2 months! I just wanted to start off by showing an “ending” that turned out to not be an ending, but rather a continuation. Often situations like this end up retracing to

some fibonacci level far enough to have gotten you out of the trade, but now you see that though sometimes you seem to get out “early” by following the rules, sometime the rules do end up working in your favor. Ok, so now let’s look at a real “ending”. Take a look at the following chart. Here is another GBP/USD late in 2004. Near the beginning you see that your 5, 20 and 60 S.E.X. lines are nicely bunched (always prefer to start when your 60 S.E.X. is bunched). Though there are certain technical reasons that indicated the potential of this move to the left of what is shown on this chart, it wasn’t the easiest to spot (nor wouldn’t have been your most confident entry), but this chart snippet nicely shows the “ending” signs, hence why I am showing you this here. Obviously we are looking at the major uptrend here. Near the bottom you see your 20 S.E.X. lines are diverged quite a bit indicating a robust shot up, but soon after the initial upsurge the start closing together as the market quickly looses it’s momentum. The 20 S.E.X. lines end up crossing making you suspect that perhaps this was a short lived “trend”, and you start trailing your protective stop losses even tighter “just in

case”. Notice however that the candles don’t penetrate through the 20 S.E.X. lines and continue making progressive higher highs and higher lows. Obviously this is all good and you are still in the trade. All of a sudden the market makes a strong upwards move for about a week and a half (“that’s nice” you think), and the purple 20 EMA makes a reappearance crossing above the black 20 SMA. So far so good. Then the inevitable happens – the market retraced back down. Here it poked your 20 EMA, remembering that this usually indicates that your friendly trend could soon come to an end you raise your protective stop loss to that low after the market went back up (had it made a dramatic run through the 20 S.E.X. you might consider a manual exit, but it didn’t in this example). The market went back up somewhat then receded down again. You noticed that your 20 S.E.X. line has again crossed over (purple under black). The green money line keeps creeping closer to the 20 line until sure enough it crosses. You keep in mind that you have your protective stop already set at that last significant low so you don’t worry about it until the market moved up again so that you could reset it to the more recent significant low. There then followed another low that is just marginally higher that you could reset your stop at. Finally the death of your trend occurs when you would have got stopped out at 1.9117. The candles and the green money line have reversed going south, just as you could now go somewhere south (i.e. a nice beach in the tropics) from the profits you exited this trade with.