Trends are characterised by
higher highs and higher lows for an uptrend, as in Sterling against the US dollar above,
otherwise known as Cable, or lower highs and lower lows for a downtrend.
Trends, of course, can come
to an end. Price can either turn around and begin trending in the opposite
direction or it can start to move sideways, and become range bound. This is
most likely to happen at one or other significant level, which becomes either
support or resistance. We
have pointed out on a number of occasions that, after having trended nicely for a period, GBPUSD has currently come to
respect the 200 period Simple Moving Average (SMA) on the monthly chart as,
initially, a resistance level and, more recently, as a support level:
How our software assists
The Silver Trigger and
Mandelbrot software that we use has a number of features to help us to cope
with the search and exploitation of trends. Firstly, they allow us to test
pairs historically, using data going back many years, in order to establish the
characteristics of individual pairs and their tendency to trend. Secondly, both
routines have triggers that identify the best entry points for a trade whenever
a trend is identified.
Thirdly, at the time when
each trade is about to be entered, they calculate the position size, based on
criteria that have been established by use of the Kelly Criterion, which is a
respected mathematical formula to optimize the balance between risk and reward
over time in trading.
Fourthly, and most
importantly, the routines have very clearly defined rules for exiting from a
trade, whether in the case where profit needs to be locked in, or when losses
have to be recognised and minimised.
In all cases we use a Stop
Loss order, but this is no more than a safety net. The rules for exiting from a
trade will, typically, have been met by the software long before the stop is
hit. In this way we attempt to keep probability on our side, because the trade
will always have a positive expectation - a potential win that is materially
greater than the risk of loss on the same trade.
We are constantly refining
the criteria for use with our routines in the light of experience, and we are
constantly on the lookout for other pairs that will assist us in our endeavors
to make profits.
What is important to realise
is that our software does not in any way constitute a robot or robots that can
be turned on and left unattended, or be used effectively by people who have no
understanding of the principles of trading and good trading practice. They are
no more or less than tools for use by the initiated, but very powerful ones at
that.
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