Topic: The Prevailing Trend Direction

I’ve thought for several days on how to determine the prevailing trend direction on a market. What came to my mind was to find out a profitable trend following strategy. The main idea is to find different strategies for the different currency pairs and time periods and the only factor used to determine the trend is the profit the strategy generates. I assume that if the strategy (regardless of the indicators) generates profit it is on its own the best trend indicator. Basic strategy rules:

   1. Use the particular market (currency pair and time period) for the trend we are looking for;
   2. There are no adding, reducing or permanent stop loss;
   3. Entry point is at the beginning of the bar;
   4. Exit point is at the end of the bar;
   5. There aren’t any “Closing Logic Conditions”;
   6. (optional) Set the spread to zero.

Such a strategy gives signals at the beginning of the bar so I hope that when I get signal the trend is:

   - buy signal - Uptrend;
   - sell signal - Downtrend;
   - no signal - No trend.

I used the strategy generator to find out a proper strategy. In order to do that I locked the “Strategy Properties”, “Opening Point” and “Closing Point” slots. I also set the number of “Closing Slots” to zero and set OOS (Out of Sample) testing to 30%.


http://www.postimage.org/aVQxtG9.jpg


In 1 minute I got this strategy:


http://www.postimage.org/PqQbZ69.jpg

Since I’m trading manually and always in the trend direction I hope I have found out a new valuable way to improve my trading performance. What I’m going to do is to observe these parameters on my trading platform and to trade only when this system allows. I used “Out of Sample” (forward) testing to generate this strategy, so I think it has to work for some time. Probably I’ll change it if its performance drops.

What do you think? Does it make sense?

Re: The Prevailing Trend Direction

Popov wrote:

I’ve thought for several days on how to determine the prevailing trend direction on a market. What came to my mind was to find out a profitable trend following strategy. The main idea is to find different strategies for the different currency pairs and time periods and the only factor used to determine the trend is the profit the strategy generates. I assume that if the strategy (regardless of the indicators) generates profit it is on its own the best trend indicator. Basic strategy rules:

   1. Use the particular market (currency pair and time period) for the trend we are looking for;
   2. There are no adding, reducing or permanent stop loss;
   3. Entry point is at the beginning of the bar;
   4. Exit point is at the end of the bar;
   5. There aren’t any “Closing Logic Conditions”;
   6. (optional) Set the spread to zero.

Such a strategy gives signals at the beginning of the bar so I hope that when I get signal the trend is:

   - buy signal - Uptrend;
   - sell signal - Downtrend;
   - no signal - No trend.

I used the strategy generator to find out a proper strategy. In order to do that I locked the “Strategy Properties”, “Opening Point” and “Closing Point” slots. I also set the number of “Closing Slots” to zero and set OOS (Out of Sample) testing to 30%.


http://www.postimage.org/aVQxtG9.jpg


In 1 minute I got this strategy:


http://www.postimage.org/PqQbZ69.jpg

Since I’m trading manually and always in the trend direction I hope I have found out a new valuable way to improve my trading performance. What I’m going to do is to observe these parameters on my trading platform and to trade only when this system allows. I used “Out of Sample” (forward) testing to generate this strategy, so I think it has to work for some time. Probably I’ll change it if its performance drops.

What do you think? Does it make sense?


Hi Popov

It seems an interesting approach. If you want to put some logic in it I would say that the inside bar formation is more suitable for higher time frames 30M, 1H. Nevertheless it is worthwhile trying it. Let us know your results once you start.

Re: The Prevailing Trend Direction

**inside bar formation is more suitable for higher time frames 30M, 1H**

It's correct. I'm using EURUSD1Day market.

I'll try to find another combination of indicators (smoother balance chart) before applying on the market.
I expected that the standard trend indicators like Fast MA > Short Ma or Market > MA or MA rises will work but the backtest shows other.

From the test of this particular strategy I see that EURUSD 1D needs 1 day rest (Inside Bar) before start moving.

I intend to use this technique as additional confirmation to my trades for the tested or a shorter time frame.

Re: The Prevailing Trend Direction

Well, I've used such technique for more than a year. I'm using an EA on my MT trading chart - normally a regular one (not limited to "Bar Opening" and "Bar Closing").
Well, when the EA trades long I also tend to trade long. It works for me.

Re: The Prevailing Trend Direction

Hi Popov

I have used your rationale for EURUSD daily for the prevailing trend direction. Take a look below and let me know your thoughts


http://www.postimage.org/gx1lrqGS.jpg

Re: The Prevailing Trend Direction

Hi  Steos,

My fist thought is that the usage of "Close and Exit" is an excellent idea, but after that  I realized that this strategy is always on the market. As we know the market doesn't trending  all the time but alternates trends and ranges. This system doesn't indicates a ranging market.


By the way, the logic rules of  both filters you use - "... rises" is a good choice of trend following logic.

Re: The Prevailing Trend Direction

I am wondering how to translate the oversold/overbought aspect into metatrader....... does some one have a way to do that.

Thanks

Re: The Prevailing Trend Direction

Hi daveM. The Relative Strenght Index (RSI) is a pretty good indicator for overbought and oversold market situations. The way the RSI works is by calculating the ratio of up-moves to down-moves and normalizing the calculation so that the index is expressed in a range of 0-100.
Default RSI levels are 30 and 70, and default period is 14:
- if the line drops below 30 it means the currency pair is oversold (which is usually used as a buy signal);
- if the line rises above 70 it means the currency pair is overbought (which is usually used as a sell signal).
I personally use it in 25 75 with an extra level at 50.
More information on RSI can be found here:
http://www.forexrealm.com/technical-ana … index.html

Another pretty nice OB/OS indicator is the Stochastic Oscillator. Default values are
- levels: 20 and 80
- K period: 5
- D period: 3
- Slowing: 3
More information about Stochastics can be found here:
http://www.forexrealm.com/technical-ana … lator.html

IMPORTANT: Both of these indicators (RSI and STOCH) are limited in the sense that they send signals based on previous market data, so a strategy relying solely on them would be very vulnerable to fakeouts.

Hope this information helps.

9 (edited by marventus 2009-07-22 15:04:33)

Re: The Prevailing Trend Direction

I forgot to mention in my previous post that there's a free MT4 EA called "God's Gift" (version 7c) by Matt Edmonds and 3 or 4 of the main entry signals are based on 3 Stochastic levels (Low, Medium, and High). Perhaps you could take a look at the code see if you can reuse it to translate OB/OS. I know there's an improved version of this EA by Daniel Fernandez, but I've never tried it.
I have the Matt Edmonds version and I wouldn't mind posting it here, but I don't know what the forum rules are regarding this matter.
Hope this helps.