Optimizing Trend Trading

I recently re-listened to an episode on the Humbled Trader podcast featuring Lance Breitstein and it ignited some additional thoughts in my own trading process. My process, which surprisingly went from super contrarian to trend following, could use some further refinement.

As outlined in a few posts ago, I started focusing on identifying key ranges where price might reverse and how to scale into positions by using the Darvas box breakout approach. While this process hasn't changed, I do see one key opportunity to optimize it.

So what led to all of this?

The Humbled Trader podcast episode is this: How to be the Top 5% Winning Trader? Ft. Lance Breitstein

If you're not willing to sit through the full 1 hour and 34 minutes episode, which I highly recommend listening in full, there's a clip that touches upon exactly what stood out to me. You can listen to the YouTube Shorts clip here.

Lance says, paraphrasing a little bit, "to go from a losing trader to a consistently winning trader, 9 out of 10 times it's focusing on the easy trades and sizing them up."

This is aligned to the refinement of my setups over the years as I've consolidated and reduced the signals that I look for. At present, it's just one - follow the trend.

I think this is something we've all done at one point - trying to build more rules in place, trade multiple setups, and seek profit opportunities from all market and price action conditions. In reality, you should only be focusing on the highest probability setups that give you a big win or the opportunity to exit fast.

For example, you're really just coin-flipping 50/50 trading the Non-Farm Payrolls release unless you have a proven edge that gives you a consistently high expectancy (payoff of wins far exceeds the loss when one occurs). To my knowledge, even high-frequency trading firms struggle with taking an algorithmic approach to event-driven trades such as NFP.

I did a bit of backtesting and I believe I identified one clear way to further increase the probability of trend-following trades. This is by looking at the moving average crossover for confirmation of momentum.

Here's an EURSGD chart below:

EURSGD Daily

1. Upper Level Defined: although I now take trades where my directional bias follows the dominant trend on the daily timeframe, I look out for tops and bottoms. At this point in the chart, I mark a possible upper range boundary. Of course, this range boundary would be adjusted if price pushes even higher.

2. Lower Level Defined: this is where price sold off and stalled. Defining this range gives me a good indication that there isn't any significant demand or supply outside the boundaries. At least, not at the moment.

3. Initial Break: I normally would take this trade, but it is no longer the case. When the moving averages don't cross, it's a little premature to tell if this will actually be a momentum-driven downside move.

4. Enter Short Position: two things are happening here. The faster moving average is crossing below the slower moving average. Price also breaches below the lower range boundary. This trade does not pan out as I would've exited when prices re-enters the original range.

5. No Trade Zone Unless Clear Break: still maintaining a downside bias, I would not be entering short unless price makes a clean breach below the lower boundary.

6. Re-enters Range but No New Highs: this simply signals that I should continue remaining bearish as buying strength isn't present.

7. Enter Short Position: this is the next high-probability entry because two things again are happening. Firstly, the faster moving average is moving even lower below the slower moving average. Secondly, price breaches below the lower boundary of the range. While I forgot to mark it on my chart, this would've been a 2.74R trade.

8. No New Highs: further confirmation that I can maintain a downside bias.

9. Enter Short Position: this trade is exited with a small loss after the formation of the strong bullish bar as price re-enters the range.

10. Enter Short Position: this is the big move to capitalize on. This trade could potentially be held from early August to late November since price never makes a higher high.

11. Exit In Rectangle: in this trade, a stop loss would constantly be configured and reconfigured to trail this trend move. The stop loss would've been placed somewhere in the rectangle and get triggered on the uptick. This is a 14.03R trade with a holding time of approximately four months.

Since the market only trends about 30% of the time, there will be even fewer high-probability trend following signals. This can seem like you're missing out on a lot of intraday and shorter term opportunities.

To get myself out of this FOMO mindset, I look at it like this: I'm placing fewer trades, racking up less commissions, and capitalizing on bigger wins by making fewer intraday punts that have greater failure rates.