A trend following system is a form of forecasting. Traders have to forecast, as accurate as possible, the movement of the market and come up with a process/system to follow market trends to succeed in trading. Unfortunately, only a few traders have come up with an effective trend trading system. The rest are either just wondering how the market moved this way and that, or on the brink of quitting.
In this video, you will learn how to establish a tested Trend Following System to succeed in today’s market.
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Welcome to this video on putting together a trend following system. Today we’re going to talk about the basics of a trend following system which generally is considered; by the way, I will also add incorrectly, to be based on higher highs, higher lows. Now we all heard that; and that’s supposed to be a trend, that is not enough. So it’s not that that’s completely wrong, but there were some things in trading that are complete truth, the whole truth and nothing but the truth. Other things that you read about in trading are half-truths, and this is a half-truth. So let’s get to the whole truth and nothing but the truth and show you why that is not enough. In fact, I was on a Webinar the other day and I liked what a woman said.
I’ve adjusted what she said a little bit. I used to say, OK, so this is your basic Meta pattern and that’s true, but we’ve got to add more details to it in order to make it more specific and accurate and precise. So I said, the devil’s in the details, she said no heavens in the details. And I kind of like that thought. So I decided to change that up a little bit and to say the Dinero is in the details worth a dollar is in the details if you will. Let’s take this higher, high and lower high stuff off here because it’s not meaningless, but it’s not enough. So, let’s move our charge forward. Now, technically, if you look here, we do have a higher, higher from this high to that high, definitely a higher high.
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So, is that a trend that should we build a trend following system around that? And the answer is absolutely not. Now, it’s a higher high. That’s correct. But it’s not a trend continuation, and here’s why. So in the markets, you have to give the market some wiggle room. You’ve got to allow for some noise and chaos in the market. You’ve got to remember, there are people all over the globe who are trading these markets and they’re trading from different countries using different methodologies, different time frames, and different systems. Some are discretionary traders. Anyway, you get millions of people trading this stuff and nothing’s going to come out exactly to the penny, to the pip, to the tick or to the pixel on your chart. So the bottom line is you have to allow for that variance that is just part of the system.
What I do, instead of just saying, we need a higher high, I go like this, ‘I take a vertical or I’m sorry, a horizontal line and I’ll put it at that high’. That’s it. Looks like it’s about right there. And then I say, OK, we did make a higher high here. That is correct. But what actually is going on there, price-wise, is the dynamic of the auction place because that’s really what markets are. Markets are huge auction places. So what’s actually happening here? And if you’ve ever been on the floor of the exchange, like I have, you will really see and feel it’s a visceral thing, the energy of the money flow.
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And then when I came back to screen trading, I brought that experience with me and I’m like ‘now I understand the charts are just mapping the math of the mass psychology’. That’s going on through the exchanges. The real market is what’s going on between people and to these days, computerized systems and so forth. So, when we look at this, and again, allowing for a little bit of chaos, randomness and so forth in the market, what we see here is, sure, you get a higher high. But that’s just the very high of where we reached. What really was the auction place saying? In other words, the massive, what’s the mass psychology there? We got a little bit above it and made a little bit of a higher high, then the event, and right away the market reverses, right?
So it negates the Barbie for that in my type of candlestick analysis, a little bit different than most. I don’t really stick to the traditional Japanese candlestick pattern trading, a little outmoded. That’s my personal opinion. Anyway, we say that in top dog trading, the red bar negates the Green Barn. Then we get a neutral bar and then we make another attempt. And then again, now what happens? This bar is splitting this high, these highs. So it opens below, closes above; which is the high there, closes above. So the overall dynamic of the auction place is that it starts down here and up here, and we’re testing these areas. That’s what’s happening. But the market is constantly testing previous support and resistance levels because the market has memory, as they say in.
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So the participants were actually thinking, ‘that’s the value of the market that was established’, and well in this case about an hour ago. And people want to come back into that level, get a little nervous like uncertainty, which the market hates. And people are thinking ‘this is the highest value that people were willing to pay’. Again, think of it as an auction place. Think of it like selling your car, right? You might want to sell that car for $20,000 and that’s great, but if no one’s willing to pay you $20,000, you’re not going to sell it for $20,000 because there’s no one on the other side of that transaction to pay you that much money. Now they might sell and pay you $18,000 and then you have to decide whether or not you’re willing to take less or negotiate something in between.
That’s the exact same type of dynamic that’s happening here. So the answer here is no, no one’s willing to pay $20,000. Now, I shouldn’t say nobody. Oh, you can’t see the price there. Anyway, that’s a 121. So we’ve got a few, but we can’t get enough buying traction or there are not enough buyers to make this market sustain to the upside. Actually, let me forward to the right a little bit more so you can see what actually happens. So the way we read this again is, all right, this green bar here, that’s just an attempt. This is the market participants testing. Do the global markets, the global market participants, is their sentiment now bullish enough to break through that resistance level and say we’re willing to pay more than that no? And the very next bar, the red bar answers the question and says nope.
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And, in market profile terms, this is called a rejection of value. I’m not the only one who talks about this stuff. This is now saying the market has and the term, again, is rejection of value. It’s tested. These higher prices and the global markets have rejected that, meaning not enough people are saying ‘I’m willing to buy that’. I believe the market is worth that. They’re saying ‘no, it’s not worth that much, that’s overpriced, I’m not buying’. And if you don’t get enough buyers coming in there, you don’t get into finding traction, it will not follow through and so, therefore, that is not so. For example, we call this a wave one and we called this a failed three because it attempted to go higher and it did go higher, but it actually could not again get enough traction so it actually becomes a bearish pattern.
It’s actually the opposite of trend following to the upside and it becomes a reversal pattern. So, that is the kind of thing we would actually take short. If you liked this video and you’ve got some value from it, of course, it’s absolutely free on the Internet. But, you know, I think we get so used to everything being free that we forget about our moral obligation. So, if you got value out of this, then I really encourage you, the best thing you can do is to click the share button. That is number one, click the share button below that provides value to other people. That’s your way of paying it forward. I don’t charge you anything for these lessons. I’ve got over 100 videos on youtube right now.
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