Trend Follower 5 Minute System
Thread Starter : TheWicker
Time Frame : 5 Minute
Currency Pairs : Majors, USD/CAD, AUD/USD, EUR/JPY, GOLD
Related Files : Click Here
Thread Link : http://forexfactory.com/showthread.php?t=86766
Source : http://onlinefraudprevention.blogspot.com/2007/07/earn-money-with-forex-trend-follower.html
Background :
Components of The System
First we are going to take the system apart and provide a little description of
all the indicators.
The indicators are:
a) Signal Arrows
b) MACD
c) Volatility Channel
d) Laguerre
e) Slope Direction line
f) Pivot Points
g) Guppy Multiple Moving Averages (GMMA)
Signal Arrows
The alert is produced by a cross of two Exponential Moving Averages. Faster EMA
is 4 and slower EMA is 8.
MACD Histogram
The default settings are (our system uses 5,35,5) :
* Slow moving average - 26 days
* Fast moving average - 12 days
* Signal line - 9 day moving average of the difference between fast and slow.
* All moving averages are exponential.
The signals from the MACD indicator tend to lag price movements. The MACD
Histogram attempts to address this problem by plotting the distance between MACD
and its signal line. Because of this, the histogram signals trend changes well
in advance of the normal MACD signal. It however should not be used alone,
therefore we have other indicators to confirm our signal.
Volatility Channel
This is a technique that measures volatility. It consists of 34 EMA high and 34
EMA low. It is not really a part of the system, but I like to see it, especially
if I look for confirmation on longer time frame.
Laguerre
This is an advanced form of RSI indicator. The Laguerre Transform provides a
time warp such that the low-frequency components are delayed much more than the
high-frequency components. Globally, latest bar data has more weight than
previous bar data a bit like an exponential moving average.
Slope Direction Line
The name says is it all. Its a line that measures the slope of the trend and
direction as well. The direction is shown as red for a downtrend and blue for an
uptrend.
Pivot Points
Traders use pivot points to find intraday support/resistance levels. Pivot
points are found by a simple calculation which involves the open, high, low and
close for the previous day of any particular stock or index. It is said that
when a price hovers below a pivot or pivot support/resistance and breaks up
through it then its a buy signal (or vice versa for a sell signal). Or if the
prices are above the pivot it is considered bullish and if they are below then
bearish. The most common way to use pivot points are as reference points for
entering trades if your other favorite indicators are also giving the same
directional signal. Market Makers can use the pivot points to create a market by
shifting the price around between levels to entice buyers or sellers of a stock
into a trade. This can best be seen on low volume trading days as the prices
fluctuate between the calculated points.
Many variations exist for calculating the pivot point and its related support
and resistance levels. The Traditional Method:
* Pivot point = (H + L + C)/3
* First support = (2 * Pivot) – H
* First resistance = (2 * Pivot) – L
* Second support = Pivot – (H – L)
* Second resistance = Pivot + (H – L)
In our system we mainly use pivots for exits. You don't need to know these
calculations as they are automatically calculated in the software, its more just
for informational purposes.
Guppy Multiple Moving Averages GMMA
The Guppy MMA is a combination of moving averages and is optimized to allow for
smoother and more accurate moving averages that are not easily spiked by sudden
market movements.
The biggest fallacy of basic moving average crossover systems is that they can
and will be very choppy when markets are not trending. At the same time when
using basic crossovers systems the traders have little or no idea of underlying
trend. Is the trend continuing or is it about to end. The Guppy MMA will answer
all this questions and will give you the reason why you entered the trade so you
can improve on your trading skills.
The importance of this indicator can not be emphasized enough! You must agree
with what it is that it is telling you. The original guppy method was created by
Darryl Guppy and is called the guppy. The original consists of 3,5,8,10,12 and
15 EMA for the short term moving averages (traders) and 30,35,40,45,50 and 60
EMA long term moving averages (investors).
The time frame is not important with this indicator, in the Trend Follower
system we use it in 5 minute markets, but it can be used anywhere from 1m to
monthly charts. It is just as accurate in any time frame. In our modified guppy
we use 5 different colors for each different type of trader. When you are
trading it is important that you know the underlying trend, hence you have to
know what other traders are doing. Using the colors you are able to tell what
other market participants are up to and as such make better trading decisions.
1. Yellow - short term traders (Mainly going for quick pips and not interested
in holding positions)
2. Orange - short term traders (Those hold on the positions a little longer than
the yellow)
3. Blue - mid term traders (Mainly swing traders, usually hold on the positions
longer than previous 2)
4. Green - long term traders (Will hold on to their positions longer than mid
and short term traders)
5. Red - long term traders or investors (They hold on to their position the
longest)
The MMA reveals the relationship between short term traders and investors.
Traders (yellow and orange) probe for weakness in the underlying trend and
always lead the next trend or current trends. As they are going for quick
profits, they are in and out of the market very quickly. Investors on the other
hand are slow to move. However for a trend to succeed, the support of investors
(red and green) is essential.
As a trend trader, you will be looking for situations where all the traders
agree on the direction of the market (Yellow, Orange, Blue, Green & Red moving
averages). If all the traders are in agreement, then that is the direction to
trade. Any disagreement means you do not trade. By correct interpretation of the
MMA, you will be able to identify the trend, possible trend exhaustion and also
possible trend changes. Overall, you will be able to make better trading
decisions.
Breakouts
Though we avoid trading breakouts, the guppy MMA shows us exactly when this is
happening. Once a breakout has occurred whereby the yellow lines cross the red
lines but the green lines are still below the red, we would expect the yellow
lines to retrace back. This is the point where we would be waiting to place our
new positions in the direction of the new trend. Please note that you DO NOT
place trades during a breakout but after the prices have retraced which is
denoted by the green and red lines changing positions.
Long Breakout:
The red lines had been above the green lines then the yellow crossed the red
lines and soon the price retraced to the other lines. The green are now above
the reds and they show a long trend.
Short Breakout:
The red lines had been below the green lines. This was indicating a long trend.
Then the yellow lines crossed the green and red lines. Once the green lines have
been below the red lines we can say that we are in a short trend now and we can
wait for signals.
Remember the positions of GREEN lines and RED lines. For a trend
to be considered long the green must be above the red lines, and for short the
green lines must be below the red lines.
False Breakouts
False breakouts can be more easily identified with the Guppy MMA. This also is
one of many benefits of this indicator. False breakouts can be financially and
emotionally draining to a trader.
If the yellow or orange color lines cross the reds but the green lines still
remain in their previous direction, then we are most likely facing a false
breakout. For a trend change all lines especially the greens must change
positions with the reds. You should especially be careful with volatile pairs
such as GBP/USD.
The Rules
Trend Follower - The Rules
All the criteria must be met at the bar with signal or one after! If everything
is not met at the signal bar or one after, leave it alone! It might eventually
go the right way, but in the long term it will give more false trades. Only take
trades where at the signal bar or one after all these rules apply! We enter the
next bar after the signal.
Long\Buy
ENTRY: First We wait for a long signal alert
GUPPY MMA: The green lines must be above the red lines! Green, Red and Yellow
lines must agree and head north. All the lines must be going in the same
direction!
LAGUERRE: Laguerre line must cross the 0.15 from below and head up
MACD: This is important! When you get the signal MACD must be above 0
STOP LOSS: 5 points (+spread!) below recent LOW
ALTERNATE STOP LOSS: 20 points on default pairs and 25 point on more volatile
pairs such as the GBP pairs and crosses. Choose whatever SL method fits you best
EXIT (combined): When you open a position you can then choose to close half of
the position on the first pivot point and let the other half run till the slope
direction line goes red
ALTERNATE EXIT: You can choose your own method and close positions at pivot
points or when slope direction line goes red after a move, or when price (a new
candle) opens on the other side of the volatility channel
Short\Sell
ENTRY: First We wait for a short signal alert
GUPPY MMA: The green lines must be below the red lines! Green, Red and Yellow
lines must agree and head south.All the lines must be going in the same
direction!
LAGUERRE: Laguerre line must cross the 0.75 from above and head down
MACD: This is important! When you get the signal MACD must be below 0
STOP LOSS: 5 points (+spread!) above recent HIGH
ALTERNATE STOP LOSS: 20 points on default pairs and 25 point on more volatile
pairs such as the GBP pairs and crosses. Choose whatever SL method fits you best
EXIT (combined): When you open a position you can then choose to close half of
the position on the first pivot point and let the other half run till the slope
direction line goes blue.
ALTERNATE EXIT: You can choose your own method and close positions at pivot
points or when slope direction line goes red after a move, or when price opens
on the other side of the volatility channel.
