Diversified Trend Trading Approach

Greetings traders

I have been a lurker on this forum for quite a while and have been looking at the pro's and con's of sharing my trading approach with everyone here. Bottom line is that I wish to collaborate with the community as I have seen some very worthwhile contributions in some of the threads I have visited, particularly those from the trend following camp who have spared the time to spread the jubilation that sustainable trading for a living can bring.

I am particularly excited with the robustness of the strategy referred to as the Diversified Trend Trading Approach or DTT, as I have been involved in trading for the better part of my life both in the operation of a small fund and in areas of compliance relating to fund management and have seen and experienced first hand a lot of false hopes. Experience has taught me to avoid Martingale's no matter how they are hedged (I was a past Martingale addict and once you are one, it is incredibly hard to pull yourself out) and I also avoid aggressive pyramiding into trades. On Martingales, the key is a regular harvest and the need to ensure you only allocate a small percentage of your trade capital towards them, as you just never know when or even if that day will arrive, no matter how clever you structure your progression. The market has this unnerving ability to sniff out the weaknesses in your creation.

If I was asked, what are the merits of this approach and why does this strategy deserve any attention, then the simple response is this.....and trend traders have all heard it before. A single instrument may experience only a small number of significant trends over a defined extended period. On a D1 chart, maybe as little as 2-4 times a year......A trend trader wants to be on these trends as this is his/her bread and butter......but they also want to avoid or minimise false starts .......so to increase your probability win rate, you need to focus on confirmed trends of substance, and keep control of your trigger finger.......and if your living is dependent on your approach, you want to control your behaviour to prevent overtrading as soon as you sniff a trend.To improve trade probabilities, reduce lumpy cashflow and diversify risk, you also need to keep watch over a large number of diversified instruments so you can afford to be selective in only choosing those trades that 'scream out to you for action'......and you want to strictly control your risk to keep you in the game, pay those bills and keep your family happy. This approach seeks to address these important issues faced by a trend trader.

Warning!!! Ifyou are new to the game of trend trading then I strongly suggest you spend considerable time backtesting, forward testing, trialling a demo account on a single instrument before you launch into multiple instrument trading..and before you even think of going live..not that multiple instruments pose any significant different nuances....but rather that it is essential to understand how to trade trends first before you attempt to diversify. Managing multiple instruments is only going to compound your problems if you are not fluent at trading trends on a single instrument. Your hands will be flying everywhere, your screens will bear witness to grimaces of pain and torture....and your pets will be steering clear of you. This thread should not put you off participation but I strongly advise that you do the hard yards and earn your certificate first....for you could very well be swearing at me in later posts....and I can always refer you back to this original section of the first post, without having to say I told you so directly.

Note regarding the use of correlation and trend strength measures as filters for the strategy. Despite the power of these tools for trend trading strategies in general, I tend to disregard these filters as their inclusion significantly reduces the number of available trades. I recognise the importance of these measures if trading a narrow range of instruments, but given the diversified nature of this strategy, my backtest concludes that they are not necessary....at the moment but may alter in the future as this strategy is honed (as discussed later). What is the critical determinant as a filter for this strategy is whether or not a trend exists with the instrument.

I have a very low risk tolerance and to be perfectly honest with you all, I am not a very good trader.....however my strength, in my opinion at least, lies in risk management and system design. I have been through many trading phases in my life looking at various systems including working with a programmer on a host of EA's, but inevitably find that conditions in the market change thereby rendering these different approaches to the dustbin...meaning that these approaches failed the robustness test in that a truly robust system needs to weather all market conditions.

Given that in the next few years I will be returning to full-time trading for a living my focus has been on the development of sustainable trading systems that focus on capital preservation and income yield....and here we are today.

To be clear, I have not commenced trading this strategy as I lack sufficient available capital at the moment to commit my livelihood towards this venture. Furthermore, despite the relatively low trade frequency, this strategy is for a team that are prepared to operate 24/5 in shifts. I have time on my side to get this all cracking if this strategy stands up to intensive scrutinisation.

What I have done however over the past year or so is extensively backtest and forward test it over the past 688 calendar days commencing 1 January 2013.

Some guidelines for the Strategy:

1. Obviously different trading strategies suit different personalities. This strategy may appeal to those seeking a trend trading strategy backed up with a solid risk management approach.
2. I use IG Markets as my preferred platform as opposed to MT4 due to the excellent advanced charting package provided that assists in managing a diversified portfolio, plus the vast array of products which IG offers that can be traded from currency pairs to indices and commodities. The strategy is currently configured to actively monitor 24 products and a user friendly charting interface with comprehensive trading alerts is essential. It works well on MT4 but can become a pain in the neck when speed of execution is required....but of course it is your choice. I just thought I would mention what I use.
3. I have not been successful developing an EA for this strategy as the determination of the trend is not timeframe dependant which makes programming difficult. Significant decision making needs to be made at D1, W1 and M1 levels Maybe there is a talented individual out there that might want to see if they can convert this into an EA. My feeling is that this approach will only ever be semi-automated at best given the discretionary nature of trend determination with the mechanistic nature of trade management.
4. Despite my lack of success in developing an EA for this, I have removed human discretion at H1 TF where possible.
5. An initial stop is always placed on each trade but immediately following stop execution, the standard deviation channel becomes your exit mechanism so you rarely hit your initial stop. As a result, time in trend is your friend as each bar of progression reduces your loss factor. The standard deviation channel is used to manage the trade at all times.
6. My maximum risk tolerance is 0.5% risk per trade but this does not stop others from magnifying this amount if they are prepared to strike for a higher risk:reward ratio. For example, a 1.0% risk per trade doubles returns but also expect an associated doubling of associated risk parameters such as the drawdown. I actually feel that this approach could handle a bit of aggressive risk management so based on current results, a 1.00% risk per trade would be regarded as perfectly acceptable as it is unlikely to keep you awake with cold sweats.
7. For the DTT I use a daily chart to determine if a trend is in place with a standard deviation channel (1.0 std dev's) to confirm the trend and it's significance, and then I go to the H1 timeframe to redraw the trend from the D1 commencement point again using a standard deviation channel of 1.0 std dev's, and then wait for a Donchian breakout, or jump in immediately if it has just occurred using a 40 period Donchian on the H1. I know I don't spend much time discussing support and resistance levels which is a key requirement for trend trading, but this is where the Donchian comes into play by visually confirming that at least in the short term, following a breach, you will be trading in blue sky. Identification of support and resistance is a key step in your analysis on the D1 timeframe in identifying entry points and periods of congestion, but I don't think I need to go into this much in this thread as there are many other threads that do a better job of this.
8. Upon (or just before) breakout of the Donchian on H1 timeframe, immediately redraw the standard deviation channel from the commencement of the trend (on D1) to the bar immediately preceding the entry bar. The lower or upper standard deviation channel (dependant on trend direction) determines your initial stop distance = R.
9. If I achieve 2.5R profit I redraw the trend on the H1 timeframe using a standard deviation channel of 0.5 standard deviations to further confine the trend boundaries and ensure not too much profit is taken off the table before an exit.
10. Note that this strategy does not pick the highs and lows of a trend and tends to execute when the trend is well established and never achieves maximum profit potential.
11. Using these rules you will ensure you are always in the direction of the daily trend.
12. Note that I do not use price action signals such as pin bars, engulfing patterns etc. I simply use the Donchian breakout on H1 to keep things simple for me. This is necessary as I watch a large portfolio and cannot afford to be too detailed in my trend assessment.
13. Also as I am not using traditional price action patterns I therefore use a bar chart as opposed to candlestick charts to keep things clean, decision making fast and avoid letting my brain override the technique.
14. Note that I use the standard deviation channel to define a trend and do not use the classic trend definition methodology of a sequence of highs or lows. The reason for this is that a standard deviation channel is defined using the entire data set as opposed to say 3 or more points in a trend. The basis of this methodology is that I am looking for consistent trend patterns across the entire timeframe I am using. This helps me to validate those trends moves of more regular nature as opposed to those trend moves that may be biased by a few bars in the set. Furthermore the use of the standard deviation channel removes human discretion that is often present in drawing trends. For example, give the same chart to different people and they frequently draw different trend lines. This is avoided through the standard deviation channel method provided you draw the channels from the lowest point in the trend to the highest point in the trend. Another reason the the std dev channel is that I use it as a linear regression tool to define the slope of the trend.
15. When in a trade, always redraw your standard deviation channel when a new high is made (for a long) or a new low is made (for a short). It is essential that when new data is added, the standard deviation channel is redrawn as this manages risk on your trade as it progresses.
16. Note that use of the standard deviation channel effectively acts as a trend volatility measure like an ATR. For example volatility prior to entry will result in a wide std dev channel prior to entry. As a result your R will be wide reducing your position size for your level of risk tolerance.
17. Losses are a fact of life so expect them. Fortunately this strategy strictly manages those losses and through diversification attempts to reduce drawdowns, so let the strategy take care of them.....do not attempt to second guess. Just keep in your mind that you only trade strong trends on a longer term timeframe so momentum from fundamental factors are most likely driving these movements as opposed to random market behaviour. We never predict the future and simply jump on board the current daily trend......until of course it bends.

If this approach sounds interesting to you then I welcome you to this thread. As with standard warnings on other threads, this is for interested members only, who wish to learn or positively contribute.

I am not going to post backtest results (ok I lied...refer to Post 13) as it is a pointless exercise given no live trading has occurred. This will be a task for those who wish to trade this strategy themselves. Despite this however, from my own testing results, I could not be happier and I think those who get involved will also come to this conclusion.

What I can tell you however is this. Over the last 688 calendar days, there have been only 450 trade opportunities across the portfolio which gives you an idea that the strategy is fairly selective in its entries namely due to the condition that a good quality daily trend needs to be in place before a trade entry is signalled. For those who lack the patience to wait for these opportunities, this strategy may not be for you.

If you are happy with all this then I will shortly start posting a few charts to get things cracking.

Regards

Copernicus

Note to Readers
During the course of this thread the approach has been dynamically adjusting to respond to market conditions and strategy additions have been made to supercharge performance results. This approach described above which I refer to as the Diversified Trend Trading Approach DTT represents the core module to this technique and it is a necessary pre-requisite to fully understand this approach prior to moving onto supercharging trend trading additions which can be found later in the thread.

1. Posts 1 to 230 relate to the basic DDT approach;
2. Posts 231 onwards relate to a supercharged variant called the Enhanced Diversified Trend Trading approach of EDTT​. Comprehensive details regarding the EDTT are found on post 231.
3. Pay particular attention to post 360 onwards relating to a methodological recap of the EDTTI. RedLineFred has kindly compiled this recap into a pdf for easy reference.

​Unfortunately to understand this approach in its entirety, you need to do a bit of reading for Posts 1 to 230 are still compuslory for understanding and get's you a beginers certificate before you can advance to supercharged variants. This thread is not a free ride for a trader and demands a bit of effort on the readers part if they wish to participate or trade this approach. There are many nuances that must be understood before committing your hard earned dollars to this technique. I wish you all well, but please do your homework first.