Building a trading system is done by putting together the right components and leaving out the wrong ones. Both points are equally important. An essential ingredient that is missing may destroy an otherwise promising trading system and make it a losing one. The wrong particle at the wrong place may block the best trading machine.
For trend trading a stop loss system is essential as indicated in the last post about the edge named trend trading exclusively for the small trader. This is not only true because a stop loss method prohibits bigger losses. The secret of the stop loss and its meaning for trend systems is that it will automatically ensure that a position is trending in the right direction.
Basically there are three market conditions or phases. The market can move randomly, be trending or have negative feedback forces. Random forces makes the market fluctuate unpredictable. The trend forces one direction and negative feedback does the opposite – the market moves but without getting ahead in any direction.
If random forces prevail, trading systems have a tough time. Simply said, there is no money to be made in such a situation. This is not completely true and we are going to highlight exceptions or circumventions later.
Market jitter without advance is the ground for “reversed trend trading systems”, for instance scalping systems. Unfortunately these system lose terribly when suddenly a trend out of nowhere emerges.
The best bet for the trader is still the trend. A stop loss almost inevitably makes a system being a trend trading system. If the market is in the right mood, it will earn greatly. In random phases nothing will be lost except slippage or fees. Only the third market characteristics cause a problem. Fortunately it can be capped to only small losses.
However, this third behavior divides the good from the bad systems in trend trading. The best illustration for this phenomenon may be the zigzagging trend that is whipsawing your trading capital.
The outcome is, trend trading looks so easy, by having a look at the right chart and using hindsight, but… the next time you try it in reality your “personal trade chart” with your entry and exit looks different to the one you had in mind.
And the conclusion is – only very few trend trading systems navigate successfully around the zigzags of the markets.
There are two principal ideas to deal with the zigzags:
- Use a swing trend trading software that outrivals most human traders.
- Concentrate only on high probability trades with a specialized trend system.
Autotrading and taking only the best chances are generally to wise ways to trading success. But especially they are right for traders who feel that they are not in sync with the market, who have a trading block or are otherwise intimidated.