Survive in Forex: Use Both Trend Following and Range Trading Systems
In Episode 57 legendary trader Akil Stokes came on the Two Blokes Trading podcast for his second appearance. Amongst the usual shower of sparkling knowledge-bombs, one in particular caught my attention: he used to be rubbish in September. I’ll elaborate - he used to only trade range trading systems, which worked great in sideways markets. But when traders all went on holiday in the Summer the volatility was sucked out of the market and they would trend as a result.
The effect of this was to hammer Akil’s trading account every September. His answer? Get a trend trading system together and run it alongside his range trading system. Now he says, he can make money in all markets.
One Trick Pony
This got me thinking on my own trading. Until recently I have been almost exclusively a trend trader. My favoured technique is to find a pullback in an existing trend and trade that back to the recent high/low. That’s an established idea and one that works for many traders. How you choose to pick your pullback levels and trend confirmations etc. is down to the individual system. But as a basic idea, trend trading pullbacks is pretty solid. But, if I only trade currency majors, a whole bunch of which will include the USD, and the USD is generally range bound and not trending at all - well then, I’m buggered.
I needed to add either a pure range trading system or a counter trend trading system. Something that could take advantage of markets which repeatedly fail to build big trends.
Step up Traders Support Club.
As you know we have recently moved on from the coaching aspect of the Traders Support Club programme to learning and backtesting their specific trading strategies. One of the striking takeaways from their Swing Trading video series is their insistence that you learn and trade three different strategies. One is an early trend finding system based on breakouts, one is a pullback strategy that aims to achieve what I outline above, and one is a range trading trading system. Tick, tick, tick.
I saw this tweet recently from Jerry Parker, famously a follower of mega trends. He quoted the underlying article from valuewalk.com: “The worst period for trend following in the last 100 yrs was from 2010 to 2016”.
You may or may not know Jerry from the Turtle Traders book, about a group of trend traders who caused a storm in 1980s trading. But suffice to say he is a trader who lives by the maxim ‘cut your losers and let your winners run’. In fact, that is the quote on the front page of his website. His entire trading style is based on following strong, long running trends.
That Jerry Parker, known trend trader, has highlighted the difficulty of making returns when the markets just don’t do what you need them to do, and across a six year period, really makes one think. Now, he is an expert, experienced trader who still managed to make money trading trends in that period, but I am not quite at that level yet!
What Type of Trader Do You Want to Be?
A year into my trading career, I am at a place where I have a good understanding of the basics required and have traded with some success off and on. I have had the privilege of conducting well over 50 interviews with successful traders, all of whom trade slightly different styles. But now, at this moment, I need to make a decision on what type of trader I want to be. Then I need to stick with it, to give myself a chance of making consistent gains.
That is a broad question to answer, and I don’t feel it all needs to be answered at once. But, the first part of that answer, for me at least, needs to be: “I want to be a trader who can make money in all market conditions”.
Up, Down and Sideways
After all, isn’t the ability to make money at any time the reason why so many of us choose currency trading rather than stocks and shares investing? We want to make money in up markets and down markets. But, what about sideways markets? The market moves in three directions - up, down and sideways. Don’t forget the last one.
Is there a system that enables you to trade all three directions with the same set of criteria? Not that I know of. So I have resolved to trade one trend trading system and one trend reversal / range trading system. I know that TSC want me to trade all three, but I’m still a naughty schoolboy at heart. Two trend systems and one range system seems to be overbalanced in one direction to me, so I will pick the Traders Support Club trend system (from the two available) that gives me the best backtested returns and stick with that.
Objections to Counter Trend Trading and Trend Following Combined
There are two potential objections to range trading and trend following systems concurrently. The first of these is that people are just ‘suited’ to a trend following system or a counter trend trading system based on their personalities.
The second of these is that you will damage your profits if you are trading range systems in trending markets and trend systems in ranging markets; by sticking to one you can make hay while the sun is shining. In other words, you will limit your profit when the markets turn in your favour.
Objection 1 - Your Personality Is Better Suited to Either Trend Following or Range Trading
This is tied in with the idea that we have heard from guests on the podcast many times that you should trade a system based on your personality.
One concept I have heard repeated is that conventional thinkers will be more suited to trend following, while unconventional ‘out of the box’ thinkers will be more suited to counter trend trading systems. This seems like a neat and tidy idea, but I am not sure it holds weight.
Personally I would suggest that your personality will determine more the way you trade than the type of system you choose. So, day or swing trading; fundamentals or technical trading; forex or research-based shares investing etc. If you are a technical trader you may look for RSI setups to suggest extended markets and buy reversals, or you may look for the MACD to suggest a building trend and trade with that trend. But that seems to me to be largely the same thing from a personality and intellectual style perspective.
That isn’t to say that you won’t have a preference. I am more comfortable with trend trading than counter trend trading. But I suspect that is largely because I have heard so many times the refrain ‘the trend is your friend’ and ‘the longer a trend has been in place the more likely it is to continue’. People who haven’t heard these things so much may look at all time record highs and repeat the refrain ‘what goes up must come down’. But the positions could so easily be reversed with exposure to different influences and the basic pressures of recency bias.
From the Horse’s Mouth
As always, I am keen at this early stage of my career not to just make this stuff up. So, I asked Ali Crooks, Founder and Lead Trainer of Traders Support Club to give me his thoughts:
When people ask me “How do I learn to be good a counter trend trader?" I often say, “Get good at analysing the trend!” Why? Because when you progress your trading application in a systematic way, like many of of the TSC traders who started as trend based traders, you can also become counter trend traders as as result.
In fact it can also work the other way round! This is because a good trader of either discipline after a period of time usually doesn't just take every trend based or counter trend based setup that comes along.
Over time they bring in their own overall discretionary analysis, alongside the potential strategy set up, and it’s that skill that allows them to pick better sets ups and when they spend more time in the market many then want to trade both types of set up because they see both by default.
Ali has taught hundreds of people over the years, many of whom have gone on to be very successful traders. His experience suggests that learning one of these systems feeds into the other and they become mutually reinforcing. You don’t have to sit in one camp and suffer for years when the markets just move sideways or almost only trend.
Objection 2 - You Will Limit Your Profit When the Markets are Favourable to Your System
This objection on the surface of it seems valid. Imagine if, in Jerry Parker’s 6 year dry spell for trend trading you were a counter trend or range trader. You would, presumably, have killed it. If all the (numerous) other factors for you to be a successful trader were in place, and you traded markets that were largely ranging and failing to form strong trends, then you would have made a fortune if you were a counter trend trader.
But imagine you had added in a trend trading system before this period started, to balance your styles. That system could have failed for six long years and eaten into your profits from your counter trend trading. Or worse, it could have made you ultimately unprofitable. Then best case scenario is that you used up valuable capital trading a system that made less return than your other system.
The simple counter to this argument, however, is to imagine that the shoe was on the other foot. Imagine you were, like Jerry, a trend trader only. You will likely have struggled in ‘the worst period for trend following in the last 100 years’. Even if you were a great trader and managed to squeeze some returns from the market, this will have been less that the returns you could have taken by trading against forming trends, right? So, if you had traded both systems your returns would have been higher.
Survival > Greed
What I am effectively talking about is a system of hedging. By trading both with and against trends you flatten out your profits, sure, but you flatten out your losses too.
Now, let me ask you: what is most important in learning to trade Forex - maximising profits, or basic survival?
If you blow your account, or get disheartened and quit, then you are done. You are a statistic. Goodbye and good luck with the 9 to 5 grind. If instead you are cautious and make (for example) 20% next year rather than 30%, but continue to trade and grow your account then you have survived. You are a successful trader and can continue to return better-than-bank returns with your capital. (Though, perhaps, you are still in the 9 to 5!).
The number one issue facing you as a retail trader, trying to build his account in the aggressive, merciless world of online forex trading, is Survival. If you trade two systems that by their very natures allow you to make money in up markets, down markets and sideways markets, then you have taken the first step to seeing the year out and living to trade another day!
If you are interested in exploring the counter trend, trend trading and range trading systems from Traders Support Club then click here to find out more.