low-risk-strategies-for-bull-and-bear-market-types

Long-term Trading in Brief: Low-risk Strategies for Bull and Bear Market Types

Did you know that research shows you are 2x to 3x more likely to stick with your habits if you make a specific plan and write it down?

And if there is one habit you should be writing down as a Forex trader, it is this:

I WILL ONLY TRADE WELL-ESTABLISHED TRENDS.

Why? Because most retail traders trade against trends, and get it wrong.

Look at this data and you will see what I mean:

I WILL ONLY TRADE WELL-ESTABLISHED TRENDS.

The majority of traders (69% in this case) are fighting the trend and most of them are losing.
So, instead of fighting the trend, how do you let the trend become your friend?

Identify evident trends

When long-term trading, you need to think big picture. Where are the major trends right now?
To figure this out, identify the trend using weekly charts. These are the trends we want to be involved in.

Identify evident trends

You want the price to be trending between the mid and lower (bear) or upper (bull) Bollinger Band.
The trend is initiated when there is a weekly close below the lower or above the upper Bollinger Band, after a sideways market type.
Note there can be penetrations of the mid Bollinger Band as long as they reverse quickly. A sustained move through the mid Bollinger Band signals a change in market type.

Rule #1: Identify a bull or bear market type on the weekly charts. An alternative, systematic way to identify trends is to always trade on the correct side of the weekly Supertrend indicator (3,7) 

Trends don’t go in a straight line to your objective

Trends, by nature, are choppy, so when you identify one, there should be no rush to jump aboard.
Instead, we stalk a low-risk entry point in the direction of the trend.
There are three entry points that you can use. For each of them, you need to go down to the daily charts.

1. Busted breakout. Wait for a reversal to a key level in the opposite half of the daily Bollinger Bands. Then look for a candle stick reversal pattern, such as a hammer, engulfing or other candlestick pattern.

Identify evident trends

2. Breakout from consolidation. If the trend is strong, then you simply need to wait for a period of consolidation on the daily charts before trading a confirmed break lower. The Bollinger Bands will typically squeeze in for this entry, but not always.

Breakout from consolidation

3. Low volatility breakout. This is similar to the above entry. Look for periods of consolidation where the Bollinger Bands go tight for an extended period (like in a sideways quiet market type). Then, when you get the breakout in the direction of the trend, you not only enter, but you scale-in three times on each new bearish candle (as long as it is at least 0.5% away from the previous entry point).

Low volatility breakout

When you are looking for these entries, keep the “quality filter” high. There are plenty of trends and plenty of low risk entry points; the trick is to wait for them.

Rule #2: Wait for a low-risk entry point, and then enter.

You are a risk manager first and a trader second

Your top job as a trader is to get out of your losses without greatly damaging your account. As we saw in the previous post, retail traders are notoriously bad at cutting losses.

You are a risk manager first and a trader second

So, before you do anything, you need to get your risk management sorted.

Rule #3: Put your stop 0.5% behind the entry candle or at least 1.25% away. If the entry candle is large, you can place it 0.5% above the mid-point of the candle (the Marbuzo line).

Rule #4: If you can’t put the stop less than 3% away, then don’t take the trade.

Rule #4: On busted breakouts only, once the first target is hit, move the stop to the high (if short) or low (if long) of the entry candle. This rule is optional; you can leave the stop where it is.

We don’t move the stop to breakeven at any point, as we expect the trend to continue, and moving it to breakeven puts it in an illogical place.

Employ a complex exit strategy

By exiting in thirds, we can make some money when the market first goes our way. We can keep our profits after the market trends in our favour and we can keep some on the table for big wins.
The first bit of profit comes off relatively quickly to keep our trading consistent.

Rule #5: Close 1/3 of your position if either of the following conditions are met on the daily charts:

  • Busted breakouts only—Exit on the opposite Bollinger Band on daily charts with a 1:1 risk/reward stop activated, when the price gets within 0.5% of the Bollinger Band.

Employ a complex exit strategy

  • Breakouts only—Exit on a fast market type stop, which is either a daily reversal candle or a close back inside the outer Bollinger Band (trail the stop to the high/low of the candle to let profits run that little bit more).

Breakouts only

The second third we look at to capture the trend, but we don’t want to sit through a large pull back (that is, for the final part of the trade).

Rule #6: Close the second 1/3 of the position if the following conditions are met on the daily charts:

  • If you see a daily double top or bottom, then exit.
  • If the market type turns extreme, then exit by trailing the stop by 1% behind the current market price.

Breakouts only

Smart-Trade-Better

We leave the final third of our trade on for a big win by moving to a higher timeframe.

Rule #7: Exit the final 1/3 of the trade when the following conditions are met on the weekly chart:

  • If you see a daily double top or bottom, then exit.
  • If the market type turns extreme, then exit by trailing the stop by 3% behind the current market price.

Tips-to-Trade-Better

  • If there is no clear reversal pattern, protect your profits by using the super trend indicator (with the settings 2,7).

Super-Trade-Indicator

Capture windfall profits with targets

While you have a variety of ways of taking profits, you still want to have a profit target, just in case the market goes crazy and trades there while you are not watching. This is happening more and more now that algorithms are replacing dealers at banks.

Rule #8: Place a distant profit target at a major area, such as weekly support and resistance or a key figure (such as a 00).

Be smart and don’t fade trends

When you work for a broker (like I have) and get the chance to see the trades that retail traders place, you might get quite the shock.

The market might be a fast bear, but look who’s buying?

That’s right. The flow from the retail trader will be “BUY, BUY, BUY”, yet the market, of course, trades lower.

So don’t be the chump, and stop fighting the trend.

About the Author

Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (get free access). He is the owner of  www.fxrenew.com a provider of Forex signals from ex-bank and hedge fund traders (get a free trial). If you like Sam’s writing you can subscribe to his newsletter.