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The Trend Following Bible: How Professional Traders Compound Wealth and Manage Risk by David Druz, Andrew Abraham

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CHAPTER 8

Trend Retracements

As for trend breakouts, there are seven basic rules you must follow for trend retracements.

  1. Identify the strongest markets and the weakest markets via a smoothed rate of change. These should be the only markets where you look for a trade.
  2. When you get a trend breakout signal, confirm the breakout risk is not more than 1 percent of your core account size; if so, go to the next step. In most cases I risk even less personally.
  3. Trade only in the direction of the MACD. If long, confirm you are above the zero line. If short, confirm you are below the zero line.
  4. Do not exceed more than 10 longs and 10 shorts.
  5. Do not take a commodity trade if the dollar risk exceeds $2,500 a contract regardless of account size.
  6. Do not take the trade if you have already allocated 5 percent of your account in that sector.
  7. Do not take the trade if you have already have 20 percent of your total core equity in open profits.

We have some additional parameters that I have added. Throughout my career many trend followers have used the concept of multiple time frames. Trend followers from David Harding from Winton to Don Steinitz to Alexander Elder are proponents of multiple time frames. You want to be in sync with a time frame one step higher.

For example, if you are trading daily bars, you want to look at the weekly bars direction. If you are day trading and trading hourly bars, you want to look at daily bars to determine trend direction.

Don Steinitz's Approach

Don Steinitz's ...

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