Profitable Trend Following Strategy is used as the base chart (this is where we screen for potential places on the chart where trading signals may occur) and the 1h timeframe as the signal chart, or the trade chart (where we execute orders according to this strategy).
If you choose to use a different timeframe as the base chart remember that you go one timeframe lower for the signal chart (so if 1h is the base chart then the 30m timeframe is the signal chart).
The main cornerstones of Profitable Trend Following Strategy are as follows:
We need to have a trend. This strategy rests on trend behavior and without one it basically can not be used.
To determine if there is a trend or not we are going to use a set of two moving averages, out of which one is a 34 period and the other a 55 period MA. You may notice that these numbers are part of the Fibonacci sequence.
We can judge if a trend is worth trading or not by observing how the moving averages relate to price action.
Note: For this strategy feel free to experiment with different types of moving averages (like simple, exponential and weighted).
- For an uptrend, the trend should meet the following conditions: Price action is above the two moving averages
- Price stays above the moving averages
- The 34 MA is above the 55 MA and stays above the 55 MA
- The MAs are sloping upwards for most of the time as they follow the trend
- For a downtrend, the same applies just in the opposite direction: Price action is below the two moving averages
- Price stays below the moving averages
- The 34 MA is below the 55 MA and stays below the 55 MA
- The MAs are sloping downwards for most of the time as they trail behind the trend