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A very useful tool used by trend traders to manage stops is the Regression Trend Channel (RTC). The formula to create the RTC is beyond the scope of this article but in summary can either be created using standard deviations or the highest or lowest bars in the channel. The RTC tool is also accompanied by the Pearson’s R value, with a reading of 0.80 most preferable, suggesting a linear and tradable structure to the trend.

A well behaved trend will stay within the confines of the RTC, only breaking the upper channel in a bull trend and the lower channel in a bear trend. The lower channel can then be used as a trailing stop loss in a bull trend and the upper channel in a bear trend.

Below are examples of trades that were taken in 2013 and how the RTC was used as a trailing stop loss. The Pearson’s R value appears next to the RTC.

A typical year

There are several misconceptions in trading. The first is that traders feel the need to create new strategies when there are strategies that have been in existence for decades that are still equally powerful today. Next is that one has to be pulling trades daily to be a trader. Another misconception is targeting a certain amount, say 100 pips, a week which is a very challenging style to practice.

The correct approach is to trade when the trends are in play, typically 3 to 4 months, and stand aside when not. The reality is the markets consolidate longer than they trend and, therefore, exercising patience is again another challenge for the inexperienced, and is also a topic for another article.

2013 was a typical year for experienced trend traders. With a stringent risk management system in play, pip total for the year was in excess of 25 000 pips, returning profits of over 90%.

George Soros said “If investing is entertaining, if you’re having fun, you’re probably not making any money.” I once asked my mentor how I would know I had cracked it and his reply was when it becomes boring.

Trend traders have already started applying the same principles in 2014, applying the same mechanical approach with the same ruthless efficiency. Less is certainly more by applying proven and simple price based strategies. When the wheel is already in motion, why try to reinvent it?

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Zaheer Anwari

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