My Best Trend Following Strategy (Forex & Stock Trading System)

What’s up Traders, in this article, we’re going to be talking about My Best Trend Following Strategy (Forex & Stock Trading System). If you’re a trend trader and prefer the swing trading, I’m sure that you face the same problems. 

I was facing when, I started trading the main struggle as traders is to exactly pinpoint, the market entry in order to catch the next big move. 

But what if you developed a simple swing trading setup that would generate high probability entry signals. 

And if you stick with me for a few minutes, I will share with you a simple and an easy swing trading strategy, that will improve your trading results. 

The core of this system relies on divergences between, the price and the stochastic indicator in the direction of the prevailing trend, on the market indicated by the 200 EMA. 

 

Spot Divergences between Stochastic and Price 

 

• A Divergence signals momentum coming into the Market
• Regular Divergence uptrend
• Regular Divergence downtrend
• Continuation Pattern
• We don’t Trade all the Divergences
• We must Eliminate the Market noise

Let’s dive right into a dis strategy and see, how it works here’s the first rule of the strategy, we need to spot divergences between, the price action and the stochastic indicator. 

A Divergence signals momentum coming into the Market

If you are a Trend trader divergences should be, one of your most important tools. 

Because the divergence signals momentum, coming into the main trend suggesting, a possible continuation in the prevailing direction of the market. 

 

Regular Divergence uptrend

As you probably know there are two types of divergences, a regular and hidden a regular divergence involves, higher high prices and lower indicator values, during an uptrend and lower low prices.

Regular Divergence downtrend

And higher indicator values during a downtrend, when this happens.

 

That’s an indication of market exhaustion a possible, sign of market reversal or at least a short-term correction a hidden divergence, is a visual non confirmation which involves higher lows of the price. 

But lower indicator values during an uptrend and lower highs of the price, but higher indicator values during a downtrend. 

 

Continuation Pattern

A hidden divergence signals, a continuation move in the direction of the prevailing trend. 

That’s why if you prefer to take Positions in the direction of the main trend, the hidden divergence can generate some pretty accurate signals, for spotting divergences you can use many tools. 

 

We don’t Trade all the Divergences

But I prefer to use the stochastic indicator, now here’s the key to our system, we don’t trade all the divergences during strong trends. 

The stochastic will generate divergence after divergence, and most of the signals will probably fail, you look at this Bitcoin chart. 

And as you can see the Price was in a strong upward trend, and the stochastic indicator generated several divergences. 

But most of these signals were false, that’s a wrong approach in what concerns trading the divergences. 

 

We must Eliminate the Market noise

We have to be smart and filter this technique in order to eliminate false signals. 

 

Establish the Trend with the 200 EMA

 

• Trade only in the direction of the main Trend
• Train your eyes to spot the Divergences
• Divergences on higher Timeframes are more reliable

Now here’s the second rule of this strategy, will establish the main trend with a 200 period exponential moving average, and we only trade divergences in the direction.

Of the main trend also, I only trade on the hourly on the 4 hours and on a daily timeframes in order to reduce the market noise. 

And filter the bad signals generated on shorter timeframes, here’s how it takes signals with this swing trading setup. 

When the price trades above the 200 EMA, we consider taking only long entries, when the price trades below the 200 EMA, we consider taking only short entries.

We search for divergences between the stochastic indicator and the price, only in the direction of the main trend indicated by the 200 EMA.

If the price trades above the 200 EMA, we search for divergences on the lower side of the stochastic, and if the price trades below the 200 EMA. 

We search for divergences on the upper side of the stochastic a very important, we are not interested in trading divergences, that signal reversals possible pull backs or counter trend positions.

Here’s the pound dollar on the four hours time frame, we determine the upward trend with the 200 EMA, and we start searching for divergences on the lower side of the indicator. 

And we only consider to go along on the market, the first signal was the buy entry after a hidden divergence around 200 EMA, observe how the price was making higher lows. 

But the indicator was making lower lows, the second signal was the buy entry after a classic divergence, also around the 200 EMA see how the price is making lower lows.

But indicator makes higher lows, the third opportunity was generated after a classic divergence, also around the same 200 EMA the fourth signal was also classic divergence. 

If we look at the chart we see the price making lower lows, but the stochastic making higher lows, the fifth signal was a hidden divergence. 

Observe how the price was making higher lows, but the indicator was making lower lows the sixth signal, was also hidden divergence with the same setup, as before the market price making higher loss. 

But the stochastic generated lower loss as you can see, we ignored all the signals offered by the divergences, on the upper side of the stochastic, as we are in a strong upward trend. 

Let’s look at this goal chart also on the four hours timeframe, we establish the downward trend with a 200 EMA, and we start searching for divergences on the upper side of the indicator this time. 

 

The first signal was a short entry after hidden divergence, observe how the price was making highs, but stochastic was making higher highs. 

The second entry was a short signal after a classic divergence, see how the price is making higher highs, but the indicator is making lower highs. 

The third opportunity was a classic divergence, around the 200 EMA the fourth signal was also classic divergence, if we look at the chart.

We can see the price making higher highs, but the indicator making lower highs the fifth signal was a hidden divergence, observe how the price was making lower highs. 

But the indicator was making higher highs the sixth signal, was a classic divergence the price was making higher highs. 

But the stochastic was making lower highs as you can see, we ignored, all the signals offered by the divergences on the lower side of the stochastic, as we’re in a strong downward trend. 

 

Trade only in the direction of the main Trend

The trick of the strategy is to determine the main trend with the 200 EMA, and only take positions in the direction of the trend. 

So we don’t chase all the divergences, that occur on the chart we only trade the ones with a higher probability meaning the ones in the direction of the main trend. 

 

Train your eyes to spot the Divergences

If you are a trend-following trader, you should train your eyes to spot the divergences on different charts, please keep in mind that this system is more reliable. 

 

Divergences on higher Timeframes are more reliable

When you are using higher Timeframes a signal, that is produced on the 4-hour or on the daily chart, is more reliable than a signal produced on the 15-minute chart. 

But divergence is more reliable on higher time frames, because the market does not move as fast, and is easier to define trends by using higher time frames. 

You will see the patterns developing, and you’ll have time to make the correct decisions testy strategy on your charts, and I look forward to hearing from you in the comment.

 

Final words

Okay, so that’s it I’ve come to the end of this presentation, I hope you’ve enjoyed it and if you really do please write a comment and click the share buttons smash it right, and click to subscribe bell to Allow notifications be updated.

Whenever, I publish content like, this and finally any questions or feedback let me know below and I’ll do my best to help, so with this guide, I hope you got value out of this presentation, I wish you good luck and good trading and I’ll talk to you soon you.

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