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Trend Filter Indicator

2020-11-12

2020-11-12

Trend following strategyOleg Tkachenko

Today we will learn about the classic trend following Forex trading strategy for novice traders and learn how to use the Trend Filter indicator. This trend following indicator shows the beginning of the trend and flats with efficiency of at least 80% and a target profit of at least 20 points. In this review you will find the indicator template and detailed instructions for how to use it. You will also learn how to start making money with this indicator.

The article covers the following subjects:

Trend following strategy using the Trend Filter Indicator

Simple trend following strategy with the unique Forex Trend Filter

indicator

Would you like to learn about a simple and profitable strategy based on a single indicator, which will allow you to open at least 80% of profitable positions under strict conditions?

In this review you will:

  • Learn what the Trend Filter indicator is and how to add it to MT4.
  • Read about the Trend Filter trading strategy details: initial conditions, signals for entry, rules for exiting the market, risk management rules.
  • Look at the analysis of individual situations and learn about the peculiarities of the trend following strategy.

You are always welcome to ask your questions in the comments!

What is trend following strategy?

The trend following strategy is a strategy of opening positions in the direction of the market price movement according to the trend indicator signal.

This means we enter the market with a buy position when the indicator gives a signal of a price increasing. We sell when we get a signal of the price falling. If the asset (the selected trading instrument, for example, a currency pair, stock, oil, etc.) grows, you assume that a growing trend has formed, and open a buy position expecting further growth. If the price of the trading instrument has begun to decline, you open a sell position, because you assume a downtrend has formed. Trend trader always acts in accordance with the trend movement.

Trend Filter Indicator

Trend Filter is a trend and flat indicator that gives fairly accurate and easily interpreted signals. You can use the MA as a confirmation tool.

Trend Filter is not one of the classic trend following indicator MT4, so it’s not used by everyone yet and its signals are quite effective. It is possible that in the future its formula will need to be corrected. The essence of the strategy is to follow the classic trading rule - follow the trend and squeeze what you can out of it. To do this, you need to find its beginning and have time to open a position before the trend reverses.

The Trend Filter is quite good at this and is the best trend following indicator. The indicator opens in a separate window below the chart. It shows the presence of a trend or flat on the market, and in the presence of a trending price movement, it shows its direction.

The main parameters of this trend following strategy:

  • Time Frame - H4. I recommend learning to work with the indicator on this interval, and then experimenting with H1 or D1. The indicator will lag on time frames below H1.
  • Currency pair - EURUSD.
  • Additional indicator - MA (simple or exponential Moving Average). This indicator is auxiliary and is needed only for certain situations, which will be discussed below.

The target profit level is 20-30 points. This is the intraday trend following strategy, but there may be situations when trades are opened at the crossing of trading days, so do not forget about swaps.

Please note: the indicated figures of the target profit and stop orders are for 4-digit quotes!

1. Installing the Trend Filter Indicator and setting up the trend

following strategy

The Trend Filter indicator is not pre-installed in MT4. So you need to follow these steps:

Restart MT4. In MT4, click “File / New Chart” and select the [EURUSD][1] currency pair. Additionally, display the data window in the chart (Data Window on the toolbar; this is not required but it can come in handy), choose the candlestick chart and the H4 timeframe.

The chart is ready, all you need to do now is add the indicators and set them up. Click “Insert / Indicators / Custom” and find the indicator you downloaded earlier.

Trend Filter settings:

By default, the Nbars parameter is at 89, this value needs to be changed to 59. You can leave the remaining parameters, including information in other tabs, as they are. If you wish, you can change the colors of the indicator lines. Then we add moving averages (MA) to the chart in the same way. The indicator period is 16, the offset is 2.

2. Entry and exit conditions. Peculiarities of using Trend Filter

Conditions for opening a long position:

  • Trend Filter has been below the level of -0.9 for at least 7-10 candles, but no more than three weeks. The indicator drew a long horizontal red line at the bottom of the range.
  • Trend Filter came out of the -0.9 range by drawing a yellow line.

After the indicator has changed color, open a position at the next candle. Set the stop loss behind the nearest local low or at a distance of 30 points.

Exit the market:

  • Upon reaching a profit of 20-30 points, we close 50% of the position, set the stop loss at the breakeven level (opening level).
  • The remaining 50% is insured with a trailing stop of 30 points. To set the trailing stop, right-click on the order and select “30 points” in the “Trailing stop” submenu.

Conditions for opening a short position:

  • Trend Filter has been above 0.9 for at least 7-10 candles, but no more than three weeks. The indicator drew a long horizontal green line at the top of the range.
  • Trend Filter came out of the 0.9 range by drawing a yellow line.

The entry and exit  conditions are similar: on the next candle after the indicator changes color, we open a position with a target level of 20-30 points and a stop order at a distance of 30 points. Exit 50% of the position upon reaching the target, another 50% - by trailing stop.

Peculiarities of opening positions that you should pay attention to:

1. Do not open positions one candle before and one candle after the release of important news (3 stars on the [economic calendar][2]).

2. Ignore signals (or enter with caution and constantly monitor the price movement) if it is middle or end of Friday. First, you lose on a triple swap, second, there’s a risk of getting into the gap, third, most of the positions are closed before the weekend - volumes and trend strength are falling.

3. The larger the angle of the Trend Filter at the moment of exit from the border zones (ideally as close as possible to 90°), the stronger the signal. If the angle is less than 45°, ignore the signal.

4. The signal is considered weak (carries great risks) if the signal candle, on which the color of the indicator changes, has a large body relative to the previous ones.

5. The moving average can help when in doubt: it should be completely under the candles for a long position, and above the candles for a short one. Doubtful situations include the following:

  • Trend Filter angle of 45° or less.
  • Trend Filter shows a clear signal (angle close to 90°), but the signal candle or candle after it goes in the opposite direction.

6. Close the trade ahead of schedule in the following cases:

  • Trend Filter reached the opposite end of the range and changed color from yellow to red / green, although a profit of 20-30 points has not yet been achieved.
  • The price went in the opposite direction and drew a relatively large candle.
  • For more than 3 candles in a row there is no directional movement.

This trend following trading strategy needs not only periodic, but also constant monitoring. With an interval of H4, you should look at the formation of a candle at least twice (once every 2 hours). As practice shows, Trend Filter catches the beginning of a strong trend perfectly.

Therefore, to get a profit target of 20-30 points, it is enough to wait for 1-3 candles. If after 3 candles it is clear that there is no trend, it is better to close the position manually ahead of schedule, without waiting for the stop order to be triggered. Or insure it with a trailing stop at the breakeven level.

Important! A trailing stop is a type of stop loss that follows the price at a predetermined distance, but does not move when it reverses. It is placed in the terminal itself, while trades are opened on the broker’s server. In the event of Internet connection failure, the trailing stop will not work and the trade might empty your entire deposit. If unsure of your connection stability,  use the [VPS server rental service][3].

3. Практические примеры применения трендовой стратегии с

индикатором Trend Filter

Example 1

We see three trading signals in this chart: Trend Filter moved horizontally and the edges of the range (green and red colors) for more than 7 candles, then changed color and went up / down at an angle close to 90°. Blue vertical lines show the moment of the color change and a signal candle, after which a position should be opened. Red arrows show candles for opening positions (the first and third - sell, the second - buy).

None of the signals turned out to be false and no position would have been closed by stop order., You can see how much you could earn on them on the right scale or if you open this chart in MT4. If you do not use a trailing stop and monitor each candle, you could make a profit of at least 150 points from all three trades.

Pay attention to the frequency of signals in this trading system. For example, in this case, only 3-4 signals appeared in 1 month. This can be considered a disadvantage, but on the other hand, you will agree it is better to have several strategies with rare signals but low risk and stable profit, than a strategy with many risky signals and a minimum of profit.

Example 2

Unfortunately, there are no ideal strategies and indicators, and this is no exception. All the conditions must be met: Trend Filter stayed at the bottom for a long time, changed color at a steep angle, confirming MA is below the price, indicator color changed after the weekend, there are no large candles.

Despite all conditions being exactly right, the uptrend was very weak. The trade did not close by stop order, but do not forget about the swaps that will eat up the potential profit. In this case, the position would have to be closed when the indicator reaches the opposite edge of the range (blue arrow). And even in this case, it would not be closed at a loss (see information in the Data Window).

Example 3

Do not enter in conditions like these. First, the indicator did not reach the edge of the range. Second, it was not horizontal for at least 7 candles. And third, the behavior of the MA is very ambiguous - on the signal candlestick it only crosses the price instead of being above it.

Example 4

This is an example of a high risk trade that I would recommend avoiding. Remember the peculiarity No. 3: the indicator line should be horizontal and come out at an angle as close as possible to 90°.

In this case, the indicator began an arc-like movement without changing color, which is evidence of ambiguity. These are fluctuations between the bulls and bears that have not yet made a decision (blue rectangle). If you look closely at the chart, you could still open a position (yellow arrow). You could even earn within 50 points in 4 hours, as we see by the Open/Close price (red rectangle). But the question is: are you willing to take that risk? This is what a demo account is for. Use it to perfect your strategy, learn to see signals and evaluate risks.

Example 5

Here we see two interesting situations that are worth considering.

5.1. The first signal gives absolutely accurate signals to enter the market (red arrow). But if you closed it ahead of schedule based on the Trend Filter signal, which changed color after a couple of candles, you would not have received all the profit you could. This shows there can be no templates on Forex. Remember the basic rules, but also improvise and observe the chart at least 2-3 times per candle.

5.2. The second and third situations are examples of the peculiarity No. 4. Here the signal candle has an abnormal body. I do not recommend entering in such situations!

4. Brief summary

To start making money with the Trend Filter trend strategy, you need to:

  • Open a [demo account with LiteForex][4] and [install the MT4 platform][5]. You can download it from the broker’s website.
  • Download the LiteForex indicator template. I have given the link above.
  • Carefully study the input parameters, the entry/exit conditions, and the peculiarities of the indicator.
  • Look at the screenshots in this review to better understand the essence of the indicator.
  • Launch the indicator on a demo account and try to get a performance of at least 80% by opening a several dozen positions.

If you have questions, please ask them in the comments!

In conclusion, I would like to add that LiteForex is one of the best brokers for training and perfecting your skills in this strategy:

  • Opening a demo account takes two minutes, and you can test the strategy at one. No verification is needed.
  • In LiteForex MT4, you can open any number of demo accounts within a minute by setting up the required starting deposit and leverage.This is convenient for stress testing the risk management system. You will also learn when and how to open trades, what is leverage, etc.
  • Order processing speed is among the best on the market - execution up to 100 ms.

LiteForex also gives traders an opportunity to win many prizes on the occasion of its 15th anniversary. Would you like to know more about this? Click [here][6] and register!

Conclusion

Trend Filter is a pretty rare and effective trend following indicator for intraday and also for medium-term strategies. The above example with EUR/USD and the H4 timeframe is just one of the options. It can be tested on other liquid instruments. If you have experience with Trend Filter, tell us about it in the comments! Also I would like to recommend you to check out the [trend trading strategy based on Thomas DeMark indicator][7]. It is an original and also noteworthy trend following trading strategy that combines Thomas DeMark’s technical tools.

P.S. Did you like my article? Share it in social networks: it will be the best “thank you” :)

Ask me questions and comment below. I’ll be glad to answer your questions and give necessary explanations.

Useful links:

  • I recommend trying to trade with a reliable broker [here][8]. The system allows you to trade by yourself or copy successful traders from all across the globe.
  • Use my promo-code BLOG for getting deposit bonus 50% on LiteForex platform. Just enter this code in the appropriate field while [depositing][9] your trading account.
  • Telegram chat for traders: . We are sharing the signals and trading experience
  • Telegram channel with high-quality analytics, Forex reviews, training articles, and other useful things for traders

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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  1. my.liteforex.com/trading/chart?symbol=EURUSD
  2. liteforex.com/trading/calendar/
  3. liteforex.com/trading/additional-services/vps-services/
  4. my.liteforex.com/
  5. liteforex.com/downloads/mt4/
  6. liteforex.com/contests/dream-draw/
  7. www.liteforex.com/blog/for-professionals/trend-trading-strategy-with-demark-indicators/
  8. my.liteforex.com/?category=for-beginners&slug=trend-following-strategy&openPopup=%2Fregistration%2Fpopup&utm_source=blog&utm_medium=article&utm_campaign=bonus
  9. my.liteforex.com/deposit/?category=for-beginners&slug=trend-following-strategy&promo_code=BLOG&utm_source=blog&utm_medium=article&utm_campaign=bonus