Dual Momentum Trend Trading

1. Daily charts are the optimal trading timeframe for most traders

Daily charts help inhibit over-trading because you get fewer signals, but they are more accurate.

Avoid common pitfalls. Using daily charts as your primary trading timeframe helps prevent several common trading mistakes:

• Over-trading: Fewer but more reliable signals reduce the temptation to trade excessively
• Over-analyzing: Focus on the most pertinent market view, reducing confusion and indecision
• Inconsistency: Clearer and stronger signals on daily charts lead to more effective and consistent trading

Daily charts provide a balanced perspective, allowing traders to see significant trends without getting caught up in short-term noise. This timeframe also aligns better with the lifestyle of most traders, reducing the risk of becoming overly preoccupied with minute-by-minute market movements.

2. The Guppy Multiple Moving Average (GMMA) is a powerful trend indicator

The GMMA indicator is constructed from two groups of moving averages.

Dual trend analysis. The GMMA consists of two sets of exponential moving averages (EMAs):

• Short-term GMMA: 3, 5, 8, 10, 12, and 15-day EMAs (colored blue)
• Long-term GMMA: 30, 35, 40, 45, 50, and 60-day EMAs (colored red)

This unique configuration allows traders to simultaneously analyze both short-term and long-term trends. The short-term GMMA reflects the sentiment of short-term traders, while the long-term GMMA represents the activities of longer-term investors. By observing the relationship between these two groups, traders can gain valuable insights into the strength and potential direction of market trends.

3. Stochastic Oscillators and RSI complement GMMA for trend confirmation

We use the long-term STO as a cycle indicator to time the cycles on the primary trend and the short-term STO for the secondary trend.

Multi-indicator approach. Combining the GMMA with Stochastic Oscillators and the Relative Strength Index (RSI) provides a more comprehensive view of market conditions:

• Long-term Stochastic Oscillator: Identifies cycles in the primary trend
• Short-term Stochastic Oscillator: Analyzes cycles in the secondary trend
• RSI: Acts as a momentum filter and confirms trend strength

By using these indicators in conjunction, traders can more accurately assess trend strength, identify potential reversals, and confirm entry and exit signals. This multi-faceted approach helps reduce false signals and improves overall trading performance.

4. Strong trends are characterized by clear GMMA separation and alignment

Sustained activity of the short-term GMMAs above (or below) the long-term GMMAs confirms a strong trend.

Identify robust trends. Strong market trends exhibit specific characteristics in the GMMA indicator:

• Clear separation between short-term and long-term GMMAs
• Short-term GMMAs consistently above (uptrend) or below (downtrend) long-term GMMAs
• Expansion of both short-term and long-term GMMA groups

When these conditions are present, it indicates a strong and stable trend with a low probability of sudden collapse. Conversely, when the GMMA groups begin to compress or interweave, it suggests weakening trend momentum and potential reversal.

5. Only enter trades aligned with the dominant and primary market trends

We only trade on markets with strong primary trends that are aligned with their dominant trends.

Trade with the trend. To maximize the probability of successful trades:

• Ensure the primary trend (indicated by long-term GMMA) is strong and clear
• Confirm that the primary trend aligns with the dominant trend (200-day EMA)
• Enter trades only when secondary trend (short-term GMMA) aligns with primary trend
• Buy dips in uptrends and sell rallies in downtrends

By adhering to these principles, traders can avoid the common mistake of trading against the prevailing market direction. This approach harnesses the power of strong trends and reduces the risk of being caught in short-term market noise or false breakouts.

6. Use trailing stops and clear exit criteria to protect profits

Use 60 EMA as a trailing stop.

Preserve capital and profits. Implementing effective exit strategies is crucial for long-term trading success:

• Set trailing stops using the 60-day EMA to protect profits while allowing trends to run
• Exit when both short-term and long-term Stochastic Oscillators move against the trade direction
• Confirm exit signals with RSI crossing the 50 level in the opposite direction of the trade

These exit criteria help traders avoid the common mistakes of exiting profitable trades too early or holding losing positions too long. By systematically managing exits, traders can lock in gains, limit losses, and maintain a positive risk-reward ratio across their trading portfolio.

7. Diversify across uncorrelated markets and practice proper position sizing

Diversification is preferable to having "all your eggs in one basket."

Manage risk effectively. Proper diversification and position sizing are essential for long-term trading success:

• Spread investments across multiple, uncorrelated markets (e.g., stocks, currencies, commodities)
• Invest no more than 20% of trading equity in a single position
• Risk no more than 3% of total equity on each trade

This approach helps mitigate the impact of poor performance in any single market or trade. By carefully managing position sizes and spreading risk across diverse assets, traders can better weather market volatility and preserve capital for future opportunities.

8. Scan for setups and measure relative strength to find the best trades

When trading relative strength plays, I prefer to use forex pairs and Exchange Traded Funds (ETFs) rather than individual stocks.

Identify optimal opportunities. Use systematic methods to find the best trading setups:

• Utilize market scanning tools (e.g., StockFetcher) to identify securities matching technical criteria
• Measure relative strength to find outperforming markets and sectors
• Focus on ETFs and forex pairs for relative strength plays to avoid individual stock volatility

By combining technical scans with relative strength analysis, traders can identify high-probability setups across a wide range of markets. This approach helps focus efforts on the most promising opportunities while avoiding less favorable trading conditions.

9. Develop a consistent daily and weekly routine for trading success

To succeed at trading, you need to get in tune with the market rather than impose your own set of beliefs upon them.

Cultivate discipline and consistency. Establish a structured routine to maintain objectivity and improve trading results:

Daily routine (30 minutes):

• Review order status and adjust positions as needed
• Analyze charts of current positions for exit signals or stop adjustments
• Evaluate watch list for new setups and enter orders accordingly

Weekly routine:

• Review all open positions to ensure trends remain strong
• Update watch list based on relative strength and market conditions

By adhering to a consistent routine, traders can minimize emotional decision-making and maintain a disciplined approach to market analysis and trade management. This systematic process helps traders stay aligned with market conditions and capitalize on high-probability opportunities while avoiding impulsive or poorly-timed trades.

Last updated: July 29, 2024