Forex 104Lesson 2

The 2C Trend Following Strategy

The 2C trend following strategy is a method of trading which aims to profit from an established, strong trend. The main point of difference is instead of

waiting for the inside-bar formation, we are looking for a small

retracement to form and then fail.

Waiting for the retracement to fail does two things: it eliminates the hassle

of trying to pick tops and bottoms, and it shows us that the market does

actually want to continue in the direction of the underlying trend.

So how do we know when the retracement has failed? There are many ways

in which one could do this, but the best way I’ve found is to wait for two

consecutive candle closes across a moving average. Hence the name 2C, standing for ‘two close’.

The image below shows exactly what I mean. The first candle

must cross the moving average and the second must close beyond

the moving average:

The moving average that I like to use is the 25 Period Simple Moving Average (SMA). So why the SMA this time? The EMA is a

moving average which is more predictive than the SMA because it

places more weighting on the most recent price action.

We don’t want this for this strategy – we want a smooth moving

average. The idea is to watch how the price action behaves

around the moving average, not the other way around. The EMA is

too responsive and gives too many weak signals.

To clearly identify a trending market we actually use two moving averages, and simply wait for the faster (or lower period) average to be above or below the slower (or higher period) average. The other moving average is the 100 SMA.

Rules of engagement

Wait for the moving averages to cross:

For a buy trade we are looking for the 25 SMA to have crossed above the 100 SMA and price action should be trading above the 25 SMA. For a sell trade the 25 SMA should

have crossed below the 100 SMA and price action should be trading below the 25 SMA.

Wait for the market to begin trending:

The 25 SMA will always be above or below the 100 SMA, so we need to wait for a trend

to form. The easiest way to do this is to look for either of the following:

Look for higher highs followed by higher lows for a bull trend, or lower lows

followed by lower highs for a bear trend.

Look for a strong directional move to the upside or downside, with little or no

retracements.

Wait for a retracement:

Once you’ve found a market which has formed a trend, the next step is to wait for a

retracement. This retracement must cross back over the 25 SMA (so it’s trading between both

SMAs)

Look for the two candle closes:

Now we are looking for the two consecutive candle closes back across the 25 SMA. This shows

us that the market is likely to continue trading in the direction of the underlying trend.

Place Entries, Stops, and Targets:

For a buy trade we want to enter using a Buy Stop pending order, placed 5–10 pips above the

high of the entry candle. The Stop Loss is placed 5–10 pips below the low of the most recent

swing low. And vice-versa for a sell trade.

As for Profit Targets I recommend using the same strategy as the Inside-bar breakout strategy. Set the first one at a 1:1 risk to reward ratio and the second one at a 1:3. This way you can take

half your profit at a 1:1 and move your Stop Loss to breakeven.

Long trade example

The image below shows an example of a buy trade on a 4– Hour chart. This is a text-book

setup – the market makes higher highs followed by higher lows, then prints the ‘two candle

close’ entry signal.

A Buy Stop would be placed 5–10 pips above the high of the entry candle, and the red line

represents where the Stop Loss should go.

Here we can see the trade triggered on the very next candle and traded much higher very quickly. If the

trade doesn’t trigger immediately, leave it for around 5

candles before removing your entry order.

Short trade example

The image below shows a sell trade on another 4–Hour chart. The

market sold off after a period of consolidation and then began to make lower lows followed by lower highs. Entry, Stop Loss, and

Profit Targets are placed in the same manner as before.

The trade triggered on the next candle and the trend continued, producing approximately a 1:2 risk to reward ratio. Once target

one is hit it is a good idea to trail your Stop Loss behind the most

recent highs (or lows) to lock in profits.

it is important that you test this strategy to figure out how you are likely to trade it. This strategy (like the

Inside-bar) can produce some very high probability

signals, and it’s important to be able to pick these out

from the lower probability ones.

I have found from my own testing that the 4–Hour

chart is the most profitable, of the higher timeframes. I don’t see any reason why it wouldn’t work on a lower

timeframe though.