forex trading strategies -...

ForexTrading3ProvenStrategiesYouCanStartUsing

ByJonMcFarlaneCo-Authors;NigelPriceand“Forex”

http://forexuseful.com/

DISCLAIMERTradinganyfinancialmarketinvolvesahighlevelofriskandmaynotbesuitableforeveryone.Youshouldonlytradewithmoneyyoucanaffordtolose.Youshouldfullyunderstandtherisksinvolvedinanyformoftradingandbewillingtoacceptthem.Thecontent

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ForexUseful-http://forexuseful.com/

TABLEOFCONTENTS

AboutThe3LittlePigsTrading

StrategyThePriceActionSwingTrading(PAST)StrategyTradingWithConfluence–

TheFoundations

TheAuthor

Thisbookhasbeenwrittenbyme,JonMcFarlane.Ihavebeensuccessfullyinvestingandtradingmyownmoneyonafullorpart-timebasisfor

over20years.

In2008IsetupSystemsFor

Traders,anindependentreviewsitefortradingrelated

products.

Theaimwasto,inmysparetime,basedonmy

experience,helpthosenewtotradingavoidthemanyuselessproductsbeing

peddledacrosstheindustry.Withover120reviewsof,inthemain,useless,Trading

systemsandSignalservices,Iconcludedthatachangeindirectionwasneeded.

Withanewfocus,toprovidequalitytradingrelatedcoursesandresources,togetherwithotherqualifiedtraders,in2013,IfoundedForex

Useful.Twoofthosetraders,

whoIhavegreatrespectforandamentirelygratefultoknow,NigelPriceand

“Forex”John,areco-authorsofthisbook.

AllForexUsefulauthorsarerealtraderswhotradeona

fullorparttimebasisandcanbecontacteddirectlyviathe

ForexUsefulwebsite.

OurFREEstrategies(detailedinthisbook)havebeen

downloadedover10,000timesbytradersacrossthe

entireglobe.

ThisBook

DuetomanyrequestsfromForexUsefulmembersandratherthanpublish3separate

books,thisbookisaconsolidationofthe3FREETradingstrategiescurrentlyavailableontheForexUseful

website:

The3LittlePigsTradingStrategy,

byJonMcFarlane

ThePriceActionSwingTrading(PAST)StrategybyNigelPriceTradingWith

Confluence–TheFoundationsby“Forex”John

The3LittlePigsTradingStrategyisatrendfollowing

swingtradingstrategybasedonMultipleTimeFrame

(MTF)analysis.ByusingtheWeekly,Dailyand4Hourtimeframesitiscompletelypossibletoapplythe3LittlePigsTradingStrategyacrossmanymarketsinlessthan10minutesaday.The3LittlePigsisaformerwinneroftheBabyPipsBestFREE

ForexTradingSystemofthemonth!

ThePriceActionSwingTrading(PAST)Strategyisdesignedtogiveyouaclearsetofguidelinesthatcanbeusedtomakesureyourwinningtradesarebigger

thanyourlosingones.Itusescandlestickreversalsignalsonthelonger“anchor”time-framechartsandthentrendlinebreaksonthelowertime-

framechartstomakeprecisionentries.Improve

yourForexfuture,learntotradethePAST!

TradingWithConfluenceisabouttakingsoundtradingfoundationsandbringingthemalltogether.The‘Analysis’foundations

providearealtimeviewofthemarket.Whencombined

withthe‘Trigger’and‘Awareness’foundationsatechnicaloutlookofthe

marketisformed.TheresultisaTradingplanwithclearlydefinedhighprobabilitytradingopportunities.

Confluence:Agathering,flowing,ormeetingtogetheratonejunctureorpoint

IhopeyouenjoythisbookandIwelcomeyoutovisit

ForexUseful(http://forexuseful.com/)

Asamember(it’scompletelyFREE)youwillbeabletodownloadandprintthe3strategiesinthisbook

andyouwillalsohaveaccessto:

Viaournewsletter,FREEweeklyupdates

onallthestrategiesinthis

bookFREELive

marketsessions(usuallyevery

Monday

morning)

Aswellasaccesstotheproducts,updatesand

sessionsyouwillalsobeinformedoffuturebook

releasesincludinglaunchanddiscountoffers,before

anyoneelse!

TounderstandandimplementthestrategiesdefinedinthisbookobviouslyrequiresatleastsomebasicknowledgeofForexandCurrency

Trading.ThoseneworevenrelativelynewtotradingmayfindmybookForexFor

Beginners–AnIllustratedIntroductionToCurrency

Tradingofinterest.

ThoseofyouconsideringtradingBinaryOptionsyoumayalsofindmyotherbook

BinaryOptions–AStrategyGuaranteedToBeatTheBrokersIn15MinutesFlat,ofinterest.

Ireallyhopeyouenjoythisbookandifyoudothenpleasedotakethetimetoleaveareview,ittakeslessthanaminuteandyour

feedbackispersonallyappreciatedbyme.

JonMcFarlane

ForexUseful

(http://forexuseful.com/)

The3LittlePigsTradingStrategy

JonMcFarlane

Introduction

The3LittlePigsTradingStrategyisatrendfollowingswingtradingstrategybasedonMultipleTimeFrame

(MTF)analysis.

ByusingtheWeekly,Dailyand4Hourtimeframesitiscompletelypossibletoapplythe3LittlePigsTrading

Strategyacrossmanymarkets

inlessthan10minutesaday.

IuseittotradetheForexmarketsbutintheoryitcanbeappliedtoanyfinancial

market.

The3LittlePigsisaformerwinneroftheBabyPipsBest

FREEForexTradingSystemofthemonth!

InTheFairyTale...

The1stLittlePig

UsedcommonsenseHewantedtoprotecthimself

fromthewolfAndhewantedtodoitquicklyandeasily

Hebuilthishousefromstraw

The2ndLittlePig

Usedcommonsenseandlogic

Healsowantedtoprotect

himselffromthewolfButheneededsomething

strongerthanstrawHebuilthishousefromsticks

The3rdLittlePig

Usedcommonsense,logicandexperience

Healsowantedtoprotect

himselffromthewolfButheneededsomething

strongerthanStraw&sticks

Hebuilthishousefrombricks

WhenTrading...

The1stLittlePig

Usescommonsense

TotradeinthedirectionOftheLongtermtrendby

ObservingPriceactionontheWeeklychart

The2ndLittlePig

UsescommonsenseandlogicTotradeinthedirection

OftheLong&Mediumterm

trendsbyAlsoobservingPriceaction

ontheDailychart

The3rdLittlePig

Usescommonsense,logicandexperience

Totradeinthedirection

OftheLong,Medium&Shorttermtrendsby

UsingPriceactiononthe4HourchartforEntry

BasicPrinciples–Part1

The3LittlePigsisa:TrendFollowing

SwingTradingstrategy

BasedonMultipleTimeFrame(MTF)trading

MultipleTimeFrame(MTF)tradingwasmadepopularbyMarcelLinkinhisexcellentbooktitled“HighProbability

Trading”:

The3LittlePigshastakentheMTFtradingconceptand

addedsoundtradingprinciplestoestablishasolidstrategythatcan,intheory,be

appliedtoanyfinancialmarket.

BasicPrinciples–Part2

The3LittlePigsisbasedon3time

framesThe1stLittlePigusesARedSMA(55)ontheWeeklytimeframe

TotradeinthedirectionoftheLongtermtrendbasedontheAverageClosingpriceduringtheLASTYEAR

Longwhenpricecloses

abovetheRedSMA(55)ShortwhenpriceclosesbelowtheRedSMA(55)

The2ndLittlePigusesAnAmberSMA(21)onthe

Dailytimeframe

Totradeinthedirectionofthe

LongandMediumtermtrendsbasedontheAverageClosingpriceduringthe

LASTMONTH

LongwhenpriceclosesabovetheAmberSMA(21)Shortwhenpricecloses

belowtheAmberSMA(21)

The3rdLittlePigusesAGreenSMA(34)onthe4

Hourtimeframe

Toenteratradeinthedirectionofthe

Long,MediumandShorttermtrendsbasedonthe

AverageClosingpriceduringtheLASTWEEK

LongwhenpriceclosesabovetheGreenSMA(34)Shortwhenpricecloses

belowtheGreenSMA(34)ThedirectionofthetrendoneachtimeframeisbasedonPricerelativetoaspecificSimpleMovingAverage

(SMA).

TheSimpleMovingAverage

TheMovingAverageisanindustrystandardindicator

andtherearemanyvariations;Simple,

Exponential,Smooth,Weighted,tonamebutafew.

MovingAveragesreflectTheAverageClosingpriceofaMarketOveraspecific

Numberofperiods

ForthepurposesofThe3LittlePigsANDtokeep

thingssimple:

TheSimpleMovingAverageisused

TheSimpleMovingAverageiscommonlyreferredtoastheSMA

SMAiscommonlywrittenasSMA(Numberofperiods)

Thisexamplehasbeentaken

fromtheDailyGBPUSDchartin2012.TheSMA(5)hasbeenmanuallycalculatedtoshowhowitworks–TheSMA(5)shows,eachday,theAverageClosingpriceforGBPUSDduringthelast5

periods(Days).

AND...

Hereitisonthechart

TheSMA(5)isshownasaBlackLineAutomaticallycalculatedanddisplayedBy

theChartingpackage

Why55,21And34?

TheFibonaccisequence(ofnumbers)

TheFibonaccisequence(ofnumbers)isfrequentlyobservedinnatureandis

commonlyreferencedintheworldoftrading.

TheNumberofperiodsforeachSMAusedbyThe3LittlePigsisderivedfromtheFibonaccisequence.

The1stLittlePigusesARedSMA(55)ontheWeeklytimeframe

ThisreflectstheAverageClosingPrice

DuringtheLASTYEAR–GiveortakeaweekortwoTheLONGTERMTREND

canbeconsidered:

UPifpriceclosesabovetheRedSMA(55)

DOWNifpriceclosesabovetheRedSMA(55)

The2ndLittlePigusesAnAmberSMA(21)onthe

Dailytimeframe

DuringtheLASTMONTH–GiveortakeadayortwoTheMEDIUMTERM

TRENDcanbeconsidered:

UPifpriceclosesabovetheAmber

SMA(21)DOWNifpriceclosesbelowtheAmberSMA(21)

The3rdLittlePigusesAGreenSMA(34)onthe4

Hourtimeframe

DuringtheLASTWEEK–GiveortakeanhourortwoTheSHORTTERMTREND

canbeconsidered:

UPifpriceclosesabovetheGreen

SMA(34)DOWNifpriceclosesbelowtheGreenSMA(34)

BuyingStrategy–The1stLittlePig

The1stLittlePigMUSTconfirmthat

TheLONGTERMTRENDisUP

PricemusthaveclosedaboveitsAverageClosingpriceduringtheLASTYEAR

ItmusthaveclosedabovetheRedSMA(55)ontheWeeklytimeframeToconfirmthat:TheLONGTERMTREND

BuyingStrategy–The2ndLittlePig

The2ndLittlePigMUSTconfirmthat

TheMEDIUMTERMTRENDisalsoUP

PricemusthaveclosedaboveitsAverageClosingpriceduringtheLASTMONTHItmusthaveclosedabovetheAmberSMA(21)ontheDailytimeframeToconfirmthat:TheMEDIUMTERMTRENDisalsoUP

BuyingStrategy–Confirmation

TheLONGTERMTRENDandtheMEDIUMTERM

MustBOTHbeUPbeforelookingforBuyingopportunities

InthisexampletheLONGTERMTRENDwas

confirmedasbeingUPwhentheWeeklycandle19-08-2012closed–Weekly

candlestypicallyopenonaSundayandcloseonaFridaysoitmeansthatthefirst

tradingdayafterthiscandleclosedwouldhavebeen(Monday)27-08-2012–

Markedonthe4Hourchartthatfollows.

Onthe27-08-2012therewasnoneedtowaitforthe

MEDIUMTERMTRENDtobeconfirmedasbeingUPasitwasalreadyconfirmed

whentheDailycandleon08-

08-2012closed.

InthisexampleitisOK,fromthe27-08-2012,whentheLONGTERMTRENDand

theMEDIUMTERMTRENDwerebothconfirmed

asUPtolookforBuyingopportunities–The3rdLittle

NOTE:Sometimesthisisthecase,theLONGTERMTRENDisconfirmedaftertheMEDIUMTERMTREND,sometimesthe

MEDIUMTERMTRENDconfirmsfirst(seeSellingexamplelater).Itdoesnotmatterwhichwayround

theconfirmationoccursjustaslongasbothare

confirmedbeforelookingforBuying/Sellingopportunities.

BuyingOpportunities–The3rdLittlePig

IMPORTANT!

TRENDMustBOTHbeUP

BeforelookingforBuyingopportunities

The3rdLittlePigMUST

confirmthatTheSHORTTERMTRENDisalsoUP

Buyingopportunitiespresentonthe4Hourchartwhen:

Pricefirsttouches(orhasbeen

below)theGreenSMA(34)

AndthenclosesabovetheGreen

SMA(34)

(ItsAverageClosingprice

duringtheLASTWEEK)

Toconfirmthat:

TheSHORTTERMTRENDisalsoUP

SellingStrategy–The1stLittlePig

The1stLittlePigMUSTconfirmthat

TheLONGTERMTRENDisDOWN

PricemusthaveclosedbelowitsAverageClosingpriceduringtheLASTYEAR

ItmusthaveclosedbelowtheRedSMA(55)ontheWeeklytimeframeToconfirmthat:TheLONGTERMTREND

isDOWN

SellingStrategy–The2ndLittlePig

The2ndLittlePigMUSTconfirmthat

TheMEDIUMTERMTRENDisalsoDOWN

PricemusthaveclosedbelowitsAverageClosingpriceduringtheLASTMONTHItmusthaveclosedbelowtheAmberSMA(21)ontheDailytimeframeToconfirmthat:TheMEDIUMTERMTRENDisalsoDOWN

SellingStrategy–Confirmation

MustBOTHbeDOWNbeforelookingforSelling

opportunities

InthisexampletheLONGTERMTRENDwas

confirmedasbeingDOWNwhentheWeeklycandle26-08-2012closed–WeeklycandlestypicallyopenonaSundayandcloseonaFridaysoitmeansthatthefirst

tradingdayafterthiscandleclosedwouldhavebeen(Monday)03-09-2012.

TheLONGTERMtrendwasmostrecentlyconfirmedasDOWNwhentheDaily

candleon19-09-2012closed.

InthisexampleitisOK,fromthe20-09-2012,whentheLONGTERMTRENDand

theMEDIUMTERMTRENDwerebothconfirmedasDOWNtolookforSelling

opportunities–The3rdLittlePig.

NOTE:Sometimesthisisthecase,theMEDIUMTERMTRENDis

confirmedaftertheLONGTERMTREND,sometimestheLONGTERMTRENDconfirmsfirst(seeBuyingexampleearlier).Itdoesnotmatterwhichwayround

theconfirmationoccursjust

aslongasbothareconfirmedbeforelooking

forBuying/Sellingopportunities.

SellingOpportunities–The3rdLittlePig

IMPORTANT!

TRENDMustBOTHbeDOWNBeforelookingforSelling

opportunitiesThe3rdLittlePigMUST

confirmthatTheSHORTTERM

TRENDisalsoDOWN

Sellingopportunitiespresentonthe4Hourchartwhen:

Pricefirsttouches(orhasbeen

above)theGreenSMA(34)

AndthenclosesbelowtheGreen

SMA(34)

(ItsAverageClosingprice

duringtheLASTWEEK)

Toconfirmthat:

TheSHORTTERMTRENDisalsoDOWN

Entries,StopsAndTargets

The3LittlePigsTradingstrategymakestheTradeidentificationprocessmechanical–Iteasily

identifiesLowRiskHighProbabilityBuyingandSellingopportunitiesfor

SwingtradesinthedirectionoftheLong,Mediumand

ShortTerm(Yearly,MonthlyandWeekly)

trends.

However-AlthoughtheTradeidentificationprocessismechanicalThe3LittlePigsisNOTandCANNOT

be100%mechanicalbecause...

Yes,it’safact,wearealldifferent.Itmeansthat

dependingonexperience,circumstancesandattitudeto

riskwewillallchoosedifferentcriteriatousewhendecidinghowwemanageour

ownEntries,StopsandTargets.

Entry,StopandTargetmanagementis

DISCRETIONARY...

ItmeansYOUchoose!

Entries

Ofcoursethesearejustsuggestions,othersuggestionsinclude:

Anadditionalcandleclose

Above/BelowtheTriggercandleHigh/Low

Anadditionalindicatorconfirms,e.g.RSI,MACD,Stochastic...

Thefactis...EntrymanagementisDISCRETIONARY...

Itwillbedependentonyourpersonalexperience,

circumstancesAndattitudetorisk

ItmeansYOUchoose!

Ofcoursethesearejustsuggestions,othersuggestionsinclude:

AFixedStop,e.g.50PIPs

Anadditionalindicatorcanbe

used,e.g.ParabolicSAR,Bollingerband...

Thefactis...

StopmanagementisDISCRETIONARY...

ItmeansYOUchoose!

Targets

Thiscanbe:

Asetamount,e.g.50,100,200

PIPs...Basedon

differencebetweenEntryandStop

Open/Trailing

Above/BelowthemostrecentSwing

High/LowWhenprice

touchesSMA(34)

WhenpriceclosesAbove/BelowSMA(34)

Active

ActivemanagementbasedonPriceaction

Support/Resistanceand/orTrendlinesLongertermbasedontheDailytime

frameTakinghalfprofits/Runningsome

profits

Again,thesearejust

suggestions,thefactis...TargetmanagementisDISCRETIONARY...

ItmeansYOUchoose!

MoneyManagement

Thissubjectisoftencomplicatedbutyoucankeepitsimplewiththesesimple

rules:

Neverriskmorethan2%onany

onetradeNevertrademorethan5marketsatanyonetime

Sticktothesesimplerules

NeverRiskMoreThan2%OnAnyOneTrade

Thismeansifyouhavea£10,000balanceyouwill

neverriskmorethan£200onanyonetrade.Ifyouare

placingatradeandyourStoplossis50PIPsawaythat

meansyouwilltradeat£4aPIP.IfyourStoploss(whichis50PIPsaway)ishityouwillloseamaximum2%ofyourbalance,£200(50PIPs

multipliedby£4).

NeverTradeMoreThan5MarketsAtAnyOneTime

Ifyoulimityourtradingto5marketsatanyonetimeandyou“Neverriskmorethan2%onanyonetrade”yourmaximumexposureinthemarketatanyonetimewillbe10%.Thisismorethan

enoughforeventhemostexperiencedtrader.

StickToTheseSimpleRules

Summary

UseThe3LittlePigsToIdentify

LowRiskHigh

ProbabilityBuyingandSelling

opportunitiesForSwingtradesinthedirectionof

TheLong,MediumandShort

term(Yearly,MonthlyandWeekly)

trends

Entries,StopsandTargetsAllow

Experience,Circumstancesand

Attitudetorisktoguideyou

ChoosecriteriathatsuitsYOU

MoneyManagementStickToTheRules

Neverriskmorethan2%onany

onetradeNevertrademorethan5marketsatanyonetime10%maximumexposureinthe

marketAtanyonetime

Remember,asamember(it’scompletelyFREE)ofForex

Useful(http://forexuseful.com/),youwillbeabletodownloadandprintthe3strategiesinthisbookandyouwillalso

haveaccessto:

Viaournewsletter,FREEweeklyupdatesonthe3LittlePigsTrading

Strategyandallotherstrategiesin

thisbookFREELive

Mondaymorning)

releasesincludinglaunchanddiscountoffers,beforeanyoneelse!

Nextup,ThePriceActionSwingTrading(PAST)StrategybyNigelPrice...

ThePriceActionSwingTrading(PAST)Strategy

ImproveyourForexFuture

LearntoTradethe

ByNigelPrice

ChapterOne

“It’snotwhetheryou’rerightorwrongthat’simportant,it’showmuchmoneyyoumakewhenyou’rerightandhowmuchyoulosewhenyou’rewrong.”

-GeorgeSoros

TheabovequoteisthefoundationofthePAST

Strategy.Astraders,wetendtoconcentratemuchofourenergiesonattemptingtopredictthefuturedirectionofthemarket.Unfortunately,oureffortstoforecastfuturemarketpricesonaconsistentbasisusuallyfail,nomatterhowexperiencedwemightbe.

Asaconsequenceofthis,wefrequentlyfindourselves

caughtupinawildgoosechaseoftryingtofindatechnicalchartingindicatororacombinationofindicatorsthatwillhelpuspredictwhatpriceisgoingtodonext.Wemistakenlythinkthatifwecandothis,successandprofitswillautomaticallyfollow.

Oftenourprogress,asnewtradersatleast,dependson

howquicklywecancometoacceptthatwehaveverylittlerealideaofwhatpriceisgoingtodointhefuture,andnoamountoffancyindicatorsonourchartsisgoingtochangethat.Ifyoufollowfinancialcommentatorsandanalystsyouwillnoticethattheyarepronetoshoutingveryloudlyaboutthecallstheygetrightandtheykeepcomparativelyquietaboutthe

callstheygetwrong.Giventhattheyarestartingoutwithaoneinthreechanceofbeingrightinanyevent,(themarketcanonlymoveup,down,orsidewaysafterall)theycan’thelpbutbecorrecteverynowandagain,nomatterhowterribleaforecastertheymightbe(andsomeare).

Putslightlydifferently,they

makethemostoutofthecorrectpredictionsandlimitthedamagefromtheonesthatdidn’tworkout.

That’swhatwetradersshouldbedoingtoo.Wemightnotbeverygoodatpredictingthefuture,butwedon’tneedtobe.Wejustneedtomakesurewemakeasmuchprofitaswecanwhenwearecorrectandwemitigatethelosses

whenwearewrong.ThatistheessenceofgoodtradingandthatiswhatthePASTStrategyisallabout.

ChapterTwo

“Thedesiretomaximisethenumberofwinningtrades(orminimisethenumberoflosingtrades)worksagainstthetrader.Thesuccessrateoftradesistheleastimportantperformancestatisticandmayevenbeinverselyrelatedtoperformance.”

-WilliamEckhardt

Mostreaderswillhaveencounteredthephrase“riskversusrewardratio”atsomestageinrelationtotheirtrading.Essentiallyitmeanstheratiobetweenhowmuchyouarewillingtoloseonagiventradeandtheamountyouaretargetingtogain.

Somepeoplearehappytoriskafewhundredpipsto

gain10or20pips.Thesetraders,ifprofitable,willhavetowinmostoftheirtrades-theywillhaveahighpercentagesuccessrateandahighriskvrewardratio.Othertradersprefertoriskasmalleramountthantheyaimtoprofit-theycanoperatewithalowerpercentagesuccessrateandstillbeveryprofitable.Itisworthnotingthatsomeofthebesthedge

fundmanagersintheworldhaveatradesuccesspercentagerateofaround5%.Althoughtheyarewrong95%ofthetime,theystillmakemillions,ifnotbillions,ofdollarsfortheirclients,consistently.Theirwinningtradesareverylargeandtheirlosingtradesareverysmall.

Thereisnorightorwrongapproachtothis.Some

tradersdonotliketakingregularlossesbecauseitaffectstheirtradingemotions.Consequently,theyarenaturallyattractedtohighsuccesspercentagestrategies.Othersarewillingtotakelotsofsmalllosses,safeintheknowledgethatwhentheirwinnerscometheywillmakesurethattheyarebig.Whattypeoftradingapproachtouseislargelyamatterfor

personalpreference.

ThePASTStrategyfallsfirmlyintothesecondofthetwocategoriesabove.Italwaystriestokeeplosingtrades(risk)verysmall,andtriestoallowwinningtrades(reward)togrowaslargeaspossible.Becauseofthisapproach,thestrategycansustainsignificantlymorelosingtradesthanwinners

andstillreturnanoverallprofit.

HowdoesthePASTStrategydothis?Well,ofprimaryimportanceisourconstantemphasisonthestrictcontrolofrisk;thiscomesfirstandforemost.Then,oncewehaveapositioninthemarket,ourconcentrationshiftstowardsfindingtechniquesthatallowittogrowaslargeaspossible.

ChapterThree

“Thefundamentallawofinvestingistheuncertaintyofthefuture.”

-PeterBernstein

ThePASTStrategyaimstotakeadvantageof“swings”thattakeplaceinthemarkets.Weattempttogetintothemarketsomewherenearthetopofamarketmove,asitis

rollingover,andgetoutsomewherefurtherdown,closertothebottom.Orviceversaforanupwardmarketmove.Theswingslooklikethis:

Althoughtheseswingstake

placeonallmarkettimeframes,theonesthatinterestusmostarethosethathavethepotentialtobethebiggestandrunforthelongestperiodoftime.Thebestplacestolookforareaswherealargepotentialmovemightbeoccurringarethelongertermcharts,suchastheweeklyormonthlycharts.Irefertotheseasmy“anchor”charts.Swingsthat

occurontheselargetimeframesareseenassignificantbylargeparticipantsinthemarkets,likeinstitutionaltraders,banksandhedgefunds.Thesearethepeoplethatreallydrivemarketdirectionandsoweshouldwanttopositionourselvesalongsidethemwheneverwecan.OnrareoccasionsImightlookatthedailychartforswingsto

develop,butcertainlynolowerthanthat.

ThechartbelowisaweeklychartoftheAustralianDollar/SwissFranccurrencypair,whichhasbeenshowingsomeniceswingsrecently.

Sohowcanwetradeswings

likethese?Ofcourseitisveryeasytoopenupapricechart,scrollbackandpickoutniceswingsthatwouldhavebeenveryprofitabletotrade.Anyonecandothat.Theproblemishowcanweidentifyinadvancewhereandwhenanewoneisgoingtostart?

Welltheansweristhatwedon’tknow-noonereally

does.Allwecandoistradeinsuchawaysothatwearepositionedtoprofitifanewswingdoesoccur,andtolimitourlossesifitdoesn’t.

Nowitistimetoanalysehowwecanidentifywhereanewswingmightbebeginningtoemergeonalongertimeframechart.

ChapterFour

“Ibelievetheverybestmoneyismadeatthemarketturns.Everyonesaysthatyougetkilledtryingtopicktopsandbottomsandyoumakeallyourmoneybyplayingthetrendinthemiddle.WellfortwelveyearsIhavebeenmissingthemeatinthemiddlebutIhavemadea

lotofmoneyattopsandbottoms.”

-PaulTudorJones

InthePASTStrategyweusetwoverysimplecandlestickchartingsignalstoindicateanareawherethemarketmightbebeginningtocontemplateturningaroundandstartinganewswing.Wecanrefertotheseastrendreversals.

Butbeforewelookatthesesignals,itisimportanttorememberthatinorderforatrendreversaltooccur,weneedtohaveatrendinthefirstplace.Aprecedingtrendiseasytoidentify,infactitshouldbeobvious.Ifyouhavetolooktoohardfortheprecedingtrend,itprobablyisn’tthere.

Onthenextpagewewilllook

atsomeexamplesofwhatprecedingtrendslooklike.

Hereisabearishtrend.Noticethatitismainlycomprisedoflargelongbearishcandles.Priceisobviouslymovinginadownwarddirection.

Wecanseeanexampleofabullishprecedingtrendonthesamechart:

Theprecedingtrendisimportant.Thisisbecausereversalsoccurabitlikea

ballbouncingoffawallorsomeonebouncingoffatrampoline.Theharderandfasterpriceismovingintothereversal,themorelikelyitistosnapbackharderandfasterawayfromit.Itismucheasiertotradepricethatismovingniceandquicklyratherthanpricethatismovingslowlyandnotreallygoinganywhere.Itisnotimpossibletotradeweak

reversals,buttheycansometimesbealittlebitmoredifficultthanstrongones.You’llusuallyneedabitmorepatiencetotradeweakreversals.Ifyouarejuststartingoutyouwouldbebestadvisedtostickwiththestrongreversalsuntilyougainmoreexperienceinthisstyleoftrading.Soalwayslookforgoodlongcandlesandanicestrongpreceding

trend.

Oncewehaveidentifiedagoodprecedingtrend,eitherbullishorbearish,wethenlookforcluesthatareversalmightbebeginningtotakeplace.Wewillexaminewhatthesesignalslooklikeinthenextchapter.

ChapterFive

“Tolearnaboutthemarket,askthemarket.”

-HommaMunehisa

Candlestickanalysisisoneoftheoldest,simplestandbestwaystoidentifyareaswherepricemightbecontemplatingachangeindirection.Thefirstcandlesignalwelookforisonewhere,inabearish

trend,astrongbullishcandleappearsthatclosesabovetheopeningpriceofthemostrecentbearcandle.Thismightsoundcomplicatedbutitreallyisn’t.Hereisanexample:

Let'slookatthebullish

reversalcandleitselfabitmoreclosely:

Hereisanexampleofabearishreversalcandle:

Noticehowthelargebearish

reversalcandleformingattheendofthebullishprecedingtrendhassparkedasell-offtothedownside.

Again,let'slookatthereversalcandleitselfabitmoreclosely:

Thesecondsignalwelookfor

thatwarnsusthatthemarketiscontemplatingareversalisacandlethathasalongwick(sometimescalleda“shadow”)whencomparedtothesizeofitsbody.Longwicksshowthattheprecedingtrendcouldbebeginningtorunoutofsteamandthatthemarketisthinkingabouttryingtoreversedirection.Again,thismightsoundcomplicatedbut

it’snot.Withalittlepracticeyouwillbeabletoidentifythesesignalsveryquicklyandeasily.Itbecomessecondnatureafterawhile-likeridingabike.

Hereareacoupleofexamplestogettheballrolling-firstabullishlongwickcandlereversal:

Andalittlebitcloser:

Candlesticksthathavelongshadowscanbeextremelypowerfulatalertingustoareaswherepricemightbethinkingaboutchangingdirection.Butlikeanyformoftechnicalanalysis,theydonotworkallthetime.Youshouldneverjustidentifyalongwickcandleandthenblindlyenteratradeintheoppositedirection.Longwicksarejustoneofthetools

weusetoanalysepotentialmarketturningpoints.Whenweseeacandlewithalongwickonaweeklyormonthlychartforinstance,weshouldbethinkingtoourselvesthatthemoveintheoppositedirection,ifitmaterialises,couldbequitelarge.Oneweeklycandleisoftenafewhundredpipsinrange.Weshouldbethinkingaboutwayswecantakeadvantage

ofthis.

Hereisanexampleofabearishlongwickreversal:

Readerswhohavecomeacrosscandlestickanalysisbeforewillprobablyrecognisesomeofthesecandlepatternsandknowtheirnames.Isupposethelongwickwouldbesomethingakintoadojipattern,andthefirstreversalpatternwelookedatwasprobablyalongthelinesofanengulfingpattern.

Althoughthereisnothingwrongwithconventionalcandlestickanalysis,Isometimesthinkthattherulesareveryrigidaboutwhatconstitutes“valid”or“invalid”patterns.Insteadofworryingtoomuchaboutlearningtheexactconstituentcriteriaofacandlestickpattern(anditsfunny-soundingname),weshouldconcentrateonreadingprice

actionasawhole,asifwearereadingabook.Asentencedoesn’tloseitsmeaningbecauseofaspellingmistake,justlikeareversaldoesn’tstopbeingareversaljustbecauseitisnotidenticaltoanexampleinatextbook.

Hereisthechartexamplefromaboveagain,zoomedinabitthistime:

Atthisstageitisimportanttoreiterate,aswesaidin

ChapterThree,wearenottryingtopredictthefuturewiththesecandlesignals.Wearejustanticipatingwhatthemarketmightbeabouttodo.Ifwegetitwrongafewtimesinarowitisnotnecessarilyapoorreflectiononourskillsasatraderorareaderofpriceaction.Itisjustthatthemarketdidnotactaswethoughtitmightontheseparticularoccasions.

Soonerorlaterthemarketwillperforminlinewithourexpectationsanddevelopintoanicelongswing.Remember,themarketcanonlygoup,downorsideways,sowealreadyhavea33%chanceofbeingright,evenifwedonoanalysisatall!

Whenthemarketdoesmoveinaccordancewithour

expectationsourjobissimplytomakesurethatwemakethemostoutoftheopportunity.Whenthemarketmovesagainstourexpectationswegetintodefensivemodeandquicklyclosetradesiftheyareshowinglosses.That’sthenameofthisgame-thereisnothingmoretoitthanthat.

Youshouldtakesometime

nowtoscrollbackthroughyourchartsandpracticeidentifyinggoodprecedingtrendstogetherwithcandlestickreversalsignals.Youwillfindthatthesesignalsdonotalwayswork;infacttheymightonlyworkoutperhaps50%ofthetime,maybeevenless.HopefullybynowyouwillhaverealisedwhytradersofthePASTStrategywouldbeextremely

happywitha50%tradesuccessrate.Ifyouhaven’t,youwillberemindedagaininthecomingchapters!

ChapterSix

Inthelastchapterwelookedatwaysofidentifyingwhereaswingmightbebeginningtooccuronalarge(“anchor”)timeframe,suchasaweeklyormonthlychart.Whenthesesignalsaresuccessful,theyoftenresultinamoveofhundredsorpossiblyeventhousandsofpips.Howeverifwewantedtoenterthemarket

usingtheseanchorchartsalone,wewouldhavetoriskalotofpipstomakesurethatourstopwasinanappropriateplace.Mostlyforthesetypesofreversalcandlesticksignalsitisrecommendedthatastopisplacedabovethehighofthesignalcandle,whichforaweeklyormonthlysignalcouldbehundredsofpipsfromourentryprice.

But,aswehavesaidalready,wewanttokeepriskverytightlycontrolled.A300pipstopissimplytoomuch.Soinsteadofenteringthemarketandsettingastopontheanchortimeframe,wedropdowntoalowertimeframetoseeifwecanmakethesameentry,butwithtighterrisk.

Whenmovingtoalowertimeframeweshouldtryto

adoptaflexibleapproachinrelationtowhichoneweuse.Sometimestraderstreatdifferenttimeframesalmostasiftheyaretotallydifferentinstruments.Thepricetracesthesamepathnomatterwhattimeframeyouarelookingat,orwhetheryouusecandles,OHLCbarsorjustlines.Theyareallsimplydifferentwaysofdisplayingthesameinformation.

Ipersonallyliketojustflickaroundlotsofdifferenttimeframestogetagoodoverallperspectiveonwhatpriceisdoing.HoweverIalsoliketodomyanalysisonthebasisthatthehigherthetimeframe,themoreimportantthesignal.Iftheweeklytimeframeisshowingastrongreversalsignalthatsuggeststhatpriceislikelytomovetothedownsideover

thecomingsessions,Iwon’tbesecond-guessingmyopinionjustbecausethe5minutecharthappenstolookdecidedlybullish.

Ifnovicetradersfindatthebeginningthatconstantlyjumpingbetweentimeframesisabitconfusing,theycouldsimplysticktousingtheweeklytimeframeastheanchorchart,andthenjust

takingentrysignalsfromeitherthe4hourorthe1hourcharts.Thesethreetimeframestogetherwillgiveyouaverygoodoverallideaofcurrentpriceaction.

So,wehavenowlookedatthefirstpartofthetradingstrategy,whichislocatingacandlestickreversalsignalonalargeanchortimeframechart.Wewillnowlookat

thesecondpartofthestrategy,whichistodropdowntoalowertimeframetomakeanicetightentryforsmallandcontrolledrisk.

Fortheseentriesweuseanothersimplebutveryeffectivepriceactionpattern-thetrendlinebreak.

ChapterSeven

“Iabsolutelybelievethatpricemovementpatternsarebeingrepeated;theyarerecurringpatternsthatrepeatoverandover.Thisisbecausethestockswerebeingdrivenbyhumans–andhumannatureneverchanges.”

-JesseLivermore

Youwillnoticethatwhenamarketistrending,inanytimeframe,ittendstomoveinazig-zagfashion,likethis:

Whenweseeamarketbehavingliketheabove,wejustseeifwecanconnectthelowswithastraightline,andifwecan,wehaveourselvesatrendline.Etvoilà:

Wecandrawtrendlinesbetweenanytwoormorepointsonachart.Generallythemoretouchesbypriceoffthetrendline,thestrongeritis.Quiteoftenthestrongerthetrendlineis,thebiggerthemoveiswhenitdoeseventuallybreak.Somoretouchesarebetter,butdon’ttotallyignoretrendlineswithonlytwoorthreetouches,theycanproducegoodtrades

Inaddition,weshouldn’tgettoodistractedbywhetherthetrendlinematchesupexactlyateachlowornot.Somepeoplewhentheyaredrawingtrendlinesgetslightlyobsessedbywhetheryoushouldonlydrawfromthepreciselowofthecandle,orthecloseprice,orwhatever.Asisthecasewithsomuch

intrading,thereisnorightorwronganswer;itissimplyamatterofstyle.Practiceanddevelopyourownwayofdrawingthem-it’syourtrendlineafterall,drawithoweveryouthinkisbest!

Oncewehaveourtrendline,wewanttoenteratradetotheshortsideifandwhenitbreaks:

Now,thiswillnothappeneverytime,butquiteoftenwe

willnoticethatwhenatrendlinebreaks,pricewillmovequitequicklyawayfromit.ThisisagreatfeatureoftrendlinebreaksandisthemainreasonwhytheyformpartofthePASTStrategy.Whenpricemovesquicklyintoprofit,itgivesustheopportunitytocontrolriskverytightly;ifpricemovesawayfromtheentrypointquickly,thismeansthesize

ofthestoplossrequiredismuchsmaller.

Youoftenheartraderstalkingaboutgivingpositions“spacetodevelop”or“roomtobreathe”.ThePASTStrategyrejectsthis;stopsshouldneverneedtobeanybiggerthanwhatisabsolutelynecessary.Itisperfectlypossible,withsomepractice,toenterthemarketina

preciseandaccuratefashionandexpectpricetomovequitequicklyintoprofit.Ifpricemovesquicklyintoprofitweknowwewerecorrect.Ifpricegoesnowhereormovesagainstus,weshouldlistentowhatthemarketistellingus,acknowledgethatonthisoccasionwewerewrong.Weclosethetrade.Thereisnoneedtoallowatradego100

pipsintotheredbeforewestartwonderingwhetheritisgoingtoworkoutornot!

Inthelastexampleinthegraphabove,pricebrokethetrendlineandmovedawayfromitquickly.It’sgreatwhenpricedoesthisbecauseitmakesforacleanandsimpletrade.However,unfortunatelysometimesthemarketlikestomakeuswork

alittleharderforourmoney.Afteryouhavebecomefamiliarwithtrendlinebreaksyouwillnoticethatsometimesafteritbreaks,pricecomesbackuptotestthetrendlineagainfromunderneath,beforethenmovingaway.

Thisisperfectlynormalandweshouldexpectitandbepreparedforittohappen

regularlywhenwearetradingtrendlinebreaks.Onceweknowthatthisoccurswecanbereadyforittohappenandadjustourtradingaccordingly.

Somepeoplegetfrustratedat

retraces.ThePASTStrategylovesretracestobeneathatrendlinethough-theyallowyoutogetinataverynicepriceandoftenmakethebesttrades.

ChapterEight

“1.Cuttinglosses

2.Cuttinglosses

3.Cuttinglosses

Ifyoucanfollowthesethreerules,youmayhaveachance.”

-EdSeykota

Aswehavesaidalready,our

primaryobjective,firstandforemost,istocontrolrisk.Thatmeanssettingtheappropriatestoplossordersforourtrades.

Itisnotpossible,orindeedpreferable,tostrictlydefinewhereastoplossshouldgo,orhowmanypipsitshouldbefromyourentry.Everysingletrendlinewillbedifferentandsoweneedto

learnhowtodealwitheachoneasitpresentsitselftous.Insteadoffrettingoverwhetherourstopisinthe“correct”placeornot,justkeepinmindtheoverallobjective.Wewanttoputthestopinaplacethatwillcontrolriskastightlyasispossible,butitneedstoberealistictoo.Settingastop3or4pipsfromentrywillalmostdefinitelygethit,

whereasasensiblyplacedstop15or20pipsawayfromentrymightbequiteunlikelytobehit,dependingonthechart.Havingsaidthat,ifwearetradingona1hourchartandwehavea100pipstopwearecertainlynottightlycontrollingrisk-wecandomuch,muchbetterthanthat.Itisaboutstrikingagoodbalance.

Althoughtherearenohardandfastrules,thereareafewguidelineswecanbearinmindwhenwearedecidingwheretoputastop.Insimpleterms,wewanttosetthestopatalevelthatifitgetstriggered,themarketisloudlyandclearlytellingusthatitisnotreadytobehavequiteaswewouldlike.Themarkettellsuswearewrongwhenitmanagestoovercomelevels

thatitreallyshouldn’tbeabletoifitwasmindedtobemovingintheoppositedirection.

Onasimpleandstraightforwardtrendlinebreak,weshouldtrytoseeifwecanplacethestoplossabovethetrendlineitself:

Anotheroptionthatmightbeavailabletous,dependingon

theindividualtrendlinebreakconcerned,istolocateastopaboveboththetrendlineandarecenthigh.Remember,wewanttolocatethestopinaplacethatifpricemanagestotriggerit,priceistellingusthatwearewrong.Ifpricehastheabilityandstrengthtorecovertotheextentthatitcanmakeitbackaboveboththebrokentrendlineandarecenthigh,thereisnodoubt

thatthemarketistellingusthatitisnotreadytomovetothedownsidejustyet.

Ifthemarketisn’tbehavingasweexpectwhatshouldwedo?Leavethetradeopenandsweatitout?Waitandwatchthepricemovehigherandhigher,takingwithitchunksofouraccountequity?No,ofcoursenot.Wecloseoutthetrade,takethelosswhileitis

smallandmanageableandthenwaituntilthemarketisbehavinginaccordancewithexpectationsagain.

Therearedayswhenthemarketdoesexactlywhatwewant-asweet,clean,fasttrendlinebreakwhenpricemovesintoprofitstraightawaywouldbeoneofthosedays.Weshouldbeactiveinthemarketonthese

days.Therewillalsobedaysthatthemarketbehaveslikeaspoilt,angrychild-itwillbreak,retrace,jumparoundandgenerallyfrustrateyou.Onthosedays,itisfarbettertosimplytakeastepbackandletthemarketgetwhateveritisoutofitssystem.

Hereisanexampleofsettingastopaboveboththetrendlineandarecenthigh:

ThischartshowsanexampleofwhereImightconsiderputtingmystopifIwasenteringonaretestoftheunderneathofthetrendline:

Tosummarisethen,therearetwowayswecantradetrendlines:eitherontheinitialbreakoronaretestifitoccurs.Thesetwomethodshoweverwillinevitablysometimesoverlap.

Forexample,sayweenteredonaninitialbreakandputourstopabovethetrendlineandaprevioushigh.Pricemovesintoprofitinitiallybutthen

startstoretracebackupthetrendline.Butbecausethetrendlineisslopingupward,thestopweplacedaboveitwhenweopenedthetradecouldbebelowitnow.Soitgetstriggeredforaloss.Butwethennoticethatpriceisstrugglingattheundersideofthetrendline,sowecoulddecidetoenteragain,attheretest.

Thismightsoundalittlebitcomplicatednow,butonceyoustarttopracticetheseentriesyouwillbecomebetteratnoticinghowpricemoves.Ifyouareunsure,themainpointtorememberisthatyoumustkeepyourriskundercontrolatalltimes.Ifyouaredoingthatwell,whereexactlyyouenterthemarketinrelationtothetrendlineisnotsoimportant.

Wemustremindourselves,whenwearelookingattheseexamples,ofthedifferencebetweentheoryandpractice.Intheory,priceshouldbouncenicelyofftrendlines,andthenwhenitbreaksitshoulddosocleanlyandprofitably.

Intherealworld,themarketmightdecidetocompletelyignoreournicelydrawn

trendlineandthereisnothingwecandoaboutthat.Thereisnomagicintrendlinesintheexactsamewayasthereisnomagicinanytechnicalanalysis.Thetrendlineissimplyatooltosuggestwhatmightbeagoodentrypointandagoodplacetosetastoplosstomanagerisk.Itisnothingmorethanthat.

Pricesometimesovershoots,

reverses,hesitates,oftenitjustgoesnowhere.Italsohasthisprofoundlyannoyingtendencytojusttriggerourstopandthenmoveoffsmartlyinthedirectionweoriginallyexpectedtogo.Wehavetoacceptthatthisissimplywhatthemarketdoes.Wecan’tchangeit;ifwearetohaveanychanceofsucceedingintradingwehavetorecognisethatit

happensandworkaroundit.Whenthemarketisn’tplayingalongtoexpectations,wegointodefensivemode,weconservecapitalandwedon’tletlossesbuildup.Wecertainlydon’ttrytoforcetrades.Ontheoccasionsthatthemarketitisbehavingitself,wegoontheoffensive,andmakeasmuchmoneyaswecanwhiletheopportunityremainsopen.

ChapterNine

“ItrytoassemblefactsanddecidewhatkindofscenarioIthinkwillunfold.”

-BillLipschutz

Sofarwehavelookedatlongertermcandlestickreversalsignalsandthenshortertermtrendlinebreaks.Let’snowlookataworked

exampleofhowweputthetwotogethertolookforpotentialtradeentries.

Step1:Identifyagoodprecedingtrendonalongertimeframechart

Hereisagoodoneonaweeklytimeframe:

Priceintheabovechartisveryobviouslyinastronguptrend.Alltrendscometoanendatsomepointthough.Ifpricewastoshowsignsofchangingdirection,wecouldconsiderstartingtolookforopportunitiestoshortit,intheanticipationthatacorrectioncouldbeabouttooccur.Perhapseventheverystartofanewbeartrend

couldbeforming.Thetruthisthatwedon’tknow,eitherway.Ifthesignalturnsouttobecorrectandaselloffoccurs,wewillaimtoputourselvesinapositiontoprofitasmuchaspossible.Ifthesignalfailsandpricejustcontinuestotheupside,wewanttocontrolourriskandlosetheleastamountpossible.

Step2:Waitforareversalsignaltooccur

Themarketasshowninthechartaboveshowsnosignwhatsoeverofturningaroundjustyetandthereforeifwestarttryingtoshortitnow,wearejustfightingastrongtrendandwillmostlikelylosemoney.Thisisveryimportant-manytradersfailtoheedthisruleandtrytotrade

reversalsbeforethemarketactuallyshowsanyrealsignofturningaround.Weneedtowaitforthemarkettogiveusafirmsignalthatitcouldbeturningbeforewedoanything.

Donottradebeforethemarketgivesyouasignal-therewillbeplentyoftimetogetinvolvedafterithasturned.Waitforthemarketto

showwhatitisintendingtodofirst,thengetinvolved,nottheotherwayround!

So,confrontedwiththechartabovewewouldkeepaneyeonitbutnotdoanythinguntilwesawoneofthereversalsignalswelookedatinChapterFive.Wewantthemarkettogiveusanindicationthatitiscontemplatingachangein

direction.

Afterthenextweek’spriceactionthechartnowlookslikethis:

HopefullyifyouhavebeenpracticingbeingabletoidentifythereversalsignalsthatwediscussedinChapterFiveyouwillrecognisethatthelatestcandleissignalingthatthebearshavewokenupandhavestartedtostruttheirstuff.Thesellersthinkthatthebulltrendhasbeengoingforlongenoughanditistimethattheyfoughtback.The

candleisalargestrongbearishoneandhasclosedbelowtheopeningpriceofthepreviousbullcandle.Wearenowstartingtogetinterested,asthemarkethasgivenusagoodfirmsignal.

Asweusuallydo,let’stakeacloserlook:

Onceasignalliketheaboveoccurs,wecanthenbegintopositionourselvestotakeadvantageifthepricedeclinesfurtherinthecomingweeksasweexpectitmight.Evenifthisweeklysignalonlyresultsintwoorthreemorebearishcandlesbeforearesumptionofthepreviousbulltrend,therecouldbeatleastafewhundredpipsavailabletousifweknow

whatwearedoing.

Beforewemoveonitisimportanttonotethatonceweseeabearishsignallikeontheabovechart,wearenowinsellmodeandareonlylookingtoplaythemarkettothedownside.Wearenotinterestedinbuyingopportunitiesrightnow.

Onceweseeareversalsignalliketheoneabove,wethen

dropdowntoalowertimeframecharttolookfortrendlinestoform,andgettingshortwhentheybreak.

Solet’ssee,ifwehadbeentradingtheaboveexampleinrealtime,whatwewouldhavebeenconfrontedwith.

Step3:Dropdowntoalowertimeframe

Hereiswhattheweeklyreversalsignallookslikeonthehourlychart.Thetwoshadedareas,greenandred,arethetwocandlesthatcomprisetogetherthereversalsignal.Wecanseethatpricewasmovingupcautiouslyduringthefirstcandlebutduringthesecondcandleitfellawayquitesharply.Theopenpriceofthefirstcandleismarkedingreenontheleft

handsideofthechartandtheclosepriceofthesecondcandleismarkedinredontherighthandsideofthechart.Wecanseethatthesecondcandleclosedbelowtheopenpriceofthefirst,whichisafactorwelookforwhensearchingforreversalsignals.

Aswementionedbefore,thereisnorightorwrong

timeframetodropdownto,justwhateverwefeelgivesagoodperspectiveonwhatpriceisdoing.PersonallyIliketomakesurethatmychartiszoomedoutatfirstsoIcangetagoodlookatpreviouspriceaction-attheveryleastweshouldbeabletoseeallofthepriceactionthatformedthereversalsignalitselfonthechart.

Sometimestraderstendtozoomrightinandconcentratealmostonindividualcandles.That’sfineformakingpreciseentries,butintermsofgettingagoodoverallfeelforwhatpriceisdoing,weshouldtrytofitasmuchpriceactiononourscreenaspossible,atthebeginningatleast.Forthisexamplewearegoingtosticktothe1hourchart.

Step4:Trendlines

Solet’sfastforwardpriceonabitnowsowecanseehowitbehavedduringtheweekfollowingthesignal,whichiscolour-codedinblue.Remember,wearelookingforlowsthatwecanjointogethertoformtrendlines.Oncetheybreakwethencanthenthinkabouttradingshort.

Thefirsttwolowsthatjump

outarehighlightedwithyellowarrowsinthechartbelow-let’sseehowtheyplayedout:

Sothefirsttradeoftheweekwasaloser.Nottoworry,as

longaswearecontrollingourlossesandkeepingthemassmallaspossiblewearedoingourjob.

Wecanusethenewlownowtodrawanothertrendline:

Thistimewegetanicer

break,andpricemovesawayabitmorequickly.Thatiswhatweshouldbelookingfor-whenatrendlinebreaksproperly,weshouldknowaboutit.Howeveralthoughpricebreaksnicelyonthisoccasion,andourtradeshouldbeinprofit,thereislittleinthewayoffollow-throughafterwardsandpricestartstoconsolidatesideways.Thisisperfectly

naturalandweshouldbereadyforthistooccurregularly,especiallyduringquietertradingsessions,suchaswhentheAsianmarketsareopen.

Afterpricehasfinishedconsolidating,lookwhathappensnext:

Duringtheperiodofconsolidation(betweenthe

redandgreenarrows)thepricehasbeeneyeinguptheundersideofthetrendline.Whenyoubecomemorefamiliarwiththepriceactionofmarketsgenerally,youwillnoticehowpricelovestomovebacktoretestalevelthatithasbroken.Iliketothinkofitinthesamewaysomepeoplewillgothroughadoor,lockit,thentheytrythehandletomakesureitis

locked,andthenleave.Priceoftendoesthesamethingwithbrokentrendlines,notallofthetime,butsomeofthetime.Sometimesitisintoomuchofahurrytocheck!Bereadyforit,andbepreparedtotakeadvantageofitwhenithappens.

Aftertestingtheundersideoftheprevioustrendline,pricefallsaway.Itthenbreaks

anothertrendlinewecouldhavedrawnbyjoiningthelowsoftheconsolidationfromthenightbefore:

Hopefullyreadersarebeginningtoseeapattern

emergehere.Thesetrendlinebreaksoccuroverandoveragaininthemarkets.Whenwenoticepatternssuchastheseweshouldbealwaysthinkingofwayswecantakeadvantageofthem.

Afterweidentifiedthereversalpatternontheweeklytimeframe,wethoughtthatitwaspossiblethatthemarketmighttaketoturntothe

downside.Areversalonaweeklychartcaneasilybeafewhundredpips,ifnotmore.However,insteadofriskingperhaps300pipstosetastoplossontheweeklychart,wecanzoominandmakeprecisionentriesonthelowertimeframechartswithourtrendlinebreaks.

Aswecontinueonthroughtheweek:

Priceconsolidatesandthen

moves,consolidatesthenmoves.Inadowntrend,likewhatweareobservingabove,thedownsidebreakscanbequitequickandaggressive.Theseareverygoodtradingconditions.Also,onsomeoccasions,wenoticethatpriceretracestotestthebrokentrendlinefromunderneathandthencontinuesinadownwarddirection.

Now,theaboveweek’spriceactionwasselectedbecauseitisagoodexample,noteveryweekwillhavesuchnicecleanpriceactionlikethis.Oftenwemighthavetoendureafewlosingtradesbeforewegetonethatmovesintoprofitnicelyforus.Orwewillmisssometrades,simplybecauseweareworkingatsomethingelseorawayfromthetradingscreen.

Thisislargelybesidesthepoint.Thekeythingtorememberhereisthatoncewehaveidentifiedareversalsignalonalargetimeframewhichissuccessful,thepriceactionwilloftengiveusampleopportunitytogetinonthemovewithverylittlerisk,perhapsaslittleas10-20pips.

ChapterTen

“Bepatientwithwinningtrades;beenormouslyimpatientwithlosingtrades.”

-DennisGartman

Itisclearthatthepriceactionwelookedatinthelastchapterofferedatleast2or3opportunitiestoenterthemarketandmakesomepips.

Thesetrendlinebreakscancertainlybeprofitableintheirownright.Itcouldbeaperfectlyplausiblestrategytosimplytradethesetrendlinebreaksalone,targetingperhaps20–30pipsoneachbreak.

HoweveracoreobjectiveofthePASTStrategyisnotonlytocontrolriskbuttoalsotrytostretchoutrewardasmuch

aspossible.Wemeasureriskonasmalltimeframebuttargetrewardonalargertimeframe.Inthiscontexttherefore,aswedidouroriginalanalysisontheweeklychart,wecouldhavereasonablyexpectedpricetocontinuefurthertothedownsideafterthefirstweek,andpotentiallyforfurtherweeksthereafter.Thisisnotluckorfluke,itisalegitimate

expectationbasedonsoundweeklycandlestickanalysis.

Veryoftenyouseetradersusinglongertimeframestogaugemarketdirectionandthenmovingdowntoalowertimeframetomakeanentry.ThePASTStrategyisnotuniqueinthisrespect.However,mostofthetimewhenyouseetraderstakedirectionfromadailyor

weeklychart,theythenclosetheirtradesat30or40pipsprofit!Ifthemarketismovinginaparticulardirectiononalargetimeframe,thatmeansthatitiscoveringalargenumberofpipstodoso-weshouldbetryingtotakefulladvantageofthemovementandmakingasmanypipsaspossible.

Thechartbelowshowsthe

firstprofitabletradingset-upencounteredduringthetradingweekthatwehavebeenusingasanexample.Pricebrokeatrendline,retesteditfromtheunderside,andthenfellaway.It’saverynicetrade.Wecouldhaveeitherenteredontheinitialbreak,orindeedontheretest.Somepeopletradingthissetupmighthavehadatightstopsetaftertheinitialbreak

andgotstoppedoutforaverysmallloss,andthenre-enteredontheretest,withastopabovethetrendline.Thereisnowayweshouldbetradingthissetupwithanymorethan,sayforargument’ssake,20pipspertrade,or40pipsintotal.Soourrisk,setonthehourlytimeframe,is40pips.

Soourriskismeasuredonthehourlytimeframe-butwecanseebelowwhatcan

happenifrewardismeasuredontheweeklytimeframe.Remembertheweeklychartonpage34showingthereversalsignal?Hereitisagainonthenextpage:

Thetradethatwastakenonthehourlytimeframedevelopedontheweeklytimeframeintoamoveofnearly600pips,orapotentialriskvrewardratioofalmost1:15.

Do600pipopportunitiesoccuraftereveryweeklyreversalsignal?No,ofcoursetheydon’t.Sometimespricemightonlymoveacoupleof

hundredpips.Oftenpricewon’treallymoveforusatallandwemighttakealoss.Onstillotheroccasionspricecouldmoveathousandpipsinourdirection.Thekeypointisthatwhenweenteratrade,weshouldalwaysbethinkingabouthowfarcoulditpossiblygo,andhowcanwetakeadvantage.

Althoughitmakeslittle

sense,thedefaultsettinginourbrainsencouragesustokeeplosingtradesopen,allowingthelossestoaccumulate.Andthenassoonasawinningtradebeginstodevelopandgrow,werushtocloseitasquicklyaspossible.

Weneedtotrainourselvestodoexactlytheopposite.

ChapterEleven

“Thewaytobuildsuperiorlong-termreturnsisthroughpreservationofcapitalandhomeruns...Whenyouhavetremendousconvictiononatradeyouhavetogoforthejugular.Ittakescouragetobeapig.”

-StanleyDruckenmiller

Wehavespentaconsiderablelengthoftimeinthelastfewchapterslookingatwaystoenterthemarketinanticipationofalargemove.Weliketheideaofenteringthemarketontrendlinebreaksorretests,allocatingrisk(stoplosses)onalowertimeframe,butalwaysremainingmindfulofthelargemovethatcouldbecoming.Ifweareanticipating

thatpriceisgoingtomovetothedownside,welookforbreaksofbullishtrendlinestosell;ifnoneoccur,thenwesimplydon’ttrade.

Noteverytradewetakewillturnouttobeonethatcanreturnhundredsofpips,butwebelievethataslongaswecontrolrisk,opportunitiestomakelargegainswillinevitablyarrive,sooneror

later.Thegainsfromthelargewinnersshouldbemorethanenoughtonotonlycompensateusforthesmalllosses,buttoreturnagoodprofitalso.

It’stimenowtobegintolookmorecloselyattechniqueswecanadopttoletthesewinningtradesstretchtheirlegs.

Oncewehaveasuccessfultrendlinebreakorretest,and

pricehasmadeitswaysomedistanceawayintoprofit,thefirstthingweshouldconsiderdoingistakingriskoffthetablecompletelyforthetrade,andsettingastoplossorderattheentryprice,i.e.atbreakeven.Thisissensibletradingpractice;atleastifpriceretracesandtriggersthestopwewillhavelostnothing.Remember,thefirstruleofgoodtradingiscapital

preservation.

Ofcourse,howfarweallowthetradetogetintoprofitbeforewebringastoptobreakevenisamatterforeachindividualtradertodecide.Youwillfindthataftersomepracticeyouwillgetagoodfeelforit.Ifweweretospecifyagoodruleofthumb,perhapsallowthetradetogetthesamedistanceinprofit

fromyourentryasyourstopwas.Soifyourstopwas20pips,onceyourtradeis20pipsintoprofit,thinkaboutbringingyourstoptobreakeven.Again,thisisjustasuggestion,aftersomepracticeyouwillbeabletogetagoodfeelforwhenthetimeisrighttotightenrisk.

Secondly,weneedtodefineinadvancethecriteriathat

willneedtobemetbeforewewillclosethetrade.Sometimestradersusecriteriathatarebasedonwhattheyarefeelingordoingratherthanwhatthemarketisdoing.ThePASTStrategyencouragesusalwaystolistentothemarketfirst-wedonotgetintothemarketunlessthemarketgivesusasignal(longertermcandlestickreversalsignal)

andweshouldnotgetoutunlessthemarketgivesusasignal.

Whatshouldthesignalbe?Tradersarelargelyfreetodecidewhatthecriteriaisthemselves,buttherecommendationmustbethattheprimaryobjectiveistogivethetradeeverychancetodevelopintoasbigawinneraspossible.

MyownpersonalpreferenceistokeepmytradeopenuntilIseeareversalcandleontheanchortimeframe-i.e.ifIamtradingaswingtothedownside,Iwillwaituntilabullishcandleformsthatclosesabovetheopenofthemostrecentdowncandle.Aswitheverythingintechnicalanalysis,thereisnomagicinvolvedinthissignal-itisjustanobjectiveoccurrence

thatonceithappensIcannotarguewithit.

Takingtheweeklyexamplewewerelookingatinthelastchapter,areversallookslikethis:

Thereareothermethodsthattraderscouldusetodeterminewhetheraswingiscomingtoanend-somemightconsiderusingamovingaverageforinstance-whenamovingaverageflattensoutitcouldbeanindicatorthatthetrendislosingmomentum.Anotherwaytopotentiallydeterminewhentotakeprofitmightbetojoinconsecutivelower

highstoformdowntrendlines.Similartothewayweusebreaksofupwardtrendlinestogetintothemarket,wecouldusebreaksofdecliningtrendlinesasanindicatorforwhentogetout.

Thereisnosuchthingasaperfectindicatortotellyouwhentogetout,butthatisnotwhatwearelookingfor.Wesimplychoosean

indicatortouseasatooltoachieveanobjective.Inthisparticularinstance,theobjectiveisrunningwinnersforalongaspossible.Ifanything,ifyouarefindingitdifficulttomakeyourmindupwhetheryouareclosingatradetooearly,thedefaultpositionshouldalwaysbetoerronthesideofleavingthetradeopen.Ifyouareunsure,leaveitopen.You’llfindin

timethatifyoulookafterthelosers,thewinnerswilltendtolookafterthemselves.

ChapterTwelve

“Ihavetwobasicrulesaboutwinningintradingaswellasinlife:Ifyoudon’tbetyoucan’twin.Ifyouloseallyourchips,youcan’tbet.”

-LarryHite

Wehavealreadyacknowledgedthatwhenweareanalysingouranchor

timeframechartswereallyhaveaverylimitedabilitytodeterminewhatdirectionthemarketisgoingtotake.Insteadoftryingtodosomethingweareunlikelytosucceedat,weprefertoconcentrateondoingsomethingthatiswithinourcontrol-namelytradingmoreaggressivelywhenthemarketbehavesaswehopeitwill,andtradingdefensivelywhen

itdoesn’t.Thisstyleoftradingdemandsthatwearepreparedtoacceptthatwewillencounterquiteanumberoflosingtrades,however,aswearetradingwithagoodrewardtoriskratio,wecancomfortablysustainsomelosingstreaksbeforeourabilitytoreturnaprofitiscalledintoquestion.

Insteadoftryingtoavoid

losingtradesorpretendingthattheydon’texist,weadoptamorepragmaticattitude;werecognisethatlosingtradesaresimplyafactoftradinglifethatwemustacceptandgetonwith.Losingtradesareinevitable,butwinningtradesareinevitabletoo-allwehavetodoisbepatientandwaitforthemtocomealong.

Withthisinmind,let’stakealookatanotherweeklyreversalsignal.However,thistimeitisasignalthatdoesn’tplayoutaccordingtoexpectations.AsIamsureyouhavegatheredbynow,thePASTStrategycanbetradedeitherlongorshort.Sothistimewewilllookatanexampleofabullishreversal-sowewillbelookingforbuyingopportunitieson

trendlinebreakstotheupside.

Takealookatthefollowingchart:

KnowingwhatyoudoabouthowthePASTStrategy,whatareyourthoughtsregardingtheaboveweeklychart?

Frommyownpersonalperspective,ifIencounteredthischartonmyscreenIwouldbelookingforwardtothecomingtradingweek.Thestrongprecedingtrendisthere,priceisobviouslymovingdown,anditfinishes

offwithaverynicereversalcandleatthebottom.Thebearscouldberunningoutofsteamandthebullsarethinkingabouttakingashotatpushingthemarketbackup.IwouldbegettingreadytozoominonMondaymorningtoseeifthereareanygoodtrendlinesthatIcouldwatchforbreakstotheupside.

Beforewemovetothelowertimeframecharts,let’stakeacloserlookatthepotentialreversalitself:

Aswebecomemoreusedtolookingatpriceaction,wewillbecomebetteratrecognisingwhenthemarketismovingwithmomentumandwhenitisbecominglesscertainaboutdirection.Thefirstthreebearishcandles,withtheorangearrowspointingtowardsthem,aregoodexamplesofamarketmovingwithmomentum.The

candlesareniceandlong,andthewicksareshort.Assoonasthecandleopensthebearsareincontrolfromthebeginningrightthroughtotheend,whenthecandlecloses.

Thenexttwocandles,withtheyellowarrowspointingtowardsthem,areexamplesofamarketbeginningtolosemomentum.Therearewicksinbothdirectionsandthe

candlesareshorter.Thebearsarestillwinning,becausethecandlesaremovingdown,buttheyarenotwinningthebattlesconvincinglyanymore.Doesitmeanthatthebearswingcan’tcontinue?Absolutelynot.Butitdoesgiveusadvancewarningthatthebullsareconsideringmountingachallenge.Weshouldbeawareofthisandtrytopositionourselvesto

profitiftheydomanagetotakecontrolofthemarket.

Let’szoominnowandlookabitcloser.Forthisexamplewearegoingtousethe4hourchart.Thereversalcandleiscolourcodedinredandtheprecedingcandleingreen.Theopeningandclosingpricesarealsomarkedinredandgreen.Wecanseethattheopeningandclosing

pricesarealmostequal.

Wecanfastforwardonnowthroughthenextweek’spriceaction.Remember,wearenowlookingoutfortrendlinesthatwecanhelpusdefineentrypointsforlongtrades.

Thenextweekiscolourcodedinblue.Doyouseeanypointsthatyoucouldjointogethertoformatrendlineyet?

Remember,thetrendlinesareamatterofpersonalstyle;notwopeoplewilldrawidenticaltrendlines.YoumightdrawatrendlineontheabovechartthatIwouldn’t,andviceversa.

Ifthereistobeoneguidingprinciplewhenitcomestotrendlines,itwouldbetotrytodrawtheonethatlookslikeitwouldbethemost

obvioustoeveryonelookingatthechart.Don’ttrytoohard.Whenlotsofpeopleareplacingtheirordersaroundthesametrendline,that’swhatcausesthemovementinpricewhenitbreaks.

Here’smyfirsttrendlineattempt:

Noticeabovehowwhenthetrendlinebreakspricemovesawayfromitsmartly-thisiswhatwewanttoseehappen.Unfortunatelyhoweveronthisparticularoccasion,despitetheinitialjumppricedoesnotcontinuetofollowthroughinabullishdirection;iteventuallyretracesbackdowntobeneaththetrendline.Despitethis,weshouldhavehadample

opportunitywhilethetradewasinprofittotightenriskandsetastoplosstobreakevenoratleastonlyaverysmallloss.

Traderscouldalsohavepotentiallyconsideredtakingalongpositionontheretracetothetrendline.Inthisparticularexampletherewasinfactaweakbounce(lookatthecandlethebluearrowis

pointingto)fromitbutthebullscouldn’tgetanytractionandpricethencontinuedtofall.Again,ifwedidtakeapositionfromthistrendline,weshouldbeaimingtoeitherhavetakenasmalllossorperhapstohaveastopsettobreakeven.Eitherway,thelossshouldneverbeallowedtobecomealargeone.

Howdoestheweek’sprice

actionlooklikebackontheanchorchart?

Ok,soweexpectedpricetomovetotheupsideoffthereversalcandle,butthishasn’toccurred.Wehavehadtwopotentiallongtradesduringtheweek;oneoffatrendlinebreakandthenanotheronaretest.Neitherhaveworkedout,butwelosteitherverylittleornothingatall.That’sexcellent,becauseitmeanswearecontrolling

risk.Whenasignaldoesn’tworkoutexactlyaswehope,weneedtoaskourselvesthefollowingimportantquestion:

Doesthislatestanchorcandlestickcallourbullish(orbearish)outlookintoquestion?

Forme,inthisinstance,theanswertothatquestionisno.Thepriceactioncouldbeseenasconsolidativein

nature,andgranted,thebullshaveyettotakecontrolofthemarket.Howeverthereisnoevidencefromtheweek’spriceactionthatsuggeststhatthebearshavethepowertopushpricedownmuchfurthereither.Eachtraderwillformtheirownviewonthis,butifIweretradingtheabovechart,Iwouldstillverymuchbeopentotheideaoftakingmorelongopportunitieson

trendlinebreaks.

Let’sfastforwardoncemoreandlookatthenextweek’spriceactionontheweeklychart,colourcodedinorangethistime.

Whatareyourthoughtsonthelatestcandle?Wouldyoustillbebullishnow?

Asreferredtointhechartabove,themarkethasjusttoldussomething,loudandclear.Thebullsareoutofthegamenow.Thereversalcandlewasjustaresultofthebearsstoppingtotakeabreathandnowtheyarebacksellingagain.Weneedtolistentothemarketwhenitgivesussignalslikethis.Thecasetobuynowisover,and

weshouldlookelsewhereforotheropportunities.Whattradersshouldneverdoisignorethemarketwhenitisgivingthemaclearsignalthattheirdirectionalviewisincorrect.Themarketisspeakingtousconstantly-theabovechartisagoodexampleofitscreamingatthebullstogetoutoftheway.Unfortunatelyalotofthetimetradersareproneto

makingthemistakeoftradingwhattheythinkandnotwhattheysee.

Butwhataboutourtrades?Surelybeingsoutterlywrongonourpredictionofthefuturedirectionofthemarketmusthavehitushardinourpockets?Wellwealreadyknowthatwearecarryingeithernolossorasmalllossonourattempttoenterlong

thepreviousweek.Let’slookatthelastestweekonthefourhourchart(colourcodedorange):

Wecanseeherethatbyzoomingdowntoalowertimeframeandwaitingforatrendlinebreakbeforetrading,wemanagedtoavoidtakinganylossesatall,becausewedidn’ttakeanytrades.

Let’sjustreflectforamomentonwhatwecanlearnfromtheaboveexample.Thatwetradedfortwoweeksand

madenoprofits?No.Thekeytakeawayhereisthatweidentifiedapossibletrade,which,ifitwassuccessful,hadthepotentialtoreturnalotofpips.Toputthisincontext,intheaboveexamplethedistancethatthemarketfellfromthemostrecenthighstothereversalcandlewas730pips.Whatwemanagedtodowasgiveourselvestheopportunityto

realisesubstantialprofitbutatvery,verylowrisk.Inthisparticularcase,therealisedlosseswereeitherverysmallorquitepossiblyzero.

Bydefinition,becausethesetradesthatwearetakingusingthisstrategytargethighreward,wedonotgetbigwinningtradeseveryday.Infact,enduringastringofsmalllossesorbreakeven

tradesisabigpartofthetradingroutine.Sometimestradersaretooimpatientoremotionaltoendureaperiodoftimewhentheiraccountequityisflatliningordecliningslightly.Theyarestillintheframeofmindofa“normal”job,i.e.Ihavesatatthiscomputerfor9hours,andnowthemarketowesmemypay.Forthoseofuswhocanseepastthisandbealittlebit

morepatient,themarketholdssignificantlymorepotential.

Thereisnothingbetterthangettinganicetightentryatthebottomofaweeklyswing,gettingtherisktakenoffthetablewiththestoplosssettobreakeven,andthenjustcheckingitmaybeonceadayforthenextmonth,orevenlonger,astheweekly

signalplaysoutandtheprofitsteadilyaccumulates.Tome,thatisinfinitelymoreappealingthansittingatascreenfor18hoursaday,tryingtoscalpafewpipshereandthere.Perhapssomeofthereadersherewillagreewithme.

ChapterThirteen

ThefinalpartofthePASTStrategyisthemostimportant.Ithasnocharts,noexamples,notechnicalanalysis.Itisaboutthedifferencebetweenfollowingastrategyandtrading.

ReadersmighthavenoticedthatthroughoutthisbookIhavebeenquitevaguewhen

itcomestooutliningstrictcriteriathattellsuswhentogetinandoutofthemarket.Idon’tdictatetoyouwhatavalidcandlestickpatternlookslikeortellyouhowtodrawyourtrendlines.Idon’tspecifyhowmanypipstosetyourstopatorwhereyoushouldtakeyourprofits.Intruth,thePASTStrategycanbesummarisedinasinglesentence-lookforareversal

onalongtimeframe,enteronatrendlinebreakonashortertimeframe,keepatightstopandrunthepositionsforaslongasyoucan.

Somereadersmighthavebeenslightlyannoyedatthislackofclarity,butitisdeliberate,andthebookiswritteninthiswayforverygoodreason.Weshouldrealisethatwearenaturally

inclinedtogolookingforthesimplesetofrulesthatwecanjusttrytoapplywithouthavingtothinktoomuchaboutwhatwearedoing.Theproblemisthatthisapproachisflawed,andyouarefightinganuphillbattletoachievelastingsuccessasatraderifyouadoptit.HopefullyIcangosomewaynowtowardsexplainingwhy.

Ifyouarelookingforsomethingthattellsyouexactcriteriaabouthowtogetintothemarketandwhentogetout,youarestillblindlyfollowingatradingstrategy.

Youhaveyettomakethejumptobecomingatrader.

Whyisitthatwhenpeoplereadaboutastrategyonaforum,orbuyonefromatradingsystemvendor,and

theydecidetouseit-itrarelyeverseemstoworkoutforthem?Theygetaperiodofdrawdown,theylosefaith,theystarttotinker,itgetsworseandthentheygiveup.Theydismissthestrategyasunprofitableandthepersonwhodeviseditasanefariousscamartist.Theymoveontothenextforumthread,lookingforthenextsetofrulesthattheyaregoingtotry

toadhereto.Andthecyclecontinues.Forsometradersthispatterncanlastaverylongtimeduringwhichtheymakelittleornoprogressinthemarkets.

Similarly,whyisitthatyouhavepeoplewhoareveryexperiencedinthemarkets,theyknowtheirtechnicalanalysisorfundamentalanalysisbackwards,butyet

stillcan’tmanagetomakeaprofit?

ThroughoutthisbookIhavetriedtorepeatedlystresstheimportanceoftherelationshipbetweenriskandrewardinyourtrading.Propertradersaren’tpeoplewhoblindlyfollowtechnicalrulesorsystemstotradethemarkets.Theyareriskmanagerswhousetechnicalsortheir

strategyrulesastheirtoolstodefineandcontrolriskandtargetreward.

InthePASTStrategyIhaveintroducedyoutoagoodframeworkoftechnicaltoolswithinwhichyoucancontrolyourriskandstretchoutyourreward.Butcandlesticksandtrendlineswon’tmakeyouprofitablebythemselves.Neitherwillmoving

averages,stochasticsoranythingelse.Givingatechnicalsystemtosomeonewhodoesn’tunderstandtheroleofriskmanagementintradingisthesameastakingastrangeroffthestreet,givinghimorherahammer,sawandachiselandtellingthemtogoandknockupasetofstairs.Theyhavethecorrecttools,butunlesstheyknowwhattheyaredoingwith

them,itissimplynotgoingtowork.

Thebesttraderisnottheonewhocanrecitethelast12monthsNonFarmPayrollfiguresorsitatascreenfor24hoursstraight.He’snottheonewhocandrawthemostbeautifultrendlinesorinventanewfancyindicator.Thebesttraderistheonewhoconsistently,dayin,dayout,

controlshisriskinthemarketandtakesmaximumadvantageofthegoodopportunitieswhentheypresentthemselvestohim.

Thefirststeptosuccessfultradingistounderstandyourgoalsinthemarketandthentounderstandthetoolsyouintendtousetoachievethem.Itdoesn’treallymatterwhetherthecandlestick

patternwasspot-onperfect,orthatthetrendlinewasdrawnatthewrongangle.Whatmattersisthatyouaretrading-ifyouaredoingthatwell,youwillseethegains,soonerorlater.

ChapterFourteen

ThereareafewthoughtsthatI’dliketoleaveyouwithbeforeIwrapthisbookup.AsIhavesuggestedthroughout,thereisalotmoretotradingthanenteringwhenthiscrossesthat.Infact,ifIweretorankinorderofimportanceskillsthatIthinkpeoplewhowanttobesuccessfultradersshould

develop,theorderwouldprobablybesomethinglikethis:

1.Anunderstandingoftheimportanceofriskandrewardintrading

2.Everythinginthischapter

3.Technicalanalysis(orfundamentalanalysis,sentimentanalysis,anythingelsereally)

It’sfunnyhowifyouweretomeasuretheamountofmaterialavailabletonovicetradersintermsofcontent,theorderoftheabovelistwouldprobablybeinreverse.I’mprettysurethereisalessontobelearntintheresomewhere.

Expectations

No-onewantstotalkaboutrealisticexpectations.The

retailtradingindustryisbuiltonsellingdreamstoinvestors.Realisticexpectationsdon’treallysellthatwell.

Whatdoyoureallyexpecttoachievefromyourtrading?Thinkaboutithonestlyforafewmoments.Wecanallsaywhatwewouldliketogetfromtrading,butwhatdoweexpecttoget?

Whatreallyarethechancesofanyofusreadingatradingbookoveraweekendandthenturningathousandpoundsintotenmillionpoundsinayear.Notimpossible,obviously,butlet’sfaceit,itisunlikely.Andifwearegoingtodoit,isitreallygoingtohappenwithusspendingnomorethan15minutesadayinfrontofthecomputerinourpants?

It’slikethelottery;thechanceisundeniablythere,butitisvery,verysmall.

Whatisarealisticexpectationthen?Withabitofworkandpatience,couldwelearnaskillthatwecanhavefortherestofourlives,thatwecanusetomakeasolidfew%returnonaverage-monthaftermonth,yearafteryear?Youbetitis.Absolutely

possible.

Let’sstartbygrowingatradingaccountbyafew%monthonmonthconsistentlyforawhilefirst,thenwecanthinkabouttheyachts.It’samarathon,notasprint.

Losses

Everyonehateslosses.Theyhurt,theyreallydo.Thelastthinganyonewantstoseeisa

stoplossgettingtriggered.It’slikealittlepieceofyoudies.NassimTalebreckonsthatalosshasanegativeimpactonusthatissignificantlygreaterthanthepositiveimpactwederivefromawinofanidenticalsize.Traderswillgotoallsortsoflengthstoavoidthepainoftakinglosses,oftenwithprettycatastrophicconsequences.Takeanyof

thefamousroguetradingscandalsasanexample–thedislikeoflossesisnotjustconfinedtoretailtraders,thebigboysfeelittoo.

Thefirstthingtodoistoacceptthatlosseshappenintrading.Wehavealreadydiscussedthisinapreviouschapter.Ratherthanrunningawayfromthemortryingtoavoidthem,weshouldbe

readyforthemwhentheycomeandsetaboutdealingwiththeminawaythatwillcontrolandmitigatetheirimpact.

Ipersonallyliketoputlossesinacontextthathelpsmelookatthemmoreobjectively.Iviewthemasasimplecostofbusiness.Ifyouopenedasweetshopyouwouldhavetopayrent,rates,

salaries,stock,insurance,energy,etc.,beforeyoucansellyourgoodsandreturnaprofit.Anybusinessendeavourwillcomewithcosts,andpersonaltradingisnodifferent.

Shoportrading,itdoesn’tmatter-youkeepatrackofyourexpenses,andprovidedthatyouareresponsible,disciplinedandfollowyour

strategy,youcanexpecttoreturnaprofitovertime.

Ontheflipsideofthis,asweetshopownerwhopayshiscleanerahundredgrandayear,turnsuptoworkdrunkandeatshalfhisstockisunlikelytoreturnmuchofaprofit.Thesameappliestoyourtradingbusiness.

EmotionalCapital

Theideaofemotionalcapitaltiesinnicelywiththeparagraphonlossesabove.Astradersweallhaveanaccountwithourbrokerinwhichweholdourcapital.Weusethiscapitaltospeculateinthemarkets.Itislimited–ifitrunsout,wecan’ttrade.Buteachofusalsohasanaccountinourmindsinwhichweholdouremotionalcapital.Justaswe

arealwaysinterestedinwhatouraccountbalanceiswithourbroker,weneedtoremainmindfulofthebalanceinouremotionalcapitalaccounttoo.

Ouremotionalcapitalisrunninglowifthesizeoftheloss,orindeedgain,thatwestandtorealiseinthemarketsislargeenoughtoaffectourdecision-making.Thisvariesforeveryoneandsotherecan

benoclearone-size-fits-allrule.Sometradingguruswilladvise-“neverriskmorethan5%ofyouraccountonasingletrade”.Thisisplainlyrubbish,becauseitassumesthattheleveloflossorgain,eitherinpercentagetermsorindeedcashterms,hasthesameeffectoneveryone.

Forsomepeople,carryinga40%drawdownmightnot

affectthematall,theyarestillthinkingclearlyandimplementingtheirtradingstrategywithdiscipline.Theyhavealargeemotionalcapitalaccount.Otherpeoplecouldbeanemotionalorindeedphysicalwreckatthethoughtatcarryingevena5%drawdown.Iftheyfoundthemselvesinsuchasituationtheycouldbeengaginginallsortsofdestructiveactivity-

doublinglotsizes,martingale,sleeplessnights,runninglosingtrades,breakingrules,etc.Theyaregettingamargincallintheiremotionalcapitalaccount-whenthathappens,amargincallinthecashaccountoftenfollowssoonafter.

Thepersonwhoisemotionallycapableofdealingwithlargerriskisnot

necessarilyabettertraderthanonewhopreferstokeeprisksmall.Theyjustwillhavedifferentstyles.Thekeyistobeabletorealisewhenwemightbebeginningtostrayoutofourcomfortzoneandhavethedisciplinetotaketheappropriatestepstobringourselvesbackonside.

Ifyoufeelthatyouaregettingangryoremotionalat

themarket,youshouldsimplyloweryourpositionsize,lowertheleverage.Itcanalwaysbeincreasedagainatalaterstageifyouarefeelingmorecomfortable.What’sgreatabouttradingisthatitispossibletogetinandoutofthemarketatthedropofahat-it’snobigdeal.Orclosetheplatformandtakeabreakforafewdaysifyouneedto.Themarketwillstill

betherenextweek,butyouraccountmightnot.Dowhateveryouneedtodotopreserveit.

What’sthebiggestobstaclestandingbetweenusandconsistentlyprofitabletrading?Thetrendlinewedrewthatwasslightlyoff?Thatthecandlestickpatternwasn’t“valid”?No,thebigdamagegetsdonewhenwe

losecontrolofouremotionsandstarttotradeinarecklessanddestructiveway.Weneedtotakealltheprecautionswecantoensurewekeepouremotionsincheck.

Leverage

Youhaveprobablyreadabouthowleverageisadouble-edgedsword,increasesyourprofits,butalsoyourlosses,etc.,a

milliontimes.IknowIhave.

Theuseofleveragedoesincreasethesizeofyourprofitsandthesizeofyourlosses.Inthatrespect,itisusuallypresentedasabenignforce,i.e.potentiallygoodandpotentiallybadinequalmeasure.HoweverI’djustliketodrawyourattentiontoacoupleofpointsthatarerarelydiscussed:

Whenyouleverageyouraccountyouleverageyouremotionstoo.Theuseofbigleveragewillmagnifythosepotentiallydestructiveemotionsthatwetalkedaboutinthepreviousparagraphandweneedtobemindfulofthis.Ifyourequitycurveisjumpingaround,30%down,swingingto100%up,backto70%down,thechancesofyoulosingyourdiscipline

somedayandblowingyouraccountareincreased,exponentially.Ifyouareusingsizeableleverageandputtingachunkofyouraccountontheline,watchhowyouarefeelinglikeahawk.Ifthepalmsaregettingsweatyandtheheartisbeatingfast,youareoverextendingyourself.Youarenottrading;(i.e.controllingrisk)youaregambling.And

ifyouwanttogamble,Icanthinkofwaybetterplacestodoitthaninfrontofalaptopbyyourselfathome.Atleastgosomewherewhereyoucangetafewfreedrinksorsandwicheswhileyouloseyourmoney(yes,Iamtalkingaboutthecasino!).

ThesecondtopicthatIrarelyseeincludedindiscussionsaboutleverageisthatof

transactioncosts.Theleveragemultipliesthesizeofthewinners,itmultipliesthesizeofthelosers,anditalsomultipliestheamountofmoneyyoupaytoyourbrokereverytimeyouenteratrade,thespread.Thisisoneofthereasonswhybrokersloveseeingtraderscomingtotradeat200:1leverage,itvastlyincreasestheircashflow.Thebrokersdon’t

careifthetraderissuccessfulornot,theywillhaveanyriskwellhedged.Tradersrarelydothesumsonthis-Iwouldencourageyoutoworkitout-howmuchpermonthdoyouhavetomakejusttocoveraveragetransactioncosts?50:1leverageintheretailforexworldwouldoftenbeconsideredtobequiteresponsible,sowhatabout50:1leverage,20tradesper

month,witha2pipspread–soundsreasonable?

Asimple,roughcalculationwouldbeasfollows:

Ifyouhavea$1,000accountandareleveraged50:1,youwillbecontrolling$50,000,($1,000*50=$50,000)or5minilots.Aminilotpipisusuallyworthabout$1,althoughthiscanchangedependingonthecurrency

pairbeingtraded.

Ifyourspreadis2pipsandyoutrade20timespermonth,yourtotaltransactioncostswillbe2pips*20trades*5lots=$200.

$200,or20%ofyourcapital,willbespentjustontransactioncosts!Canyoureturn20%permonth,everymonth,andthenmakesomeprofitontopofthat?Now,

thisfiguremightfluctuatebasedonavarietyofdifferentfactors,forinstanceifyouclosemostofyourtradesinprofit,youmightnotnoticethecost,butthegeneralpointstillstands-leveragedtransactioncostscanbeenormous.Weneedtobeawareofthem.

Tradingversusaconventionaljob

I’mawarethatpartsofthisparagraphmightbeconstruedasconflictingwiththeprinciplesmentionedinthesweetshopexampleabove,butIthinkthisisimportantsoIamgoingtomentionitanyway.Peoplewhostarttradingafterworkingelsewhereinamoreconventionaljobwillusuallyhaveadifferentmindsetinrelationtowhatworkisand

howitisappliedtotrading.Intheconventionalworkplace,moreeffortexpended,moretimespent,isgenerallyagoodthingandwecanreasonablyexpecttoberewardedforhardwork.

Thisisnottrueinthetradingsphere.Yes,workisrequiredtolearnhowtotrade,thatmuchistrue.Buttimespentinfrontofthescreenactually

tradingdoesnotnecessarilypositivelycorrelatewithtradingprofits.IfanythingIwouldsuggestthattheoppositeistrue;themoretimeyouspendtrading,theworseyourresultstendtobe.Thisisdifficultforpeopletowraptheirheadsaroundsometimes;itgoesagainsteverythingwearetaughtaboutworking.

Sometimesthemarketonaparticulardayorweekissimplynotmoving,orweareonthewrongsideofthemomentum,orwhatever,itcouldbeanything.Maybewearetiredorwehavesomethingelsegoingoninlifethatisdistractingusoraffectingourconcentration.Thesearethedaysthatweneedtostepback.Ourday’sworkissimplyhavingthe

disciplinetorecognisethatwearenotonformandclosedownthescreen.Thiscanoftenbemuch,muchhardertodothanitistoputinalongdayinyourdayjob.Thedaysthatwespendtryingtoforcepipsoutofamarketthatisnotplayingballwithusarethedaysthatwewillrealisethebig,unnecessarylosses.Weneedtocontrolthisdownsiderisk.

Patience

“Itneverwasmythinkingthatmadebigmoneyforme.Itwasalwaysmysitting.Gotthat?Mysittingtight!”

-JesseLivermore

Patienceisatoughone.Themarket,contrarytowhatmanypeoplethink,movesfarmoreslowlythanwewould

likeitto.Thenaturalmovementofthemarketissplitbetweenshortburstsofmovementandthenlonger,oftenfrustrating,periodsofranges.

Partofthebattleistoknowingtostayoutofthemarketwhenitisnotperformingaswewant,andhavingthepatiencetostayoutuntilitis.Remember,the

marketdoesnotexisttoprovideuswithentertainment.

However,thegoodthingisthatthemarketusuallyrewardspatienttraderswithbigmoves:

RecordingandMeasuring

“Ifyoucan’tmeasureityouprobablycan’tmanageit-thingsyoumeasuretendtoimprove.”

-EdSeykota

IlostcountofthenumberoftimesIreadaboutthemeritsofkeepingadiaryorarecordofmytrades.Ialwaysthoughtthatitsoundedlikea

usefulideabutIneverreallybotheredtodoit.Nowhowever,havingkepttradingrecords,thereisnothingthatIknowofintradingthatwillhavesuchapositiveimpactonyourperformanceinreturnforsuchlittleeffort.

Wemeasuresomuchinourday-to-daylives,itisinconceivablereallythatsomepeopledonotmeasure

theirtradingperformance.AndbymeasureitIdon’tmeancheckingwhetheryourprofitandlossaccountispositiveornegative,Imeankeepingproperstatisticsandmonitoringthemregularly.

Ifyouaregoingonadiet,youweighyourselffirstandthenperiodicallythereafter-that’showyouknowifyouaremakingprogressornot.

Athletesmeasureallsortsofdifferentthingsastheytrain,inanefforttoidentifysomethingthatcouldshaveanextraprecioussecondofftheirtime.Wemeasureourperformanceatschool,college,oruniversitybydoingexams.Theyareabenchmarkagainstwhichtomeasureprogress.

Ifwewanttomeasureand

improveourtradingweneedtokeepgoodrecords.Thereareavarietyofservicesavailableonlinenowthatwilltakethedatageneratedfromyourtradingdirectlyfromyourbrokerandspitoutallsortsofstatisticsforyouautomatically.Ifyoudon’twanttolinkyouraccounttooneoftheseservicesforwhateverreason,youaregoingtohavetofireupyour

excelspreadsheetandstartrecordingyourtrades.

Reviewthesestatisticsregularly.Iwouldrecommendatleastonceaweek.Whenthemarketisclosedontheweekendcanbeagoodtimetoreviewperformance.Attheveryleast,youshouldknowthesizeofyouraveragewinner,thesizeofyouraverageloser

andyourpercentagetradesuccessrateoffbyheart.Ifyouhaveyourstatisticsinyourhead,yourbrainwillprocessthisinformationandimplementitintoyourtradingsubconsciously.Afterreviewingyourstatsoveraweekendyoumightnoticethatyouraveragelosingtradeisgettingalittlebiggerthanitusedtobe.Inresponseyouwillfindthatyouwill

automaticallystarttobemorecarefulwithyourentries,tighterwithstops.Youwillbemakingallsortsofimprovementswithoutevenrealisingit.

PerseveranceandDetermination

"Allofold.Nothingelseever.Evertried.Everfailed.Nomatter.Tryagain.Failagain.Fail

better."

-SamuelBeckett

Weallknowthestatisticthatisquotedeverywhere,that95%oftradersfail.Well,Ihaveseentheallegedfailureratequotedasbeingaslowasa90%,andashighas99%,soIsupposepickingafiguresomewherenearthemiddleislikelytobethefairest.

Inanyevent,ifaccurate,afailurerateofanywherenorthof90%isaprettydauntingprospectfortheaspiringtrader.

Ihaveaproblemwiththisstatistic,onanumberofdifferentfronts.Iwouldliketoseeadefinitionoftheterm“trader”tostartwith.Issomeonewhothrows£100intoaspreadbettingaccount

andlosesitonafew£1perpointForexbetsreallydeservingoftheterm“trader”?

Inaddition,inordertofailatsomething,youmustfirsttrytosucceedatit.Whathavethesepeopledonetoattempttoactuallysucceedattrading?I’dalsoliketoseewhatfailureisdefinedasbeing,andwhilewe’reatit,

I’dliketoseewhatsuccessisdefinedastoo.

IfIpickupatennisracket,trytohitaball,miss,andputtheracketdownagain,haveIfailedattennis?HaveItriedtosucceedattennis?

Iamnotsayingthattradingiseasy;itcertainlyisnot.ButIdon’tthinkthatthefailurestatisticssoundaccurateeither.Ifyouaretodefinea

traderassomeonewhohasactuallytakenthetimeandefforttoreallystudyandlearnaboutthemarkets;andifyouaretodefinesuccessasthemreturningaconsistentandsustainableprofitoveracertainperiodoftime,Ithinkthefailurerateisalotlowerthan95%.

Ontheotherhand,ifatraderissomeonewhohasread

aboutfinancialmarketsontheinternetforaweekendandthenthrownsomesparecashintoabrokeraccount;andsuccessisdefinedasretiredsittingonayachtintheMedwithinayear,Iwouldn’targueifyousuggestedthefailureratewas100%.

Beinggoodatanythingworthbeinggoodattakestime,

effortanddedication.Yougetoutwhatyouputin.Successinanythingrequiresdiscipline,motivation,passion.Ifyoudecidetotradethemarket,itwilltestyou,provokeyou,punishyou,rewardyou.

Ifyouarepreparedtoriskthetimeandeffortrequiredtolearnhowtotradethemarkets,thepotentialfor

rewardislimitless.Everythinginlifeisatradeononeleveloranother.

Goodluckwithyourtrading.

Remember,asamember(it’scompletelyFREE)ofForexUseful(http://forexuseful.com/),youwillbeabletodownloadandprintthe3strategiesinthisbookandyouwillalsohaveaccessto:

Viaournewsletter,FREEweeklyupdatesonthePriceActionSwingTrading(PAST)StrategyandallotherstrategiesinthisbookFREELivemarketsessions(usuallyeveryMonday

morning)

releasesincludinglaunchanddiscountoffers,before

anyoneelse!

Nextup,TradingWithConfluence–TheFoundationsby"Forex"John...

TradingWithConfluence–

TheFoundations

Introduction

Asatraderwithyearsofexperience,Iknowthattotradeconsistently365daysoftheyear,throughthehighsandlows,theupsanddowns,andthesidewaysmarkets,youneedasetofsoundtradingfoundations.

TradingWithConfluence(TWC)isanunderutilised

tradingapproach.Many‘athome’traderssearchfortheHolyGrail,thesystemthatpromisesmillionsortheonethat“evenatwelveyearoldcantradeonceaday”!Most(ifnotall)ofyouhavebeenthere.

Realisticallythough,asIhavealreadysaid,allyoureallyneedisasetofsoundtradingfoundationstoallowyouto

formarealtimeviewofthemarketandatechnicaloutlook(Tradingplan).Youdon’tneedanythingfancy,whenyoubringyourfoundationstogetherandTradeWithConfluenceyouwillhaveasolidplanthatwillenableyoutoprofitinallmarketconditions.

Myfoundationsaresplitinto3categories,Analysis(Pre-

Entry),Trigger(Entry)andAwareness.

The‘Analysis’foundationsallowmetoformarealtimeviewofthemarket.Whencombinedwiththe‘Trigger’and‘Awareness’foundationsIamabletoformaTradingplanANDatechnicaloutlookofthemarket.ThisTradingplanisthecoreofmytrading,myTWCStrategyandmyTWCDailyAnalysisreports,bothofwhichareincludedin

theTradingWithConfluence(TWC)DailyAnalysisserviceavailableexclusivelyatForexUseful.

MyfoundationshavestoodthetestoftimeandtheyareusedinsomeformbyALLmajortradinginstitutions.InthisbookIaimtoteachyoumyfoundationsandhowIusethemtoTradeWithConfluenceconsistentlyand

profitablyinallmarketconditions.

Mypersonalstrikeratetargetis80%+andIalwayslookforaRisk:Rewardofatleast1:1orhigheronallmytrades.

Confluence

Confluence:Agathering,flowing,ormeetingtogetheratonejunctureorpoint

Beforewegoanyfurther,pleasetakeamomenttoreadthischapterinfull.

UntilyoureallyKNOWwhatTradingWithConfluenceisallabout,youwon’tbeabletoutiliseitinyoureveryday

trading.

Weallknowforafactthatthemarketsaremadeupofavarietyofstrategiesthatallowatradertoformanopinionandinstigateamarketorder.Wealsoknowthatthesestrategiesofferthatspecifictraderaninformeddecision.Onethingwealllikeismakinganinformeddecision,whateverthe

circumstanceinlife!

Likethefoundationsofabuilding,thefoundationsofamarketwillallowyoutogivereasonastowhythemarketdoescertainthingsandmakescertainmovements.Amuchunderutilisedapproachisusingthesefoundationsinconfluence.

HaveyoueverseenamarketcutthroughSupportor

Resistancelevelslikebutter?HaveyoueverseenaChartpatterngetbrokenlikeitwasnoteventhere?NowcoupletheChartpatternwithSupportandResistance,Trendlines,Dailypivots,etc.Doweseeanythingdifferent?YESwedo,TradingWithConfluenceisallaboutbringingfoundationstogether,allowingustomakeaSTRONGERmore

informeddecisionofwhereamarketislikelytomove.

Thinkofthefinancialmarketsasa200ftbuilding.Whatgoesintokeepingthisbuildingfromblowingoverinhighwinds?Onaverybasiclevel,thestructureofthebuildingstartswithdrawings,followedbythemathematicsforweightandloadbearing,thefoundations,

theinternalstructureandsupports,requiredmaterials,etc.,etc.

Tobecomeaconsistenttraderyouneedtothinkinasimilarway,youneedtoconsiderthebefore,thenowandtheafter.

TradingWithConfluenceisabouttakingsoundtradingfoundationsandbringingthemalltogethertocreateaTradingplanwithmuch

higherprobabilitytradingopportunities.

Lookingattheseaspectsindividuallynevergivesyouthe‘full’marketview.Bringthemtogether,and,asyouwillsee,youstarttoseetherealreasonbehindmarketmovements.

Donotgetcaughtupinlookingfora‘perfectsetup’butdobeawarethatgood

moves(profitableones)willalmostalwaysoccurwhentherearemultipletradingfoundationsworkinginconfluenceacrossmultipletimeframes.

Ihopeyouenjoythebook.

Foundations-Introduction

Asmentionedabovemyfoundationsaresplitinto3categories:

Analysis(Pre-Entry),Trigger(Entry)andAwareness

My‘Analysis’consistsofthefollowingfoundationsandmainlyassistsmeinformingarealtimeviewofthemarket:

1–Support&Resistance,

2–FibonacciRetracements,

3–TrendLines,

4–DailyPivots,

5–BigRoundNumbersand

6–ATR

My‘Entry’consistsofthefollowingfoundationsandmainlyassistsmeinformingaTradingplan(atechnicaloutlookofthemarket).

7–ChartPatterns,

8–CandlestickPatterns,

9–Stochastics,

10–BollingerBandsand

11–Divergence

‘Awareness’assistsinbothstagesasIincorporate:

12–Newsand

13–MultipleTimeFrames(MTFs)

Foundations-Overview

TheresultingTRADINGPLANisthecoreofmytrading,myTWCStrategyandmyTWCDailyAnalysisreports.

Foundations–Analysis(Pre-Entry)

The‘Analysis’consistsofthefollowingfoundations:

3–TrendLines,

4–DailyPivots,

6–ATR

Thesefoundationsmainlyassistmeinformingarealtimeviewofthemarket.Iwillworkthroughthesefoundationsbybuildingonanexamplechart,onewhereIcreatetheidealTradingWithConfluenceenvironment,simplytoaidthe‘teaching’process.

LET’SSTARTWITHTHE‘NAKED’CHART

1–Support&ResistanceIsometimessimplyrefertothisasSRandthisiswhereitallstarts.Fromthemorninganalysistothetradeentry,everythingrevolvesaroundSupport&Resistance.Thisiswhatthebigbanksandinstitutionsrefertoas‘value’.Support&Resistanceiswhereaspecificmarketis

givenavalueandarisk(longorshort).Dependingonwherethisvalueisplaced,willbewhereweoftenseeSupport&Resistancelevelsandzones.

Herewecanseethatthe1.4000levelwasResistance(nolessthan5times)onthewayupandhas,sincebroken,providedSupport.Thisisoftenthecase,asthesayinggoes,previousResistanceoftenbecomesSupportandviceversa.

2–FibonacciRetracementsFibonacciretracementsformpartofthe‘marketcycle’.Fromthemonthlydowntothe1minutetimeframeyouwillfindFibonacciretracementseverywhere.AllFibonacciretracementsfrom23.6%,38.2%,50%,61.8%arevalidlevelsthatIusetoderiveareasofpotential

Support&Resistance.

Confluence–Herewecanseethatthe50%Fibonacciretracementlevelat1.3999tiesinwiththeSupport&Resistancelevelat1.4000.

3–TrendLinesIuseTrendlinesacrossMultipleTimeFramestogenerateanopiniononmarketdirection,bothimmediateandlongterm.IusethemtoonceagainidentifyareasofSupport&Resistance,wherethemarketmayreverse.

Confluence–HerewecanseethattheTrendlineislookingatprovidingsomeformofsupportanywherefromthearea1.3985to1.4020.Dependingontimingitcouldtieinwiththe50%Fibonacciretracementlevelat1.3999andtheSupport&Resistancelevelat1.4000.

Lookingatthisfroma‘confluence’stateofmind,

wecanalreadyseeSUPPORT

LEVELSworkintandemwithatrendline.TradingWithConfluenceanyone?

4–DailyPivotsTheDailypivot(PP)willconsistentlyofferalevelofinterestforme.Idonotonlyuseittojudgecurrentmarketsentimentanddirection,buttoalsoidentifypotential‘bounce’areas.IalsoobservetheassociatedDailyPivotSupportandResistancelevels1,2and3.

Confluence–HerewecanseethattheDailyPivotSupport1(S1)levelat1.3997tiesinwiththe50%Fibonacciretracementlevelat1.3999andtheSupport&Resistancelevelat1.4000.Itcouldalso,dependingontiming,tieinwithourTrendline.

5–BigRoundNumbersMarketswilloften‘respect’BigRoundNumbers(BRNs),e.g.1.6700,0.9000,etc.Oftenthemorezero’stheyhavethemorerespecttheycommand.Thus0.9000willcommandmorerespectthan1.2300.

TheseBigRoundNumbers

oftenprovidesomeformofSupport&Resistance.

Confluence–BycoincidencetheBigRoundNumber(BRN)onourcharttiesinwiththeDailyPivotSupport1(S1)levelat1.3997,the50%Fibonacciretracementlevelat1.3999andtheSupport&Resistancelevelat1.4000.Itcouldalso,dependingontiming,tieinwithourTrendline.

6–ATRATRstandsforAverageTrueRangeanditisamuchunderutilisedfoundationthatmanypeoplefailtoacknowledge.

Let’ssaysomeonetoldyouthatthereisagreatpre-tradingwaytoidentifyanexpectedmarketmovementinPIPs,youwouldthinkthey

arecrazy!Well,withATRyougetexactlythat.Ipersonallyusethepast10daystradingperiodandtaketheaveragemovementofthemarketduringthisnumberofdays.ThisgivesmeafairindicationofhowfarIcanexpectthemarkettomovetoday.

Whenusedinconfluencewithotherfoundationsthe

ATRcanreallyhelpmeidentifykeyreversalsinthemarkets(whereitmaybecomeexhausted).

Seeadditionalexampleattheendofthisbook.

Analysis(Pre-Entry)FoundationsSummary

Wejustcoveredthefollowingfoundations:

3–TrendLines,

4–DailyPivots,

6–ATR

AsyoucanseebystartingwithSupport&Resistanceandworkingourwaythroughtheotherfoundationsweareabletoquicklyandeffectivelyformarealtimeviewofthismarket.Thisallowsus,byusing

confluence,toidentifypotentialareasofSupport&Resistance(zones)forpotentialtradeentries.

Foundations–Trigger(Entry)

The‘Trigger’consistsofthefollowingfoundations:

7–ChartPatterns,

9–Stochastics,

11–Divergence

ThesefoundationsmainlyassistmeinformingaTradingplan(atechnicaloutlookofthemarket).

OnceagainIwillworkthroughthesefoundationsbybuildingontheexamplechartfrombefore,wherewehavecreatedtheidealTradingWithConfluenceenvironment,simplytoaid

the‘teaching’process.

Pricehasnowbeenrolledforwardsothatwecanobservethe‘Trigger’foundationsinaction.

7–ChartPatternsA‘Doubletop’anda‘Doublebottom’aretheprimarychartpatternsIfocuson.Bothprovideacluetopotentialmarketrejectionareas.Theyaresimpletospotandtheyareleadingindicators,soprovideastrongweightingforbothanalysisandpotentialtradeentries.

Herewecanseethe‘Doublebottom’Chartpattern.

Note:Ifyoudohaveagoodknowledgeoffurtherchartpatterns,thenpleaseincludetheseintoyourowntrading,astheywillcertainlynothinderyou.

8–CandlestickPatternsDespitetherebeinganumberofcandlestickpatterns,IhaverefinedmyknowledgetofocusonaHammer(bullishmove),andaShootingstar(bearishmove)askeysignalsformarketdirection.Candlesticksareusedforbothimmediatedirectionandforpotentialentries.Longer

timeframesoftenprovidemorereliablesignals.

Herewecanseethe‘Hammer’Candlestickpattern.

9–StochasticsTherearemanyindicatorsouttherebutmypersonalpreference,afterusingthemforover10years,istouseStochasticsandBollingerBands(seethenextsection).However,anythatsuitYOUasatradercanbeusedsolongasyoulooktousetheminconfluencewithotherfoundations.

IuseStochastics(andBollingerBands)todeterminepotentialreversalareasinthemarket.Stochastics(andBollingerBands)weredevelopedtoidentifypivotpointsinthemarket,aswellasareasforpotentialexpansion.Theyofferaquickvisualofwhatthemarkethasbeenandiscurrentlydoing.Forbothanalysisandlivetrading,for

me,thesearecrucialtools.

HerewecanseetheStochasticin‘Oversold’territoryindicatingapotentialreversalareainthemarket.

IusetheStochasticsettings(14,5,2)andconsiderOversoldbeinglessthan20andOverboughtasgreaterthan80.

10–BollingerBandsAsmentionedabove,BollingerBandsistheotherindicatorIusetodeterminepotentialreversalareasinthemarket,byobservingpriceinrelationtotheUpper/Lowerbands.

HerewecanseetheLowerBollingerbandhasbeenpiercedindicatingapotentialreversalareainthemarket.

IusetheBollingerBandsettings(18,2).

11–DivergenceThelastfoundationIconsiderisdivergence.Divergenceprovidesanindicationthatpriceandanindicator(IuseStochasticsastheyarealreadyonmychart)areoutofsyncthusthereispotentialforacorrectioninthemarket.

Herewecanseeanexampleof“hiddenbullishdivergence”.

Trigger(Entry)FoundationsSummary

Wejustcoveredthefollowingfoundations:

7–ChartPatterns,

9–Stochastics,

11–Divergence

Beingawareofandapplyingthesefoundationsinconfluencemeans:

Wecanformatechnicaloutlookofthemarket,Anticipatepotentialentries

andVerifytheminreal-timeasandwhenthey‘trigger’

AswehavecreatedtheidealTradingWithConfluenceenvironment,simplytoaidthe‘teaching’process,herewecanseeallthe‘Trigger’foundationscomingtogether.

Foundations-Awareness

‘Awareness’assistsinbothstagesasIincorporate:

12–Newsand

13–MultipleTimeFrames(MTFs)

Intomyplan.

12–NewsJustviewNFP(NonFarmemploymentfigures)onthefirstFridayofeverymonthandyouwillseewhyNEWSissomethingwhichshouldalwaysbeconsidered.HerewecanseeSupport&Resistancehavingnomeaningduringthisnewsannouncement(a100PIPmove).Pleasealsonotethat

theBigRoundNumberwas‘ignored’bythemarkettoo,notimetoTradeWithConfluence!

MypersonalopinionistoavoidtradingaroundhighimpactNEWSareas(atleasthalfanhoureitherside).Thatsaid,IdouseNEWStoprepareforpotentialmomentumthatitcanbringtothemarket.

IalwayscommentonNewsinmyTradingplanandincludereferencetoitintheTWCDailyAnalysisreport.

13–MultipleTime-Frames(MTFs)TradingWithConfluencewouldbeincompletewithoutincludingMTFanalysis.Asimpleglanceacrossmultipletimeframes(Iuse3)offersacompletelydifferent,indepthmarketprofile.

Thinkofasingletimeframelikea1mpcameraorsimply

anoldstylewebcam.Picturesarepixelatedwithlittlecolourandsharpness.Nowaddinothertimeframes(thelatestdigitalDLR20mpcamera)andweseethingswecouldn’tdreamofseeingacrossthatsingletimeframe.Couplemarketfoundationsacrossmultipletimeframesandwegethighprobabilitytrades,timeaftertime.

IpayconsiderationtothefollowingfoundationsontheDaily,4Hourand1

Hourtimeframesasindicated:

1–Support&Resistance(ALL)

2–FibonacciRetracements(ALL)

3–TrendLines(ALL)

4–DailyPivots(1hour)

5–BigRoundNumbers(1hour)

6–ATR(1hour)

7–ChartPatterns(ALL)

8–CandlestickPatterns(ALL)

9–Stochastics(ALL)

10–BollingerBands(ALL)

11–Divergence(ALL)

Lookingatthesefoundationsindividuallyoranytimeframeindividuallynevergivesyouthe‘full’marketview.But,bringthemtogether,and,asyouwillsee,youstarttoseetherealreasonbehindmarketmovements.

Remember:Donotgetcaughtupinlookingfora‘perfectsetup’butdobeawarethatgoodmoves

(profitableones)willalmostalwaysoccurwhentherearemultipletradingfoundationsworkinginconfluenceacrossmultipletimeframes.

IoftencommentonMTFsinmyTradingplanandincludereferencetothemintheTWCDailyAnalysisreport.

ItAllCameTogether

Obviously,asmentionedaboveIcreatedtheidealTradingWithConfluenceenvironment,simplytoaidthe‘teaching’process.Thisishowitallcametogether.

Seehowweusedconfluence.Our‘Analysis’includedtheconfluenceofourSupport&Resistance,FibonacciRetracement,TrendLine,DailyPivotandBigRoundNumberfoundations.Our‘Entry’includedtheconfluenceofourChartPattern,CandlestickPattern,Stochastic,BollingerBandandDivergencefoundations.

Ofcourseintherealworldwewouldalsohavepaidattentiontoour‘Awareness’foundations,NewsandMultipleTimeFrames(MTFs).

Note:OntradeslikethismytypicalStoplossisabout10–20PIPsandmytypicalTargetis20–30PIPs,aimingforausual1:1.5Risk:Rewardtradeprofile.

AdditionalExample

Inthisexampleweseeadifferentkindofreversalandadifferentsetoffoundationsmakingupourconfluence.

Our‘Analysis’thistimeincludestheconfluenceofourDailyPivot(atS2(0.8905)),BigRoundNumber(at0.8900)andATR(extension)(at0.8902)

foundations.

Our'Entry'thistimeincludestheconfluenceofourCandlestickPattern,Stochastic,BollingerBandandDivergencefoundations.

And,hereishowitallcametogether.

Onceagain,Iwillmentionthatintherealworldwewouldalsohavepaidattentiontoour‘Awareness’foundations,NewsandMultipleTimeFrames(MTFs).

Note:Also,withtradeslikethis,again,mytypicalStoplossisabout10–20

PIPsandmytypicalTargetis

20–30PIPs,aimingforausual1:1.5Risk:Rewardtradeprofile.

Remember,asamember(it’scompletelyFREE)ofForex

Useful(http://forexuseful.com/),youwillbeabletodownloadandprintthe3strategiesinthisbookandyouwillalso

haveaccessto:

Viaournewsletter,FREEweeklyupdatesontheTradingWithConfluenceStrategyandallotherstrategiesin

thisbookFREELive

Mondaymorning)

releasesincludinglaunchanddiscountoffers,beforeanyoneelse!

TounderstandandimplementthestrategiesdefinedinthisbookobviouslyrequiresatleastsomebasicknowledgeofForexandCurrency

Trading.ThoseneworevenrelativelynewtotradingmayfindmybookForexFor

Beginners–AnIllustratedIntroductionToCurrency

Tradingofinterest.

ThoseofyouconsideringtradingBinaryOptionsyoumayalsofindmyotherbook

BinaryOptions–AStrategyGuaranteedToBeatTheBrokersIn15MinutesFlat,ofinterest.

Ireallyhopeyouenjoythisbookandifyoudothenpleasedotakethetimetoleaveareview,ittakeslessthanaminuteandyour

feedbackispersonallyappreciatedbyme.

JonMcFarlane

ForexUseful

(http://forexuseful.com/)

TableofContents

AboutThe3LittlePigsTradingStrategyThePriceActionSwingTrading(PAST)StrategyTradingWithConfluence–TheFoundations

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