forex trading strategies -...
TRANSCRIPT
ForexTrading3ProvenStrategiesYouCanStartUsing
Today
ByJonMcFarlaneCo-Authors;NigelPriceand“Forex”
John
http://forexuseful.com/
DISCLAIMERTradinganyfinancialmarketinvolvesahighlevelofriskandmaynotbesuitableforeveryone.Youshouldonlytradewithmoneyyoucanaffordtolose.Youshouldfullyunderstandtherisksinvolvedinanyformoftradingandbewillingtoacceptthem.Thecontent
withinthisbookisprovided
forgeneralinformationalpurposesonlyandnopartofitshouldbeconstruedas
advice,investment,financialorotherwise.
Thisbookisnotintendedfordistributionto,oruseby,any
personorentityinanyjurisdictionorcountrywhere
suchdistributionorusewouldbecontrarytothelaworregulationorwhichwould
subjectthepublishertoanyregistrationrequirementwithinsuchjurisdictionor
country.
Thisbookmaycontainlinkstoexternalwebsites.Thepublisherisnotresponsibleforanycontentofthose
websites.
Althoughduecareandattentionhasbeentakeninpreparingthisbook,the
publisherdisclaimsanyliabilityforanyinaccuracies
oromissions.
Byreadingthisbooktheuseracceptstheseconditionsandagreesthatthepublishershallinnowaybeliableforanylosscausedeitherdirectlyorindirectlyasaresultofusing
anypartit.
COPYRIGHTNopartofthisbookmaybereproducedinanyformwithoutpermissionin
writingfromtheauthor.Reviewersmayquotebrief
passagesinreviews.
Copyright©JonMcFarlane2014
ForexUseful-http://forexuseful.com/
TABLEOFCONTENTS
AboutThe3LittlePigsTrading
StrategyThePriceActionSwingTrading(PAST)StrategyTradingWithConfluence–
TheFoundations
About
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
By
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
ThisreflectstheAverageClosingPrice
DuringtheLASTMONTH–GiveortakeadayortwoTheMEDIUMTERM
TRENDcanbeconsidered:
UPifpriceclosesabovetheAmber
SMA(21)DOWNifpriceclosesbelowtheAmberSMA(21)
The3rdLittlePigusesAGreenSMA(34)onthe4
Hourtimeframe
ThisreflectstheAverageClosingPrice
DuringtheLASTWEEK–GiveortakeanhourortwoTheSHORTTERMTREND
canbeconsidered:
UPifpriceclosesabovetheGreen
SMA(34)DOWNifpriceclosesbelowtheGreenSMA(34)
BuyingStrategy–The1stLittlePig
The1stLittlePigMUSTconfirmthat
TheLONGTERMTRENDisUP
PricemusthaveclosedaboveitsAverageClosingpriceduringtheLASTYEAR
ItmusthaveclosedabovetheRedSMA(55)ontheWeeklytimeframeToconfirmthat:TheLONGTERMTREND
isUP
BuyingStrategy–The2ndLittlePig
The2ndLittlePigMUSTconfirmthat
TheMEDIUMTERMTRENDisalsoUP
PricemusthaveclosedaboveitsAverageClosingpriceduringtheLASTMONTHItmusthaveclosedabovetheAmberSMA(21)ontheDailytimeframeToconfirmthat:TheMEDIUMTERMTRENDisalsoUP
BuyingStrategy–Confirmation
TheLONGTERMTRENDandtheMEDIUMTERM
TREND
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
Pig.
NOTE:Sometimesthisisthecase,theLONGTERMTRENDisconfirmedaftertheMEDIUMTERMTREND,sometimesthe
MEDIUMTERMTRENDconfirmsfirst(seeSellingexamplelater).Itdoesnotmatterwhichwayround
theconfirmationoccursjustaslongasbothare
confirmedbeforelookingforBuying/Sellingopportunities.
BuyingOpportunities–The3rdLittlePig
IMPORTANT!
TheLONGTERMTRENDandtheMEDIUMTERM
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
TheLONGTERMTRENDandtheMEDIUMTERM
TREND
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!
TheLONGTERMTRENDandtheMEDIUMTERM
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!
Stops
Ofcoursethesearejustsuggestions,othersuggestionsinclude:
AFixedStop,e.g.50PIPs
Anadditionalindicatorcanbe
used,e.g.ParabolicSAR,Bollingerband...
Thefactis...
StopmanagementisDISCRETIONARY...
Itwillbedependentonyourpersonalexperience,
circumstancesAndattitudetorisk
ItmeansYOUchoose!
Targets
Fixed
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...
Itwillbedependentonyourpersonalexperience,
circumstancesAndattitudetorisk
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
marketsessions(usuallyevery
Mondaymorning)
Aswellasaccesstotheproducts,updatesand
sessionsyouwillalsobeinformedoffuturebook
releasesincludinglaunchanddiscountoffers,beforeanyoneelse!
Nextup,ThePriceActionSwingTrading(PAST)StrategybyNigelPrice...
ThePriceActionSwingTrading(PAST)Strategy
ImproveyourForexFuture
LearntoTradethe
PAST!
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
too.
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)
Aswellasaccesstotheproducts,updatesand
sessionsyouwillalsobeinformedoffuturebook
releasesincludinglaunchanddiscountoffers,before
anyoneelse!
Nextup,TradingWithConfluence–TheFoundationsby"Forex"John...
TradingWithConfluence–
TheFoundations
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:
1–Support&Resistance,
2–FibonacciRetracements,
3–TrendLines,
4–DailyPivots,
5–BigRoundNumbersand
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:
1–Support&Resistance,
2–FibonacciRetracements,
3–TrendLines,
4–DailyPivots,
5–BigRoundNumbersand
6–ATR
AsyoucanseebystartingwithSupport&Resistanceandworkingourwaythroughtheotherfoundationsweareabletoquicklyandeffectivelyformarealtimeviewofthismarket.Thisallowsus,byusing
confluence,toidentifypotentialareasofSupport&Resistance(zones)forpotentialtradeentries.
Foundations–Trigger(Entry)
The‘Trigger’consistsofthefollowingfoundations:
7–ChartPatterns,
8–CandlestickPatterns,
9–Stochastics,
10–BollingerBandsand
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,
8–CandlestickPatterns,
9–Stochastics,
10–BollingerBandsand
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
marketsessions(usuallyevery
Mondaymorning)
Aswellasaccesstotheproducts,updatesand
sessionsyouwillalsobeinformedoffuturebook
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