How to Build your Trading Watchlist Table of Contents

Transcription

1

2 Table of Contents Risk Warning... 1 We ve All Been There... 2 Why Do you Need a watchlist?... 2 Starting Where you Have an Edge!... 2 Find the Dominant Psychology in a Pair... 3 Understanding Directional Bias... 4 Market Memory or Look Back... 5 Trend Following and Time Frame Selection The Power of the 34EMA Wave!... 11

3 Risk Warning Trading Foreign Exchange and other Derivatives involves a significant and substantial risk of loss and may not be suitable for everyone. You should carefully consider whether trading is suitable for you in light of your age, income, personal circumstances, trading knowledge, and financial resources. The information in this material and the links provided are for general information only and should not be taken as constituting personal investment advice. Only true discretionary income should be used for trading Foreign Exchange and Derivatives. Any opinion, market analysis, or other information of any kind contained in this material is subject to change at any time. All trade ideas and trading scenarios found in this material are hypothetical. Past performance is not necessarily indicative of futures results. Nothing in this material should be construed as a solicitation to trade Foreign Exchange or Derivatives. If you are considering trading Foreign Exchange or Derivatives, before you trade make sure you understand how the markets operate, understand how ThinkMarkets is compensated, understand the ThinkMarkets trading contract rules, and are thoroughly familiar with the operation of and the limitations of the platform on which you are going to trade. A Financial Services Guide (FSG) and Product Disclosure Statement (PDS) for these products is available from TF GLOBAL MARKETS (AUST) PTY LTD by ing compliance@thinkmarkets.com. The FSG and PDS should be considered before deciding to enter into any Derivative transactions with TF GLOBAL MARKETS (AUST) PTY LTD. The information contained in this material and on the ThinkMarkets website is not directed at residents of any country or jurisdiction where such distribution or use would be contrary to local law or regulation TF GLOBAL MARKETS (AUST) PTY LTD. All rights reserved. AFSL ABN Please note: ThinkMarkets does not service US entities or residents.

4 We ve All Been There Most of us have experienced the whipsaw, the correction that keeps on going, high volatility, and the painful contrarian trade. And for many traders that is the sum total of their trading experience: Frustration and confusion. What if I told you it needn t be that way, that with a handful of indicators I can show you how to understand why trades go wrong and to reduce that helpless feeling? I can. My name is Raghee Horner and I have been trading for over twenty years. I have traded stocks, options, futures, and forex and have seen it all and suffered through many of the same things that may be troubling you now. There s no magic bullet but there are better ways to select and prioritize your trades and increase your winning percentage so let s get to it. Why Do you Need a Watchlist? Coming from a background of nearly a decade of trading futures and stocks, it s not so long ago that my mornings were filled with endless scans: Scans for the biggest percentage moves, scans for overbought and oversold markets, scans for price breaks through a 50 or 200 day moving averages. This was all in an effort to whittle a mammoth list of potential symbols to trade into a management and focused watchlist. This is initially why trading the foreign exchange market was so appealing; my world consisted of anywhere from six to seven, maybe eight pairs. Soon however this focus became limiting as I realized that while different individual currency stories played out, I was missing opportunities. Naturally I began to expand my watchlist and as a result it began to lose focus. I found that a longer watchlist wasn t necessarily a productive thing and I began to see that my focus was my edge. I began to consider why a pair was on my watchlist to begin with. I shifted my criteria: A pair had to offer me an edge to be on my watchlist; it had to earn a spot on the list. But with what criteria? This process had to be simply, fast, and straightforward as to not distract or slow down my process of setting up actual trades. Starting Where you Have an Edge! Starting with pairs where you have an edge is the first step. Keeping with the idea that the filter I want to use must be equally as fast as it is effective I kept with the notion that the dominant psychology of the market is the market TREND that will be most agreed upon. The simplicity in that is the fact that the daily chart is the most viewed time frame across all market participants and therefore that trend - the daily trend - is the one that most trades will agree is the dominant psychology or trend.

5 My process for creating a watchlist became very simple: I would identify whether the daily chart had an up or down trend and then include that pair on my list of symbols to consider for a trade. Now let me mention this: Just because I am using the daily chart does NOT mean that is the time frame I will ultimately trade, it simply is a means of looking a market with ideal price action organization. Think about it this way: If most (it s never all) market participants agree that the daily chart is in an uptrend, it then increases the likelihood and expectation that moves lower are corrections and the floors that these corrections test will likely be supported and bought into. Uptrend increase the expectations for higher highs and when a market is in an overall (dominant) uptrend, traders also tend to gravitate towards the positions fundamentals in the market. There is a bias that a trend creates in a market and that s why I identify a trending daily time frame as having Directional Bias. I call my main list of pairs to scan and trade my D.B. Watchlist. D.B. of course stands for Directional Bias and therefore my list of pairs is made up solely of pairs that are trending on their respective daily time frames. This keeps me focused on those specific pairs that have what I call Market Clarity. I will get into what that is and how I measure that in a moment. Find the Dominant Psychology in a Pair This is where the Directional Bias concept meets the chart. I will now share with you a tool that I have been using since I basically developed it. It s called the 34EMA Wave and it is comprised of three exponential moving averages. Why exponential moving averages? Most simply put, this weights the most recent price action more heavily than older price action. In a simple moving average, all the prices (for example all the closes in a simple moving average calculated on the closing price) are weighted equally. I prefer to place more emphasis on what has most recently plotted on the chart. The setting I use is based on 34 periods so this means that I would be calculating the exponential moving averages on the last 34 days on a daily chart or the last 34 five- minute candles on a five- minute chart. Why 34? It s a Fibonacci number and as a believer in the power of Fibonacci as applied to the way in which things in nature expand and contract, I believe there is application in the financial markets since it is a reflection of human nature. The last part of putting together the 34EMA Wave is the three exponential moving averages themselves. I use three because it plots a wider footprint on the chart and gives me more

6 insight into the area in which price action could be accelerating, decelerating, stalling, and/or reversing. I don t believe price action always necessarily turns on a dime. The 34EMA Wave is plotted on a chart by inserting three separate exponential moving averages (EMA): The 34 period EMA on the high The 34 period EMA on the close The 34 period EMA on the low These three lines will move higher, lower, and sideways with price action but will also allow you to more consistently and objectively identify the underlying market trend on any time frame, which of course includes the Directional Bias (D.B.). There is a process to follow to find the D.B. easily and correctly every time. Understanding Directional Bias Subjectivity is the bane and blessing of discretionary traders and unless you are using a system to trade, you are to some varying degree a discretionary trader. But let me add, at some point even the most dedicated systems trader had to have and explore discretionary ideas that eventually became systematized. These ideas had guidelines and rules and it s these rules and discipline that discretionary traders can learn from as they build their methodology. And yes, a discretionary trader should have a methodology; it s the difference between having a system and being systematized. I prefer the former, which is to say that I have a system or methodology but I do not mechanize it or systematize it, rather I will execute it at my discretion when I want to and on which pairs I want to. I do not want to deviate from that system - that is not what discretionary trading means. The goal for a discretionary is to use their discretion to identify when their trading approach or a particular strategy would be best applied. So for me there are two parts to being a discretionary trader. 1) I determine which pair(s) I will look to trade. 2) I determine which strategy applies to the pair. This all starts with Directional Bias. Since I have the three lines of the 34EMA plotted on my daily chart I can look to it to help me determine not just the trend but also the CLARITY of the trend which takes into consideration the volatility, the length, and the strength of the trend. The goal is consistency and objectivity so there are guidelines to this process. It starts with how much data I have on the chart.

7 Market Memory or Look Back I find it interesting that traders don t always have a set amount of data on their chart for each time frame. Since the time frame for determining Directional Bias is the daily, let s discuss that look back now. Any time I begin analyzing a daily chart I will begin with a one- year view, 52 weeks, at a minimum. From this view I will view the dominant trend of the past year, the 52- week high, low, significant rallies and declines, trend lines, and the angle of the 34EMA Wave. The last part, the angle, is of course by it s very nature subjective because I am using moving averages and the angle at which they are moving. This angle is more consistently determined by using the same look back each time I view a daily chart with the 34EMA Wave. The angle can better be described with the term clock angles. I call these clock angles because I literally imagine what angle the trio of moving averages are making as it would line up with the right side of a clock face. (e.g. one, two, three, four, five, and six o clock) Once you have the daily time frame chart you are looking at filled with one year of price action, look at the angle at which the three lines of the 34EMA Wave are travelling. Imagine that it is the hour hand of a clock. What time is it pointing at? If the 34EMA Wave is travelling at between twelve and two o clock then it is in an uptrend. If the 34EMA Wave is travelling at between four and six o clock it is in a downtrend. If the 34EMA Wave is flat it s a three o clock angle and is consolidating. Finally, if the 34EMA Wave is not steep enough to be a twelve to two or four to six o clock angle and not flat enough to be a three o clock angle, it s a two to four o clock which is a non-trending, choppy, congestion. That is like a warning sign to price action organization. In fact, if all you were to get out of this section was to AVOID pairs that have daily charts moving in a two to four o clock 34EMA Wave, that would be reason enough to use this tool! Here are three examples: This is the daily NZD/JPY trending higher in a twelve to two o clock 34EMA Wave uptrend.

8 This is the daily GBP/USD trending lower in a four to six o clock 34EMA Wave downtrend

9 This is the daily USD/CAD moving in a narrow, sideways range (consolidating) in a flat, three o clock 34EMA Wave angle.

10 Notice that the individual candles on the chart are not necessarily in a comfortable view and separation for your eyes. Don t worry. Once you have taken some key information about what you see from this vantage point, you are free to expand the chart and look at less price action. Do take note of touch points for trend lines, support, resistance, gaps, perhaps chart patterns if you are a pattern trader, and again be sure you take the 34EMA clock angle reading; too much price action can artificially steepen the angle of the 34EMA Wave while too little data can flatten it out distorting the real market trend of the time frame and therefore giving you an incorrect Directional Bias reading! One last set of questions I would also like you to ask while the daily chart is in the market memory or look back view of one year is concerning the way in which the 34EMA is moving. This is called determining the MARKET CLARITY. Are the lines of the 34EMA Wave smooth? Are the lines of the 34EMA Wave established? (Or for how long has it been moving in the most current clock angle?) Are the lines of the 34EMA Wave being respected as support or resistance on pullbacks or bounces - this depends of course on whether there is an UP or DOWN trend on the chart. Once you have asked and answered those three questions, you now know the volatility of the market, how long the trend has been in place (if at all!), and whether the corrections are organized. Again, you have asked the questions that will answer whether you have clarity in the price action hence Market Clarity. This goes hand- in- hand with Directional Bias. If D.B. tells you what the trend is (if any) in the market, then Market Clarity tells you the quality of that trend. This is the NZD/CAD daily chart trending higher in a twelve to two o clock angle however it is important to notice that the uptrend has pierced the 34EMA Wave on one occasion with a wick that broke the 34 period EMA low and notice the shaky (lack of smoothness) nature of the 34EMA Wave itself; this reflects a higher amount of volatility and lack of price action organization.

11 On the other hand, notice the Market Clarity quality of the following trend which has a smooth 34EMA Wave, respect on pullback to the 34EMA Wave, and is established (it has been moving at the current clock angle for long enough to make the overall or dominant opinion of the market more obvious). Each pair you are considering trading must go through this process and if the pair is not trending (up or down) in a twelve to two or four to six o clock angle, leave it off your watchlist.

12 Trend Following and Time Frame Selection I will now share with you another reason to understand Directional Bias and use the 34EMA Wave to help determine which pairs are moving in up or down trends. It s about understanding intraday time frame selection. Remember that even though we are starting off our analysis with the daily chart, we may not even be trading this time frame. This analysis is primarily used to determine whether there is a dominant psychology at work in the pair. It also defines for us what constitutes a trend following intraday trade and a counter- trend trade. This isn t just trading lingo it s the difference between going with the (price action) flow of the market or fighting the dominant opinion of the market. Trend following is like floating with the flow of a river - while counter- trend trading is like trying to swim against the flow! You may be able to swim upstream for a short while, but eventually (and most often) you will exhaust yourself and succumb to the flow of the water. Time frame selection therefore becomes much easier when you understand the flow. In an uptrend, going long or buying is trend following just like in a downtrend, shorting the market is trend following. That is not to say that there are not strategic times that a counter- trend trade can be successful, it s just that these trades should ideally be nimble and executed on a shorter- term intraday time frame. For example, if the daily is in an uptrend. Feel free to look for buy entries across any time frame; you are trading with the Directional Bias and overall, dominant psychology However if the market begins to correct, there will often be opportunities to take shorter- term entries that are counter- trend. Be sure to focus on the five, 15, or 30- minute time frames for these counter- trend entries. Remember that you are swimming against the flow. By staying nimble and not committing to longer- term, counter- trend trades you will avoid fighting the stronger forces of the market which are working with a clear, defined trend. You know what the clear, defined trend is because you will have already determined the market clarity of the 34EMA Wave s clock angle!

13 The Power of the 34EMA Wave! While these examples have focused on the way in which the 34EMA Wave is used on the daily time frame thus also showing the Directional Bias of that pair, the 34EMA Wave can also be used on intraday time frames to reveal the trend on shorter- term charts. The trend (or lack of trend) on intraday charts can reveal trend- following entries (trades that follow the Directional Bias on the daily) and counter- trend entries (trades that go against the Directional Bias on the daily). In this way a trader can better understand their entry within the overall psychology of the market. For example, to follow a trend is to trade with the flow of the market and the widest held opinion of the market s movement. In this way a trade can choose to trade counter- trend trades on only the shorter- term, more nimble time frames. Traders can also choose to not trade markets that do not have a clear trend and thus avoid the choppy, non- directional movement of range bound markets. Conversely traders who look to capitalize on range- bound markets and the price action exhaustion at the extremes of range can more accurately identify when that approach is more likely to be successful.