Multi Indicator Usage Concepts 4/1/2012 Brooky-Indicators.com Brooky

Transcription

1 Multi Indicator Usage Concepts 4/1/2012 Brooky-Indicators.com Brooky

2 U.S. Government Required Disclaimer Commodity Futures Trading Commission Futures, Currency and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don t trade with money you can t afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results. CFTC RULE 4.41 HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR- OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN. All information on this website or any e-book or software purchased or downloaded from this website is for educational purposes only and is not intended to provide financial advice. Any statements about profits or income, expressed or implied, do not represent a guarantee. Your actual trading may result in losses as no trading system is guaranteed. You accept full responsibilities for your actions, trades, profit or loss, and agree to hold and any authorized distributors of this information harmless in any and all ways (c) Copyright All Rights Reserved Page 2

3 Introduction Many traders have downloaded and used Brooky-Indicators in a vast variety of ways to form either a basis of or to supplement an existing Trading strategy. The level of competence of the individual trader also varies from fresh to the game to seasoned professionals and every stage in between. Nothing can replace experience, especially bought experience; however a common sense approach from the beginning can assist in a positive outcome. Without rewriting the entire trading almanac, presented here are powerful combination concepts that can be fine tuned into a trading strategy with correct application of money management and timing. The indicators used are all Brooky-Indicators that have been constructed to easier see the data that is presented, though standard indicators can also be used. After reading the document, the aim is to empower you with the ability to see that 1) There are Higher Probability setups that appear with PATIENCE. 2) There are distinct zones that are easy to define with practice that often yield similar outcomes. 3) That confirmation between indicators that show data in a different way are far superior than single indicator strategies or a strategy that has 3 trend indicators and no power indicator. The indicators that will be used in the explanations are as follows. 1) stdonchian Designed to show Levels that price has attained ( standard equivalent are Donchian Levels ) onto which is plotted an oscillator that regards the top stbands level as 100 and the bottom band as 0. (Standard equivalents are Stochastic and RSI as a combined data point.) If you do not have stdonchian, you can obtain it at 2) Colored RSI with Moving Average- Designed to easier see the movements of Relative Strength with color coding and a smoothing moving average to gauge general direction. Besides the obvious overbought oversold indications, it is included in this mix because it has an ability to show divergence well. (Standard equivalent is the RSI indicator). If you do not have the enhanced version, you can obtain it from 3) Brooky Enhanced ADX Designed to show the power of any move. All moves have a period of consolidation prior to going up or down. This can either be a continuation of a trend or a reversal. The ADX will serve as a filter to differentiate if the market is ranging or trending. The enhanced version makes the ADX much simpler to read than the standard. (Standard equivalent is the ADX indicator). You can obtain the enhanced version at Page 3

4 Indicator Selection Criteria The indicators mentioned previously have been selected to fulfill distinct roles and that is because we want to see the data presented to be useful as confirmations between each other. The basics we want to see are Levels Where has Price been and where is it going to. Both historic and actual price levels need to be calculated and presented so that depending on your trading timeframe, you have some concept of where the market has been and where it might go to. These levels can be calculated in a myriad of ways from Gann to Fibonacci, longer moving averages and pivot levels. All are perfectly valid within relevant strategies. We have chosen to use Donchian channels that plot the highest highs and lowest lows over a period of time because they can serve both purposes of having historical levels to gauge against as well as current price movements. They also fit in particularly well in confirming supply and demand levels. Power Has the move got any sustaining power to get to a level. Any trend runs out of strength at some point or other. The ADX (Average Directional Index) in conjunction with it s built in DMI (Directional Movement Indicator) is an excellent combination that can assist in gauging whether or not the market is in a trend, consolidation or ranging phase. This is vital as oscillators often show overbought in an uptrend or oversold in a downtrend, and a blanket approach of selling an overbought or buying an oversold area (catching the knife) just on a single oscillator s information is fraught with danger. Momentum Has the move made lots of extremes HH or LL If you think of a momentum oscillator like a bobbing cork on a big ocean swell you can see why they are important. While the big swell may be building (eg: uptrend), there will be smaller wave movements on top that go up or down as the larger swell develops. The tops and bottoms of these smaller waves are what the momentum oscillators try to pick. If the power of the swell is still building, then you will try to pick the bottom of a smaller swell (ie: Oscillator under 50) and ride upwards with the larger swell. It is only on the top of the larger swell ( Market ranging) that the oscillators tend to behave as mean reverting indicators and actually turn on overbought and oversold directly. The momentum oscillators are used to try and identify these smaller market movements within a larger context. Page 4

5 Supply and Demand - Where are the buyers or sellers that missed the boat. These zones are not a preprogrammed indicator but are zones that are identified by the trader and drawn in with either a rectangle tool or a horizontal line. All of the above indicators have been selected so that we can confirm an entry around these zones. With practice these zones become quite easy to pick on any timeframe. In a simplistic sense, Supply zones are where there are willing Sellers and Demand zones are where there are willing buyers. The problem many new traders face without knowing it is that they are buying directly into a supply zone and selling at the point of a demand zone. It is their stops that the professional market uses to take the market in the direction that they really want it to go. The reason for that is often traditional moving cross indicators only ever show a signal at the point that the intended move has already completed. Supply and Demand is exceptionally well covered and we believe a vital learning curve that you can gain much more information on at where in conjunction with the online trading academy you can obtain much Free information as well as in depth professional information on supply and demand. Page 5

6 The Setup All commentary from now on will reference the following chart. It is setup on EURUSD M30 as that is a highly liquid pair and similar setups will be seen time and time again offering many trading opportunities. The settings for each indicator are presented as well if you want to replicate the setup. Page 6

7 Page 7

8 Page 8

9 The Detail Identify Zones The first step is to identify valid Supply and Demand zones. In general the beginning of a zone will be either at a stdonchian High extreme, Low extreme or the green centre between both. The zone is often characterized by a Very sharp pull away from a price point and is often at the top or bottom of a long candle. It is a point where there is an obvious rejection either by buyers or sellers to continue the current move any further at that point in time. The beginning of the two green demand zones and the reddish supply zones are atypical examples to look for. See Supply Circle 1 and the start on left of chart of the green Demand Areas. Validate Zones If we use the beginning of Supply Area A and the detail in the sub window 1s we can see that the Supply Area A could well be a good zone to trade a short in the future: eg Circle 2. There are a distinct lack of buyers at this price point (Circle 1) and the possibility that another round of sellers who missed the first selling opportunity at Circle 1 would want to go short at the next opportunity that price pulls back to that level is large. That is the wave that you want to also be short in. This is evidenced by a) A higher high was made at Circle 1 without ADX trending power. b) The stbands oscillator was near its stbands overbought area and price then did reverse. c) A clear divergence to that Higher High was seen in the RSI where actual price climbed higher than its last highest high yet the RSI in fact had a lower high. Bearish divergence. Once you identify zones that are within the time context of your chart plus a little history, you simply draw a rectangle across your chart capturing the high or low extreme and often the small candle next to it. These become your zones of interest for the next few days. Trading Setup If you opened the charts and had your Demand Areas A and B and Supply Area A drawn and the time was somewhere between Circle 1 and 2 there are two HIGH TRADE PROBABILITY opportunities that with PATIENCE will present themselves. Price at some point will (not might) either a) Attempt to go higher again and touch Supply Area A or b) Continue South to touch Demand Area B Unless you have a crystal ball, you should do nothing until either of these situations present themselves. Aggressive (experienced) traders will often place a Sell Limit order at the bottom of Supply Area A and a Buy Limit order at the top of Demand Area B with stops on the opposite sides of the zones. With practice you will possibly feel confident in doing this yourself in the future. Page 9

10 Crunch Time Assuming you have been patient, you will see that in fact buyers have taken the price up to the Supply Area A zone at the Circle 2 point. Now you need to make a decision. What are the indicators telling me? a) stbands oscillator is high into the Overbought bands area. ( Think Short) b) ADX is in a very low power area meaning that the oscillator signal carries high weight. ( Continue to think short) c) After a few candles have gone by at Circle 2, RSI is showing a higher high than at circle 1 yet price refuses to go higher. Hidden Bearish divergence.( More Short thoughts) d) There is still an untapped pool of buyers down at Demand Area B who are willing to take shorts off your hands if price goes down again enabling you to close your trades and profit.( Ok we are really thinking short now) e) Stop Loss if we were to go short would be at the top edge plus a few pips of Supply Area A and initial take profit would be at the centre stbands Area (Green Line) with the optimist trader placing a Take Profit at the Demand Area B top line plus a few pips. In either case, there is a very good risk reward ratio with reward being in excess of 3 times the risk. As you can see, the confirmation of a simple set of indicators with dynamic levels enables you to take a high probability short. Waiting for these high probability trades is worth every moment you wait for them. Crunch Time 2 Now that the market did in fact go short at Circle 2, we are presented with the exact reverse decision tree at Circle point 3, so let s approach the decision the same way as in above. a) stbands oscillator is low into overbought bands area and the bands are plotting higher lows. ( Think Long) b) ADX is now showing some power into the short move. That is problematic as sellers are still strong. We need to see a weakening to be sure. ( Think wait) c) RSI is heavily into oversold area but with ADX still showing short strength we need to see if it and the stbands oscillator continue north and show us a possible bullish divergence.( Think wait but longish possibility) d) This is the first opportunity the bulls that missed the long spike at the start of Demand Area B have had a chance to join in that upward movement. The Supply Area A has only been touched once at Circle 2 so there are still possibly some Bears who will take the longs off a Bull. ( Longish thoughts arise) e) Stop Loss is the reverse for the earlier short trade at Circle 2 and offers the same risk reward ratios so if we were to go long, money management gives the ok nod. f) A few bars further on we can in fact see weakening of shorts and once RSI breaks over 50 and ADX turns green, we have a HIGH PROBABILITY LONG that we can enter. Page 10

11 In Continuation The two trades outlined above are generally the highest probability in that it is the first revisit into a supply or demand area that often yields the best result. You will notice that as a zone is touched the third time ie: Circle 4 that there are less sellers available and that the retrace only goes as low as the centre of the stbands. The penetration was a little higher in circle 4 and this is typical of the market needing to go higher into the zone to find willing sellers. Exhaustion of that zone is taking place and the next time it is touched, you will find that it could well be breached and a new higher high is made or that only a small reversal occurs once the absolute top of the zone is reached. Generally it is advised for new traders to stay out of these Circle 4 and 5 point trades as the market can often turn these areas into tight consolidation zones before breaking out in any direction. And fake outs as new price zones are tested can prove costly. Different Timeframes etc The above example was all structured on M30 and EURUSD. The reason was that the M30 timeframe gives traders time to think and EURUSD has enough liquidity to satisfy most traders profit objectives and to sustain a move long enough to take reasonable profit without major retraces. With experience, all other timeframes offer exactly the same opportunities in exactly the same way. Larger timeframes do not always mean larger stop losses, though take profit areas can sometimes be many hundreds of pips away and trades can stay open for days weeks or months. Often new traders elect to go into the shorter timeframes at M15 or less. They are good for timing an entry, but most newbie s are shell shocked about the fast movements and emotions of missing the boat etc overtake sound trading practice. If all this is new to you, please work on demo accounts until you understand what and why you are trading the way you are and how profitable it is or is not. Page 11

12 Summary 1) Learn to spot and draw Supply and Demand Zones. 2) Use indicators that give information in different ways for confirmation. 3) Analyze consistently so that you can accurately track the results of your analysis or strategy. 4) BE PATIENT. There are better times and points to place trades than others. Overtrading will overdraw your account. I hope that these examples have enlarged your Forex experience and that you take the time to analyze and trade with a holistic approach. The market is not always the same every day and to be a truly discretionary trader that understands their own emotions, market dynamics and the outcome of that entanglement requires many years of hard earned experience. In the meantime a structured approach that allows some discretion may be a good starting point on the amazing adventure that Forex Trading can be. Regards Brooky. Page 12