[Pick the date] CURRENCY TRADING FOREX ARMAGEDDON. Steven Lee Jones Forex Trading Manuals

Transcription

1 [Pick the date] CURRENCY TRADING FOREX ARMAGEDDON Steven Lee Jones Forex Trading Manuals

2 DISCLAIMER While all attempts have been made to verify information provided in this publication, neither the author nor the Publisher assumes any responsibility for errors, omissions or contrary interpretations of the subject matter herein. This publication is not intended for use as a source of legal or financial advice. The Publisher wants to stress that the information contained herein may be subject to varying state and/or local laws or regulations. All users are advised to retain competent counsel to determine what state and/or local laws or regulations may apply to the user s particular business or personal circumstances. The purchaser or reader of this publication assumes responsibility for the use of these materials and information. Adherence to all applicable laws and regulations, both federal, state and local, governing investing in financial markets, professional licensing, business practices, advertising and all other aspects of doing business in any jurisdiction is the sole responsibility of the purchaser or reader. The author and Publisher assume no responsibility or liability whatsoever on behalf of any purchaser or reader of these materials. We expressly do not guarantee any result you may or may not get as a result of following our recommendations. You must test everything for yourself. Any perceived slight of specific people or organizations is unintentional. Before making an investment or trading decision based on the advice or material hereon, the recipient should consider carefully the appropriateness of the advice in light of his or her financial circumstances. This material is for informational & educational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. All market prices, data and other information are not warranted as to completeness or accuracy and are subject to change without notice. 2

3 Table of Contents The Foreign Exchange Giant... 5 Forex Jargon... 5 Currency Codes:... 6 Pairs:... 6 Majors:... 6 Crosses:... 6 Time Zones (Eastern Standard Times):... 7 Calculating Profit and Loss:... 7 Position Sizes:... 7 Demo Accounts:... 8 Investor Psychology:... 8 Forex Trading Tools... 9 The Forex Armageddon Trading Plan Trading Plan Overview Trading Tool Settings Entries (Long) Entries (Short) Entry Stop Loss Trailing Stop Loss Re-Entering the Market Reversing a Trade Risk Management & Position Sizing

4 Back Testing Exercises Back Testing Exercise # DAIILY LONG: Trading Plan Check List DAIILY SHORT: Trading Plan Check List Software Online Trading Platforms / Brokers / Demo Accounts Forex & Other Info Websites NOTES

5 The Foreign Exchange Giant The foreign exchange is the fastest growing and largest market of all the financial markets it transacts over $2.5 trillion dollars every single day giving amazing liquidity and honesty to the market as it is virtually impossible for the market to be manipulated for any significant period of time. Over 95% of the foreign exchange market is made up of speculators which is why the market is so liquid, and is a 24 hour market open 6 days a week. Most positions are only held for a short period of time a massive 80% are held for less than 7 days. The leverage is also phenomenal with many variations such as 50:1, 100:1, 200:1, 400:1 etc, just another one of the reasons traders worldwide are flocking to this market and fast becoming their market of choice. With a small deposit such as $10,000 you could be controlling as much as $2,000,000 ($2 million dollars) or even more. Also known as Forex, FX, 4X or Currencies, the foreign exchange is traded via an electronic platform that can be accessed by anyone anywhere worldwide via the internet or broker over the phone. It used to be a market place only accessible to the governments, banks and large institutions, but now due to the advancement of technology and the lending available through brokers, mum and dad investors have the ability to be a competitor too. Forex Jargon Once a trader gets their head around the different terminology and a few of its unique characteristics they will realize that trading the Forex is very similar to trading any other market. The most unique characteristic of currencies is that they trade in pairs, you are trading one currency against the other. For example; the Euro against the US Dollar, or the Japanese Yen against the British Pound. Let s assume that you believe the Euro will rise against the US Dollar you would then take a long position in the Euro to profit from any rising price movement. If you believed that the Euro was going to fall against the US Dollar you would then take a short position in the Euro. 5

6 Currency Codes: AUD CHF EUR GBP JPY NZD USD Australian Dollar Swiss Franc Eurozone Great British Pound Japanese Yen New Zealand Dollar US Dollar Pairs: Pairs are quoted in their currency codes like this EUR/USD (Euro against the US Dollar). Majors: The majors are the currency pairs traded with the highest volume and therefore offer the highest liquidity. It is suggested that traders keep most of their trading within these pairs: EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/JPY, USD/CHF Crosses: These are the less popular pairs and therefore less liquidity: NZD/JPY, AUD/JPY, GBP/JPY, EUR/JPY, EUR/GBP, EUR/CHF 6

7 Time Zones (Eastern Standard Times): The best times to trade is when the major trading zones around the world overlap between 8:00pm to 9:00am (EST). To find out what time this corresponds to within your own time zone visit: Calculating Profit and Loss: The movement in price for currencies is quoted in PIPs (price in points). When looking at the standard quotation in price of a currency you will see it displayed like either of these two; (All Currencies) Or (Japanese Yen) The PIP movement is the last two digits on the right that are underlined in the price examples above. So if the price movement rose by 20 pips for the above two examples the new prices would be as follows; and The tiny movements in price is the very reason leverage is required to profit so well from the price fluctuations. Position Sizes: Currencies are bought and sold in currency lots, the size of these lots depend on the type of account that the trader has; Mini Account the minimum lot size for a Mini Account is 10,000 currency units. Standard Account the minimum lot size for a Standard Account is 100,000 currency units. 7

8 Demo Accounts: Forex Brokers offer demo or practice trading accounts, where traders have the opportunity over a short period of time (approx 30 days) to use a fictitious account of around US$50,000 to US$100,000. Take advantage of these accounts before putting real money on the line, no matter how small the amount may be that you start with, as they give you a great insight into live trading of the Forex market and the platform which you will use much better to learn some lessons on pretend money. Investor Psychology: The statistics showing how unbalanced the proportion of successful to unsuccessful traders is totally astonishing and needs to be taken into high regard. Do you know why the figures between the two groups are so unbalanced, and continue to remain that way? A tiny 10% of traders are consistently successful 10% break even 80% lose money These figures are astounding, and any trader wanting to get into the minority group of traders who are consistently successful needs to understand that there are two common factors that all the successful people share, and then takes the steps to ensure they acquire these same characteristics. These two characteristics are; Self Control A Trading Plan that suits your individual style Self control is on the top of the two as it takes great control to do everything that you need to do to become a successful trader, (most people are too impatient and have to get into the market); Research a trading plan to suit your style; study your trading plan so you know it intimately; follow each step of your trading plan regardless of what your emotions are enticing you to do; not listen to and react to other traders opinions, news reports and other information that sway you to make decisions outside of the scope of you trading plan. 8

9 Forex Trading Tools Bar Charts Bar Charts are probably the most common method of viewing financial market data. Data used to be simply a line chart, that was drawn from close to close of each trading session, and was the most popular method of analysis, however, it is very limited with the information displayed. Bar Charts are drawn using the Open, Close, High and Low data for the trading session this expansion of information enabled the trader to view so much more of the markets sentiment. These four important pieces of data create the bar formation when connected together to create a visual representation of the trading session. A line is drawn from the High to the Low prices of the trading session. This distance can also be referred to as the range. The Open and the Close prices are indicated by a simple tick to the left for the Opening Price and a tick to the right for the Closing Price. 9

10 Market Sentiment Visual charts such as bar charts, candlestick charts, swing charts, even line charts give the trader great insight into the market sentiment allowing traders to gain a feel for what may lie ahead. The bars within the bar charts can be read individually or as a group, each telling their part of an overall story. Looking at the individual bars initially we can see; Bar-1 has its open and close very close together, this shows there is indecision of direction in the market (normally either the bulls or bears have dominance), or could also be expressed as agreement of prices between the bulls and the bears. These types of candles are found at either the tops or bottoms of markets or when there is a temporary pause in the market. Bar-1 Bar-2 is a very strong bullish bar as you can see the Open and Closing Prices are at opposite ends of a long range (distance between the high and the low). This bar shows that bulls are totally dominant for this session and they are pushing the prices higher and higher. Bar-2 10

11 Bar-3 is a bar similar to bar 2 but the opposite. The Open is high on the bar and the Close is low this shows the bears are dominant as the sellers need to lower their prices to attract a buyer to buy. Bar-3 Bar Series When individual bars are read as a group of bars they tell a story and can give traders valuable insight into where the market is most likely to go next. Looking at the series of bars below, starting from the left you will notice that as the market rises most bars Open low on the bar then trade upward in price during that trading session to Close above the initial opening price, and the majority of those Closes are at the opposite end of the bar to the Open. At the top of the rise you can see that the bar at the top is the first one to have its Close below the Open, plus the Open and the Close are very close on the bar signifying that buyers are running out and that the sellers will need to lower their prices in order to attract more buyers to the market. Next a few bars of indecision and the market tries again to rally but eventually fails with a very weak bar which spurs on a wave of selling and the prices decline. Then the second last bar of this sequence we see another trading session where the Open and the Close are very close together, although there was significant movement in the overall range of the bar. Again this signifies that the downward movement is most likely over, which is confirmed when the market rallies the next day with a strong bullish bar. 11

12 Candlestick Charts Candlestick charting is now commonly used within the trading world. Originally developed in Japan hundreds of years ago when commodities such as rice were traded, candlesticks were used to highlight the imbalances in buyer and seller demand. Today the Western world has embraced the powerful technique since the early 1990s. Candles are not a tool to be used on their own in identifying trading opportunities, instead teamed with other indicators and tools can become a force to be reckoned with, as you will achieve a higher probability of a successful entry or exit. Candlesticks provide a powerful visual advantage by clearly displaying the psychology that is driving the particular market. There are patterns that are regularly found at turning points in the market, which once known alert the trader to an early entry or exit. Candles have similar characteristics to a bar chart, but rather than the importance being on the High and the Low prices of the session or the Close to Close of successive sessions, the emphasis is on the Open and the Close which the area between these two prices is boxed in, and highlights the main trading activity for that trading period. In the image below you will see two candles, a White candle and a Black candle. Both are the same in the fact that they have the area between the Open price and the Closing price boxed in, the difference is that the White candle has the Open below the Close, whilst the Black candle has the Close below the Open. The White candle clearly shows that the bulls are dominating the market and the prices are being pushed up. The market opens up, trades up for the session and closes higher. The Black candle clearly shows that the bears are dominating the market and the prices are being pulled down. The market opens up, trades down for the session and closes lower. The wick or shadow are the lines either side of the boxed area. 12

13 Candle Series Like the bar charts, candles also read like a story, and can give a trader great insight into the potential future direction of the market, but due to their visual presence virtually scream their underlying message to the trader. In the image below you can see that as the market rises there are white candles that are mostly large strong bodies where the Close is above the Open of each bar, then as the market declines the bars start the trading session high but end up closing lower on the bar, thus creating a black candle and the weakness of the market sets in. 13

14 Moving Averages Moving Averages are a wonderful tool that smooth out price activity and assist traders to view the overall trend of the market. Moving Averages can be used within many different methodologies giving traders entry and exit signals. A moving average is a simple line that gives an average of prices depending on the criteria it is based upon. The settings may be set on the open, close, high, low prices or a variation of these over a period of time, for example; a 12 Day moving average set on the Close is simply the closing prices of the last 12 Days added together then divided by 12. The lower the number the faster the moving average, and the higher the moving average the slower it is considered. The faster moving averages would be considered under for the time period (eg days for a day period), and these moving averages are much more reactive to the price movements. Whereas, the slower moving averages would be anything over 20 and much less reactive. So choosing a moving average depends on what outcome you desire, such as; the length of time you intend to hold a trade for. If it is only a matter of days, a faster moving average would help you enter and exit the market more quickly, but if you were wanting to remain in the trade for some time you would definitely look for a slower moving average that enables you to stay in the overall trend of the market. 14

15 The Forex Armageddon Trading Plan The Forex Armageddon Trading Plan was developed with lifestyle and leverage in mind. The aim is to capture the longer trends of the market allowing traders to take advantage of the almost passive income the financial markets can offer, rather than giving them another job where they have to repetitively jump in and out of trades. Simplicity has also been kept in mind, avoiding complicating traders judgment by using minimal but effective tools and indicators. The Forex Armageddon was developed on the EUR/USD but can be used on other stable currencies and even other markets. The Forex Armageddon can be used upon any time frame, but to utilize the time and money freedom this trading plan offers the daily or weekly chart is most effective. Remember that a weekly time frame uses larger price movements which can increase the potential risk of a trade therefore effective risk management & position sizing strategies need to be implemented (see page 33). All examples and back testing exercises are given using the DAILY time frame within this workbook. 15

16 Trading Tools Trading Plan Overview (DAILY Time Frame) Daily Candlestick Chart Daily Bar Chart or Swing Chart 21 Period Simple Moving Average 72 Period Simple Moving Average Long Entry Criteria SIGNAL CANDLE = 1 close above 72 Period Simple Moving Average. SIGNAL CANDLE = Candle must be a strong white candle where the open & close are in opposite thirds. 72 Period Moving Average must be above or have touched the 21 Period Moving Average. Enter At Market. Short Entry Criteria SIGNAL CANDLE = 1 close below 72 Period Simple Moving Average. SIGNAL CANDLE = Candle must be a strong black candle where the open & close are in opposite thirds. 72 Period Moving Average must be below or have touched the 21 Period Moving Average. Enter At Market. Long Stop Losses The LONG Entry Stop Loss is at the most recent swing LOW (Bar or Swing Chart) less 1 pip and the spread (eg; if the spread was 3 pips then deduct 4 pips in total from the low of the swing low). The 21 Period Simple Moving Average is the trailing Stop Loss for the position. Exit after 1 close BELOW the 21 Period Simple Moving Average. Must be a strong black candle in comparison to recent previous bars with open & close in opposite thirds. If candle is smaller, the same size or very close to the moving average line, the trailing stop can be 16

17 brought up underneath the low of that bar, (in the normal stop loss fashion, eg; if the spread was 3 pips then deduct 4 pips in total to the low of the candle). Short Stop Losses The SHORT Entry Stop Loss is at the most recent daily swing HIGH (Bar or Swing Chart) less 1 pip and the spread (eg; if the spread was 3 pips then add 4 pips in total to the high of that bar). The 21 Period Simple Moving Average is the trailing Stop Loss for the position. Exit after 1 close ABOVE the 21 Period Simple Moving Average. Must be a strong white candle in comparison to recent previous bars with open & close in opposite thirds. If candle is smaller, the same size or very close to the moving average line, the trailing stop can be brought down above the high of that bar, (in the normal stop loss fashion, eg; if the spread was 3 pips then add 4 pips in total to the high of the candle). Re-Entry LONG SIGNAL CANDLE = Strong white candle with open & close in opposite thirds re-breaking up above the 21 Period Moving Average (Red MA) PLUS the highest point of the recent up trend. (This additional criteria is specific to Long Re-Entries only). Re-Entry SHORT SIGNAL CANDLE = Strong black candle with open & close in opposite thirds re-breaking down below the 21 Period Moving Average (Red MA), (short trades do not need to wait for the market to fall below recent largest swing low). 17

18 Trading Tool Settings Candle Charts: Candle Charts = Specific to trading time frame, eg; Daily, Weekly, 60 Minute charts, (daily or weekly is the suggested time frame to start). Either a single colour (black & white) can be used or some traders may before the green and red. Bar Charts & Swing Charts: Bar Charts = Specific to trading time frame, eg; Daily, Weekly, 60 Minute charts, (daily or weekly is the suggested time frame to start). Swing Charts = Specific to trading time frame, eg; Daily, Weekly, 60 Minute charts, (daily or weekly is the suggested time frame to start). Moving Average: Simple Moving Average 72 Period (eg; daily if daily time frame is used), Close Price, colour = Blue. Simple Moving Average 21 Period (eg; daily if daily time frame is used), Close Price, colour =Red. 18

19 Entries (Long) First a time frame must be established (daily, weekly, intra-day such as 60 minute chart). The LONG Entry criteria for the FX Armageddon trading plan is 1 close ABOVE the 72 Period simple moving average (Blue Moving Average line). This candle is called the SIGNAL CANDLE. The 72 Period Moving Average must be above or have touched the 21 Period Moving Average. When the market trades and closes above the 72 Period moving average it has a greater probability of continuing into that direction as the 72 Period moving average is a much slower moving average and confirms that the trend has most likely changed and is moving into the new direction. The candle must be a strong WHITE candle, where the open and the close for that trading session is in opposite thirds of the strong long bar. When determining if the candle is a long strong bar you are comparing it to recent previous candles. In the image below you will notice the market fell down for 3 candles before having a strong WHITE candle where the Open and the Close on the bar are on opposite thirds of the bar. The white candle is also quite long (strong) in comparison to the previous bars. As soon as you observe that the market has fulfilled the above criteria (1 daily close of a long strong bar with the open and close in opposite thirds ABOVE the 72 Period moving average and the two moving averages have crossed so that the 72 Period moving average is temporarily above or they have touch) then you can go ahead and enter the next day At Market. 19

20 Opposite Thirds RULE It is important that the candle has the open and the close in opposite thirds of the bar, the 3 scenarios further below will explain in more detail why. This image below shows a candle that has the open and the close in opposite thirds of the bar should you cut the bar into three equal pieces. Corresponding commentary for the image below can be found on the following page and is assuming the DAILY TIME FRAME (daily candlestick chart): 20

21 CANDLE 1: RULE: 1 DAILY CLOSE ABOVE/BELOW 72 PERIOD MOVING AVERAGE? YES: The black candle that is to the right of the figure #1 has closed below the 72 Period moving average, ready for a possible SHORT trade. RULE: STRONG/LONG CANDLE? YES: It would be considered a strong candle in comparison to the previous candles as it has a range that is much larger than the previous candle/s. RULE: CANDLE OPEN & CLOSE IN OPPOSITE THIRDS OF THE BAR? NO: As you can see the Open is midway down on the bar. Therefore, no valid entry. CANDLE 2: RULE: 1 DAILY CLOSE ABOVE/BELOW 72 PERIOD MOVING AVERAGE? YES: The white candle that is to the right of the figure #2 has closed above the 72 Period moving average, ready for a possible LONG trade. RULE: STRONG/LONG CANDLE? YES: It would be considered a strong candle in comparison to the previous candles as it has a range that is much larger than the previous candle/s. RULE: CANDLE OPEN & CLOSE IN OPPOSITE THIRDS OF THE BAR? NO: As you can see the Open is midway up on the bar. Therefore, no valid entry. 21

22 CANDLE 3: RULE: 1 DAILY CLOSE ABOVE/BELOW 72 PERIOD MOVING AVERAGE? YES: The white candle that is to the left of the figure #3 has closed above the 72 Period moving average, ready for a possible LONG trade. YES: The 72 period moving average (blue) has crossed above the 21 period moving average (red). RULE: STRONG/LONG CANDLE? YES: It would be considered a strong candle in comparison to the previous candles as it has a range that is equal to or much larger than the previous candle/s. RULE: CANDLE OPEN & CLOSE IN OPPOSITE THIRDS OF THE BAR? YES: The open and the close are in opposite thirds of the bar. A VALID ENTRY! Interestingly enough this third rule saved the trader from entering into two losing trades. 22

23 Entries (Short) First a time frame must be established (daily, weekly, intra-day such as 60 minute chart). The SHORT Entry criteria for the FX Armageddon trading plan is also 1 close BELOW the 72 Period simple moving average (Blue Moving Average line). This candle is called the SIGNAL CANDLE. The 72 Period Moving Average must be below or have touched the 21 Period Moving Average. When the market trades and closes BELOW the 72 Period moving average it has a greater probability of continuing into that direction as the 72 Period moving average is a much slower moving average and confirms the trend has most likely changed and is moving into the new direction. The candle must be a strong BLACK candle, where the open and the close for that trading session are in opposite thirds of the strong long bar. When determining if the candle is a long strong bar you are comparing it to recent previous candles. In the image below you will notice the market fell down and with a strong BLACK candle, where the Open and the Close on the bar are on opposite thirds of the bar, closed below the 72 Period moving average. The black candle is also long (strong) in comparison to the previous bars. As soon as you observe that the market has fulfilled the above criteria (1 close of a strong bar with the open and close in opposite thirds BELOW the 72 Period moving average) you can go ahead and enter the next day At Market. 23

24 Entry Stop Loss The LONG Entry Stop Loss is the most recent SWING LOW. The swing low is lowest point created with the most recent price fluctuation. If you have access to Swing Charts within your charting software package you can use that chart view to see the swings within the market price movements, however it is just as easy to do so when viewing market data in the candlestick chart view. 24

25 Identifying a Swing Low or Swing High (Entry Stop Losses) The market is always in continuous motion of either Up, Down or Sideways. It moves in a series of rhythmic impulsion waves as it moves in an Up Trend or a Down Trend, it never moves in a straight line. The motion could be described as an upward, downward or sideways zigzag motion. If you were to draw a line from each of the peaks and troughs as a market advanced you would be able to clearly see these waves in motion. Definitions: PEAKS TROUGHS Higher Bars Lower Bars Inside Bars high points in the market followed by a bar with a lower low. low points in the market followed by a bar with a higher high. (Up Bars) = higher high & higher low than previous bar. (Down Bars) = lower low & lower high than previous bar. lower high and a higher low than the previous bar. Outside Bars higher high and lower low than the previous bar. Taking the definitions above into consideration we can work through the image on page

26 1. Starting from the low of the very first candle to the left and working our way to the right as each bar advances, the second bar gives a higher high and a lower low, then there is an INSIDE bar, so we do not yet have a peak in the market as the peak can only be validated as soon as it is followed by a bar with a lower low. 2. Following the first INSIDE bar we then have another INSIDE bar, then an OUTSIDE bar, then a LOWER (down) bar. 3. A soon as we get that LOWER bar (down bar) the PEAK before it (the high of the OUTSIDE bar) becomes validated. Now a line can be drawn from the start up to this first PEAK. 4. Quickly after the LOWER bar there is an INSIDE bar followed by a HIGHER bar (Up Bar) this Up bar validates the TROUGH so we can now draw a line from the 1 st PEAK down to the 1 st TROUGH. 5. As the market continues upward there is a series of Up bars (higher highs with higher lows). 6. Then a couple of candles with lower highs and lower lows these immediately validate our 2 nd PEAK. 7. After these two LOWER candles there is an OUTSIDE bar which gives us another lower low, but also a higher high as the higher high of this bar exceeds the previous bars high it immediately validates the 2 nd TROUGH. And so forth. There are tools available within charting software that enables you to apply a tool that automatically shows you the peaks and troughs like in the image below. (This tool is called the Gann Swing Chart Overlay or a Gann Swing Chart). However, it is very easy to train your own eye to pick out these peaks and troughs just by looking at a candlestick chart, or bar chart. 26

27 Long Entry Stop Loss Sample: The image below shows a strong white candle that has closed above the 72 Period Moving Average Line (blue), and the open and close of the candle are in opposite thirds of the candle. Now that the trader has a valid entry where they can enter the next day At Market they need to determine where to place their Stop Loss levels. Entry Stop Loss = most recent Swing Low (trough), less (1 pip and the spread) Working back in time we go backwards to the preceding lower candle, and immediately before that candle is a higher candle confirming that the low of the 1 st bar before our Entry Signal Bar to be the most recent lowest point, and therefore the point at which we place out Entry Stop Loss. If the market we were looking to enter had a 3 pip spread we would place our Entry Stop Loss 4 pips below the price of the Swing Low. 27

28 Trailing Stop Loss Once the trader enters into a trade the 21 Period Moving Average (red) becomes the Trailing Stop Loss. EXIT = exit immediately At Market the following day as soon as you see that the market has made 1 Close ABOVE (Long) or BELOW (Short) the 21 Period Moving Average with a strong bar in comparison to recent previous bars. Should the bar be a small bar in comparison to previous bars or should the close be on or close to the moving average you can remain in the trade but bring the trailing stop loss up to the low of that particular candle (the normal 1 pip plus the spread). That way should the market just be displaying a healthy pull back and it continues into your direction you have a good chance at staying in the trade (example next page). IMPORTANT: Should the market close on the opposite side of the 21 Period Moving Average within 7-10 days of entry please ignore this exit, whilst the market is getting into the rhythm as it is very likely that the market will continue into your favour your Entry Stop Loss is your exit point at his stage. 28

29 Trailing Stop Loss Option As shown in the image below, in the instances that you find the market closes just on or below the 21 Period Moving Average, as shown in the image below, you may decide that rather than close out the position automatically the next day, instead to move your Stop Loss up to a price level just underneath the low of the EXIT Signal Candle (total of 1 pip plus the spread) this way should the market continue on into your direction you will still be in the trade, otherwise if the market continues against your position you will automatically be closed out. 29

30 Re-Entering the Market Sometimes you will find that the market will have a fairly strong pull back before powering back into the direction of your trade, and in doing so has 1 strong close either below (long) or above (short) the 21 Period Moving Average which fulfils the EXIT criteria and not long after rebounds and continues on into the trades direction. Traders can re-enter the market should the following re-entry criteria be fulfilled. (Re-entries typically are in volatile/sideways periods). Re-Entry LONG Strong white candle with open & close in opposite thirds re-breaking up above the 21 Period Moving Average (Red MA) PLUS most recent largest swing high (highest point from the recent run upward indicated by the blue dotted line). Trade #1: As the market fulfilled all the long entry criteria the trader could enter the market. The market subsequently rose in the traders favor before falling down to close the position when the exit signals appeared. Trade #2: Again the market rallies up and looks to fulfil the re-entry criteria however for LONG trades there is a second component to validating a new entry. The market must also close above the previous major high created during the recent run up, (marked with a blue dotted horizontal line). This trade does not successfully execute as it did not fulfill both LONG Trade re-entry criteria. Subsequently the market fell. 30

31 This special Long Rule does not mean it is the Signal Candle that has to be the one to close above the high, it can be any subsequent candle after the initial Signal Candle. Re-Entry SHORT Strong black candle with open & close in opposite thirds re-breaking down below the 21 Period Moving Average (Red MA). Short trades do not need to wait for the market to fall below recent largest swing low. POSITION #1: In the image below the trader has a valid entry to enter the market short, which he does on open the following day after placing his Entry Stop Loss at the previous swing high in the market (blue dotted line). POSITION #2: At position 2 the trader needs to exit as the market has 1 daily close above the 21 Period Moving average (and it is beyond the 7-10 day grace period). POSITION #3: The market consequently turns around and gives the trader a RE-ENTRY SIGNAL to enter the market Short. The trader also places his Entry Stop Loss at the previous swing high (blue dotted line). Please Note: As this is a SHORT trade, the trader does not need to wait until the market has also closed below the previous major low that was created during the recent run down. (Indicated in the image by the horizontal orange line). The reason only LONG positions require the high to be taken out for a re-entry is because markets are more reactive to selling as people are panicking, so when the market again closes below the 21 Period Moving Average it is most likely going to continue falling. 31

32 Reversing from Long to Short Reversing a Trade When being stopped out of a Long trade the trader needs to be looking for their next entry criteria to be met. Either as; Long Re-Entry New Short Entry If the market continues to fall down and makes 1 close below the 72 Period Moving Average, as well as fulfilling all other Short Entry criteria, the trader can place an entry At Market the following day. POSITION #1: This candle fulfils the EXIT for a long trade. POSITION #2: Shortly after the market rises back up and closes above the 21 Period Moving Average, however this candle is not a stronger candle than previous recent candles, plus was nowhere near closing above the recent high created in the recent run up, even the subsequent candles. The market then fell back down but did not go anywhere near the 72 Period Moving Average where the trader would start to look to enter short. Instead it headed back up. POSITION #3: At position 3 the market has closed over the 21 Period Moving Average with a strong candle with the open and close in opposite thirds of the candle, however fails to fulfil the final rule unique to LONG trades where we need to see the market close over the most significant high made in the recent upward movement (blue dotted line). This rule saved the trader from entering into a market that was soon to decline. POSITION #4: The market finally dropped below the 72 Period Moving Average giving a Signal Candle for a SHORT trade entry. 32

33 Risk Management & Position Sizing Position sizing and risk management are key components to successful investing. These two go hand in hand. Risk Management identifies the total amount you are prepared to risk in relation to your account balance and also on each individual trade. Position Sizing follows from working out your Risk Management. Account Risk Efficiently managing losses by minimising the amount that you risk on each individual trade ensures that you are able to survive in the markets longer. Traders who utilise effective risk management strategies can actually be wrong more than they are right, by minimising losses and allowing profits to run these traders have a much higher chance of making it into the elite small circle of consistent successful traders. A good rule to use is to never exceed risking 5% of your total trading capital on each individual trade. If you had $100,000 that means you would take a position size so that you were not to exceed losing $5,000. Risk Management Account Risk per Trade = $100,000 x 5% = $5000 As you are entering the next day At Market and therefore cannot know the exact figure your entry price will be, you will need to work out your position risk by using the closing price from the Signal Candle. The closing price for the Signal Candle is The low price of the previous swing low is Stop Loss = Low (1 pip + spread (3pips)=4 pips total). Trade Risk = (Entry minus Stop Loss) Trade Risk = ( pips) Trade Risk = Trade Risk = 50 pips 33

34 Position Sizing Transferring the Trade Risk information to our initial Account Risk example: Total Account Risk = $5,000 maximum. Total Trade Risk = 50 pips. Standard Account Risk trading the EUR/USD = 50 pips x $10 per pip = $500. Total Account Risk divided by Total Trade Risk = $5,000 / $500 = x 100,0000 currency units = 1,000,000 currency units This trader would be able to take 10 lots of 100,000 currency units and stay within the maximum allowable risk for their Account Risk Rule. As mentioned 5% should be your absolute maximum risk per trade, you may decide upon a rule of either 2% or 3% - a figure that suits your personal risk comfort level. 34

35 Back Testing Exercises 1. On the blank Candlestick Chart on the page following that is only marked with the 21 & 72 Period Moving Averages indicated where your valid entry and exit points would be. 2. Should you find there is a potential entry or exit that fails only because it meets most but not all criteria mark the candle with an F. 3. Answers can be found on the page following the blank chart where they are described in detail each trade by trade both in text and also marked on a chart. 4. IMPORTANT: Utilise this opportunity to ensure you are learning the methods correctly do not skip ahead to look at the answers before you have completed the exercise. 35

36 Back Testing Exercise #1 36

37 Back Testing Exercise #1 ANSWERS (read corresponding to following chart) POSITION 1: The first time the market moves to the opposite side of the 72 Period Moving Average is at position 1. This candle is a white candle, so the trader would be looking to take a LONG trade. The candle meets the entry criteria by being strong in comparison to recent previous candles and that it s open and close are in opposite thirds of the candle. The trader can enter LONG At Market the following day. The next step for the trader is to place the Entry Stop Loss at the previous swing low indicated with a horizontal blue line. POSITION 2: The market rises into the traders favour, but soon after heads back down and closes 1 daily close below the 21 Period Moving Average with a strong black bar, and as it is outside of the 7-10 day grace period is giving signals for the trader to EXIT the position. However at the same time it is also giving an ENTRY to trade short, as it has also closed below the 72 Period Moving Average. The trader then works out the Entry Stop Loss, setting it at the previous Swing High (blue dotted line) working out his Risk Management and Position Sizing before placing the trade At Market the following day. The market initially starts to go into his favour, but then quickly turns around and heads up and above the 21 Period Moving Average. As it is between the 7-10 day grace period the trader can ignore the Exit Candle marked with a blue F for failed (normally if it was outside the 7-10 day grace time period the trader would need to exit the position). The market then turns around back into the traders favour back under the 21 Period Moving Average. It does then come up again to test the 21 Period Moving and did only just close above it but it was with a fairly small candle in comparison to previous ones. This candle is marked with a second blue F. The trader has two options ignore this candle until there is a strong candle closing above the 21 Period Moving Average giving a clear indication to exit the trade, or should they prefer to be a little more cautious, could bring their stop loss to be 1 pip (plus the spread) above the high of the candle of that bar. The market does nicely fall away and the trader remains in the position. The market gets into a downward trend and sets a great pace. Then finally breaks up with a very long spike but fails to close on the opposite third of the candle, plus the close is just over the 21 Period Moving Average. So again, the option here is that the trader can move the stop loss down to 1 pip (plus the spread) above the high of the candle marked with the third blue F ). Following this candle the market is trading above the 21 Period Moving Average but the candles are all relatively small in comparison to the ranges of the previous candles, as the trader has the trailing stop loss quite close to the market (at the blue F ) he can continue to hold the position. The market again returns underneath the 21 Period Moving Average. POSITION 3: The market once again comes up and tests the 21 Period Moving Average then breaks above, closing on a strong white candle with the open and close in opposite thirds. The trader exits the market the following day. Total Profit = 764 pips per contract. 37

38 Back Testing Exercise #1 CHART ANSWERS 38

39 Back Testing Exercise #2 Indicate on the chart below where you would enter and exit the market and why. Answers found on page 40 &

40 Back Testing Exercise #2 ANSWERS (read corresponding to following chart) POSITION F: This first marked position may trick people initially thinking that it is a new LONG entry but be careful as although technically the candle meets all the rules and has crossed over the 72 Period Moving Average, the thing to be wary of is that the 72 Period Moving Average (blue) is still below the 21 Period Moving Average (red). It is important to remember that at the minimum these two moving averages need to have touched. The market continues on a little downward and sideways for a little over a week before embarking again on an upward movement. At this same time the moving averages touch allowing the trader to look for the LONG entry criteria to be met. POSITION 1: Only when the candle labelled 1 appears does a candle fulfil all the entry criteria; closing above the 72 Period Moving Average (that has crossed above or has touched the 21 Period Moving Average) with a strong white candle, plus the open and the close are in opposite thirds of the Signal Candle. The trader can now enter At Market the following day. The Entry Stop Loss is placed below the previous swing low, 1 pip (plus the spread), marked by the blue dotted line. POSITION 2: The market nicely trends up only temporarily pausing to find support on the 21 Period moving average. However for the candle labelled 2 it only just closes on the 21 Period Moving Average. Traders may like to use this opportunity to move their trailing stop loss up just underneath the low of this candle (1 pip plus the spread). POSITION 3: Again the market continues on nicely rising in the traders favour, till finally closing strongly below the 21 Period Moving Average giving the trader signals to EXIT the trade. TRADE PROFIT = 866 pips per contract. POSITION 4: The market pops up above the 21 Period moving average fulfilling only 1 of the signals that the trader could re-enter the market. The previous highest high, marked with a blue horizontal line, would need to be exceeded with a white candle to also fulfil the re-entry criteria. The market then falls down crossing both the moving averages and looks that it may soon fulfil the Short trade criteria, however looking at the candle marked F that follows Position 4, it is not a strong black candle in comparison to recent previous candles. POSITION 5: Again the market pops above the 21 Period Moving Average, but doesn t constitute a Long entry as the 72 Period Moving Average has not crossed the 21 Period Averages or at least touched. For the trader to be able to enter this market Long without the Moving Averages crossing or touching the previous high marked with the blue dotted line would need to be exceeded with a white candle. 40

41 Back Testing Exercise #2 CHART ANSWERS 41

42 Charting Exercise #3 In the image following (page 44) I will take you through some trades (some successful and some unsuccessful) during a sideways moving market. The time frames following strong trending markets, both up and down, you will find that the market will travel through a period of sideways movement, this can also be referred to as a Time Phase. The strong upward or downward movement is referred to as a Price Phase, where it travels over significant distance in Price over a short amount of Time. The time phase is where time needs to catch up and it will spend more Time over less distance in Price. The best trades are when the market breaks up or down out of these time channels. So this is the very reason it is important that traders always follow their Risk Management rules for example the maximum 5% risk of total trading capital, as you may need to sit through a few losing trades before you get onto the big ride. TRADE BY TRADE Sideways Market (refer to image on page 44) Position 1: The market rises above the 72 period moving average but does not do so with a strong white candle, in comparison to recent previous bars. Position 2: The market falls down and closes only slightly below the 21 period moving average (red) for a short position to be valid it needs to have the 72 period moving average on the bottom of the two moving averages or at the minimum recently have touched, which is not the case here. Position 3: The market rallies back upward and gives a nice strong close above the 72 period moving average (blue) with a white candle here we have a valid LONG Trade so the trader enters the market long. The trader sets the Entry Stop loss at the previous swing low (dotted blue line). Position 4: The market continues upward before falling quickly below the 21 period moving average (red). The first closing candle below the 21 period moving average is only a small candle so the trader brings up their Trailing Stop Loss just underneath the low of that candle (blue dotted line), where the position eventually closes itself out at that level a few days later. The profit on this trade would have only been small. Position 5: The market falls and has one strong close below the 72 period moving average that meets all criteria for a short position. The trader sets the Entry Stop loss at the previous swing high which happens to be the opposite end of the Signal Candle for the short position (dotted blue line). 42

43 Position 6: The market continues on in a sideways fashion, and only slightly into the traders favour for the short trade before turning around and giving 1 strong close above the 21 period moving average and coinciding with hitting the Entry Stop Loss closing the position out at a loss, (the trader has not risked more than 5% of trading capital on this trade). Position 6 also fulfils all Long Entry criteria so the trader can immediately reverse their position to take advantage of the potential new direction. The trader sets the Entry Stop loss at the previous swing low (dotted blue line). Position 7: Immediately the trade goes against the traders favour and gives 1 strong close below the 21 period moving average, but as it is within the 7-10 candle grace period the trader does not close out the trade & ignores the 21 period moving average as the trailing stop loss until after such time. Position 8: The market rallies upward then downward just as quick, and gives 1 close below the 21 period moving average. As the market is fairly close to the initial entry price and entry date the trader could simply move the stop loss up into a trailing stop loss position underneath of the low of the bar and may have the chance of staying in the trade, as what would happen in this instance. Sometimes it can take the market a little time before it takes off. Position 9: Should the trader have closed out the trade as it fell below the 21 period moving average then they have the opportunity to re-enter the market as there has been a strong close above the 21 period moving average and also closed above the previous high of the most recent move upward. The trader would also set the Entry Stop loss at the previous swing low (dotted blue line). Otherwise if the trader was still in the trade from the entry back at Position 6 they would just continue to hold until an exit signal appears. Position 10: The market continues to rise after a pullback following position 9. Near position 10 you will see that the trader has brought up the trailing stop loss below the low of a candle that closes just below the 21 period moving average. The trade eventually closes itself out at this trailing stop level at a healthy profit. PROFIT = 605 pips $6,050 per lot within a Standard Account As you can see during sideways moving markets you may have a few trades that are either stopped out with; a small profit, a small loss or the maximum 5% loss per trade. Don t let these deter you, keep following the rules till you get the big trade. 43

44 44

45 DAIILY LONG: Trading Plan Check List LONG ENTRY CHECK LIST Has the market made 1 close ABOVE the 72 Period Simple Moving Average? (daily in this example). Is the candle a strong WHITE candle where the open & close are in opposite thirds? If yes to both the above you have a valid trade. Entry Stop Loss before you enter the market look for your Stop Loss placement. Stop Loss = previous Swing LOW less (1 pip plus the spread). Eg; if spread is 3 pips, then your Stop Loss is the price of the Swing Low less 4 pips. Position Sizing once you have determined the total risk of the trade (entry minus the stop loss) you know how many pips and dollars you stand to lose on this individual trade. This will enable you to work out the maximum number of currency lots you will be able to purchase. Now you can ENTER the trade At Market. Trailing Stop Loss = 21 Period Moving Average (effective after 7-10 trading sessions = 7-10 days in this case). EXIT as soon as the market has 1 strong close BELOW the 21 Period Moving Average (daily in this case). (Alternatively bring up your Trailing Stop Loss up underneath the candle that is either not so strong or the close is just on the moving average.) Re-Entry: If you are stopped out of a trade look for the following re-entry criteria. LONG = 1 strong close of white candle above the 21 Period Moving Average (red) PLUS specific to Long Trades ONLY the high of the previous major run up must also be taken out (1 close above by any candle once there has been a Signal Candle above the 21 Period Moving Average). 45