By: Z. Kolundzic. ALL RIGHTS RESERVED Street Smart Forex

Transcription

1 By: Z. Kolundzic ALL RIGHTS RESERVED Street Smart Forex

2 Table Of Contents Chapter 1 Introduction When to Enter the Market? When to Exit the Market? Cut Your Losses Short Take Part of Your Profits Let Your Profits Run Take your profit when your trade runs out of steam...12 Chapter 2 General Trading Tips Understanding Forex Trading About Currency Pairs and Exchange Rates Understanding the Standard Contract Size What is the Pip? How to Calculate the Profit The Concept of Leverage Money Management Your Trading Equipment Your Computer Equipment How to choose your Forex Broker Charting Software Monitor More Than One Currency Pair Technical Analysis Exponential Moving Average Moving Average Convergence Divergence Relative Strength Index

3 Support/Resistance Levels Zigzag Signals Paper Trading...47 Chapter 3 Intraday Trading Strategy Entry Strategy Step 1: Staying out of Sideways Market Step 2: Identifying the Long-Term Trend Step 3: Getting an Entry Signal Step 4: Confirming with the Signal Strength Zigzag Signals (12 Points) Support/Resistance Levels ( 8 Points) Relative Strength Index (6 Points) Exit Strategy Action 1 Cut Your Losses Short : Action 2 Take Part of Your Profits : Action 3 Give Your Trade Enough Space : Recursive Trailing Stop Formula Action 4 Take Your Profit when Your Trade Runs out of Steam :...65 Chapter 4 Intraday USD/CAD Trading Example Trading Day Preparation Determining the Support/Resistance Levels Entering the Market Exiting the Market...71 Chapter 5 Intraday EUR/USD Trading Example Trading Day Preparation Determining the Support/Resistance Levels Entering the Market

4 5.3. Exiting the Market...83 Chapter 6 Long-Term Trading Strategy Entry Strategy Step 1: Staying out of Sideways Market Step 2: Identifying the Long-Term Trend Step 3: Getting an Entry Signal Step 4: Confirming with the Signal Strength Zigzag Signals ( 12 Points) Support/Resistance Levels (8 Points) Relative Strength Index (6 Points) Exit Strategy Action 1 Cut Your Losses Short : Action 2 Protect Part of Your Profits : Action 3 Let Your Trade Enough Space to Make Even More Profit : Recursive Trailing Stop Formula Action 4 Take Your Profit when Your Trade Runs out of Steam : Chapter 7 Long-Term EUR/USD Trading Example Trading Preparation Determining the Support/Resistance Levels Entering the Market Exiting the Market Chapter 8 Long-Term GBP/USD Trading Example Trading Preparation Determining the Support/Resistance Levels Entering the Market Exiting the Market

5 Chapter 1 Introduction Dear forex friend, I would like to thank you for giving me the opportunity to present to you the Street Smart Forex TM trading system. As I have promised there will be no unnecessary information in this book. I assume that you are already familiar with the concept of forex trading. If you are totally new to the forex trading game you can find all of the necessary basic info inside the Chapter 2. All of the other chapters deal directly with the system itself. You should read each chapter carefully. Everything is explained in detail. The first chapter that you are just reading is just a short introduction to the logic that is behind my "Street Smart Forex TM " trading system. The basic skeleton of each trading system consists of two elements. Entering the trade and exiting the trade. Each of those elements is equally important When to Enter the Market? The profitability of a trading system is not based on the quantity of entry signals that it produces. It is based on the quality of entry signals. The entry signal needs to have the highest possible probability that the trade will move in your desired direction. After years of trading many different trading systems I have found out that most of them have one large flaw. They were producing way too many entry signals which as a result is greatly reducing the profitability of a trading system. Just have a look at the picture below to understand what I am talking about: 5

6 Figure 1-1 As you can observe on the chart above the typical trading system has produced nine entry signals during given period of time. Out of those nine signals only two would have resulted in the net profit and the other seven signals would have produced the net loss. Obviously something needs to be done about that. Now have a look again at the same picture but without losing signals. 6

7 Figure 1-2 It looks much better. Doesn t it? You can imagine how dramatically the trading system would change if we could find the method that filters out all those bad signals. So I challenged myself to find it out. I knew that some bad signals would always be there but I needed to find a way to minimize them. After spending countless weeks and months fine tuning and testing different trading szstems I found out that there were four elements that needed to be implemented into my trading system in order to avoid the poor quality signals. First: Do Not Trade Sideways Market Sideways market is a market in which the price fluctuates evenly between support and resistance lines. Each time it touches the support line the price starts moving higher only to hit the resistance line and change the direction. You could observe in the charts above that all of the losing signals occurred when the market was behaving in a sideways fashion. When we enter a trade during sideways market we place a bet that the market will move in a certain direction although the market has still not shown which trend it will 7

8 follow next. That means we have only 50% chance to be right or wrong. In that case it is the same as flipping a coin and saying Bearish or Bullish. So the first objective of my trading system is to find a way to identify if the currency pair that we want to trade is in the sideways market. If it is in the sideways market than we wait or we move to the other currency pair. If it is not in the sideways market than we go to the next step. Second: Do not Trade against the Long-Term Trend If you were ever swimming in the river you would know that it is much easier to swim with the current than it is to swim against the current. Regardless of how strong a longterm market trend is, the market never moves only in the direction of the trend there are always minor movements against the major market trend. These deviations usually don t last very long and after them the market moves again in the direction of the long-term trend. However it is precisely those minor movements that are likely to produce losing entry signals. Any system that generates entry points will provide us with entry points both against and in the same direction as the long-term trend. Even though there may be money to be made in both cases, by following only the entry points in the same direction as the long-term trend we will get the higher quality trades leading to the higher profits in the long run. Let s have a look at the chart below: 8

9 Figure 1-3 Let us assume that on the 02/25 you get a bearish entry signal and even though the longterm trend is clearly bullish you decide to get in against the long-term trend. The market does not move far enough in our direction, so we don t reach our target profit. Instead the market reverses and we are stopped out facing a loss for this trade. It is not only a pity for that trade, even more we miss to catch this nice 350 pips move! Third: Getting into the Trade at the right moment Once the trend has started, it is very important to jump into the trade as soon as possible. If you are the last one to get in, what will probably happen is that by then, winning traders, who were in earlier, start to cash in on their profits, the rally loses steam and your position starts to fall. Basically it means that we need to find the signal that has the highest probability that the trade will go in our direction. Fourth: Pay Attention to the Signal Strength It s not the same to push 100 or 20 kg. You don t use the same power. Same holds for Forex markets. Sometimes you expect a 30 pips move, in other cases 100 pips. The more relevant signals collaborate the move, the higher profit you expect. 9

10 For this purpose I have developed a new concept (formula) which I call the Signal Strength, where I combine the power of major forex indicators. We will use the formula to calculate the target profit expectations When to Exit the Market? Most traders make a mistake by thinking that entering the trade is more important than exiting the trade, and if they have found an entry strategy with positive expectations, the job is done. Nothing could be further away from the truth. Exit strategy is equally if not more important than entry. Average traders typically use a simple trailing stop as their exit strategy. Even though a trailing stop may work ok in certain cases, definitely it is not the best option for a proper exit strategy. Why? Because a trailing stop does not fulfil all the basic fundamental requirements for a proper exit strategy. Especially when it comes to let your profits run. So, which are the basic fundamental requirements for a proper exit strategy? Well, let s show them to you: Cut your losses short Take part of your profit Let your profits run Take your profit when your trade runs out of steam Cut Your Losses Short This requirement is linked to the question how much capital we can risk on one trade. This is where it gets tricky. You have probably heard hundreds of times that you need to protect yourself against large losses in order to protect your start up capital. However if by cutting your losses short you think running out of a trade like a scared rabbit as soon as the trade goes against you, you will be in a big trouble. You CAN NOT trade currencies in such fashion. The key to currency trading success is to catch a major movement. You will not be able to do that if you don t give your trade a chance. By properly 10

11 implementing my entry strategy you have done everything you can to enter the trade with a high probability that it will go in your direction. However, it doesn t mean that it will do so immediately after you placed a trade. You need to give it some space. How much space? Enough space so that you don t get stopped out all of the time while at the same time tight enough so that if you are wrong you preserve majority of your capital to fight another day. If the stop loss is reached we will get out of the trade immediately, no questions asked. You cannot cut corners with the stop loss rule. It needs to be followed every single time without exception. Failure to follow the stop loss rule is the number one reason for failure among beginning traders. It is true that sometimes price will turn around just after you get out, but there is no way to know this in advance. It only takes a few stubborn incidents to entirely devastate your initial trading capital Take Part of Your Profits Human nature is such that it values a sure profit much more highly than the probability of a much higher profit. The trader s mind works in the same fashion. They take their profits too soon. That is why I have included this step into my exit strategy. We will protect part of the profit and the rest will stay in the trade to milk out the maximum profit. In this way we are going out of a trade as a winner and we are not going to follow the rest of the trade with the anxiety. Once we have decided that we will take part of our profits, the remaining question is the right price level at which we will do so. Is 30 pips the right target or maybe we should better wait until 50 pips are reached...? For this purpose we use the concept of the Signal Strength formula: the more independent indicators collaborate our trade, the stronger our trade is and the higher profit we expect Let Your Profits Run As mentioned above, the key to currency trading success is to catch major market movements. And for that purpose we need to give our trade a chance by giving it some space for moving in our desired direction. The key issue is hereby to determine the proper space depending on your current trade situation. It is not the same situation, when you just 11

12 have entered a trade or when you are already in with a current positive balance of 200 pips. In the first case the main focus is to protect your trading capital, in the second case you don t need to protect your capital any more as you definitely will close your position with profits. The focus hereby is to give your trade more space than when you entered the trade in order to make even more money. In order to be profitable in the long run we need to extract as much profit as possible from every single trade. So we need to stay in the trade as long as the trade goes in our direction. Most exit strategy methods out there, as for example a trailing stop, do not fulfill above requirement as they will lead to exiting a position too soon. For this purpose I have developed a Recursive Trailing Stop Formula that extracts as much profit from our trade as possible Take your profit when your trade runs out of steam Once the market has been recognized as sideways, all the signals which in the past brought us to enter the market are not valid any more. That means that it is equally probable that the market goes towards or against our trade. And the odds are definitely not good enough for staying longer in the trade. Even more, if we would stick to the trade, it could occur that we turn a win into a loss! Haven t you noticed how often the previous market trend is reversed, after the market has been developing sideways for certain time period? Let s have a look at the picture below 12

13 Figure 1-4 In the picture above we can observe that after staying in the sideways market for a period of time the price have completely changed its direction. Therefore if our trade enters a sideways market after certain period of time we will get out of the trade and wait for the next opportunity. 13

14 Chapter 2 General Trading Tips In this chapter I want to give you some general trading tips that may help you to improve your trading, especially if you are a novice trader. If you are already an experienced trader this chapter might not be of interest to you, so you might just throw a glance at it Understanding Forex Trading About Currency Pairs and Exchange Rates When trading currencies, you don t trade a single currency, but always currency pairs. That s the reason why when looking at forex quotes you will always see the currencies quoted in pairs, as for example EURUSD, GBPUSD or USDCAD. To every pair you will see an exchange rate quoted. The first currency of the pair is known as the base currency, the second one as the counter or quote currency. The exchange rate gives the amount of the quote currency which needs to be sold to buy 1 unit of the base currency. EURUSD is the rate of 1 euro in US dollars, GBPJPY 1 British pound in Japanese yens, i.e., the first currency is always defined in terms of the second one. For example in picture below the exchange rate of means that for 1 euro you can get US dollars. You could also write it like 1 euro / US dollar. 14

15 Figure 2-1 Even though there are 100 s of currency pairs out there, you should pay only attention to the major currency pairs, which are the most traded. It is estimated that activity in these currencies comprises more than 85% of the daily foreign exchange volume. Liquidity is essential when trading foreign currencies. Currencies that are illiquid generally will have wider trading costs (spreads), they also will have a much greater chance to have "fast market" conditions where liquidity can be non-existent and volatility greatly increased, and they are also often more susceptible to short term market manipulation or deception, like false technical breakouts. The major currency pairs are assumed to be: EURUSD USDJYP USDCHF GBPUSD AUDUSD USDCAD EURGBP Euro and US dollar US dollar and Japanese yen US dollar and Swiss franc British pound and US dollar Australian dollar and US dollar US dollar and Canadian dollar Euro and British pound Understanding the Standard Contract Size When trading a currency pair, the standard contract size is called a "lot. A lot can have different values for different currency pairs. At present, the major currency pairs have the lot value equal to 100,000 units. But 100,000 of what? When we buy, we give money for 15

16 goods. When we sell, we get money for goods. But with currencies, we buy and sell simultaneously since we get one currency for another one. This is why it is common practice to consider that we get the first currency of the pair (base currency) when we buy and give, respectively, the second currency (quote currency). A standard lot for USDCAD is $100,000 US dollars. If we buy one lot of USDCAD, it means that we get $100,000 US dollars and give a number of Canadian dollars equal to 100,000 times the actual exchange rate. If the current exchange rate of USDCAD is 1.1, then buying one lot of USDCAD means that we get $100,000 US dollars and give $110,000 Canadian dollars. The other way round if we sell one lot of USDCAD at the same exchange rate, it means that we give $100,000 US dollars and get $110,000 Canadian dollars. Most of the forex brokers offer also the possibility to trade mini lots, which are one tenth of a standard lot (for example 10,000 units instead of 100,000 units). Here you can find the lot and mini lot definition for the major currency pairs: Currency Pair Lot size Mini Lot size EURUSD 100,000 euros 10,000 euros USDJYP 100,000 US dollars 10,000 US dollars USDCHF 100,000 US dollars 10,000 US dollars GBPUSD 100,000 British pounds 10,000 British pounds AUDUSD 100,000 Australian dollars 10,000 Australian dollars USDCAD 100,000 US dollars 10,000 US dollars EURGBP 100,000 euros 10,000 euros Table What is the Pip? The pip is the smallest price change of the exchange rate. For example when trading EURUSD the smallest price change is , for example a move from to is called a 1 pip move. Here you can find the pip definition for the major currency pairs: 16

17 Currency Pair Pip size EURUSD USDCHF GBPUSD AUDUSD USDCAD USDJYP 0.01 EURGBP Table How to Calculate the Profit The profit of your trade is calculated in the following manner: Step 1: Calculating the Pip Value per Lot The pip value per lot is calculated according to the following formula: Pip Value per lot = lot size x pip size in units of the quote currency (second currency of the pair) Here you can find the pip value per lot for the major currency pairs: Currency Pair EURUSD USDCHF GBPUSD AUDUSD USDCAD USDJYP EURGBP Pip Value per Lot 10 US dollars 10 Swiss francs 10 US dollars 10 US dollars 10 Canadian dollars 1000 Japanese yen 10 British pounds Table

18 Step 2: Calculating Your Profit in Terms of the Quote Currency The profit is calculated according to the following formula: profit = lot size x pip size x pip value per lot in units of the quote currency Example 1: Sold 3 lots of EURUSD at and bought them at In this example, we made 65 pips profit (as we sold at a higher price than we bought). The pip value for EURUSD is 10 USD, so the total profit = 3 lots x 65 pips x 10 USD pip value per lot = 1,950 US dollars. Example 2: Bought 2 mini lots of GBPUSD at and sold them at : In this example, we made 80 pips profit (as we bought at a lower price than we bought). The pip value for GBPUSD is 10 USD, so the total profit = 0.2 lots x 80 pips x 10 USD pip value per lot = 160 US dollars. Step 3: Converting Your Profit to Your Deposit Currency Though it is possible to make trades using various currency pairs, the trading result is always written in only one currency - the deposit currency. If the deposit currency is US dollar, profits and losses will be shown in US dollars, if it is euro, they will be, of course, in euros. The most usual is that you run your forex account in the deposit of your country. If you live in US, then you will probably run your account in US dollars. If you live in France, then in euros. The profit is converted into your deposit currency by using the appropriate exchange rate. For example if your account is in euros and you made a profit of 1,000 US dollars, then you can convert your profit in euros by dividing with the actual exchange rate for EURUSD. In the following example we will assume that the deposit currency is US dollars. 18

19 Example 1: Sold 5 mini lots of EURGBP at and bought them at : In this example we made 100 pips. The pip value for EURGBP is 10 GBP, so the total profit is 0,5 lots x 100 pips x 10 GBP per pip = 500 British pounds. The exchange rate of GBPUSD was (for 1 British pound you can get 1.85 US dollars), when the position was closed: 500 British pounds x GBPUSD exchange rate = 500 British pounds x 1.85 US dollars / 1 British pound = $925 US dollars Example 2: Bought 2 lots of USDJPY at and sold them at : In this example, we made 40 pips (as we sold at a lower price than we bought). The pip value for USDJPY is 1000 JPY, so the total profit is = 2 lots x 40 pips x 1000 YPJ pip value per lot = 80,000 JPY yen. The exchange rate of USDJPY was (for 1 US dollar you can get JPY yen), when the position was closed. In order to get the amount of dollars we need to divide by the exchange rate. 80,000 JPY yen / USDJPY exchange rate = 80,000 JPY yen x 1 US dollar / JPY yen = $ US dollars 19

20 Summary Tables Currency Pair Profit in US dollars: number of lots x pips x... Profit in euros: number of lots x pips x... EURUSD 10 US dollars 10 US dollars / EURUSD USDCHF 10 Swiss francs / USDCHF 10 Swiss francs / USDCHF / EURUSD GBPUSD 10 US dollars 10 US dollars / EURUSD AUDUSD 10 US dollars 10 US dollars / EURUSD USDCAD 10 Canadian dollars / USDCAD 10 Canadian dollars / USDCAD / EURUSD USDJYP 1000 Japanese yen / USDJPY 1000 Japanese yen / USDJPY / EURUSD EURGBP 10 British pounds x GBPUSD 10 British pounds / EURGBP Currency Pair Profit in Canadian dollars: number of lots x pips x... Profit in Australian dollars: number of lots x pips x... EURUSD 10 US dollars x USDCAD 10 US dollars / AUDUSD USDCHF 10 Swiss francs / USDCHF x USDCAD 10 Swiss francs / USDCHF / AUDUSD GBPUSD 10 US dollars x USDCAD 10 US dollars / AUDUSD AUDUSD 10 US dollars x USDCAD 10 US dollars / AUDUSD USDCAD 10 Canadian dollars 10 Canadian dollars / USDCAD / AUDUSD USDJYP 1000 Japanese yen / USDJPY x USDCAD 1000 Japanese yen / USDJPY / AUDUSD EURGBP 10 British pounds x GBPUSD x USDCAD 10 British pounds x GBPUSD / AUDUSD Currency Pair Profit in British pounds: number of lots x pips x... Profit in Japanese yens: number of lots x pips x... EURUSD 10 US dollars / GBPUSD 10 US dollars x USDJYP USDCHF 10 Swiss francs / USDCHF / GBPUSD 10 Swiss francs / USDCHF x USDJYP GBPUSD 10 US dollars / GBPUSD 10 US dollars x USDJYP AUDUSD 10 US dollars / GBPUSD 10 US dollars x USDJYP USDCAD 10 Canadian dollars x USDCAD / 10 Canadian dollars / USDCAD x USDJYP USDJYP 1000 Japanese yen / USDJPY / GBPUSD 1000 Japanese yen EURGBP 10 British pounds 10 British pounds x GBPUSD x USDJYP The table is to be used as following: we trade 3 lots AUDUSD, make a profit of 50 pips, our deposit currency is in euros and the actual EURUSD exchange rate is 1.5, then our profit in euros is: 3 lots x 50 pips x 10 US dollars / 1.5 (EURUSD exchange rate) = 1,000 euros 20

21 2.2. The Concept of Leverage Many beginning traders don t fully understand the concept of leverage. Basically, if you have a start up capital of $5,000 and if you trade on a 1:50 margin you can effectively control a capital of $250,000. However, a two percent move against you and your capital is completely wiped out. If you are a beginning trader you should not use more than 1:20 margin until you get comfortable and profitable and then and only then you can attempt to use higher margins. What does 1:20 margin mean? It means that with your $5,000 you will control a capital of $100,000. Let s say you are trading EUR/USD and by using my entry strategy you have decided to enter the trade on a long side. That means that you are betting that USD will depreciate against Euro. Let s say current EUR/USD rate is Again, if your trading capital is $5,000 and you are using 1:20 leverage you will effectively be exchanging $100,000 to Euros. If the current rate is you will receive 100,000/1.567 = 63,816 Euros. If the trade goes in your direction the margin will work in your favor and 1% decline in USD will mean 20% increase in your start up capital. So if EUR/USD rate moves from to you will be able to exchange your 63,816 Euros back to $101,000 for a profit of $1,000. Since your start up capital was $5,000 it is effectively a 20% increase in your account. However, if the trade went against you and USD appreciated 1% vs. Euro your account would be reduced to $4,000. That would not have happened as my system as built in hard stops to prevent such an outcome Money Management As explained in the chapter before the leverage gives basically a trader the possibility to control a higher capital, than his real start up capital. That way he is able to control higher contract size and to make higher profit, if the trade goes in his direction. But at the same time he is taking higher risk, if the trade goes against him. Resuming, leverage is a powerful tool but it should be used by traders carefully! I recommend you to start trading first without using this tool. Once you are confident with the system and able to make profits, you can use some leverage taking a well-defined risk. How can this look like? 21

22 Example 1: Intraday Rules, EURUSD, 3% risk level, $10,000 account size Well, let us assume that you want to trade EURUSD using my Intraday Street Smart Forex TM trading system and that your account size is $10,000. First of all you need to define how much risk you want to take very time you enter a trade. For example, let s say you want to take a risk level of 3% per trade ($300 per trade). Ok, in my Intraday Street Smart Forex TM trading system after entering the market we place a 30 pips stop order in order to cut possible losses short. That means the maximum loss we may suffer is 30 pips. Now, it is about to calculate the leverage we will use according to the defined risk level of 3%: Lot Size x pips = $300 Lot Size = $100,000 = 1 lot $10,000 : $100,000 = 1 : 10 That means that you will use a leverage of 1 : 10 by trading 1 lot EURUSD. Example 2: Longterm Rules, GBPUSD, 3% risk level, $20,000 account size Well, let us assume that you want to trade GBPUSD using my Long-Term Street Smart Forex TM trading system and that your account size is $20,000. First of all you need to define how much risk you want to take very time you enter a trade. For example, let s say you want to take a risk level of 3% per trade ($600 per trade). Ok, in my Long-Term Street Smart Forex TM trading system after entering the market we place a 60 pips stop order in order to cut possible losses short. That means the maximum loss we may suffer is 60 pips. Now, it is about to calculate the leverage we will use according to the defined risk level of 3%: Lot Size x pips = $600 Lot Size = $100,000 = 1 lot $20,000 : $100,000 = 1 : 5 That means that you will use a leverage of 1 : 5 by trading 1 lot GBPUSD. Please, remind yourself that one of your main aims should not only to make profit, but also to protect your trading capital. 22

23 2.4. Your Trading Equipment Before you can start trading you need the following trading equipment: appropriate computer equipment a forex broker a suitable charting software Your Computer Equipment Unfortunately, you cannot go into real forex trading with an outdated computer system or an unstable and slow Internet connection. If you enter a position, you cannot afford that your computer system crashes or that your Internet connection fails. That way you could miss a proper exit signal which would have protected your already achieved profit or what is much worst, directly after you enter a position, it could happen that you are not able to place your stop order, because your Internet connection or computer fails. This is trader s suicide, as you could lose all of your trading capital, if suddenly the price of the currency pair drastically changes! On top of that you cannot afford that you follow the market price or place market orders with a considerable time delay (either because your Internet connection or your computer is too slow), because this will cost you lots of money in the long run. As a rule of thumb you can use the following check: Is your computer and Internet connection 100% stable? Are you able to follow the market price and to place market orders in real-time without any time delay? If not, you should enhance your computer equipment, starting with the weakest part of the chain How to choose your Forex Broker Without a reliable broker, even the best traders may have a limited chance of success. Every trader I know has at least one horror story about his/her broker. What happens if you try to sell your position because the value of your holdings is quickly depreciating only to find out that your broker s server is down. By the time they fix the problem you 23

24 may be out of 100 s even 1000 s of dollars. This is especially true when trading currencies. When choosing your broker, you ll need to take into account several factors. You also need to understand that while one broker may be an excellent choice for one form of trading it may be a terrible choice for another form of trading. If you are not happy with the service and performance that you receive from your broker you should look for another one. It is not worth your time or money to be loyal to someone whose service isn t working for you. There are literally hundreds of brokers that you can choose from. When it is time to choose your broker, take the time to get informed about several prospective brokers. Although you can always change your broker later it is often a frustrating experience, so try to do everything in your power to make sure that you do it right the first time. By choosing your broker carefully you will save yourself valuable time and money. Your forex broker should have the following properties: Low Trading Costs Although brokers do say that it is not in their interest that you lose your money, you need to remember that they make profit whether you win or lose. Equities and futures brokers make their profits on commissions that traders pay to them for every trade they make. Forex brokers make their profits from spreads. Spread is the difference between bid price (the price you sell at) and ask price (the price you buy at). Every currency quote has these two numbers displayed. For example, a EUR/USD quote of / means bid(sell): and ask(buy): , a spread of 2 pips. Didn t you notice that every time you enter a trade, you start with a negative balance account? Well, that is the spread your broker is earning from you. If you would buy and sell immediately 1 lot EUR/USD, then you would make a loss of $20: as you would buy at and sell at $100,000 x ( ) = $20. Figure

25 More trades you do, more money your broker makes. This is why many brokers that cater to currency traders prefer traders who make many trades during the day. They even hold courses that teach you how to scalp in and out of positions all day long. Although this approach has worked out for some traders who were trading highflying Nasdaq stocks in the late 90s for a currency trader it is a sure way to slowly lose all of his money. Here is an example of the danger of such a system. Let s say a trader has $2,000 in capital and is using 1:5 leverage to buy/sell $10,000 per trade and let s say that he trades 20 times daily as some of those courses and strategies teach. Average spread being around 5 pips he would spend $5 per trade. At 20 trades per day this would equal $100 per day in spreads. It is five percent of the trader s capital each day just in spreads. 20 trading days a month and it would equal 100% of trader s capital each month. You are better spending your money anywhere else. The importance of spreads depends greatly on your trading style and your trading system If my system generates several entry signals per day and you are using relatively tight stops in order to limit your losses, then spread size is very important to you. With such trading style the difference between a broker that has average spread of 4 pips and a broker that has an average spread of 8 pips is of huge importance. 5 trades per day can mean $40 per day, $800 per month, $9,600 per year if you are trading in $10,000 per trade. Adds up quickly, doesn t it? Some forex brokers will request, in addition to the spread, a commission per trade. For example they may ask 5$ for every lot you want to trade. One would normally assume that brokers asking for commission are in any case more expensive than the other commission-free ones. Well, that is not always the case, as brokers asking for commissions offer typically much lower spreads than the commission-free ones. For example assume that we have a broker A that requests for trading the major currency pair EUR/USD 3 pips and a broker B that requests for trading the same currency pair 1 pip plus 5$ per lot. What would be the costs for trading 1 lot EUR/USD? With broker A the costs would be $30 per trade (3 pips x $100,000), with broker B the costs would be $15 per trade (1 pip x $100, $)! So don t automatically disregard the brokers requesting commissions. Sometimes they 25

26 are cheaper than the commission-free ones! In the Table 2-4 below you can find the trading costs of several forex brokers at the time of this writing. Fast Execution of Market Orders In order to successfully place a trade you need to be able to get the most favorable price at any given time. This is especially true for market orders. When trading currencies, prices move extremely fast and by the time your order gets filled it may be at a price that is very different from the price you were trying to get, which was exactly the price displayed at your monitor at the time you placed your order. The losses we suffer in case such a scenario occurs are known as slippage costs. Even the brokers that normally provide fast executions occasionally may take longer to fill your order. High trading volumes may affect the speed of their executions and when prices move quickly your limit orders may become outdated. Appropriate 24-hour Customer Service You should be able to contact the customer service even if the brokerage firm has technical problems and lots of clients call the customer service at the same time. Further you should be able to contact the customer service by different ways, 24-hour phone service as a must-have. Think about the possibility, that while you have an opened position your internet connection fails. In such case you need somebody on the phone being able to let you know what is happening with your trade. High System Reliability If you find out that the brokerage system is down too often, then you have to choose another brokerage. You cannot afford that after you enter a position, the brokerage system fails! For the same reason you need stable computer equipment, you also need reliable brokerage system. High Company Reliability If you do not completely trust your broker, you won t feel comfortable transferring your funds to them. Of course, there is no 100% guarantee in life, but you can minimize possible risks. First you will request that the brokerage company is regulated by a governmental agency from a country of your trust. Brokerage 26

27 companies are usually regulated by the US agencies CFTC and NFA, sometimes also by agencies from other countries such as FSA (UK), SFBC (CH) or ASIC (AU). Would you trust a brokerage company which is not regulated or even one which is regulated by an offshore island? Second you will request that the brokerage company is over five years in the market. And third that it has offices in several places around the world, desirable of course also in your residence country. Below you can find a list of brokers that are appropriate for forex trading (see Table 2-4). 27

28 Forex Broker Account Conditions Trading Costs Company Reliability Min. Deposit Max. Leverage Commission Spread on Majors Since Regulated By $ :1 No 2 to FSA (UK) $2, :1 No 2 to SFBC(CH) $2, :1 No 2 to NFA(US), FSA(UK), ASIC(AU), BAFIN(DE), OSC(CA) $ :1 No 3 to CFTC/NFA (US) $ :1 No 1 to SFBC(CH) $ :1 No 2 to CFTC/NFA (US) $2, :1 No 3 to Polyreg (CH) $ :1 No 2 to 4* 1999 CFTC/NFA (US), FSA(UK), FSA(JAPAN) $ :1 No 2 to NFA (US) $ :1 No 3 to CFTC/NFA (US) 28

29 Forex Broker Account Conditions Trading Costs Company Reliability Min. Deposit Max. Leverage Commission Spread on Majors Since Regulated By $ :1 No 3 to 5 CFTC/NFA (US) $ :1 No 3 to CFTC/SEC (US), FSA (Japan), ASIC (Australia) $7,500 50:1 $3/100k 1 to CFTC/NFA (US) $5,000 50:1 $2/100k 2 to $ :1 No 2 to NFA(US), CFTC(US) $ :1 Yes 1 to CFTC/NFA (US) $ :1 No 3 to CFTC/NFA (US) $2, :1 No 2 to SFBC(CH) $1 50:1 No 1.2 to CFTC/NFA (US) $2, :1 No 2 to DFSA(DK) Table

30 Charting Software In order to implement my system you need charting software capable to place some TA signals (EMA, MACD and RSI) and capable to draw lines on the chart. These features are usually provided by any charting software, so you should be able to implement my system regardless which charting software you are using. Usually when you open an account in a brokerage firm, you get free or discounted charting software. If you do not feel comfortable with the provided charting software, I recommend that you to take a closer look at the following charting software programs. Most of them provide a one month free trial period so you can try several of them before you decide which one suits your needs. Here is a short list of some of the software providers. There are many others out there and you can find them by doing simple Google searching. 30

31 Free Charts Metatrader Website: Metatrader offers several technical indicators and time frames, but what sets the package apart is its builtin language for programming custom indicators and trading strategies. With this feature you can analyze the market, enter pending orders, and automatically trigger trades generated by my system. It is the best charting software for free out there. Figure

32 FXtrek Website: FXtrek offers a suite of increasingly sophisticated packages. Here you can gain access to FXtrek's free package, which makes for an extremely efficient starter kit for the beginning technician. The charts feature the most popular time frames, including tick and 1 minute. In addition, it offers the most commonly used indicators used for FX analysis. Java-based. Figure

33 Stratagem Website: Designed for ease of use, this package contains a menu bar that allows you to execute the most common charting actions with a single click of the mouse. The user friendly layout offers you the ability to organize and tile workspaces. This package includes 14 technical indicators, 7 different time frames, and a multiple-chart viewing capability. Java-based. Figure

34 Premium Charts esignal Website: Costs: $115/Month plus Data feed $50/month for the FX E-signal are a well established name in the charting software arena. E-signal offer reliable charts with a slew of technical indicators, drawing tools, as well as alerts, back testing capabilities, and a helpful support team. Windows based. Figure

35 Amibroker Website: Costs: SOFTWARE COST: Professional - $ one time purchase fee. Standard - $ one time purchase fee, FX DATA FEED COST: Varies based on Data feed Provider AmiBroker offers a robust professional charting package with such features as alerts back-testing, and indicator customization all accessible via a clear, user-friendly interface. AmiBroker is also noted for their exceptional Customer Support team, which distinguishes itself with superior service quality and efficiency. Windows based. Figure

36 CQG Website: Costs: SOFTWARE COST: $545/month, FX DATA FEED COST: $100/month CQG charts offer a robust charting solution with alerts, back testing, the ability to export to excel, and a large number of technical indicators. CQG provides worldwide data coverage including futures, options, and stock exchanges. Windows based. Figure

37 2.5. Monitor More Than One Currency Pair As I did not want to confuse our reader with too much information at once, I decided to monitor only one currency pair in my examples. Once you get more comfortable using the "Street Smart Forex TM " trading system, I recommend that you monitor more than one currency pair at the same time. That way, you will get more entry signals and in consequence you will enter more trades generating a higher profit. First you have to decide how many currency pairs you are going to monitor at once. I recommend starting with two currency pairs, as it is a manageable number. If at any time you do not get enough entry signals, you can just increase the number of monitored currency pairs. 37

38 2.6. Technical Analysis For those of you who are not familiar with the Technical Analysis (TA) tools used in my system I want to explain them to you in detail. The TA tools used in the Street Smart Forex TM trading system: Exponential Moving Average (EMA) Moving Average Convergence Divergence (MACD) Relative Strength Index (RSI) Support/Resistance Zigzag Signals Moving Average Moving averages are one of the most popular and easy to use tools available to the technical analyst. They smooth a data series and make it easier to spot trends, something that is especially helpful in volatile markets. The picture below shows a candlestick chart with a 20-period moving average as blue line 38

39 Figure 2-9 The two most popular types of moving averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA). A X period simple moving average (SMA) is calculated by adding up the closing prices of the last X bars and then dividing that number by X. Let s say we plot a 3 period SMA on the daily chart of the EUR/USD. The closing prices for the last 3 days are as follows: Day 1: Day 2: Day 3: The simple moving average would be calculated as follows: ( )/3= Moving averages are available in almost all charting packages as signals to be added to your chart. So actually you do not really need to understand how these signals are calculated. You only need to know how to add them to your charts within your charting software. In the picture below I show how to set the settings within esignal for adding a 150 period EMA to a 5 minute chart. Something similar will be in any other charting software. 39

40 Figure Moving Average Convergence Divergence Moving Average Convergence Divergence, also known as MACD, is a technical analysis tool from which a trader can get bullish or bearish signals. MACD is a tool also available in almost all charting packages. So you only need to know how to add MACD tool to your charts and how to use it for generating signals. Within an MACD chart, you will usually see three parameters that are used for its settings, two lines (base line and signal line) and optionally a histogram. 40

41 Figure 2-11 The base line is the difference between a fast and slow exponential moving average. The period of the fast EMA is given as the first parameter ( 12 in Figure 2-11), the period of the slow EMA is given as the second parameter ( 26 in Figure 2-11). The signal line is the moving average of the base line. The period of this moving average is given as the third parameter ( 9 in Figure 2-11). The histogram is the difference between the base line and the signal line. In my system we will be using a MACD(12,26,9) within a 5 minute chart. That is a 12- period fast EMA and a 26-period slow EMA for the calculation of the base line. And a 9 period MA for the calculation of the signal line. For generating signals we will only be looking at the base line and at the signal line and not at the histogram. That is the reason why I recommend hiding the histogram if possible. In the picture below I show how to set the settings within esignal for adding a MACD(12,26,9) to a 5 minute chart. 41

42 Figure Relative Strength Index The Relative Strength Index, also known as RSI, is one of the most used indicators from the oscillators toolbox. Figure

43 In my system I use a 14 period RSI from a 5 minute chart together with an upper band at 60 and a lower band at 40 for determining the Signal Strength. RSI is a tool available in almost all charting packages. So actually you do not really need to understand how RSI is calculated. You only need to know how to add it to your charts within your charting software. In the picture below I show how to set the settings within esignal for adding a 14 period RSI to a 5 minute chart. Additionally we define an upper band at 60 and a lower band at 40. Figure Support/Resistance Levels Support and resistance is the most basic concept of technical analysis. Support is created at points below current price where there is enough buyers to prevent and eventually reverse decline of the underlying instruments price. Resistance is created at points above the current price where there are enough sellers to stop and eventually reverse advance in the underlying instruments price. Support and resistance are often established around key exponential moving average such as 20 day MA and 50 day MA or around key Fibonacci Retracement levels. Sometimes they simply establish around round numbers such as 1.15, 1.10, 0.75 etc 43

44 Figure 2-15 Figure 2-15 is a hourly candlestick chart for EUR/USD. As we can observe from the chart resistance was established around For several days in the row Euro was unable to break through resistance level. When a price is unable to move through key resistance level for several times, it is considered a bearish signal and if it moves through key resistance level, coupled with other TA indicators it is considered a strong buy signal. 44

45 Figure 2-16 Figure 2-16 is a daily candlestick chart for EUR/USD. As we can observe from the chart support was established around For several months in a row Euro was unable to break through support level, and on the final bounce off the support line it picked up momentum and started a multi month rally. Support and resistance should not be used alone when looking for potential entry signals but rather in the combination with other signals. When the price reaches resistance level and starts reversing it is usually an entry opportunity on the short side. When the price reaches support level and starts reversing it is usually an entry opportunity on the long side. Such trading approach, when a trader anticipates the price to bounce off support/resistance level is also called swing trading. On the other hand traders who anticipate continuation of the current price trend after the price crosses support/resistance level are said to be using breakout trading approach. 45

46 Zigzag Signals The zigzag signal is the most effective chart pattern signal and also one of the simplest to determine. The reason why the zigzag signal is so effective is that it is based on a fundamental characteristic of forex markets. As said before regardless of how strong a market trend is, the market never moves only in the direction of the trend there are always minor movements against the major trend. These deviations usually don t last very long and after them the market moves again in the direction of the long-term trend. That means if the market is bullish, then we will get both upward and downward movements but the upward movements will be stronger. Under such market condition we will repeatedly see bullish zigzag signals: a major upward movement interrupted by a minor downward and continued by a major upward movement. Figure 2-17 Bullish Zigzag Signals in a Bullish Market Figure 2-17 is a daily candlestick chart for EUR/USD showing a clearly bullish period (the price climbed from 1.25 up to 1.46). As we can observe from the chart we have major 46

47 upward movements interrupted by minor downward movements forming several zigzag signals Paper Trading Before going into real trading, I recommend that you get the needed experience doing paper trading using one of the numerous demo accounts offered by online brokerage companies. You have to get comfortable with placing buy and sell entry market orders, placing exit stop orders and entering the market long/short. You have also to get used with your trading platform and especially with your trading system. Because, when you enter the forex trading battle, you have to be confident with these things. When you do paper trading using a demo account, then you place entry and exit orders using a real-time or pre-recorded chart quotes. Every time you close a position, the position is recorded and your demo trading capital updated. Online brokerages offering demo accounts are for example:. Once you have done paper trading and become confident, you are ready to trade for real. Be careful, watch your finances wisely, and don t hesitate to pull out of a trade if it is not going in your direction. Trading shouldn t be a gamble. With the right tools, ammunition and experience you will be able to make your trading endeavor a success. 47

48 Chapter 3 Intraday Trading System For the purpose of explaining my trading system I will be using esignal charting software. Which software and which trading platform you will be using is entirely up to you, however my setup will give you general ideas of what capabilities should your software have. Principles and rules that are explained in this system can be used to trade any currency pair Entry Strategy My entry strategy is based on the following steps: Step 1 Step 2 Step 3 Step 4 Staying out of Sideways Market Identifying the Long-Term Trend Getting an Entry Signal Confirming with the Signal Strength Step 1: Staying out of Sideways Market Sideways market is recognized when within the last 2 hours the highest price differs from the lowest price by less than 30 pips. If this is the case we do not enter the market. Otherwise we go to step 2. 48

49 Figure 3-1 Sideways Market Step 2: Identifying the Long-Term Trend For identifying the long term trend we will use 150-period Exponential Moving Average (EMA) on a 5 minute chart, as I found out that EMA is the best indicator for this purpose. It is as simple as following: The long-term trend is bullish when EMA(150) is rising. The long-term trend is bearish when EMA(150) is falling. 49

50 Figure 3-2 If the long-term trend is recognized as bullish, we will look ONLY for bullish entry signals and if the market is bearish we will look ONLY for bearish entry signals Step 3: Getting an Entry Signal An Entry Signal is a point in time where there is the highest possible probability that the trade will go into our desired direction. What I found is that there is one indicator (MACD) that gets rid of low quality signals by slightly changing it. For that purpose the +3/-3 pips range is added to the conventional way of using MACD. We will add MACD(12,26,9) to the 5 minute chart and plot the +3/-3 pips range. Our set up should look as shown in the figure below. 50

51 Figure 3-3 We get a bullish trigger signal if the base line crosses the signal line from below to above and the base line gets outside the +3/-3 pips range. We get a bearish trigger signal if the base line crosses the signal line from above to below and the base line gets outside the +3/-3 pips range. In the example below around 05:30AM we get a bearish signal as the base line crosses the signal line from above to below and the base line is outside the +3/-3 pips range. 51

52 Figure 3-4 Bearish Entry Signal Step 4: Confirming with the Signal Strength The Signal Strength is calculated by adding the points assigned to the Zigzag, Support/Resistance and RSI signal. I will now explain Zigzag, Support/Resistance and RSI signals respectively: Zigzag Signals (12 Points) For recognizing zigzag signals we will use 1 minute chart. A bullish zigzag signal is recognized when we get a major upward movement, followed by a minor downward and finished by a major upward movement. Here is an example on a chart: 52

53 Figure 3-5 Bullish Zigzag Signal A bearish zigzag signal is recognized when we get a major downward movement, followed by a minor upward and finished by a major downward movement. Here is an example on a chart: 53

54 Figure 3-6 Bearish Zigzag Signal Support/Resistance Levels ( 8 Points) Support and resistance is the most basic concept of technical analysis. Support is created at points below current price where there is enough buyers to prevent and eventually reverse decline of the underlying instruments price. Resistance is created at points above the current price where there are enough sellers to stop and eventually reverse advance in the underlying instruments price. 54

55 Figure 3-7 How to determine the support/resistance levels? Even though support/resistance levels are one of the most commonly used tools, there are many different approaches how to determine them. I have found the following approach as the best one for our purposes. Step 1: Determining when the trading day starts and ends Although forex market is in essence a 24-hour market, for the purpose of my strategy we need to define when does the trading day start and when does it end. Let s have a look at figure below: 55

56 Figure 3-8 The figure above shows 15-min candlestick charts for USD/JPY and EUR/USD respectively. What do they all have in common? We can observe that the time of the lowest trading volume for all of them is at approximately 5pm EST or 10pm GMT. That is the time when almost all of the Forex Trading Centers around the world are closed. Therefore we will use 10pm GMT as the time when previous trading day ends and the new trading day begins. Here is an example: You live in Europe. It is Thursday morning 9amGMT. Previous trading day has started on Tuesday 10pmGMT and it has ended Wednesday 10pmGMT. Another example: You live in North America. It is Thursday morning 9amEST. Previous trading day has started on Tuesday 5pm EST and it has ended Wednesday 5pm EST. For those who don t know: Eastern Standard Time (EST) = Greenwich Mean Time (GMT) 5 Why is it important to determine when does the trading day start and when does it end? It is important because we will need values such as Previous Day High, Previous Day Low and Previous Day Close later on for determining the support and resistance levels. Step 2: Determining Previous Day High, Previous Day Low and Previous Day Close Once we know that previous trading day ended at 05:00 PM of previous day, we need to determine Previous Day High, Previous Day Low and Previous Day Close: 56

57 Figure 3-9 The figure above is a 15 min candlestick chart for EUR/USD. From the chart above we can determine that: Previous day High PDHigh = Previous day Low PDLow = Previous day Close PDClose = Step 3: Determining Pivot Point The Pivot Point (PP) is calculated as: PP = (PDHigh + PDLow + PDClose) / 3 For the example above the PP is found to be: Pivot Point PP = ( ) / 3 =

58 Step 4: Determining the Support and Resistance Levels S1, S2, R1 and R2 The S1, S2, R1, R2 Support and Resistance Levels are calculated using the following formulas: R1 = (PP x 2) PDLow R2 = PP + (PDHigh - PDLow) S1 = (PP x 2) PDHigh S2 = PP - (PDHigh - PDLow) For the example above the S/R levels for the next trading day are: Figure 3-10 R1 = ( x 2) = R2 = ( ) = S1 = ( x 2) = S2 = ( ) =

59 Although it may look a little difficult at the beginning, you will get comfortable with the calculations after some practice. And these calculations need to be done only once before the start of your trading day! How to get signals based on the support/resistance levels? A bullish Support/Resistance signal is got, when: the price bounces from above at a S/R level (bullish bouncing) or the price crosses from below to above a S/R level (bullish breakthrough) Figure 3-11 Bullish Support/Resistance Signals A bearish Support/Resistance signal is got, when: the price bounces from below at a S/R level (bearish bouncing) or the price crosses from above to below a S/R level (bearish breakthrough) 59

60 Figure 3-12 Bearish Support/Resistance Signals Relative Strength Index (6 Points) In my strategy we will be using a 14 period RSI on a 5 minute chart together with an upper band at 60 and a lower band at 40: if RSI is above 60 (upper level), then we read this as a bullish signal if RSI is below 40 (lower level), then we read this as a bearish signal In the example below we read a bearish signal as the RSI is less than

61 Figure

62 ENTRY STRATEGY RULES Entering on the LONG side We will enter on the LONG side If the Market is NOT Sideways Market Long Term Trend is Bullish meaning EMA(150) is rising MACD base line crosses the signal line from below to above and the base line gets outside the +3/-3 pips range. And the SCORE (Zigzag + S/R + RSI) is greater or equal to 12. Zigzag signal is bullish = 12 Points Support/Resistance signal is bullish = 8 Points RSI is greater than 60 = 6 Points Entering on the SHORT side We will enter on the SHORT side If the Market is NOT Sideways Market Long Term Trend is Bearish meaning EMA(150) is falling MACD base line crosses the signal line from above to below and the base line gets outside the +3/-3 pips range. And the SCORE (Zigzag + S/R + RSI) is greater or equal to 12. Zigzag signal is bearish = 12 Points Support/Resistance signal is bearish = 8 Points RSI is less than 40 = 6 Points 62

63 3.2. Exit Strategy Following actions define my exit strategy: Action 1 Cut Your Losses Short : Immediately after entering the market we place a stop order. 30 pips below entry price if the entry signal was bullish or 30 pips above entry price if the entry signal was bearish Action 2 Take Part of Your Profits : Depending on the number of points (SCORE) we got from the Signal Strength, we will define target profit as follows. Signal Strength number of pips distance from the target level to the entry price pts 30 pips 20 pts 40 pips 26 pts 50 pips Table 3-1: Target Level In the case the price reaches the target level we close only half of the position. The other half is still in trade to make even more profit Action 3 Give Your Trade Enough Space : Recursive Trailing Stop Formula The basic idea of my Recursive Trailing Stop Formula is as follows: The more the market moves in the direction of our trade, the more space we want to allow our trade in order to make even more profit. So in order to avoid that we are stopped out just at the moment when our trade needed just a little more space, we need a wider space to the actual price than 30 pips. The key question is, how much exactly we want to risk in order to be able to make even more profit? 63

64 I have answered this question by using a proprietary Recursive Trailing Stop Formula for recalculating the stop order every time the market moves in our direction. This method behaves in a way that the more the market moves in the direction the more space we want to allow our trade. Every time the price moves 30 pips in our direction we readjust the stop order by using the following Recursive Trailing Stop Formula : Current stop order = Old stop order + Previous Stop Loss x 0.85 Equation 1 Here is an example for the usage of the Recursive Trailing Stop Formula : Figure 3-14 We enter long (bullish) the market at the price of First stop order is set 30 pips below the entry price: First Stop Order at =

65 If the price moves 30 pips in our direction, here it means that the price reaches , then the stop order is readjusted to: New Stop Order = x 0.85 = = If the price moves again 30 pips in our direction, here it means that the price reaches , then the stop order is readjusted to: New stop order = x 0.85 = = And so forth Action 4 Take Your Profit when Your Trade Runs out of Steam : We close the position in case the market gets sideways and our actual balance is positive. In this case Sideways market is recognized, when within the last 4 hours the highest price differs from the lowest price by less than 30 pips. Figure 3-15 Sideways Market 65

66 Chapter 4 Intraday USD/CAD Trading Example In this example we are going to trade the currency pair USD/CAD. Ok, today it is February :00 AM. Before we start trading we have to do the following preparations: 4.1. Trading Day Preparation Determining the Support/Resistance Levels First we need to determine the Support/Resistance Levels. For that purpose we open a 5 minute candlestick chart and check for the Previous Day High, Previous Day Low and Previous Day Close. Remember that end of previous trading day is defined at 05:00 PM EST of previous day. 66

67 Figure 4-1 From the chart above we can determine that: Previous day High PDHigh = Previous day Low PDLow = Previous day Close PDClose = The Pivot Point (PP) is calculated to: Pivot Point PP = (PDHigh + PDLow + PDClose) / 3 = ( ) / 3 = The S1, S2, R1, R2 Support and Resistance Levels are calculated to: R1 = (PP x 2) PDLow = (1.0011x 2) = R2 = PP + (PDHigh - PDLow) = ( ) = S1 = (PP x 2) PDHigh = ( x 2) = S2 = PP - (PDHigh - PDLow) = ( ) =

68 The S/R levels for the trading day are: Figure Entering the Market Now we are ready to start. Step 1: Check if the market is recognized as non-sideways. For that purpose we need to look at the 5 minute chart and pick up the highest and lowest values within the last two hours. As we can see from figure below the market is non-sideways as the highest price (0.9968) differs from the lowest price (0.9905) by more than 30 pips. 68

69 Figure 4-3 Step 2: Identify the long-term trend. For that purpose we add EMA(150) to a 5 minute chart and check if the EMA is rising or falling. As EMA is falling the long-term trend is recognized as bearish. So we will look only for bearish entry signals. Figure 4-4 Step 3: Getting an entry signal. At 07:10 we get a bearish trigger signal, as the base line (blue line) crosses from above to below the signal line (red line) and the base line is outside the 3pips range. 69

70 Figure 4-5 Step 4: Confirm with the Signal Strength. The Signal Strength is calculated by adding the points assigned to the Zigzag, Support/Resistance and RSI signal. As we can see from the figure below: There was no Zigzag signal that makes 0 points The last S/R signal is bearish that makes 8 points The RSI is below 40 that makes 6 points If we add up all these points, we come to Signal Strength of 14 points. 70

71 Figure 4-6 As the Signal Strength is 14 points we place an order for entering the market. In this example we sell 5 lots of the currency pair USDCAD at the price of Exiting the Market Ok, now we are about to find how far we will let the market move before we exit our position. First of all we place a stop order 30 pips above the entry price. That means at = It s represented by the thick blue line in the picture below. 71

72 Figure 4-7 We will also determine the target level. The Signal Strength was determined to be 14 points and based on Table 3-1 at page 63 we get a target level 30 pips below the entry price at Figure

73 At 08:05 the target level is reached so we close half of our position (2.5 lots) at the price of making a profit of 759$. Figure 4-9 As the price has moved 30 pips in our direction (from to below ) we also readjust the stop order to using the Recursive Trailing Stop Formula: New stop order = Old stop order + Previous Stop Loss Distance x 0.85 = x 0.85 = =

74 Figure 4-10 At 11:30 the price has moved again another 30 pips in our direction (from to below ). So we readjust the stop order to : New stop order = Old stop order + Previous Stop Loss Distance x 0.85 = x 0.85 = = Figure

75 At 12:35 the price has moved again another 30 pips in our direction (from to below ), so we readjust the stop order to0.9880: New stop order = Old stop order + Previous Stop Loss Distance x 0.85 = x 0.85 = = Figure 4-12 At 14:45 the price has moved again another 30 pips in our direction (from to below ), so we readjust the stop order to : New stop order = Old stop order + Previous Stop Loss Distance x 0.85 = x 0.85 = =

76 Figure 4-13 Around 20:25 we recognize that our trade has run out of steam: the market is sideways as within the last four hours the highest price (0.9824) differs from the lowest price (0.9800) by less than 30 pips. Due to this we exit our trade closing our position (remaining 2.5 lots) at the price of making a profit of 2,702$. Figure

77 At the end using the intraday Street Smart Forex TM trading system a profit of 759 USD + 2,702 USD = 3,461 USD is achieved (see Figure 4.17). A profit of 3,461 USD for one trading day. Figure

78 Chapter 5 Intraday EUR/USD Trading Example In this example we are going to trade the currency pair EUR/USD. Before we start trading we have to do the following preparation: 5.1. Trading Day Preparation Determining the Support/Resistance Levels In our example it is 8AM EST on January 24. First we need to determine the Support/Resistance Levels. For that purpose we open a 5 minute chart and check for the Previous Day High, Previous Day Low and Previous Day Close. Remember that the end of previous trading day is defined at 05:00 PM EST of previous day. 78

79 Figure 5-1 From the chart above we can determine that: Previous day High PDHigh = Previous day Low PDLow = Previous day Close PDClose = The Pivot Point (PP) is calculated to: Pivot Point PP = (PDHigh + PDLow + PDClose) / 3 = ( ) / 3 = The S1, S2, R1, R2 Support and Resistance Levels are calculated to: R1 = (PP x 2) PDLow = ( x 2) = R2 = PP + (PDHigh - PDLow) = ( ) = S1 = (PP x 2) PDHigh = ( x 2) =

80 S2 = PP - (PDHigh - PDLow) = ( ) = The S/R levels for the next trading day are: Figure Entering the Market Now we are ready to start. Step 1: Check if the market is recognized as non-sideways. For that purpose we need to look at the 5 minute chart and pick up the highest and lowest values within the last two hours. As we can see from figure below the market is non-sideways as the highest price (1.4689) differs from the lowest price (1.4641) by more than 30 pips. 80

81 Figure 5-3 Step 2: Identify the long-term trend. For that purpose we add EMA(150) to a 5 minute chart and check if the EMA is rising or falling. As EMA is rising the long-term trend is recognized as bullish. So we will look ONLY for bullish entry signals. Figure

82 Step 3: Getting an entry signal. At 08:50 we get a bullish trigger signal since the base line (blue line) crosses signal line (red line) from below to above the and base line gets outside the 3pips range. Figure 5-5 Step 4: Confirm with the Signal Strength. The Signal Strength is calculated by adding the points assigned to the Zigzag, Support/Resistance and RSI signal. As we can see from the figure below: The last Zigzag signal is bullish that makes 12 points The last S/R signal is bullish that makes 8 points The RSI is above 60 that makes 6 points If we add up all these points, we come to a Signal Strength of 26 points. 82

83 Figure 5-6 As the Signal Strength is 26 points we place an entry order. In this example we buy 5 lots of the currency pair EURUSD at the price of Exiting the Market Ok, now we need to find out how far we will let the market move before we exit our position. First of all we place a stop order 30 pips below the entry price. That means at = (Figure 3-8) 83

84 Figure 5-7 We will determine the target level. The Signal Strength was determined to be 26 points so we get a target level 50 pips above the entry price at (Table 3-1 at page 63). Figure

85 At 09:10 the price has moved 30 pips in our direction (from to above ). So we readjust the stop order to using the Recursive Trailing Stop Formula: New stop order = Old stop order + Previous Stop Loss Distance x 0.85 = x 0.85 = = Figure 5-9 At 10:05 the target level is reached so we close half of our position (2.5 lots) at the price of making a profit of 1250$. 85

86 Figure 5-10 At 11:30 the price has moved again 30 pips in our direction (from to above ), so we readjust the stop order to : New stop order = Old stop order + (Previous Stop Loss Distance x 0.85 = x 0.85 = =

87 Figure 5-11 At 13:50 the price has moved again 30 pips in our direction (from to above ), so we readjust the stop order to : New stop order = Old stop order + Previous Stop Loss Distance x 0.85 = x 0.85 = =

88 Figure 5-12 Around 20:00 we recognize that market is sideways as within the last four hours the highest price (1.4777) differs from the lowest price (1.4748) by less than 30 pips. Due to this we exit our trade closing our position (remaining 2.5 lots) at the price of making a profit of 2,150$. Figure

89 At the end using the intraday Street Smart Forex TM trading system a profit of 1,250 USD + 2,150 USD = 3,400 USD is achieved (see Figure 5.14). A profit of 3,400 USD for one trading day. Figure

90 Chapter 6 Long-Term Trading System The Long-Term Street Smart Forex TM trading system, another viable trading approach, is suitable for those of you who have day jobs that prevent you from closely monitoring your positions during Market hours. This trading approach is called Long-Term Trading or Swing trading. This is a way of trading in which a trader is holding his/her positions for a few days/weeks. Long-Term trader is trying to capitalize on larger swings in the forex price. Sometimes Long-Term trader s time frame is one day, sometimes it is a few days and in the exceptional situations even a few weeks. Both approaches, Long-Term and Intraday Street Smart Forex TM trading system, are very similar, as only the values of some parameters are changed. Because of that fact I will not repeat all the explanations as done before for the Intraday Street Smart Forex TM trading system. Basically, I am only going to repeat the basics of the system pointing out the main differences between the Long-Term and the Intraday approach. So even you may already know that long-term trading is the kind of approach you are searching for, I highly recommend that you also read the chapter 3 that deals with the Intraday system as you will find some useful information there Entry Strategy My entry strategy is based on following steps: Step 1 Step 2 Step 3 Staying out of Sideways Market Identifying the Long-Term Trend Getting an Entry Signal 90

91 Step 4 Confirming with the Signal Strength One important remark before we start in detail. In the long-term trend approach I will very often make use of 4 hour charts. But this does not mean that one needs to follow the market every four hours, as this system is intended to be used in the way that we check the charts only once per day. We do so in order to decrease the time frame we keep a position to acceptable value of few days and in the exceptional situations even a few weeks Step 1: Staying out of Sideways Market Sideways market is recognized when within the last 3 days the highest price differs from the lowest price by less than 150 pips. If this is the case we do not enter the market. Otherwise we go to step 2. Figure 6-1 Sideways Market Step 2: Identifying the Long-Term Trend For identifying the long term trend we will use 125-period Exponential Moving Average (EMA) on a 4 hour chart, as I found out that EMA is the best indicator for this purpose. 91

92 It is as simple as following: The long-term trend is bullish when EMA(125) is rising. The long-term trend is bearish when EMA(125) is falling. Figure 6-2 If the long-term trend is recognized as bullish, we will look only for bullish entry signals and if the market is bearish we will look only for bearish entry signals Step 3: Getting an Entry Signal For obtaining an entry signal we will add MACD(12,26,9) to the 4 hour candlestick chart and plot the +20/-20 pips range. Our set up should look like as per below. 92

93 Figure 6-3 We get a bullish trigger signal if the base line crosses the signal line from below to above and the base line gets outside the +20/-20 pips range. We get a bearish trigger signal if the base line crosses the signal line from above to below and the base line gets outside the +20/-20 pips range. 93

94 Figure Step 4: Confirming with the Signal Strength The Signal Strength is calculated by adding the points assigned to the Zigzag, Support/Resistance and RSI signal Zigzag Signals ( 12 Points) We will use 1 hour chart for recognizing these signals. We will recognize a bullish zigzag signal in case we get a major upward movement, followed by a minor downward movement and followed again by a major upward movement. Here an example from a candlestick chart: 94

95 Figure 6-5 Bullish Zigzag Signal We will recognize a bearish zigzag signal in case we get a major downward movement, followed by a minor upward movement and followed again by a major downward movement. Here an example from a candlestick chart: 95

96 Figure 6-6 Bearish Zigzag Signal Support/Resistance Levels (8 Points) How to determine the support/resistance levels? Even though support/resistance levels are one of the most commonly used tools, there are many different approaches how to determine them. I myself have found the following approach as the best one for my purposes. Step 1: Determining Previous Two Weeks High, Low and Close We need to determine Previous Two Weeks High, Low and Close 96

97 Figure 6-7 The figure above is a one day candlestick chart for EUR/USD. From the chart above we can determine that: Previous two weeks High P2WHigh = Previous two weeks Low P2WLow = Previous two weeks Close P2WClose = Step 2: Determining Pivot Point The Pivot Point (PP) is calculated as: PP = (P2WHigh + P2WLow + P2WClose) / 3 For the example above the PP is found to be: Pivot Point PP = ( ) / 3 = Step 3: Determining the Support and Resistance Levels S1, S2, R1 and R2 97

98 The S1, S2, R1, R2 Support and Resistance Levels are calculated using the following formulas: R1 = (PP x 2) P2WLow R2 = PP + (P2WHigh P2WLow) S1 = (PP x 2) P2WHigh S2 = PP - (P2WHigh P2WLow) For the example above the S/R levels for the next trading day are: Figure 6-8 R1 = (1.4268x 2) = R2 = ( ) = S1 = ( x 2) = S2 = ( ) =

99 Although it may look a little difficult at the beginning, you will get comfortable with the calculations after some practice. And these calculations need to be done only once before starting your trading! How to get signals based on the support/resistance levels? A bullish Support/Resistance signal is got, when: the price bounces from above at a S/R level (bullish bouncing) the price crosses from below to above a S/R level (bullish breakthrough) Figure 6-9 Bullish Support/Resistance Signals A bearish Support/Resistance signal is got, when: the price bounces from below at a S/R level (bearish bouncing) the price crosses from above to below a S/R level (bearish breakthrough) 99

100 Figure 6-10 Bearish Support/Resistance Signals Relative Strength Index (6 Points) In my strategy we will be using a 14 period RSI from a 4 hour chart together with an upper band at 60 and a lower band at 40 for determining the Signal Strength as following: if RSI is above 60 (upper level), then we read this as a bullish signal if RSI is below 40 (lower level), then we read this as a bearish signal In the example below we read for the RSI a bullish signal as the RSI is higher than

101 Figure

102 ENTRY STRATEGY RULES Entering on the LONG side We will enter on the LONG side If the Market is NOT Sideways Market Long Term Trend is Bullish meaning EMA(125) is rising MACD base line crosses the signal line from below to above and the base line gets outside the +20/-20 pips range. And the SCORE (points added) is greater or equal to 12. Zigzag signal is bullish = 12 Points Support/Resistance signal is bullish = 8 Points RSI is greater than 60 = 6 Points Entering on the SHORT side We will enter on the SHORT side If the Market is NOT Sideways Market Long Term Trend is Bearish meaning EMA(125) is falling MACD base line crosses the signal line from above to below and the base line gets outside the +20/-20 pips range. And the SCORE (points added) is greater or equal to 12. Zigzag signal is bearish = 12 Points Support/Resistance signal is bearish = 8 Points RSI is less than 40 = 6 Points 102

103 6.2. Exit Strategy Following actions define my exit strategy: Action 1 Cut Your Losses Short : Immediately after entering the market we place a stop order 60 pips below entry price Action 2 Protect Part of Your Profits : Depending on the number of points we got for the Signal Strength, we will define target levels as follows. Signal Strength number of pips distance from the target level to the entry price 12 pts 40 pips 14 pts 50 pips 18 pts 60 pips 20 pts 80 pips 26 pts 100 pips Table 6-1 Target Level In case the price reaches the target level we close only half of the position as the other half should "let the profits run..." Action 3 Give Your Trade Enough Space : Recursive Trailing Stop Formula The basic idea of my Recursive Trailing Stop Formula is as follows: The more the market moves in the direction of our trade, the more space we want to allow our trade in order to make even more profit. I have answered this task by using a proprietary Recursive Trailing Stop Formula for recalculating the stop order every time the market moves in our direction. As the information about the last stop order goes into the calculation of the new stop order it is a 103

104 so called recursive formula. This method behaves in the way that the more the market moves in our directio the more space we want to allow to our trade. Every time the price moves 100 pips in our direction we readjust the stop order by using the following Recursive Trailing Stop Formula : New stop order = Old stop order + Previous Stop Loss Distance x 0.85 Start Value for Stop Loss Distance is 100 pips Action 4 Take Your Profit when Your Trade Runs out of Steam : We close the position in case the market becomes sideways market and our actual balance is positive. Sideways market is recognized, when within the last 4 days the highest price differs from the lowest price by less than 150 pips Figure 6-12 Sideways Market 104

105 Chapter 7 Long-Term EUR/USD Trading Example In this example we are going to trade long-term the currency pair EUR/USD and we will check the charts once per day at 20:00 in the evening. Ok, today it is Wednesday, February 20. Before we start trading we have to do the following preparation: 7.1. Trading Preparation Determining the Support/Resistance Levels First we need to determine the Support/Resistance Levels. For that purpose we open 1 day candlestick chart and check for the Previous Two Weeks High, Previous Two Weeks Low and Previous Two Weeks Close. 105

106 Figure 7-1 From the chart above we can determine that: Previous two weeks High P2WHigh = Previous two weeks Low P2WLow = Previous two weeks Close P2WClose = The Pivot Point (PP) is calculated to: Pivot Point PP = (P2WHigh + P2WLow + P2WClose) / 3 = ( ) / 3 = The S1, S2, R1, R2 Support and Resistance Levels are calculated to: R1 = (PP x 2) P2WLow = ( x 2) = R2 = PP + (P2WHigh P2WLow) = ( ) = S1 = (PP x 2) P2WHigh = ( x 2) =

107 S2 = PP - (P2WHigh P2WLow) = ( ) = The S/R levels for the next trading day are: Figure Entering the Market Now we are ready to start. Step 1: Check if the market is recognized as non-sideways. For that purpose we need to look at the 4 hour chart and pick up the highest and lowest values within the last three days. As we can see from figure below the market is non-sideways as the highest price (1.4838) differs from the lowest price (1.4608) by more than 150 pips. 107

108 Figure 7-3 Step 2: Identify the long-term trend. For that purpose we add EMA(125) to a 4 hour chart and check if the EMA is rising or falling. As EMA is rising the long-term trend is recognized as bullish. So we will look only for bullish entry signals. 108

109 Figure 7-4 Step 3: Getting an entry signal. On Thursday, December 21 we get a bullish trigger signal, as the base line (blue line) crosses from below to above the signal line (red line) and base line is outside the 20 pips range. 109

110 Figure 7-5 Step 4: Confirm with the Signal Strength. The Signal Strength is calculated by adding the points assigned to the Zigzag, Support/Resistance and RSI signal. As we can see from the figure below: The last Zigzag signal is bullish that makes 12 points The last S/R signal is bearish that makes 0 points The RSI is above 60 (bullish) that makes 6 points If we add up all these points, we come to Signal Strength of 18 points. 110

111 Figure 7-6 As the Signal Strength is18 points we place an order for entering the market. In this example we buy 2 lots of the currency pair EURUSD at the price of Exiting the Market Ok, now we need to find how far we will let the market move before we exit our position. First of all we place a stop order 60 pips below the entry price. That means at = It s represented by the thick blue line in the picture below. 111

112 Figure 7-7 We will also determine the target level. The Signal Strength is determined to be 18 points and based on Table 6-1 Target Level at page 103 we get a target level 60 pips above the entry price at Figure

113 On Tuesday, February 26, when we check the charts at 20:00, we recognize that the target level has been reached. So we close half of our position (1 lot) at the price of making a profit of 1,910$. Figure 7-9 At the same time we also recognize that the price has moved two times 100 pips in our direction (from to above and from to above ). So we readjust the stop order using the Recursive Trailing Stop Formula two times: For the first 100 pips move: New stop order = Old stop order + Start Value Stop Loss Distance x 0.85 = x 0.85 = = For the second 100 pips move: New stop order = Old stop order + Previous Stop Loss Distance x 0.85 = x 0.85 = =

114 Figure 7-10 On Wednesday, February 27, when we check the charts at 20:00, we recognize that the price has moved again 100 pips in our direction (from to above ). So we readjust the stop order using the Recursive Trailing Stop Formula: New stop order = Old stop order + Previous Stop Loss Distance x 0.85 = x 0.85 = =

115 Figure 7-11 On Thursday, February 28, when we check the charts at 20:00, we recognize that the price has moved again 100 pips in our direction (from to above ). So we readjust the stop order using the Recursive Trailing Stop Formula: New stop order = Old stop order + Previous Stop Loss Distance x 0.85 = x 0.85 = =

116 Figure 7-12 On Tuesday, March 04, when we check the charts at 20:00, we recognize that our trade has run out of steam: the market is sideways as within the last four trading days (02/29, 03/02, 03/03 and 03/04) the highest price (1.5275) differs from the lowest price (1.5142) by less than 150 pips. Due to this we exit our trade closing our position (remaining 1 lot) at the price of making a profit of 3,910 $. 116

117 Figure 7-13 At the end by using the long-term Street Smart Forex TM trading system a profit of 1,910 USD + 3,910 USD = 5,820 USD is achieved (see Figure 7.14). A profit of 5,820 USD in only two trading weeks. 117

118 Figure

119 Chapter 8 Long-Term GBP/USD Trading Example In this example we are going to trade long-term the currency pair GBP/USD and we will check the charts once per day at 20:00 in the evening. Ok, today it is Thursday, December 13. Before we start trading we have to do the following preparation: 8.1. Trading Preparation Determining the Support/Resistance Levels First we need to determine the Support/Resistance Levels. For that purpose we open 1 day candlestick chart and check for the Previous Two Weeks High, Previous Two Weeks Low and Previous Two Weeks Close. 119

120 Figure 8-1 From the chart above we can determine that: Previous two weeks High P2WHigh = Previous two weeks Low P2WLow = Previous two weeks Close P2WClose = The Pivot Point (PP) is calculated to: Pivot Point PP = (P2WHigh + P2WLow + P2WClose) / 3 = ( ) / 3 = The S1, S2, R1, R2 Support and Resistance Levels are calculated to: R1 = (PP x 2) P2WDLow = ( x 2) = R2 = PP + (P2WHigh P2WLow) = ( ) = S1 = (PP x 2) P2WHigh = ( x 2) =

121 S2 = PP - (P2WHigh P2WLow) = ( ) = The S/R levels for the next trading day are: Figure Entering the Market Now we are ready to start. Step 1: Check if the market is recognized as non-sideways. For that purpose we need to look at the 4 hour chart and pick up the highest and lowest values within the last three days. As we can see from figure below the market is non-sideways as the highest price (2.0577) differs from the lowest price (2.0136) by more than 150 pips. 121

122 Figure 8-3 Step 2: Identify the long-term trend. For that purpose we add EMA(125) to a 4 hour chart and check if the EMA is rising or falling. As EMA is falling the long-term trend is recognized as bearish. So we will look only for bearish entry signals. Figure

123 Step 3: Getting an entry signal. On Friday, December 14 we get a bearish trigger signal, as the base line (blue line) crosses from above to below the signal line (red line) and base line is outside the 20 pips range. Even though we check the charts at 20:00 in the evening, the last bar we see is the 16:00 -hour bar, as on Friday the market closes at approximately 16:00 (EST). Figure 8-5 Step 4: Confirm with the Signal Strength. The Signal Strength is calculated by adding the points assigned to the Zigzag, Support/Resistance and RSI signal. As we can see from the figure below: The last Zigzag signal is bearish that makes 12 points The last S/R signal is bearish that makes 8 points The RSI is below 40 (bearish) that makes 6 points If we add up all these points, we come to a Signal Strength of 26 points. 123

124 Figure 8-6 As the Signal Strength is 26 points, we place an order for entering the market. In this example we sell 2 lots of the currency pair GBPUSD for the price of Exiting the Market Ok, now it s about to find how far we will let the market move before we exit our position. First of all we place a stop order 60 pips above the entry price. That means at = It s represented by the thick blue line in the picture below. 124

125 Figure 8-7 We will also determine the target level. The Signal Strength was determined to be 26 points and based on Table 6-1 Target Level at page 103 we get a target level 100 pips below the entry price at