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In part 1 of this article series, we have created the Stochastic RSI indicator as part of our idea for a scalping strategy. Now that we have it functional, we will make the bull/bear phases and visually inspect whether it captures the turning market’s turning points.

### Possible ways to create bull/bear slices

Our Stochastic RSI consists of two lines, k and d, and two trigger lines, ob and os. Therefore we can use multiple variants that may allow the creation of bull/bear price legs. Let’s consider the following 3

#### Variant 1 – The transition occurs at the SRSI entrance of the oversold or overbought regions.

Bull: The d-line crosses under the ob-line, which indicates it is into the overbought area
Bear: The d-line crosses over the os-line, indicating d‘s entry into the oversold area.

##### Code:
```if crossunder (d, os)
SRSI_Long := true
SRSI_Short := false
else if crossover (d, ob)
SRSI_Long := false
SRSI_Short := true
else
SRSI_Long := SRSI_Long[1]
SRSI_Short := SRSI_Short[1]```

This code creates a condition SRSI_Long at the cross of d under os, which holds until d crosses over ob and reverses it, creating an SRSI_Short state. This condition is only modified by d crossing under os.
The else statement ensures the condition does not change from the previous bar.

Once we have defined the bull and bear segments, we can color-shade them to visualize them in the chart. To do it, we will use the bgcolor() function.

```bgcolor(SRSI_Long ? color.green: na)
bgcolor(SRSI_Short ? color.red: na)```

The first statement asks the condition of SRI-Long ( the ? sign). If true, the background color changes to green. Otherwise, no change (an). The second statement behaves similarly for SRSI_Short.

Let’s see how this piece of code behaves in the BTCUSD chart.

Variant 1 triggers the transitions too early. We see that on many occasions when the stochastic RSI enters the overbought or oversold region, it is more a signal of trend strength than a turning point.

#### Variant 2 – The transition occurs at D and K’s crossovers if in the overbought/oversold regions.

Bull: the k-line crosses over the d-line, if below os ( inside the oversold region. We ignore crosses in the mid-area)
Bear: the k-line crosses under the d-line, if above ob ( in the overbought area. We ignore crosses in the mid-area)

##### Code:

// creating the long and short conditions for case 2

```if crossover(k,d) and d < os
SRSI_Long := true
SRSI_Short := false

else if crossunder(k,d) and d > ob
SRSI_Long := false
SRSI_Short := true
else
SRSI_Long := SRSI_Long[1]
SRSI_Short := SRSI_Short[1]
// bacground color change
bgcolor(SRSI_Long ? color.green: na)
bgcolor(SRSI_Short ? color.red: na)```

The last section for the background change is similar to Variant 1.

Let’s see how it behaves in the chart.

Variant 2 is an improvement. We see that the bull and bear phases match the actual movements of the market, although entries are still a bit early, and in some cases, it missed the right direction. It can be useful as a trigger signal, provided we can filter out the faulty signals.

#### Variant 3 – the transition occurs when d moved to the overbought or oversold region and, later, crosses to the mid-area.

Bull: the d-line crosses over the os-line
Bear: the d-line crosses under the ob-line.

```if crossover (d, os)
SRSI_Long := true
SRSI_Short := false
else if crossunder (d, ob)
SRSI_Long := false
SRSI_Short := true
else
SRSI_Long := SRSI_Long[1]
SRSI_Short := SRSI_Short[1]
// bacground color change
bgcolor(SRSI_Long ? color.green: na)
bgcolor(SRSI_Short ? color.red: na)```

And this is how it behaves in the chart.

Variant 3 lags the turning points slightly, but this quality makes it more robust, as, on most occasions, it’s right about the market direction. This signal, combined with the right take-profit, may create a high-probability trade strategy.

Let’s try this one. But this will be resolved in our next and last article of this series.

Stay tuned!

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As promised, in this article, we will go through the steps to create a custom strategy, from the initial idea to the implementation of signals, stops, and targets.

### The skeleton of a trading Strategy

To create a strategy programmatically is relatively simple. We need to define the Parameters and the trade rules first, followed by the position sizing algorithm, the entry commands, and the stop-loss and take-profit settings.

### Visualizing the idea

Human beings are visual. We may think our trading idea is fantastic, but translating it into code may not be straightforward. It is much easier to detect the errors if we see our rules depicted on a chart.

With the parameter declarations and trade rules, we can create an indicator first, so we can see how it appears. After we are happy with the visual

### The idea

For our example, we will use a simple yet quite exciting indicator called Stochastic RSI, which applies the Stochastic study to the RSI values. This operation smoothes the RSI, and it reveals much better the turning points on mean-reverting markets, such as in Forex. Let’s see how it behaves as a naked strategy.

#### Diving into the process

First, you need to open an account with Tradingview. Once we are in, we create a new layout.

Then we open the Pine Editor.

It appears in the bottom left of your layout. Click on it… and it shows with a basic skeleton code.

### The Stochastic RSI code.

As said, to create the Stochastic RSI indicator, we will make the RSI and then apply the stochastic algorithm to it.

`1 study(title="Stochastic-RSI", format=format.price, overlay = false)`

This first line declares the code to be a study, called Stochastic-RSI.

format = format.price is used for selecting the formatting of output as prices in the study function.

Overlay = false means we desire the RSI lines to appear in a separate section. If it were a moving average to be plotted with the prices, overlay should be set to true.

`RSIlength = input(14, "RSI-Length", minval=1)`

We define the RSI length as an input parameter called RSI-Length.

`src = input(close, title="RSI Source")`

The variable src will collect the input values on every bar. The default is the bar close, but it may be modified by other values such as (o+c)/2.

`myrsi = rsi(src, RSIlength)`

This line creates the variable myrsi that stores the time series of the rsi.

This completes the calculation of the RSI.

```smooth_K = input(3, "K", minval=1)
smooth_D = input(3, "D", minval=1)```

These two lines create the smoothing values of the stochastic %K and %D. Since it comes from input, they can be changed at will.

`Stochlength = input(14, "Stochastic Length", minval=1)`

This code defined the variable lengthStoch, computed from the input parameter.

```k = sma(stoch(rsi1, rsi1, rsi1, Stochlength), smooth_K)
d = sma(k, smooth_D)```

These two lines completes the calculation of the stochastic rsi.

```plot(k, "K", color=color.white) - Plot a white k line
plot(d, "D", color=color.red) - Plot a red d line.```

To end this study, we will plot the overbought and oversold limits of 80 and 20, filling the mid-band with a distinctive color.

```t0 = hline(80, "Upper Band", color=color.maroon)
t1 = hline(20, "Lower Band", color=color.maroon)
fill(t0, t1, color=color.purple, transp=80, title="Background")```

The complete code ends as:

```// This source code is subject to the terms of
// the Mozilla Public License 2.0 at https://mozilla.org/MPL/2.0/
//@version=4
study(title="Stochastic-RSI", format=format.price, overlay = false)

RSIlength = input(14, "RSI-Length", minval=1)
src = input(close, title="RSI Source")
myrsi = rsi(src, RSIlength)

smooth_K = input(3, "K", minval=1)
smooth_D = input(3, "D", minval=1)
Stochlength = input(14, "Stochastic Length", minval=1)

k = sma(stoch(myrsi, myrsi, myrsi, Stochlength), smooth_K)
d = sma(k, smooth_D)

plot(k, "K", color=color.white)
plot(d, "D", color=color.red)

t0 = hline(80, "Upper Band", color=color.maroon)
t1 = hline(20, "Lower Band", color=color.maroon)
fill(t0, t1, color=color.teal, transp=80, title="Background")```

This code is shown in our layout as

Stay tuned for the second part of this article, where we will evolve the Stochastic RSI into a viable strategy.

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## Learning To Trade The ‘Turn To Trend’ Forex Strategy

#### Introduction

Although many times before, we have stressed on trading with the direction of the market, yet most traders have a hard time trading with the trend. The observation is contrary to what is said by experts and professional traders since the majority of retail traders claim to be trading with the trend but end up trading counter-trend. While everyone talks of the idiom, “the trend is your friend,” in reality, most traders love to pick tops and bottoms and constantly violate the above rule.

#### Time Frame

The strategy is fixed to two-time frames. The daily time frame for trend identification and the 1-hour time frame for trade entry.

#### Indicators

We use the following technical indicators for the strategy:

• 20-period SMA
• Three standard deviations Bollinger band (3SD)
• Two standard deviations Bollinger band (3SD)

#### Currency Pairs

This strategy is applicable to most of the currency pairs listed on the broker’s platform. However, exotic pairs should be avoided.

#### Strategy Concept

This setup recognizes the desire of most traders to buy low and sell high but does so in the predominant framework of trading with the trend. The strategy uses multiple time frames and a couple of indicators as it’s a tool for entry. First and foremost, we look at the daily chart to ascertain of the pair in a trend. For that, we use the 20-period simple moving average (SMA), which tells us the direction of the market. In technical analysis, there are numerous ways of determining the trend, but none of them is as simple and easy as the 20-period SMA.

Next, we switch to the hourly charts to find our ‘entry.’ In the ‘Turn to Trend’ Strategy, we will only trade in the direction of the market by buying highly oversold prices in an uptrend and selling highly overbought prices in a downtrend. The question arises, how do we know the market is overbought or oversold? The answer is by using Bollinger bands, which help us gauge the price action.

Bollinger bands measure price extremes by calculating the standard deviation of price from its moving average. In our case, we use the three standard deviation Bollinger band (3SD) and Bollinger band with two standard deviations (2SD). These two create a set of Bollinger band channels. When price trades in a trend, most of the price action will be contained within the Bollinger bands of 2SD and 1SD.

In order to illustrate the strategy, we have considered the chart of EUR/CAD, where we will be applying the strategy to take a ‘long’ trade.

###### Step 1

The first step is to identify the major trend of the market. This can be done using the 20-period simple moving average (SMA). If the price is very well above the SMA, we say that the market is in an uptrend. Likewise, if the price is mostly below the SMA, we say that the market is a downtrend. For this strategy, we have to determine the trend on the daily chart of the currency pair.

In our case, we see that the market is in a strong uptrend, as shown in the below image. Hence, we will enter for a ‘long’ trade at the price retracement on the 1-hour time frame.

###### Step 2

Next, we have to change the time frame of the chart to 1 hour and wait for a price retracement. In order to evaluate the retracement, we plot three standard deviations (3SD) and two standard deviations (2SD) Bollinger band on the chart. After plotting the two Bollinger bands, we need to wait for the price to get into the zone of 2SD-3SD BB.

In the below image, we can see that the price breaks into the zone of 2SD-3SD BB after a lengthy ‘range’ movement.

###### Step 3

Once the price moves into the zone of 2SD-3SD BB, we wait for the price to bounce off from the lower band of the 3SD BB to give an indication of a reversal. In a ‘short‘ set up, the price should react off from the upper band of the 3SD BB, and give an indication of downtrend continuation. During this process, we need to make sure that the price does not break below or above the 3SD BB. Because if this happens, the ‘pullback’ is no more valid, and this could be a sign of reversal. This is a crucial aspect of the strategy.

The below image shows how the price bounces off from the lower band of the 3SD BB two candles after the price moves into the zone.

###### Step 4

We enter the market at the first sign of trend continuation, which was determined in the previous step. Now we need to define the stop-loss and take-profit for the strategy. Stop-loss should be placed below the lower band of the 3SD BB, in case of a ‘long’ trade and above the upper band of the 3SD BB, in a ‘short’ trade. The ‘take-profit’ is not a fixed point. Instead, we take our profit as soon as the price touches the opposite band of the 3SD BB.

In the case of EUR/CAD, the resultant risk-to-reward of the trade was a minimum of 1:2, as shown in the below image.

#### Strategy Roundup

The beauty of this setup is that it prevents us from guessing the turn in the market prematurely by forcing us to wait until the price action confirms a swing bottom or a swing top. If the price is in a downtrend, we watch the hourlies for a turn back to the trend. If the price continues to trade between the 3SD and 2SD BB, we stay away as long as we get confirmation from the market. We can also set our first take-profit at 1:1 risk to reward to lock in some profits.

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## Introduction

A trading strategy is a systematic methodology of investment that can be applied in any financial market, for example, bonds, stocks, futures, commodities, forex, and so on. In this context, a profitable trading strategy is more than a system that provides an entry signal on the long or short side with a stop-loss and a profit target.

Big traders make money to take their investment decisions systematically, reducing their risk with the diversification of the assets that make up their portfolio.

In this educational article, we’ll present a set of elements that can be part of a trading strategy.

## The Elements of a Trading Strategy

A systematic trading strategy should be tested and validated with historical data, and its execution in the real-market should be done with the same accuracy as when using paper money.

The strategy should provide a setups series that allow us to recognize where to locate the market entry and in which direction. Finally, the trading strategy should allow market positioning in the long and short sides. This positioning should require identifiable stop-loss and profit target levels.

In particular, in this article, we’ll present the use of Fibonacci, candlesticks formations, chart patterns, trend lines, and trend channels.

## Fibonacci Analysis

Likely, Fibonacci retracements and extensions are the most used tools in the world of retail and institutional trading. The Fibonacci series has its origin from the mathematical problem of the rabbits’ population solved by Leonardo da Pisa “Fibonacci” in his work “Liber Abaci” published in 1202.

The sequence discovered by Fibonacci not only can be applied in the rabbits’ population growth, but this series also solves other growth problems in nature and also on the financial markets.

## Fibonacci and Corrections

One application of the Fibonacci tools in financial markets is the measurement of a retracement size that an impulsive wave may experience in its corrective move.

The rationale of this strategy considers that when the initial impulsive movement ends and following the subsequent corrective move, the market will develop a second impulsive move in the same direction of the first move.

The selection of the asset is linked to the timeframe under analysis; for example, the structure developed in a weekly chart will require more time than an hourly chart formation.

The following figure illustrates two potential entry setups using the Fibonacci retracement tool. The first scenario considers a retracement of 38.2% of the first move. The second scenario will occur when the price experiences a retracement of 61.8% from the top of the first impulse.

The stop-loss will be placed at the origin of the previous impulsive movement.

## Setting Targets with Fibonacci Extensions

Prices extensions are movements that resume the progress of a previous trend. Generally, the extensions occur in the third wave, and the correction corresponding to the second wave does not move beyond the origin of the first impulsive movement. The next figure exposes the extension of a regular three-wave pattern. Consider that the wave identification does not correspond to an Elliott wave labeling.

The analytic process follows the next steps:

1. After an impulsive move, the price action must develop a minimum retracement of the first move.
2. The size of the swing must be multiplied by the Fibonacci ratio of 1.618.
3. The resulting level will correspond to the price target of the third wave.

The analysis in a five-wave pattern is similar to the three-wave case. The difference in this pattern is the seek the length of an additional impulsive move.

The five-wave pattern includes three impulsive movements and two corrective moves. The following figure illustrates the Fibonacci measures of this formation.

## The Phi-Ellipse

The Phi-Ellipse is a countertrend trading method based on the oscillation of price with time. Its goal is to reduce the noise of falses breakouts and increase the stability of the investment strategy. The drawing process of a Phi-Ellipse requires to identify three points, as shown in the next figure.

After identifying the points A, B, and C, in a regular three-wave pattern, there should place the Phi-Ellipse in these points. We should expect a new impulsive move as the first impulse. There are three ways to trade against the trend at the end of the Phi-Ellipse, which are:

1. Enter in a position when the price breaks outside the perimeter of the Phi-Ellipse.
2. Entry based on a chart pattern at the end of the Phi-Ellipse.
3. Place an order when the price action when the price moves outside a parallel line to the median line of the Phi-Ellipse.
4. A buy position is recommended at the end of the Phi-Ellipse when it has a descending slope, and a sell position is recommended when the Phi-Ellipse has an upward slope.

## Conclusions

In this educational article, we discussed the elements that should contain a trading strategy. The application of a systematic trading strategy or a combination with a strategy across time in a diversified portfolio could help the investor reduce the risk in its investment decisions.

On the other hand, the strategy’s analysis methodology should provide entry-setups for both long and short-side positions. In this context, in this article, we presented the use of Fibonacci retracements and extensions to offer entry setups inlcuding its stop loss and profit target level. Finally, we introduced the Phi-Ellipse method, which allows the investor to reduce the risk of falses breakouts in its investment portfolio.

In the next educational article, we will review the use of candlesticks formations, chart patterns, trend lines, and trend channels.

– Fischer, R., Fischer J.; Candlesticks, Fibonacci, and Chart Patterns Trading Tools; John Wiley & Sons; 1st Edition (2003).

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## The H1-15M Combination Trading in a Bearish Market

In today’s lesson, we are going to demonstrate an example of the H1-15M combination trading strategy offering a short entry. In one of our previous lessons, we demonstrated an example of a long entry. Let us see how it ends up offering us the entry.

This is an H1 chart. The chart shows that the price gets caught within two horizontal levels. The chart shows that the price after getting the last rejection has been heading towards the South. The sellers are to wait for a bearish breakout to go short in the pair.

Here it comes. The last candle breaches the level of support closing well below it. The H1-15M combination traders may flip over to the 15M chart to get a bearish reversal candle for triggering a short entry. Let us flip over to the 15M chart.

This is how the 15M chart looks. As expected, the last candle comes out as a bearish candle. If the next 15M candle comes out as a bearish candle closing below the last candle, the sellers may trigger a short entry. If the chart consolidates, the sellers are to wait for a 15M bearish reversal candle to take the entry. Let us find out what happens here.

The chart produces a bullish corrective candle. The sellers are to wait for a bearish reversal candle to go short in the pair. Usually, if the price makes a correction, it goes towards the breakout level and produces a reversal candle there. Let us find out where it produces a bearish reversal candle for the sellers.

The chart produces a bearish engulfing candle closing below consolidation support. The sellers may trigger a short entry right after the last candle closes. Stop Loss and Take Profit are to be set according to the H1 chart. Stop Loss is to be set above H1 horizontal resistance before the breakout, and Take Profit is to be set with 1R. Let us now find out how the entry goes.

This is the H1 chart. We see that the price heads towards the South with good bearish momentum and hits the target of 1R with ease. After producing the 15M bearish reversal candle, the price never looks back but goes towards the trend’s direction. This is what usually happens in the H1-15M combination trading. The price heads towards the trend’s direction without wasting time.

Do a lot of backtesting in your trading chart to find out some entries based on the H1-15M chart. Then, do some demo trading with the strategy before going live. It will help you be a better trader.

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## The ABC pattern: One of the Traders’ Favorites

Trading ABC pattern is one of the most frequently used trading strategies by Forex/financial traders. Once the price makes a breakout, makes a correction, and produces a reversal candle upon finding point C, traders trigger their entry. It is a favorite pattern among all kinds of financial traders. It brings profit at least on 80% occasions. In today’s lesson, we are going to demonstrate an example of an ABC pattern trading.

The chart shows that the price after being bearish has a double bounce at a level of support. It produces a bullish engulfing candle followed by another bullish candle. However, the price starts having consolidation. Since it is double bottom support, the buyers may keep their eyes on the chart.

The chart produces another bullish candle followed by a long bullish one. The price usually makes a correction after such a move. The buyers are to wait for the price to make a bearish correction and produce a bullish reversal candle to go long in the pair above the last highest high.

As expected, the price starts having the correction. It produces two bearish candles. The buyers hope that the chart produces a bullish engulfing candle closing above the last highest high to trigger a long entry. This is what pushes the price with more momentum. Let us find out what happens next.

The chart produces an inside bar. This is not a strong bullish reversal candle. However, the price finds its support. This is called the C point. If the price makes a breakout at the last highest high, the ABC pattern traders trigger a long entry.

The price makes a breakout closing well above the last highest high. The buyers may trigger a long entry right after the candle closes by setting stop loss below the last support (C point). Take Profit is to be set with 1R. Let us proceed to the next chart and find out how the trade goes.

The price heads towards the North with good bullish momentum. It produces two consecutive bullish candles and hits the target (1R). Here is an important point to remember. The ABC pattern is a widely used trading strategy. Thus, the price often reverses once it hits the target. Thus, the traders are recommended that they close the whole trade and enjoy the profit. Trailing Stop Loss and partial profit-taking do not work well in this pattern. Do some backtesting and get well acquainted with this pattern. It may bring you a handful of pips.

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## Develop An Unbeatable Forex Trading Strategy – Round 1

### Develop An Unbeatable Forex Trading Strategy

Example 1: In this session, we are going to be discussing trading strategy as this is something that new traders find difficult to develop and implement without deviation.

Any forex strategy should be a systematic step-by-step procedure for how and when to use specific tools when a sequence of analysis needs to be developed.
Typical components of any strategy should include the following:

Example 2: The types of analysis tools we will be using. Whether it’s technical, fundamental, or both, it is something that will always be personal and based on your preferences. Now, although preferences are important specific analysis tools will have a generally higher success rate, and you should take some time to learn out of your comfort zone to improve on your weaknesses. You should have a clear order setup before you as to when and how you apply these analysis tools.

Example 3: next, you will want to have a clear picture of the timeframes, and trading windows will need to use. It’s no good trading an unsocial trading window that encroaches on your sleep and day-to-day responsibilities, and in addition, we want to use the same timeframe to implement our analysis tools while considering the type of trader we want to become. For instance, scalpers will rarely use the daily time frame because they are looking for quick in and out trades based on the technical analysis of the lower time frames.
For the longer time frame Traders, it would be beneficial to scan through the pairs that you are interested in trading in order to ascertain the key levels of support and resistance enable to drill down using your technical tools to look for potential trade entries and exits.
No matter what type of trader you want to be, it is important to consider fundamental factors which might impact on your trading, or assist your decision-making such as economic data releases, interest rate decisions, and key political events. In which case, you want to keep an eye on the economic calendar for the day or even week ahead.
We want to establish what high probability trades are available based on our technical and fundamental analysis. When developing a trading strategy, we need to implement all of these features and stick to them rigidly in order to achieve consistent trading profitability. Should any part of the strategy fail for any reason, we will need to make adjustments accordingly in order to make the trading strategy more fail-proof.

Example 4: What types of orders will you be using. If you are unable to be available during the times where you would normally need to trigger a buy or sell, you must make use of pending orders. If you’re trading news and have plenty of time on your hands, you may want to enable one-click trading to quickly enter the market based on data releases. This will all factor into your larger plan, and you should write down every detail. The purpose of strategy development is to increase your probability of success through research, development, and application, just as any other commercial business would go through in their model.

Example 5: We can’t talk about developing a successful strategy without looking at risk management in great detail. Risk management is the key most important aspect of a financial traders toolbox. Trying to determine what your risk appetite is while training can initially be very difficult.

Example 6: You need to consider your available balance, the pair being traded, pip worth, lot size, and other factors. You should never be trading with money you actually need because this will play with your emotions and put enormous psychological pressure on your trading, especially when things are not going your way.

Example 7: Let’s look at the strategy checklist and add any of these components to your own strategy if you have not done so already. Be patient, test your strategy on a demo account over a period of 2 to 3-months and tweak and adjust as necessary because if it doesn’t work on a demo account, it certainly will not work on a real money account.
Successful Traders will look at the amount of money they can lose as well as the money they can make. Do not fall into the same trap as many Traders and simply bury your head in the sand when you are needed in a losing trade. Stop losses are the best way to implement against trades that run away from you. Having a frugal mindset will protect you against losses and bad decision making.
In every trade that you enter, you must have two things on your mind: at what point do you get out if it becomes a losing trade and at what point do you get out of a winning trade.
One thing is for sure when trading, there will be trades that you get stopped out of, and they then turn around and become what would have been winning trades, there will be trades that you will be stopped out of, and they will continue to have moved against you, and you will be grateful for your stop loss, and there will be trades that you get out of having taken your profit, only for them to continue on for hundreds of more pips. This is all a part of trading. It is all about sticking to

your methodology and trading strategy, making money consistently, looking for the next set up, and fighting on. Do not dwell on losses, do not dwell on what might have been, simply carry on with your strategy and remember the old adage: if it ain’t broke don’t try and fix it.

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## How To Succeed In Forex – Why Knowing your Strategy parameters makes sense

### Why Knowing your Strategy parameters makes sense

Usually, traders’ interest focus on entries. Forecasting seems to them a crucial skill for succeeding in the Forex market, and they think other topics are secondary or even irrelevant. They are deadly wrong. Entries are no more than 10 percent of the success of a trader, while risk management and position sizing are crucial elements that the majority of traders discard as uninteresting. Let us show why risk can be such an exciting topic for people willing to improve in their trading job.

Making sure our strategy is a winner

There are two ways to trade The good one and the bad one. The good one is when the trader fully knows the main parameters of his system or strategy. The bad one is when not.
So, why do we need to know the parameters to be successful? The short answer is that it is
Firstly, to know if the system has an edge (profitable long-term).

Secondly, by knowing the parameters, we will know how much we can risk on each trade.
And thirdly, and no less important, by identifying these parameters, we can more easily define the monetary objectives and overall risk (drawdown).

Good, let’s begin!

The two main parameters of a strategy or system!

To fully identify a strategy, we need just two parameters. The rest of them can be derived from these two with or without the position size. The parameters in question are the percent of winning trades and the Reward-to-risk ratio.
Mathematical Expectancy (ME)
With these two parameters, we can estimate if the system is a winner or a loser using the following simple formula, defining the player’s edge: ME = (1 + A)*P -1

Where P is the probability of winning and A is the amount won. The formula assumes that A is constant since this formula came from gambling. Still, we can very much approximate the results is A is our average winning amount, or even better, the Reward-to Risk Ratio.

As an example let’s assume our system shows 45% winners with a winning amount two times its risk
ME = (1+2)*0.45 -1
ME = 0.35
The mathematical Expectancy (ME) expressed that way, shows the expected return on each trade per dollar risked. In this case, it is 35 cents per dollar risked.

Planning for the monetary objectives
Once we know ME, it is easy to know the daily and weekly returns of the strategy. To do it, another figure we should know, of course, the frequency of trades of the strategy. Let’s assume the strategy is used intraday on four major pairs delivering one trade per pair per day. That means, the system’s daily return (DR) will be 4XME dollars per day per dollar risked, while monthly returns (MR) will be that amount times 20 trading days:

DR = 4 x ME = 4 x 0.35 = 1.4
MR = 20xDR = 20 x 1.4 = 28

Therefore, a trader risking \$100 per trade would get \$2,800 monthly on average.
That is great! By defining our monthly objectives, once knowing ME and the number of trades the system delivers daily or monthly, we can determine the risk incurred. For example, another bolder trader would like to triple that amount by tripling the risk on each trade. Why not a ten-fold or a hundred-fold risk to aim for 280K monthly income?

Drawdown

That touches the dark side of trading, which is drawdown. Drawdowns are the result of the combination of the probability of losing of the trading system and the amount lost. Drawdowns are unavoidable because a system always shows losing streaks. Therefore, any trader must make sure that streak does not burn his trading account.

The risk of ruin increases as the trade size grows, so there is a rational limit to the size we should trade if we want to keep safe our hard-earned money.
As a basic method to be on the safe side, a trader must first decide how much of his account is willing to accept as drawdown, and from there, use as trade size a percent of the total balance which satisfies that condition of maximum drawdown.

Let’s do an example

Let’s say a trader using the previous strategy will not accept to lose more than 25 percent of his funds. As an approximation to this drawdown, we can think of a losing streak of 10 consecutive trades, an event with 0.35% probability of happening. Which is the trade size suitable to comply with these premises?
Trade Size = MaxDD% / 10
Trade Size = 25% / 10 = 2.5%
That gives us the reasonable trade size for this particular trader. If another trader is not willing to risk more than 10%, then his trade size should be 1%. Once this quantity is known, the trader only has to compute the dollar value by multiplying by the current balance.

Resetting the objectives

Let’s assume the balance is \$5,000, then the max risk per trade allowed is \$ 125. That means we could expect a monthly return of about \$3,500 on the previously discussed strategy for a max drawdown of no more than 25%. If the trader would like to earn \$7,000 instead, he should add another \$5,000 to the account to guarantee a 25% drawdown or accept a 50% drawdown and risking \$250.

Final words

Please, note that this is just an example and that sometimes the trade size is limited by the allowed leverage and other conditions. Also, note that trading the Forex market is risky. Therefore, please start slow. It is better to begin by risking 0.5% and see how your strategy develops and the drawdowns involved.

The first measure you must take is creating a spread-sheet annotating all your trades, including entry, exit, profit/loss, and risk per trade. Then compute your strategy parameters on a weekly basis. This is a serious business, and we should be making our due diligence and keep track of the evolution of our trade system or systems.

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## Perfecting The Fibonacci Retracements Trading Strategy

### Introduction

The Fibonacci tool was developed by Leonardo Pisano, who was born in 1175 AD in Italy. Pisano was one of the greatest mathematicians of the middle ages. He brought the current decimal system to the western world ( learned from Arab merchants on his trips to African lands). Before that, mathematicians were struggling with the awkward roman numerical system. That advancement was the basis for modern mathematics and calculus.

He also developed a series of numbers using which he created Fibonacci ratios describing the proportions. Traders have been using these ratios for many years, and market participants are still using it in their daily trading activities.

In today’s article, we will be sharing a simple Fibonacci Retracement Trading Strategy that uses Fibonacci extensions along with trend lines to find accurate trades. There are multiple ways of using the Fibonacci tool, but one of the best ways to trade with Fibonacci is by using trend lines.

With this Fibonacci trading strategy, a trader will find everything they need to know about the Fibonacci retracement tool. This tool can also be combined with other technical indicators to give confirmation signals for entries and exits. It also finds its use in different trading strategies.

Below is a picture of the different ratios that Leonardo created. We will get into details of these lines as we start explaining the strategy.

### Strategy Prerequisites

Most of the charting software usually comes with these ratios, but a trader needs to know how to plot them on the chart. Many traders use this tool irrespective of the trading strategy, as they feel it is a powerful tool. The first thing we need to know is where to apply these fibs. They are placed on the swing high/swing low.

• A swing high is a point where there are at least two lower highs to its right
• A swing low is a point where there are at least two higher lows to its right

If you are uncertain of what the above definitions meant, have a look at the below chart.

Here’s how it would look after plotting Fibonacci retracement on the chart.

In an uptrend, it is drawn by dragging the Fibonacci level from the swing high all the way to swing low. In case of a downtrend, start with the swing high and drag the cursor down to the swing low. Let’s go ahead and find out how this strategy works.

### The Strategy

This strategy can be used in any market, like stocks, options, futures, and of course, Forex as well. It works on all the time frames, as well. Since the Fibonacci tool is trend-following, we will be taking advantage of the retracements in the trend and profit from it. Traders look at Fibonacci levels as areas of support and resistance, which is why these levels could be a difference-maker to a trader’s success.

Below are the detailed steps involved in trading with this strategy

##### Step 1 – Find the long term (4H or daily time frame) trend of a currency pair

This is a very simple step but crucial, as well. Because we need to make sure if the market is either in an uptrend or a downtrend. For explanation purposes, we will be examining an uptrend. We will be looking for a retracement in the trend and take an entry based on our rules.

##### Step 2 – Draw a line connecting the higher lows. This line becomes our trendline.

The trend line acts as support and resistance levels for us. In this example, we will be using it as support.

##### Step 3 – Draw the Fibonacci from Swing low to Swing high

Use the Fibonacci retracement tool of your trading software and place it on swing low. Extend this line up to the swing high. Since it is an uptrend, we started with a 100% level at the swing low and ended with 0% at the swing high.

##### Step 4 – Wait for the price to hit the trend line between 38.2% and 61.8% Fibonacci levels.

In the below-given figure, we can see that the price is touching the trend line at two points (1 and 2). There is a significant difference between the two points. At point 1, the price touches the trend line between 78.6% and 100%, whereas, at point 2, the price touches the trend line between 38.2% and 61.8%.

The region between 38.2% and 61.8% is known as the Fibonacci Golden Ratio, which is critical to us. A trader should be buying only when the price retraces to the golden ratio, retracements to other levels should not be considered. Therefore, point 2 is where we will be looking for buying opportunities.

##### Step 5 – Entry and Stop-loss

Enter the market after price closes either above the 38.2% or 50% level. We need to wait until this happens, as the price may not move back up. However, it should not take long as the trend should continue upwards after hitting the support line.

For placing the stop loss, look at previous support or resistance from where the price broke out and put it below that. In this example, stop loss can be placed 50% and 61.8% Fibonacci level because if it breaks the 50% level, the uptrend would have become invalidated. The trade would look something like this.

### Final words

The Fibonacci retracement tool is a prevalent tool used by many technical traders. It determines the support and resistance levels using a simple mathematical formula. Do not always rely only on Fibonacci ratios, as no indicator works perfectly alone. Use additional tools like technical analysis or other credible indicators to confirm the authenticity and accuracy of the generated trading signals. One more important point that shouldn’t be forgotten is not to use Fibonacci on very short-term charts as the market is volatile. Applying Fibonacci on longer time frames yield better results.

We hope you find this strategy informative. Try this strategy in daily trading activities and let us know if they helped you to trade better. Cheers!

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## A Strategic Plan for Trade Management

I’ve already stated my view that most wannabe traders put their focus in technical analysis of the market and on trading signals, mostly provided by others, hopefully, more knowledgeable than themselves.

The issue is that any advice, no matter how good it is, is worthless to most of the beginners because the problem is 10% of the success as a trader is entries, 20% exits, including stops and targets, and 70% is the rest of overlooked themes.

The overlooked themes, all of them has to do with the trader’s psychology:

• Lack of a strategy
• Not following the plan
• Skipping entries or exits
• let losses grow to wait for a reversal
• cut profits short, afraid of a reversal…

Every one of these subjects is critical, but if you make me choose, I’d say that overtrading is the worst evil that happens to a novice trader. Improper position sizing kills the majority of the Forex trading accounts. This trait is also linked to the cut profits short, let losses run character flaw, so let’s do create a basic strategic plan to help traders with a basic trade management plan.

### Emotional Risk

For the following plan to work, the trader needs to accept the risk. It is easy to say but challenging to do. Mark Douglas, in his book Trading in the Zone, explains that “To eliminate the emotional risk of trading, you have to neutralize your expectations about what the market will or will not do at any given moment or in any given situation.”

That is key. You cannot control the market. You can only control yourself. You need to think about probabilities. Create a state of mind that is in harmony with the probabilistic environment. According to Mark Douglas, a probabilistic mindset consists of accepting the following truths:

1.  Anything can occur.
2. To make money, there is no need to know what will happen next
3. It is impossible to be 100% accurate. Therefore there is a win/loss distribution for any strategy with a trading edge.
4. An edge is just a higher probability of being right against a coin toss (if not, the coin toss would be a better strategy)
5. Every moment in the market is unique. Therefore
6. A chart pattern is just a very short-term approximation to a statistical feature, therefore less reliable than a larger data set pattern. We trade reliability for speed.

The idea is to create a relaxed state of mind, ultimately accepting the fact that the market will always be affected by unknown forces.

### The Casino Analogy

Once that is understood and accepted, we can approach our trading job as if the trading business were casino bets. When viewed through the perspective of a probabilistic game, we can think that trading is like roulette or slot machines, where you, the trader, have a positive edge. At a micro level, trade by trade, you will encounter wins and loses but looked at a macro level, the edge puts the odds in your favor. Therefore, you know only need to manage the proper risk to optimize the growth of the trading account.

### A plan to manage the trade

Lots of traders enter the Forex market with a rich-quick mentality. They open a trading account with less than 5,000 USD and think that due to leverage, they can double it week after week. This is not possible, of course, and they get burned within a month.

#### Our plan consists of three ideas

• Profit the most on the winners, while let die the losers
• let profit run, or even, pyramid on the gains.
• Reach as soon as possible a break-even condition, for our mind to attain a zero-state as quickly as possible.

#### The Strategy and Exercise

##### Pick a forex pair.

Choose one actively traded pair. All major pairs fit this condition, but then choose the one that provides the best liquidity of your time zone.

Choose your favorite strategy, that you think it works and fits you.

##### The strategy must include the following components:

An Entry: The entry method should be precise. No subjective evaluations or decisions. If the market shows an entry, you have to take it. Of course, you can condition it with a reward-to-risk ratio filter, since this is an objective fact. Really, having a reward-to-risk ratio filter is quite advisable. A 3:1 ratio would be ideal, but 2:1, which is more realistic, can work as well.

A Stop-loss: Your methodology should define the level at which set your stop loss.

Timeframes: You need to choose a couple of timeframes: A short timeframe to create low-risk trades, and a longer timeframe to be aware of the underlying trend and filter out any signal that does not go with that trend.

Profit Targets: This is the tricky part. We will define at least three take profit points: One-third very-short, one-third defined bt the short-term timeframe, and the rest of the position specified using the longer-term timeframe.

The trade size: Choose a total trade size such that the entire initial risk is no more than 2 percent of your account. So if your account is \$3,000, the total risk of the trade will be \$60.

Accepting the risk. The smaller dataset needed to get any statistical information is 30. Therefore, you should accept the loss equivalent of 30X the average loss per trade. Think that to analyze and decide about changing any parameter, you must move in chunks of 30 trades.

#### How it works

• Measure the pip distance between entry and stop-loss.
• Compute the value in dollars of that risk
• Calculate how many mini or micro-lots fit in that amount.

2.- Trade that size and mentally divide it into three parts

3.- take profits of1/3 of the position as soon as you get 5-6 pips profit or 10% of your main profit target. This will help you tame the risk if the trade is a short-term gainer that, next, tanks.

4.- As soon as you get a profit equivalent to the size of your risk (1:1), move your stop-loss to Break-even.

5.- Take profits of the second third of the position when your second target is hit

6.- Let the remaining 1/3 run until your third target (from the longer timeframe) trailed by your stop loss. Use a parabolic approach to the stop loss, as the risk-reward diminishes when approaching the target.

7.- Alternatively, use the profits of the last winning trade and add it to the risk of the following trade. That way, on a combination of two trades, you can gain 4X with a risk of just one trade since the added risk was money taken from the market.

8.- The next trade should start with the basic dollar risk, but computed over the newly acquired funds.

Reference: Trading in the Zone by Mark Douglas.

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## The Most Simple Scalping Strategy To Trade The Forex Market!

### What is Scalping?

Scalping is one of the trading styles in the forex market, which is gaining popularity with the emergence of artificial intelligence and automated trading systems. Nowadays, there are a set of traders who enjoy scalping than day trading, swing trading, or position trading.

The main difference between scalping and other styles of trading is that in scalping, the trading time frame is very short and face-paced. The holding period does not last more than a few minutes, whereas ‘positional’ traders hold their trades from 1-Hour to few weeks. Scalpers find trading opportunities on very short timeframes such as the 1-Minute and 3-Minutes.

Impulsive traders are the ones who are most attracted to scalping, as they don’t want to wait for a trade to set up on the higher time frame. Sadly, new traders fall into this trap and start scalping the market, totally unaware of the risk it carries.

To scalp, a trader needs to be experienced. We recommend first being consistently profitable on the higher time frame or swing trading and then move on to scalping. Because this form of trading is extremely difficult as it requires a trader to make decisions in mere seconds or minutes.

### 5-Minute Scalping Strategy

In this section, we’ll cover a simple yet very effective scalping strategy on the 5-minute timeframe. The most suitable time to implement this strategy is during volatile market conditions. This means the best results are obtained during the New York-London session overlap (8:00 AM to 12:00 PM EST). During this time, trading costs are also relatively low, and liquidity is high, which is essential for the scalpers to take a trade.

We will be using two exponential moving averages in this strategy. Below are the indicators that one needs to apply to their charts.

• 50-Period exponential moving average
• 200-Period exponential moving average
• Stochastic indicator

### The Strategy

Let us look at the detailed steps involved in the 5-minute scalping strategy.

Step 1️⃣ – Identify the current trend

The two EMAs are used to indicate the trend in the 5-minute chart. To identify the larger trend, a trader will have to change the time frame to 15-minutes. Identifying the bigger trend is crucial to understand the overall direction of the market. The 50-period EMA is much faster than the 200-period EMA, which means it reacts to price changes more quickly.

If a faster (50-period) EMA crosses above the slower EMA (200-period), it means the prices are starting to rise, and the uptrend is more likely to be established. Similarly, a cross of faster EMA below the slower EMA indicates a drop in the price, and that also means a downtrend is about to form. Always make sure to take trades in the direction of the major trend.

Step 2️⃣ – Look for a pullback

Once we determine the current trend on the 5-minute chart based on EMA’s, it is time to wait for a pullback and stabilization of the price. This is one of the most important steps in this strategy as prices tend to make false moves after strong ups or downs. By waiting for the pullbacks, we can prevent ourselves from entering long or short positions too early.

Step 3️⃣ – Confirmation with the Stochastic Indicator

Finally, the Stochastic indicator gives the confirmation signal and helps us to take only highly-profitable trades. A reading above 80 indicates that the recent up move was strong, and a down move can be expected at any time. This is referred to as the overbought market condition. Whereas, a reading below 20 indicates that the recent down move was strong, and an up move is about to come. This market condition is referred to as the oversold market condition. After a pullback to the EMA’s, the Stochastic Indicator’s final confirmation gives us the perfect trade entry.

Let us understand this strategy better with the help of an example.

`Chart-1`

The above figure is a 5-minute chart of a currency pair, and the 200-period EMA is represented by the orange line while the 50-period EMA is represented by the pink line. The cross of the pink line above the orange line signals that the currency pair is entering into an uptrend on the 5-minute chart. As long as the faster EMA remains above the slower EMA, we’ll only look for buying opportunities. This step is to identify the direction and crossing of the two EMAs.

`Chart-2`

A trader shouldn’t be going ‘long’ as soon as they see the lines crossing. They should always wait for the pullback and only then take an entry. In ‘chart-2’, when we move further, we were getting the kind of pullback that we exactly need.

The next question is, at which point to buy?

`Chart-3`

The Stochastic plotted in the above chart helps in giving us the perfect entry points by getting into the oversold area. One can take a risk-free entry after all the indicators support the direction of the market.

`Chart-4`
Finally, the trade would look something like this (chart-4). The risk to reward ratio (RRR) of this trade is 2:5, which is very good. Also, make sure to place precise stop-loss and take profit orders, as shown above.

### Final words

Scalping is a faced-paced way of trading that is preferred by a lot of traders these days. The main difference between scalping and other styles of trading is the timeframes involved in analyzing the market. This type of trading carries certain risks that are unavoidable, such as high trading costs and market noise, which can impact your profits. We hope you find this article informative. Let us know if you have any questions below. Cheers!

Categories

## Ichimoku Kinko Hyo Guide – A walk through a trade.

### Ichimoku Kinko Hyo Guide – A walk through a trade.

I want to preface this guide with a screenshot of my account.

### Multiple Timeframe Analysis – Daily, 4-Hour, and 1-Hour

The Ichimoku Kinko Hyo system is most effective when utilizing multiple timeframes. It is the only way that I use the Ichimoku system. In my trading, I use the Daily, 4-hour, and 1-hour time frames. Multiple timeframes are extremely useful in filtering your trade entries and ensuring higher probability trade setups. The process below will go through the process I used to take the trade.

Step One – Daily Chart Check: Price greater than Kijun-Sen, NOT inside the Cloud.

The very first thing I check is the daily chart. If the price is inside the Cloud on the daily chart, I skip the chart. It’s dead to me. If the price is not inside the Cloud, I then look for where the price is in relation to the Kijun-Sen. The daily chart determines my trading direction. If the price is above the Kijun-Sen, I only take long trades. If the price is below the Kijun-Sen, I only take short trades.

Step Two – 4-Hour Chart Check: Price above the Cloud, Chikou Span above candlesticks.

If the daily chart determines the direction of my trading, the 4-hour provides the filter for the entry chart (the 1-hour chart). The only things I am concerned about with the 4-hour chart is that the Chikou Span is above the candlesticks, and that price is above the Cloud. Preferably, the Chikou Span would also be in ‘open space’ – but I don’t use it as a hard rule. I have not found the open space to be as important during the change of a trend or corrective move.

(a note about ‘Open Space’ – Open Space is a condition where the Chikou Span won’t intercept any candlesticks over the next five to ten trading periods. When the Chikou Span is in open space, this represents ease of movement in the direction of the trend with little in the form of resistance (or support) ahead.)

The EURGBP trade we are analyzing is a good example of why, at the current position, I don’t consider the open space as strict as I would on the hourly. I want to refer you back to the daily chart. If, on the daily chart, both price and the Kijun-Sen are below the daily cloud, but price moves above the Kijun-Sen – I don’t consider the open space variable as important on the 4-hour chart.

Step Three – 1-Hour Chart Check

The 1-Hour chart is my entry chart. As long as Step One and Step Two are true, the 1-hour chart is where the bread and butter of the trading occurs. My entry rules are this:

1. Future Span A is greater than Future Span B.
2. Chikou Span above the candlesticks and in ‘open space’ – for five periods.
3. Tenkan-Sen is greater than Kijun-Sen
4. Price is greater than the Tenkan-Sen and Kijun-Sen.

I generally look for a profit target of 20-40 pips, depending on the FX pair. For example, on the NZDUSD, I would look for 20 pips, and on the GBPNZD, I would look for 40 pips. But there are some hard technical reasons to leave a trade before that profit target is hit. The list below represents my exit rules on the 1-hour Chart – I exit the trade if any of these conditions occur.

1. Exit if Chikou Span below candlesticks for more than three consecutive candlesticks.
2. Exit if price enters the 1-hour Cloud.
3. Exit if Tenkan-Sen below the Kijun-Sen for more than five candlesticks.

Step Four – Reentry Rules

Entry rules are fine, but the problem isn’t always finding the entry. One of the hardest problems is creating rules for re-entering a trade. Mine are as follows:

1. Tenkan-Sen and Kijun-Sen must be above the Cloud.
2. Chikou Span above the candlesticks.
3. Price greater than Kijun-Sen and Tenkan-Sen.

A quick summary of steps taken

1. Checked the daily chart, the price was above the daily Kijun-Sen. The trade direction is long/buy.
2. Check the 4-hour chart, the price was above the Cloud, and the Chikou Span was above the candlesticks.
3. All 1-hour rules confirmed an entry; profit taken at 40 pips.
4. Re-entered trade on 1-hour chart, exited when price entered the 1-hour Cloud.

Sources: Péloille, Karen. (2017). Trading with Ichimoku: a practical guide to low-risk Ichimoku strategies. Petersfield, Hampshire: Harriman House Ltd.

Patel, M. (2010). Trading with Ichimoku clouds: the essential guide to Ichimoku Kinko Hyo technical analysis. Hoboken, NJ: John Wiley & Sons.

Linton, D. (2010). Cloud charts: trading success with the Ichimoku Technique. London: Updata.

Elliot, N. (2012). Ichimoku charts: an introduction to Ichimoku Kinko Clouds. Petersfield, Hampshire: Harriman House Ltd.

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## Understanding The Volatility Breakout Strategy

### Introduction

Breakout trading is one of the most common and popular strategies among traders across the world. In this article, we have added a powerful concept to this strategy, which is volatility. In a volatility breakout, we determine the movement of prices just before the breakout and also their reaction at important support and resistance levels. After analyzing the market, we will decide which breakout is safe to trade and which is not.

### Volatility cycles

We have built the volatility breakout strategy in a very simple way. The principle of this strategy is that, when the market moves from one level to another (support to resistance or resistance to support) with strong momentum, the momentum is said to continue further. The other characteristic of the price is that it moves from periods of sideways movement (consolidation) and vertical movement (trend).

Price breaking out of a consolidation prompts us to believe that price will continue in that direction, which might last for one day, one week, or one month. The market after trending downwards gets choppy and reduces directional movement. Traders can use technical indicators like Bollinger Bands, which helps them to determine the strength of the breakout. Breakouts that happen with low volatility are ‘real’ breakouts; on the contrary, breakouts with high volatility can result in a false breakout. We shall look at each case in detail in the next sections of the article.

### High volatility breakout

When we are talking about volatility, we mean the choppiness of the price, i.e., the back and forth movement of price. There are traders who like this kind of volatility, as they feel price moves very fast from one point to another. But this isn’t necessarily true in case of a breakout. If you don’t have the required strength in a breakout, you could be trouble.

In the above chart, we see that the price has been in a range for a long time. This means a breakout could happen anytime. Much later, the price tried to break above resistance and stayed there for quite a long time. The price is just chopping around without moving in any particular direction eminently. All these are indications that the breakout, if it happens, will not sustain. Hence, one needs to be extra cautious before going ‘long’ after the breakout.

There are many traders who are willing to take the risk and want to try their luck in such conditions. In that case, after you buy the forex pair, always keep a tight stop loss. The reason why we are suggesting a tight stop loss is that there are high chances for the trade will not work in your favor, and you should avoid making a big loss in that trade. The setup would look like something below.

If the trade works, it can give a decent profit with risk to reward of more than 1.5, which is really good. Again this strategy is only for aggressive traders.

### Low volatility breakout

When a breakout happens with a lot more strength, it is said to be a low volatility breakout. The price here does not face much of hurdle and crosses the barrier with ease.

As you can see in the above chart, the price does not halt at resistance, and the breaks out smoothly, which is exactly how a breakout should be. After that, you can see that the breakout happens successfully, and the price continues to move higher. When such type of volatility comes into notice, we will see a higher number of traders being a part of this rally because they are relatively risk-free trades. This strategy is recommended by us to all types of traders, irrespective of their risk appetite. The next question is where to take profit and put a protective stop.

Stop-loss can be placed below the higher low, which will be formed near the resistance, and profit should be booked at a price which will result in a risk to reward ratio of 1:2. Some money management rules should also be applied while booking profits. The setup would look something like this.

### Measuring volatility

Since this strategy is mostly based on volatility, it is important to know how to measure volatility.

• Bollinger bands are excellent volatility and trend indicators, but like all indicators, they are not perfect.
• Average true range (ATR) measures the true range of the specified number of price bars, typically 14. ATR is a volatility measuring indicator and does not necessarily indicate a trend. We see a rise in ATR as the price moves from consolidation to a strong trend and a fall in ATR as market transitions from strong trend to choppiness.
• ADX is also a prominent indicator that measures the strength of a trend based on highs and lows of the trend over a specified number of candles, again typically 14. When ADX rises, it indicates that the volatility has returned to the market, and you might want to use a strategy that fits that market condition.

### Bottom line

The market does not always be in trending and consolidation phases, and we also have to learn to deal with different types of volatility. This is where most of the strategies can be used at their best, and using volatility indicators can help you trade more effectively. A breakout, when accompanied by the right amount of volatility, can be highly rewarding. Hence this is an important factor in any breakout trading system. Cheers!

Categories

## Ichimoku Strategy #1 – The Ideal Ichimoku Strategy

The Ideal Ichimoku Strategy is the first strategy in my series over Ichimoku Kinko Hyo. There are two sides to a trade, and so there will be two different setups for long and short setups. This strategy comes from the phenomenal work of Manesh Patel in his book, Trading with Ichimoku Clouds: The essential guide to Ichimoku Kinko Hyo technical analysis. Buy it, don’t pirate.

Patel identified this strategy as the foundational strategy. Because it uses all of the components of the Ichimoku system, I believe that this is the strategy that people should be able to know so well, that they can glance at a chart and understand what is happening. You should see this strategy and be ready to trade it profitably before you transition into trying other Ichimoku strategy. If you don’t, you can run the risk of being disenfranchised with the system and believe that it is another trading system that doesn’t work.

Moving on to the other strategies without mastering this strategy first is very dangerous to your trading development and your understanding of the Ichimoku Kinko Hyo system.

### Ideal Ichimoku Bullish Rules

1. Price above the Cloud.
2. Tenkan-Sen above Kijun-Sen.
3. Chikou Span above the candlesticks.
4. The Future Cloud is ‘green’ – Future Senkou Span A is above Future Senkou Span B.
5. Price is not far from the Tenkan-Sen or Kijun-Sen
6. Tenkan-Sen, Kijun-Sen, and Chikou Span should not be in a thick Cloud.

### Ideal Ichimoku Bearish Rules

1. Price below the Cloud.
2. Tenkan-Sen below Kijun-Sen.
3. Chikou Span below the candlesticks.
4. The Future Cloud is ‘red’ – Future Senkou Span A is below Future Senkou Span B.
5. Price is not far from the Tenkan-Sen or Kijun-Sen.
6. Tenkan-Sen, Kijun-Sen, and Chikou Span should not be in a thick Cloud.

Sources: Péloille, Karen. (2017). Trading with Ichimoku: a practical guide to low-risk Ichimoku strategies. Petersfield, Hampshire: Harriman House Ltd.

Patel, M. (2010). Trading with Ichimoku clouds: the essential guide to Ichimoku Kinko Hyo technical analysis. Hoboken, NJ: John Wiley & Sons.

Linton, D. (2010). Cloud charts: trading success with the Ichimoku Technique. London: Updata.

Elliot, N. (2012). Ichimoku charts: an introduction to Ichimoku Kinko Clouds. Petersfield, Hampshire: Harriman House Ltd.

It is said that the market only trends for 30% of the time. So it becomes necessary to have a range trading strategy to take advantage of the other 70% of the time. Range trading is not difficult, but it requires discipline and determination to make most out of it. When a market is trending, it forms a pattern of higher highs and higher lows, in case of an uptrend. The move, in this case, is really strong and is known as an impulsive move. The other type of movement is known as the corrective move, which comes in the form of a pullback. Impulsive moves are stronger than corrective moves.

When the market is making any such moves, it finds itself stuck between a high or low and continues to oscillate between these two points. It means buyers and sellers are equally strong, and this creates a very choppy environment.

Traders now trade these extremes and continue to trade until price breaks out on either of the sides. These two points act as potential support and resistance points, used by traders to place their orders.

In the above chart, we have drawn a few lines from where the market bounced off. The price action in those areas creates many trading opportunities. The instrument in the chart first trends down and then puts up a low (marked by line 1). Initially, you might think it as a downtrend and expect the pattern of lower lows and lower highs to continue.

Then you see the market rally to line 2, from where the market falls back to line 3 but does not fall till line 1. This highlights the fact that the market is no more trending. The market instead could be stuck in a range between line 1 and line 2. These are not ‘defined’ prices. Always consider them as zones with a margin of error both outside and inside the range. A trader will look to position himself/herself at these zones of support and resistance that forms the range.

### Why support and resistance?

The price that is stuck between these two extremes has a lot of significance. This is because, at this point, the price can either Stop, Reverse, or Breakout. When you have the right knowledge, it will stop you from simply pushing the buttons and will make you trade with a defined strategy.

`Range = Consolidation`

A range is nothing but a price consolidation of the overall trend move. It could either end the current trend or cause a reversal. The different price behavior pattern in the range creates many trading opportunities, which can be traded by all types of traders, depending on their risk appetite. Now let’s discuss some important trading strategies using support and resistance of ranges.

### Strategy Using Technical Indicators

In the above image, the two lines represent the support and resistance of the range formed. When the price reaches the resistance at point 1, the Stochastic enters the overbought area, and the slowdown in momentum is the confirmation signal for a sell. The resistance pushes the price back to support (point 2), but this time the momentum is very strong, hence no entry. The stochastic also does not enter the oversold area clearly. Next time the price goes to resistance with greater momentum, and the Stochastic too does not give an entry signal as it is not in the overbought area. This means one shouldn’t be going short at this point.

Overall, there is only one risk-free trade available in the above chart, and that is at point 1 (short).

### Strategy Recap

Firstly, we should be able to see the price at one of the extremes. When that happens, the indicator should show either be at overbought or oversold conditions. The momentum of the price should be an important factor that determines our entry. If we see reversal patterns, this could be the best entry with a good risk to reward ratio. Do not forget to place protective stops much below or above the support and resistance levels, respectively. This will always protect your trades from a false breakout.

### When not to buy at support and sell at resistance in ranges

You must have probably heard traders saying that more time a level is tested, the stronger it becomes. This is not true in the case of our range break-out strategy. You need to start paying attention to the price patterns at these ends. If the price has made multiple touches, it could be getting ready for a breakout in the direction of the higher time frame.

The above chart is an example of such a scenario. It shows a range, and at point 1, you can see the strength in the candle as price pushes towards the resistance area. The next push makes the price to consolidate at the extreme. It appears to be a battle between the bulls and bears. It is also making higher lows as a part of the uptrend. Hence a breakout after this point is not surprising.

You don’t want to see the higher lows at the resistance extreme and lower highs at the support extreme.

The resistance could still work, and a reversal could happen, but this type of price action does not give much confidence for shorts. Only aggressive traders may find some entry in that consolidation, for a potential long. They can put a protective stop below the higher low that was formed before the accumulation.

We hope you find this strategy informative. Let us know if you have any questions in the comments below. Cheers!

Categories

## Heard Of The Amazing ’20 Pips Per Day’ Strategy?

### Introduction

Forex is the most liquid and volatile market in the world. The average pip movement in the major currency pairs is around 100 pips. However, as a retail trader, it is not impractical to grab 100 pips every single day. Though there are some strategies out there, it is very challenging to make 100 pips per day every day. But, there is 20 pips strategy, 30 pips strategy as well as 50 pips strategy, which is much reliable than the 100 pips strategy. So, in this lesson, we shall be discussing the 20 pips strategy.

### The 20 Pips Strategy

The strategy is very simple and straightforward. According to this strategy, when the price breaks above a range in a logical area, you must go long, and when it breaks below a range in a logical area, you must go short. So, this strategy is basically a breakout strategy. However, it’s not as straightforward as it sounds. There are some criteria one must consider before trading this strategy.

### ❁ Considerations

##### ✓ Currency Pair

You can trade this strategy on any currency pair. However, it is recommended to focus mainly on major and minor currency pairs.

##### ✓ Session

Though the market is open 24 hours, it does not mean you can apply this strategy any time during the day. To keep it safe, it is advised to trade only during the times when there is high liquidity. That is, the London – New York overlap would be the best time to apply this strategy. Else, the London session or the New York session will work perfectly fine as well. And it is great if you do not trade it during the Asian session, as markets don’t usually break out during this period.

##### ✓ Timeframe

Timeframe plays an important role when it comes to trading a strategy of this type. To make 20 pips a day, it is ideal to stay between the 1hour timeframe and the 15-minute timeframe.

##### ✓ Indicators

This strategy does not require any technical indicators.

### ❁ How to trade the 20 pips strategy

Below is a step by step process to trade this strategy.

1. Open the candlestick chart of any currency pair, preferably, a major or minor currency pair.
2. Firstly, go to the 1-hour timeframe in the chart and see if the market is in a logical area to buy or sell (Ex: Support and resistance).
3. If yes, then wait for the price to break above or below the consolidation area.
4. Check the strength of the breakout on the lower timeframe (15 minutes). Based on the strength, prepare to hit the buy or sell.

### ❁ Trading the 20 pips strategy on the live charts

Below is the chart of AUDUSD on the 1-hour timeframe. We can see that the market has been bouncing off from the purple line. So, this becomes a logical area to buy. At present, the market is holding at the purple support line. And it was in a tiny range for like ten candles. Now, to apply the strategy, we need the market to break above this range.

In the below image, we can see that the market breaks above the range with a big green candle. But, before hitting the buy, we must switch to the lower timeframe and see if the momentum of the candle that broke the range was strong or not.

In the below 15 min chart, we can clearly see that the broke above the range in just two green candles. This is an indication that the buyers have come up strong. Hence, now we can prepare to go long.

Coming to the take profit and stop loss, the take profit would, of course, be 20 pips, and the stop loss can be kept a few pips below the support area. Alternatively, you can even go for a 1:1 RR by keeping a stop loss of pips.

• Sell example

Note that this strategy can be applied when the market is in a trending state as well. Below is the chart of EUR/USD on the 1-hour timeframe, and we can see that the market is in a downtrend. The market keeps making lower lows and lower highs. At present, it can be seen that the market is pulling back, and a green candle has appeared. Now, all we need is the price to break below the pullback to give us a heads up that the downtrend is still active.

In the below chart, we can see that, in the very next candle, the market broke below the pullback area. Hence, we can prepare to go short after getting confirmation of the strength from the lower timeframe.

In the below 15-minute timeframe chart, we can see that the momentum of the candle was sufficiently robust during the breakout. Hence, we can consider shorting in now.

As far as the take profit and stop loss are concerned, it remains the same as the previous example. That is, 20 pips take profit with 20 pips stop loss.

### Bottom line

A great feature to consider about this strategy is that it can be used in any state of the market. However, all the criteria mentioned above must be met for the strategy to work. If you’re a beginner in trading, then this could be an ideal strategy to get started with. And if you have experience in trading, you can try enhancing the strategy by applying some indicators and patterns.

Note that this strategy, just like other strategies, does not provide 100% accuracy. There are times when this strategy fails, as well. Hence, it is recommended to use this strategy in conjunction with other strategies to have a better winning probability. Happy Trading!

Categories

Forex trading is a hard business. A trader has to work hard to learn the algorithm of it as well as psychologically strong enough to apply them when it comes to making money out of it. Some individuals may have enormous knowledge as far as trading is concerned, but they do not do well in trading. It is because they are not capable of dealing with the real heat.

Having losses is another inevitable issue with trading, which every trader is to encounter. It does not matter how good a trader is; he or she must face losses. In trading when a trader loses a trade, he loses in two ways

1. He loses his money
2. He loses faith in his calculation or belief

#### Losing the Money

When a trader loses money in trading, I do not think it needs an explanation of how bad it feels. Losing money on any occasion hurts. Traders are bound to err because this is a game of chances, so they sometimes lose money. In the Forex markets, a trader can lose an unlimited amount of money. He can lose an amount of money he even cannot think of. Experienced traders do err as well.

In most cases, it is not about making mistakes. The market can be unpredictable from time to time. Even excellent trade setups don’t always work. This fact may make a trader believe something wrong with the strategy. He starts adding/changing more things with the strategy; runs after Holy Grail. We know what the last consequence is. He quits after losing valuable time and invested money. Statistics show that only around 5% of investors are successful in the Forex market.

##### How to Overcome It?

A trader must be ready to take losses. He should look at trading as a business, and count his losses as business expenditure. Let us consider. If we run a business, we have to pay utility, rent, wage, miscellaneous spending. A trader may count his losses as an expenditure of his trading business.

#### Losing on Own Belief

We often ignore this issue at the time of analyzing traders’ psychology. I find this to be a severe issue. When a trader takes an entry, he throws his skill, experience, belief in it. If it goes wrong, he loses a trade on his calculation. Psychologically, it hurts a lot. We can compare the feeling when our favorite team loses a match against an archrival. Losing on own belief is often more painful than losing the money only.

##### How to Overcome It?

It is a severe psychological trading issue. To overcome this issue, a trader must remember that there is no such strategy in the Forex market, which is 100% successful. Even the best of the best strategy is bound to encounter losses. Typically, if a strategy is successful even in 60% cases, the market analysts consider it as a good strategy.

#### The Bottom Line

A trader is to take trading as a business. The market is not an ATM. Making money consistently does not mean a trader makes money on every single trading day. A trader is to have some good days and some bad days. There is no point in jumping with joy on good days or being grumpy on bad days. Just take them professionally.

Categories

## Harmonic Geometry

Gartley Harmonic Pattern Example: Cipher Pattern

### Harmonics – Gartley Geometry

I believe we should be calling these patterns Carney Harmonics or Gilmore Harmonics because Gartley never gave a name any designs – the genius work Bryce Gilmore and Scott Carney did that in his various Harmonic Trader series books. Scott Carney is the man who discovered and named a great many patterns and shapes that we see today. And Carney’s work is some of the most developed and contemporary work of Gann’s and Gartley’s that exists today. But the understanding and application of Carney’s and Gilmore’s patterns have been woefully implemented by many in the trading community. Any of you reading this section or who were drawn to it because of the words ‘harmonic’ or ‘Gartley’ must do two things before you would ever implement this advanced analysis into any trading plan:

1. Read Profits in the Stock Market by H.M. Gartley – this is the foundation of learning and identifying harmonic ratios.

There are a series of other works by expert analysts and traders that address Gartley’s work and are worth reading, such as Pesavento, Bayer, Brown, Garrett, and Bulkowski. Do not consider their work merely supplementary – I find their work necessary to fully grasp the rabbit hole you are attempting to go down. Harmonic Patterns are an extremely in-depth form of analysis that encompasses multiple esoteric and contemporary areas of technical analysis. If you think finding the patterns and being able to draw them is sufficient to make a trading plan, you will lose a lot of money. Additionally, some words of wisdom from the great Larry Pesavento: An understanding of harmonics requires an in-depth knowledge of Fibonacci.

### Harmonic Geometry, in a nutshell

In a nutshell, Harmonic Geometry is a study and analysis of how markets move and flow as a measure of proportion from prior price levels. These proportional levels are measured using Fibonacci retracements and extensions. When these patterns (triangles) complete, they create powerful reversal opportunities. Carney calls the end of these patterns PRZs – Potential Reversal Zones. The significant error that many new traders and analysts make when they find a complete pattern is the same problem many new traders make with any new tool, strategy, or method: they don’t confirm. Make no mistake: Harmonic Patterns are powerful. But like any analysis or tool, it is not sufficient to take a trade. Harmonic Pattern analysis is just one tool in your trading toolbox. And like any toolbox, you need multiple tools to tackle the various projects and goals you want to achieve.

Contrary to popular belief, Gartley did not utilize Fibonacci levels or ratios in his work. Nonetheless, harmonic ratios are based on three classifications of harmonic ratios: Primary Ratios, Primary Derived Ratios and, Complementary Derived Ratios. As you develop a further understanding of the various patterns and their ratios, you will come to appreciate the very defined structure of this type of technical analysis.

Primary Ratios

• 61.8% = Primary Ratio
• 161.8% = Primary Projection Ratios

Primary Derived Ratios

• 78.6% = Square root of 0.618
• 88.6% = Fourth root of 0.618 or Square root of 0.786
• 113% = Fourth root of 1.618 or Square root of 1.27
• 127% = Square root of 1.618

Complementary Derived Ratios

• 38.2% = (1-0.618) or 0.618 squared
• 50% = 0.707 squared
• 70.7% = Square root of 0.50
• 141% = Square root of 2.0
• 200% = 1 + 1
• 224% = Square root of 5
• 261.8% = 1.618 squared
• 314% = Pi
• 361.8% = 1 + 2.618

### Elliot Wave and Harmonic Geometry

Ellioticians are very aware of the strong connectedness that Gartley’s and Carney’s work has within Elliot Wave Theory. There are significant elements between the two types of technical analyses that create a mutual symbiosis. However, while they are very similar, it is crucial to understand that there are some significant differences between the two.

 Elliot Gartley Dynamic, Flexible. Static, Definite. Wave counts are more fluidly labeled. Each move is labeled either XA, AB, BC, or CD. Many variations and intepretations No variation permitted. Wave alignment varied and malleable. Each price point alignment must be exact.

The combination of Elliot and Gartley is powerful, and Gartley Harmonics can help confirm Elliot Waves. The following articles will describe, in further detail, specific Harmonic Patterns.

Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall Gartley, H. M. (2008). Profits in the stock market. Pomeroy, WA: Lambert-Gann Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley

Categories

## How To Trade The Infamous Turtle Soup Strategy?

In this article, we shall be covering the Turtle soup strategy by fading the Donchian channel, and Connor’s RSI strategy.

### What is the Donchian Channel indicator?

The Donchian channel is an indicator that considers the high and low for N number of periods. For this particular Turtle Soup strategy, we will be setting the value of N=20, which accounts for the most recent 20 days.

This indicator works based on the highs and lows made by the market. The channel makes a stair-stepping pattern for every high or low made in a period of 20 days.

Below is a chart that shows the Donchian indicator applied to it.

From the above chart, we can clearly see that the top and bottom lines (blue lines) are moving in the form of a stair-stepping pattern representing the highs and lows over the past 20 days. Precisely, the black arrows represent the highs and lows in a look back of 20 days.

### Trading the Turtle Soup Strategy

The Turtle Soup is a strategy developed by a trader and author Linda Bradford-Raschke. She published this strategy in one of her books named “Street Smarts: High Probability Short-Term Trading Strategies.” Talking about history, this strategy was taught to a set of novice traders (called the Turtles) by Richard Dennis and William Eckhardt in the 1980s. Also, this strategy is in reference to a well-known strategy called ‘Turtle Trading.’ Over the years, Linda Bradford-Raschke inverted the logic and reasoning behind this strategy and came up with a short-term trading method using this strategy.

Strategy 1: Adding confirmation to Donchian Channel breakout

This is the typical Turtle strategy.

The Turtle strategy using the Donchian channel is simple. When the market breaks above the resistance line, we can prepare to go long. Similarly, when the market goes below the support line, we can go short.

Here are some of the tips and tricks for using this indicator.

• When the market breaks above/below the lines, make sure that the price is holding above/below it.
• The candle that breaks the line must be quite strong.

Consider the below figure. Reading from the left, we can see that the market was holding at the upper line of the channel. Later, a huge green candle broke above the channel. Many would hit a buy at this moment, but we wait for a confirmation. When another candle shows a bullish sentiment as well, we can hit the buy at the point shown on the chart.

According to the original Turtle trading strategy, a stop loss of ‘two volatile units is kept,’ which is equal to n-period ATR x 2.

However, to keep it simple, you can keep the stop loss a few pips below the candle, which broke the channel.

Let’s do the converse

In the above example, we saw the typical way of trading the Turtle strategy. In this set of examples, we shall reverse the logic. That is, we will look to go long when the price breaks below the channel and short when the price breaks above the channel. Let’s consider a few examples for the same.

Let’s say the market makes a 20 day low and is visible on the Donchian channel. Later, the price comes down to that low and even tries to break below it. Once the price shoots right back up to the line, we anticipate on the buy.

Rules:

• The new 20 day low must be at least four days apart from the previous 20 day low. So, you cannot compare the low of yesterday and the low of today as the difference is just one day apart.
• Entry must be 5-10 pips above the previous 20 day low.
• Stop loss must be placed 1-2 pips below the low of today.
• Aim for a take profit of 1R.

Sell strategy

The sell strategy is just the opposite of the strategy discussed for a buy. When a 20 day high is challenged for the second time having a gap of at least four days from the previous low, we can look to go short.

Rules:

• The 20 day high must be at least four days in the past.
• Entry must be placed 5-10 pips below the 20 day low.
• Stop loss must be placed 1-2 pip of today’s low.
• Aim for a take profit of 1R.

Below is the chart of the EUR/USD on the Daily timeframe. Starting from the left, we can see that the market came down and made a 20 day low (indicated by the black dotted line). Now that we have the first low, we wait for the price to down to that low in more than four candles (days). And when the price spikes below the prior low and comes back up, we can hit the buy at the encircled region.

As far as the stop loss and take profit is concerned, we can keep a stop loss 2-4 pips below the low of the present candle and aim for a good 1:1 RR on this trade.

Sell example

In the below chart, the market made a 20 day high up to the black dotted line. Later, the price goes above the previous 20 days high yet again. Here, the price holds above the line and then drops below the next candle. So, once it’s below by 5-10 pips from the previous 20 days high, we can go short. And the stop loss and take profit are self-explanatory.

### Conclusion

With no disrespect to the turtle trading strategy, we can conclude that this strategy can be used in both ways. This strategy is backtested and proven by a number of experienced traders. Try this strategy in your trading activities and let us know if you have any questions in the comments below. Happy Trading!

Categories

## Moving Average Strategies: Three Simple Moving Averages Part 2

In the article “Moving Average Strategies: Three Simple Moving Averages Part 1”, we have come to know how three simple moving averages on a chart help us detect a trend. In this article, we will demonstrate how and where to take entries with the help of ‘Three SMAs”.

A Moving Average is an indicator that shows trends as well as it acts as support/resistance. In a buying market, it acts as support whereas it serves as a resistance in a selling market. Let us have a look at how it works as resistance and offers us entries in a selling market.

We have inserted “Three SMAs” with the value of 200, 100 and 50 on this chart. The chart shows that the price has been down-trending nicely as far as “Three SMAs” rules are concerned. Please notice that every time the price goes back to the 50- Period Simple Moving Average, it comes down. However, in some cases, the price makes a bit bigger move than the others. We need to understand which one is to make a bigger move and offers us an entry. Can you spot out the differences?

Have a look at the same chart below.

Look at the arrowed candle. The price comes down with a better pace and travels more after those marked candles. There are several reasons for this.

1. The price goes back to the 50- Period Simple Moving Average; touches (or very adjacent to it).
2. The bearish reversal candles are engulfing candle.

In some cases, the price starts down-trending without touching the 50-Period Simple Moving Average, it does not travel a good distance towards the downside. It rather goes back again; touches it and then makes a bigger move.

At the very left, the first arrowed candle, the bearish engulfing candle does not touch the Moving Average, but one of the bullish candles has had rejection at the 50-Period Simple Moving Average, thus this is an entry. However, see the very next candle comes out as a corrective candle. This means the sellers are not that sanguine since the bearish reversal candle is not produced right at the 50-Period Simple Moving Average.

With the second and third arrowed candles, they are produced right at the 50-Period Simple Moving Average and both of them are bearish engulfing candles. Those two are perfect entries as far as ‘Three SMAs’ is concerned.

At the very right, the last arrowed candle is very adjacent to the 50-Period Simple Moving Average and produces a bearish engulfing candle.  Most likely, the price would head towards the South again. However, “Three SMAs” does not recommend that we shall take an entry here.

We will learn more strategies with Moving Average in our fore coming articles. Keep in touch.

Categories

To evaluate, the quality of a strategy is an old quest, and its answer has to do with gambling theory, although it can apply to any process in which the probability of profits is less than 100%. Of course, the first measure to know if our system is winning is when the current portfolio balance is higher than in its initial state. But that does not give very much information.

A better way might be to record winners and losers, and have a count of both so that we could apply some stats. It would be interesting to know the percentage of winners we get and how much is won on average. That also applies to losers.

We could try to find out if our results are independent of each other or they are dependent.

Finally, we could devise a way to obtain its Mathematical expectancy, which would show how profitable the strategy is.

### Outcomes and probability statements

No trader is able to know in advance the result of the next trade. However, we could estimate the probability of it to be positive.

A probability statement is a figure between zero and one specifying the odds of the event to happen. In simple terms,

Probability = odds+ / ( odds+  +  odds – )

On a fair coin toss game: odds of heads (against, to one) = 1:1

probability Fair coin toss = 1/(1+1)

= 0.5

Probability of getting a Six on a dice:

odds = 5:1 – five against to one

Probability of a Six = 1/( 1+5) = 0.16666

We can also convert the probability into odds (against, to one) of occurring:

Odds = (1/ Probability) -1

As an example, let’s take the coin-toss game:

Odds of a head = 1/0.5 -1 = 2-1 =1:1

That is very handy. Suppose you have a system on which the probability of a winner is 66 percent. What are the odds of a loser?

System winners= 0.66 so -> System losers = 0.34

loser odds = 1/0.34 – 1 = 2 -> about 2:1.

That means, on average, there is one loser for every two winners, which means one loser every three trades.

### Independent vs. Dependent processes

There are two categories of random processes: Independent and dependent.

A process is independent when the outcome of the previous events do not condition the odds of the coming one. For example, a coin toss or a dice throwing are independent processes. The result of the next event does not depend on previous outcomes.

A dependent process is one where the next outcome’s probability is affected by prior events. For example, Blackjack is a dependent process, because when cards are played, the rest of the deck his modified, so it modifies the odds of the next card being taken out.

This seems a tedious matter, but it has a lot of implications for trading. Bear with me.

#### What if we acknowledge our trades are independent from each other?

If we consider that our trades are independent, then we should be aware that the previous results do not affect the next trade, since there is no influence between each trade.

#### What if we know our system shows dependency?

If we know that our system’s results are dependent, we could make decisions on the position size directed to improve its profitability.

As an example, let’s suppose there is a very high probability that our system gets a winner after a loser, and also a loser after a winner. Then we could increase our trade size every time we get a loser, and, also, reduce or just paper-trade after a win.

Proving there is dependency on a strategy or system is very difficult to achieve. The best course of action is to assume there is none.

Assuming there is no dependency, then it is not right to modify the trade size after a loser such as martingale systems do since there is no way to know when the losing streak will end. Also, there is no use in trading different sizes after a winning or losing trade. We must split the decision-making process from trade-size decisions.

### Mathematical expectancy

The mathematical expectancy is also known as the player’s edge. For events that have a unique outcome

ME = (1+A)*P-1

where P is the probability of winning, and A is the amount won.

If there are several amounts and probabilities then

ME = Sum ( Pi * Ai)

The last formula is suitable to be applied to analytical software or spreadsheet, but for an approximation of what a system can deliver, the first basic formula will be ok. Simply set

A = average profit and

P = percent winners.

As an example, let’s compute the mathematical expectancy of a system that produces 40% winners and wins 2x its risk.

ME = (1+2)*0.4 -1

ME = 3*0.4 -1

ME = 0.2

That means the system can produce 20 cents for every dollar risked on average on every trade.

### Setting Profit Goals and Risk

Using this information, we can set profit goals. For instance, if we know the strategy delivers a mean of 3 trades every day – 60 monthly trades- The trader can expect, on average, to earn (60 * 0.2)R, or  12* R, being R his average risk.

If the trader set a goal of earning \$6,000 monthly he can compute R easily

12*R = \$6,000

R= \$6000/12 = \$500.

That means if the trader wants a monthly average of \$6,000, he should risk \$500 on every trade.

### Final Words

On this article, we have seen the power of simple math statements, used to help us define the basic properties of our trading system, and then use these properties to assess the potential profitability of the strategy and, finally, create a simple plan with monthly dollar goals and its associated trade risk.

Categories

## Daily Crypto Update 02.07.2018 – Is The Reversal Here?

The crypto currencies market has received 16 billion in a few hours which has generated a large increase in most of the top 100 cryptos and it seems a possible a reversal in the trend. We have to be careful and expect the week to evolve before taking determinations since the overbought is present in the charts and most likely we will see a strong drop as well.

## General Overview

Market Cap: \$267.609.425.759

24h Vol: \$14.357.089.584

BTC Dominance: 42.1%

The market is green in most cryptocurrencies with two-digit gains in many of them.

Top Gainers of the day

1. Dragon Coins DRG  83.97%
2. Bitmark          BTM  69.34%
3. Alphacat        ACAT 63.01%
4. Metronome   MET  43.72%
5. NaPoleonX   NPX    37.91%

Top Losers of the day

1. Pure               PURE -32.86%
2. Selfkey          KEY    -29.27%
4. WINCOIN    WC     -18.67%

## News

Bitcoin and Ether Surge 6% as Crypto Market Adds \$15 Billion in 2 Hours
In the past 2 hours, Bitcoin and Ether, the native cryptocurrency of Ethereum, recorded a 5 per cent increase in value supported by a sudden spike in volume. Within merely hours, the volume of Bitcoin surged by over \$1 billion while the volume of Ether increased by nearly 20per cent.
Source: ccn.com

Coinbase Custody Officially Launches for Institutional Investors
Today Coinbase announced that it has officially opened up Coinbase Custody for institutional investors. The announcement, written by Sam McIngvale, product lead at Coinbase Custody, stated that Coinbase Custody accepted its first deposit last week before its official launch today.
Source: ccn.com

Kraken Strikes Back at Tether Price Manipulation Claims
Cryptocurrency exchange Kraken is calling foul on allegations that its tether (USDT) markets are frequently characterised by trading activity commonly associated with wash trading and other forms of market manipulation.
Source: ccn.com

Former ‘Big Three’ Chinese Giant BTCC Relaunches Cryptocurrency Exchange
After shuttering its doors nine months ago, the world’s oldest cryptocurrency exchange is relaunching its exchange platform for business and has revealed its plan to launch its own token in the future. BTCC on Monday announced the launch of its revamped exchange with support for crypto-to-fiat and crypto-only trading pairs including Bitcoin, Bitcoin cash, Litecoin and Ethereum.
Source: ccn.com

## Analysis

### BTC/USD

The price of the BTC has been showing a considerable rise in the last hours even crossing the resistance of \$6563.

It is not yet known what could have caused this new rise but there is something clear and it is that last week the price was affected in a very positive way for the closing of the next futures contracts, the day this happened the price immediately rushed up. Tether also printed an additional 250 million USDT and the market felt the effects of this. After strongly breaking up the level of \$6,250, BTC now looks more bullish.

Market sentiment

4-H chart technicals signal a Bullish sentiment.

Oscillators are in overbought zone pointing up.

Pivot points

```R3 6604.24
R2 6516.95
R1 6432.72
PP 6345.42
S1 6261.19
S2 6173.90
S3 6089.67```

### ETH/USD

ETH is raising up considerably today, testing the upper part of the channel on this 4-H chart. The price made a big jump from the central Pivot Point and a breakout of this line could quickly send the price to \$500, however, the EMA-200 is a strong resistance to consider at \$471 where the price is sitting right now.

Market sentiment

4-H chart technicals signal a Bullish sentiment.

Oscillators are in overbought zone pointing up.

```Pivot points R3 6604.24

R3 469.58
R2 463.14
R1 457.54
PP 451.10
S1 445.49
S2 439.06
S3 433.45```

### XRP/USD

XRP raises 6.75% in the last 24 hours while the market continues in green behind the new Bitcoin rise that drags the other cryptocurrencies along positively. In this rise, the price has broken the central pivot point and also the pivots R1 and R2. At this moment the price is moving at \$0.4914 but the indicators are still pointing upwards very close to the oversold area. The EMA-200 could be a strong resistance for the price.

Market sentiment

4-H chart technicals signal a Bullish sentiment.

Oscillators are in overbought zone pointing up.

Pivot points R3 6604.24

R3 0.4901
R2 0.4798
R1 0.4706
PP 0.4604
S1 0.4512
S2 0.4409
S3 0.4317

ADA has increased its price by 34.5% since June 29th in a very interesting rally, also helped by the price increase of BTC by 4.66% today.

The price has crossed the EMA-100 and pivots R1 and R2 in this 4-H chart, although the indicators are already showing high overbought levels so we could see the entry of sellers in the short term.

Market sentiment

4-H chart technicals signal a Bullish sentiment.

Oscillators are in overbought zone pointing up.

Pivot points R3 6604.24

R3 0.1654
R2 0.1564
R1 0.1491
PP 0.1401
S1 0.1328
S2 0.1238
S3 0.1165

## Conclusion

Crypto currencies market: BTC continues moving the market up and down, to consider a reverse on the trend the price still needs to go higher over \$8.000 because the pressure remains on the downside, while this happens there is still at risk for deeper setbacks.

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## The Connors & Raschke’s 80-20 Strategy

### Introduction

The original Connors & Raschke’s 80-20 Strategy is an intraday strategy that was published in Street Smarts by Larry Connors and Linda Raschke.

It is based on the Taylor Trading Technique, which is a manual for swing trading. Taylor’s method was the result of the observation that the markets move within a cycle that is made up of a buy day, a sell day, and a sell short day. That setup was further investigated by Steve Moore ar the Moore Research Center.

Mr. Moore focused on days that closed in the top 10% of the range for the day. Then, he checked on for the percent of time next day prices exceeded the previously established high, and, also, for the percentage of times it also closed higher.

His results showed that when prices closed in the top/bottom 10% of its range, it had an 80-90% chance of following-through the next session, but only 50% of them closed higher/lower. This fact implied an excellent possibility of reversal.

Derek Gibson, said Connors, found out that the market has an even higher chance of reversing if the set-up bar opened in the opposite end of the range. That is, a candlestick with short wicks and a large body. Therefore this pre-condition was added. To create more opportunities, they lowered the percent of the daily range from 90 to 80, because it didn’t affect the system’s profitability.

### Long Setups

1. Yesterday, the asset opened in the top 20% and closed in the lower 20% of its daily range.
2. Today the market must trade at least 5-15 ticks below yesterday’s low. This is a guideline.
3. An entry buy stop is then placed at yesterday’s low, once the trade is being filled, and an initial protective stop near the low extreme of today’s action.

Move the stop to lock in profits. This trade is a day trade only.

### Short setups

1. Yesterday the asset opened in the bottom 20% and closed in the higher 20% of its daily range.
2. Today the market must trade at least 5-15 ticks above yesterday’s high This is a guideline.
3. An entry sell stop is then placed at yesterday’s high, after being filled, and an initial protective stop near the upper extreme of today.

Move the stop to lock in profits. This trade is a day trade only.

### Testing the Strategy

We tested this strategy using the backtesting capabilities of the Multicharts64 version 11 Platform.

The naked strategy, as is, in EURUSD, USDGPY, and USDCHF over a range of 17 years, were positive in all cases. Below the equity curves for the three pairs:

### Examining the parameter map

The figure above shows the parameter maps of the USD_CHF and the EUR_USD pairs. We see that the return of the strategy increases as the parameters move to the 50% level, meaning that the importance of the starting and ending point (Open to Close) in the previous candlestick is not essential. The critical fact is the next day’s break above(below) the previous highs(lows) and the subsequent return to that level (False Breakout).

### Example of  50-50 System with optimized stops and targets on the EURUSD

As we said, this is a 50-50 system, meaning that we don’t care in which part of the candle is the Open and Close. This is a simple false breakout system.

We see that the curve is quite good over its 17-year history. Starting with 10,000 dollars, the final equity reached \$72,000, for a 6X profit figure.

Looking at the Total Trade Analysis table, we can observe that this system is also robust, with almost 40% winners and an average Ratio Win to Average loss ( Reward/risk) of 2.19.

The shuffled Trades Analysis shows that the system is very reliable, with a likelihood of small drawdowns, depicting a max consecutive loss of 16 trades.

The Net Profit distribution Analysis shows that there is a 75% probability of getting a 5X equity profit over 16 years and a 25% probability of getting a 7X profit figure.

Above is the Max Consecutive Losing Streak analysis, which shows that there is less than 10% probability of ending above a 16 losing streak. Although you think that a 16-losing-streak is terrible, it is not, but we need to be prepared psychologically to endure it. This figure is the one needed to help us conservatively decide our risk strategy.

As I already mentioned in other strategy analyses, you, as a trader, need to decide which percent of your equity you can lose without losing your temper. Many don’t like to lose any amount so they shouldn’t trade, because losing streaks are part of the trading job. Many would say 10% while others 50%. That figure has a close relation to the rate of growth of your trading account because it will decide the size of your position.

And here it comes the way to do it. Once we know the distribution of drawdowns of our trading system, we, as traders, want to minimize the probabilities that a losing streak goes beyond our max drawdown figure. This is an approximation, but its good enough to allow us to decide the best position size for our risk tastes.

Let’s say we are an average-risk trader, and we will be upset if we lose ¼ of our account. Using this trading system, and admitting a 10% probability of error, we would choose 16 as the losing streak to compute our size per trade.

Therefore, we divide 25% equity drawdown by 16, which is 1.56%. In this case, we must trade using a 1.56% risk on every trade. That means that the cost of a trade computed by the distance from entry to stop-loss levels, multiplied by the dollar pip risk and by the number of contracts should be 1.56% of your current equity balance.

Let’s simplify it using elementary math:

Percent Risk (PR) = MaxDD / Max_losing_Streak

Dollar Risk = PR x Equity_Balance

Dollar Risk = (Entry-Stop) x PipCost x Nr_of_Contracts

Let’s call Entry-Stop, Pips. And NC the Number of Contracts. Then the equation is:

Dollar Risk = Pips x PipCost x NC

Let’s move the elements from this equation to compute the Nr of contracts.

NC = Dollar_Risk / (Pips x PipCost)

That’s all. Every trade will be different, and the distance in pips from entry to stop loss will be different, but we can compute the number of contracts quickly:

Let’s do an example. Our current balance is right now \$12.000, and we want to enter a trade with 20 pips of risk, and our cost per pip is \$10 per lot. Which is my optimal size?

Our Dollar Risk is 1.56% of \$12,000 or \$187

NC = 187 / (20 x 10) = 0.93 lots, or 93 micro-lots.

### Computing the Performance of the System

Now we want to know how much on average are we going to get, monthly, from this system. That is easily computed using the numbers above. We know that this system’s history is 205 months long, and it had 1401 trades, which is seven trades per month on average. Evidently, this system trades very scarcely, but we can hold a basket of assets. Thus, If we manage to get a basket of 10 holdings, including pairs, crosses, indices, and metals, we could trade 70 times per month. And those trades will not overlap most of the time if the assets are chosen uncorrelated.

Based on our risk profile and the average Reward-to-risk ratio, we know that our average winning trade will be 2.2 times our average losing trade.

So,

AvgWin = 411

AvgLoss = 187

Our winning percentage is 40%, so our losing one is 60%

Then on a 10-asset basket, there will be 28 winners and 42 losers monthly, then:

Gross Profit: 411*28 = 11,508

Gross Loss:  42*187 =  7,854

Average Monthly Net Profit =11,508 – 7,854 = 3,654

This is an average 30,4% monthly from a \$12,000 balance. Not bad!

Note: The computations and graphs were done using Multicharts 11 trading platform.

Categories

## STRATEGY 8: Swing Trading Strategy

All of these strategies are based on setups that contain a prior market reading context with similar or, even, more important than the pattern itself. So we recommend learning to contextualize the market with Forex Academy traders, to always grasp which situation we are in.

That said, let’s see what this strategy is about and how could we apply it to the market.

Swing Trading is a kind of strategy that works in relatively long time frames, leaving trades open from one session end to the next one. It usually trades with the trend; so we position ourselves in favor of the dominant market bias; thus, the first and most crucial task is to identify it.

If we are trading on a bull market we will buy, on a bearish market, we will sell.

You need to understand that we must not buy at peaks nor sell at bottoms. We always have to wait for a retracement.

Let’s review using visual examples the best way to enter using this long-term trend strategy.

Here we observe a daily Dow Jones chart. The trend is clearly bullish, so our first requirement has been met. Now we need to wait for a retracement and detect its conclusion to enter a long position.

The easiest to identify are those retracements that develop into three smaller waves. In short time frames you can enter C-waves directly, but using this type of trading it is best to wait for the price to break the bearish guideline that signals the correction, and then, enter on its pullback in favor of the dominant trend (long in this case).

Please note the two red arrows on this chart, one close to its centre, where the price breaks the bearish trendline and continues its upward trend, for a very good long entry, and another one at the end of the chart, where it is currently breaking its corrective guideline again, to a priori, continue seeking fresh new highs. Therefore, we should remember that our first job is to identify the trend in a longer timeframe, and then identify the pullbacks and the guideline that forms them. Watch the break-out of this guideline and subsequent pullback to enter the market.

Let’s see another example:

Categories

## Wolfe Waves

All of these strategies are based on setups that have a previous market reading context, with similar or higher importance than the pattern itself. So helped by Forex Academy traders, we recommend you learn to contextualize the market to always know in what situation we are.

That said, let’s see what this strategy is about and how we could apply it to actual market action.

A Wolfe Wave is an exhaustion wedge subdivided into five waves. When we have higher highs and lows, but the distance between them is fading, we will have the context for a possible trend completion. The same happens when the wedge occurs with decreasing lows and highs.

This type of wedges will always provide us with a concluding context, but if we also ponder the five waves, we will have a setup to enter the market. Let’s view it using examples to understand it more clearly.

In this example, we are watching the EURUSD pair in a 1-minute chart. We can observe how the price moves on an upward trend with higher highs and lows, but in its latest section, these waves are dampening. The wedge is drawn in red, and we see three rectangles in part of the roof. It is important to discern these three touches on the top, which on a wave count, would be 1, 3, and 5. On the bottom of the wedge, there are Wave 2 and Wave 4. One way to find targets is to join point 1 with 4.

Here there is another example. In this case, it’s the 1-hour AUDUSD pair.  We see how the price moves on a bearish trend, and on its last section,  we observe lower bottoms and tops drawing a wedge pattern, giving us a Wolfe Wave. It is essential to recognize the three touches at the bottom, corresponding to waves 1, 3, and 5. On its tops, we would find the end of Wave 2 and Wave 4.We remind you that this type of wedges shows the final phase of a trend.

Categories

## STRATEGY 6: Elliot waves

### Foreword

All our strategies are based on input setups that have a prior market reading context, which is equal to, or more important than the pattern itself. We recommend learning with Forex Academy traders to contextualize the market, so we always know what situation we are in.

With this being said, we are going to see what this strategy consists of and how we apply it to the market.

### The Elliott Wave Theory

Elliot wave theory offers us different investment opportunities both in favor of the trend and against it. Elliott identified a particular structure to price movements in the financial markets, a basic 5-wave impulse sequence (three impulses and two correctives) and 3-wave corrective sequence.

Let’s see an example for a better understanding of this theory (click on the image to enlarge):

The chart above shows a rising 5-wave sequence. Waves 1, 3, and 5 are impulse waves because they move with the trend. Waves 2 and 4 are corrective waves because they move against this bigger trend. A basic impulse advance forms a 5-wave sequence.

The trend is followed by a corrective phase, also known as ABC correction. Notice that waves A and C are impulse waves. Wave B, on the other hand, moves against the larger degree wave and is a corrective wave.

By combining a basic 5-wave impulse sequence with a basic 3-wave corrective sequence, a complete Elliott Wave sequence has been generated, with a total of 8 waves. According to Elliott, this whole sequence is divided into two distinct phases: the impulse phase and the corrective phase. The ABC corrective phase represents a correction of the larger impulse phase.

The Elliott Wave is fractal. This means that the wave structure for one big cycle (Super Cycle) is the same as for one minute. So we will be able to work in any timeframe.

### Let’s see the three rules for our trading:

• Key 1: Wave 2 cannot retrace more than 100% of Wave 1.
• Key 2: Wave 3 can never be the shortest of the three impulse waves.
• Key 3: Wave 4 can never overlap Wave 1.
• We could trade in favor of the trend on wave 3 and wave  5  and only against the trend once wave 5  has finished.

To know when a wave may have finished, we can use Fibonacci projections and retracement. Fibonacci ratios 38.2%, 50.0%, and 61.8% for retracements and 161.8%, 261.8% and 461.8% for Price Projections and Extensions.

Categories

## STRATEGY 5: Market context + KEY levels

### Foreword

All our strategies are based on input setups that have a prior market reading context, which is equal to, or more important than the pattern itself. We recommend learning with Forex Academy traders to contextualise the market, so we always know what situation we are in.

With this being said we are going to see what this strategy consists of and how we apply it to the market.

### The strategy

This is one of our favourite setups. The first step is to identify the KEY market levels, i.e., price levels where historically the price reacted either by reversing, or at least by slowing down and prior price behaviour at these levels can leave clues for future price behaviour. There are many different ways to identify these levels and to apply them in trading. KEY levels can be identifiable turning points, areas of congestion or psychological levels.

The higher the timeframe, the more relevant the levels become.

When we have a price where two or three KEY levels come together, that price becomes an excellent trading zone.

We can see the setup in the following chart (click on the image to enlarge):

In this example, we can see the FDAX chart in a 1-minute timeframe. We have a bearish context: Short channel with a distribution phase in top and Elliot structure. Obviously, this is impossible to explain on a folio, the vital thing to understand is: when is the proper time to enter the market.

The first signal appears in the confluence between the top of the channel and the blue resistance. We mark it with a red arrow. You have to know that in a bearish context we will look for resistance levels to sell and vice versa in the opposite case.

The next arrow shows how the price breaks a support level, and then makes the ABC correction (pullback) leaving a selling opportunity.

The last arrow is again a classic pullback to a resistance level. In that case, to the green channel. The methodology is the same as on the previous occasion.

KEY levels: Supports and resistances / Bullish and bearish guidelines / trend channel / Fibonacci levels / SMA 200 / High Volume.

Categories

## STRATEGY 4: Market context + professional manipulation

### Foreword

All our strategies are based on input setups that have a prior market reading context, which is equal to, or more important than the pattern itself. We recommend learning with Forex Academy traders to contextualize the market, so we always know what situation we are in.

With this being said, we are going to see what this strategy consists of and how we apply it to the market.

### The Strategy

As retail traders, we know that markets are managed by institutional traders or “smart hands”, and we know that they practice different trading to ours. They use huge amounts of money to buy large blocks of contracts, and because there is usually not enough supply and/or demand to satisfy them, they need to create that volume by “smart” manipulation. In the market, we can observe that with false breakouts or “shakeouts”. We have learned to identify that professional maneuver in such a way that we will try to move in favor of the market trend.

This system is based on Wyckoff`s studies and accumulation, and distribution trading ranges. The market can be understood and anticipated through a detailed analysis of supply and demand, which can be ascertained from studying price action, volume and time. The main principle is: when the demand is greater than supply, prices rise, and when the supply is greater than the demand, prices fall. We study the balance between supply and demand by comparing price and volume bars over time.

We can see our setups in the following chart:

In this example, we can see the OIL TEXAS chart in a 5-minute time frame. Supports and resistances are marked with green lines.

The first setup is known as “spring”. Smart hands induce small and retail traders to sell because they need the counterpart to buy huge amounts of lots. The volume is the footprint.

If we know how to interpret this, we have a breakthrough in our trading. Obviously, this is a bullish pattern.

The second setup is the same as the first but on the other side of the market. In this case, we have a bearish pattern that is known as “upthrusts”. Smart hands induce small and retail traders to buy because they need a counterpart to sell huge amounts of lots. The volume is again the footprint.

More to the right we have the third setup, again a professional trick. Here there was a flurry of buying, quickly scooped up by the market pros, with the stock retreating above the resistance level before the close.

All these movements are shakeouts of retail stop-loss. It is important to say that smart hands know where most traders have their stops.

Categories

## STRATEGY 3: CONTEXT PLUS “MINI B”

### Forewords

All these strategies are based on input setups that have a prior market reading context, which is equal to or more important than the pattern itself. So, we recommend learning with Forex Academy traders to contextualize the market to know always on which situation we are in.

That said we are going to see what this strategy consists of and how we apply it to the market.

### The Strategy

We know that the market moves by impulses and setbacks and that many of these setbacks are in 3 waves, the so-called. A and C are corrective waves, while B is impulsive. Knowing this behavior, and that the B often reaches the F62 of A, we can try to catch the C wave.

We can use graphics to make this explanation clearer.

In the center of the graph, we see how the price is falling and leaves us with a candle of climatic volume. As we already know, these candles are usually not followed, so we expect a correction. We know that the most usual corrections ABC patterns, so when B arrives at F62 of A, you can try the length to search for C. Remember that context is essential, in this case, the climax helps us.

Let’s go with another example:

Now we are looking at the graph of the DAX in the 15-minute time frame. We see how the price is in a bearish trend, and according to Elliott’s count, we are doing wave 4, and then doing the last bearish leg or wave 5. This wave 4 is a correction of the bearish trend, and as we have already said, the corrections are often in ABC. The context tells us that when the B reaches the F62 of A, it is a good area to look for a length and take the C.

We remind you that you must always combine context with setup, and in this case, it is understood that this pattern is not worth much without a proper context behind it. This is what happens with everyone, but we believe that with this example, it is shown clearer

Categories

## STRATEGY 2: CONTEXT PLUS CLIMAX

### Forewords

All these strategies are based on a series of input setups that have a prior market reading context, which is just as important or even more important than the pattern itself. We recommend learning with Forex Academy traders to contextualize the market, so we are always aware of the present situation.

That said, we are going to recap the basis of this strategy and how it can be applied to the market.

### The Strategy

A climax is nothing more than a candle that we see at the end of a trend. Whether bullish or bearish, it has a lot of range, a large volume, and typically closes far from maximums in case of a bullish candle, or far from minimums in the case of a bearish candle. These are candles that mark a stop in continuation, and, for expert traders who know how to analyze them, they produce very good results.

Let’s see an example so that we can see the facts:

This is a graph of the DAX-30 1-minute chart, buy logically, these patterns are valid for any timeframe and market. When we have a candle with climatic volume at the end of a trend, we understand that a climax could happen, which means a pattern of no continuation. It is a very typical movement to finalize trends and create a market reversal, or at least to correct the current trend.

A simple way to trade climaxes is to look for volume discrepancies when the price falls (or rises) back towards the area of large volume.

In the example of a sale climax, we see how the price falls again, making a double bottom with volume divergence, hinting that the test to the offer to make up the bullish rally was right.

A bit further to the right in the graph, it shows a buying climax. Here the price moves to test the area (f62) with much less volume, implying that the demand test to begin the bearish rally is valid.

Categories

## STRATEGY 1: CONTEXT PLUS DOUBLE CONFLUENCES

### Forewords

All these strategies are based on setups that have prior market reading knowledge, which is just as important as the pattern itself. We recommend you to learn using Forex Academy’s educational articles and videos to contextualize the market, so you are always aware of the present situation.

That said, let’s see what this strategy consists of and how we apply it to the market.

### The Strategy

A confluence is nothing more than a price level where two or more key levels converge that act as support or resistance. If you are in a Bull market context, and you see that the price falls back to an area where two or more supports come together, you will have a pattern to enter the market long.

We are going to see some real examples in the graphs so that we can understand better what we are showing.

On this chart, we see the Dow Jones index in the 60-minute timeframe. A few days ago, the price had decreasing highs, which allowed us to draw a bearish trendline. That trendline was broken with an upward momentum, which turned the old resistance into a possible future support zone if the price were to pull back on it.

Looking at the short term, we also observe that the latest market lows were increasing, a situation that always calls for a bullish trendline. We see on the chart that there is an exact place where these two guidelines converge and that the price comes to a support level near this figure. This gives us a very good area to enter a long position, protected by two supports. Also, in the graph, we can see that the 200-period Moving Average is moving just below it, which provides even more value to the area.

Let’s see another example, but with resistance in this case.

In this image, we can see the 1-minute DAX index chart. We observe how the price is producing decreasing highs, which allows us to draw a bearish trendline.

In the first half of the current session, the price opened with a bearish gap and closed with bullish momentum. Then the market turned down to a bearish momentum that ended with a false dilation of the lows. If we draw the Fibonacci retracements on that bearish momentum, we can see how the Fibo-62 guideline converges in the same area, creating an important resistance where the price is likely to rebound. The red arrow would show the short-entry zone in this case.

In these two examples, there is no indication of whether we have a context for or against because that requires a much more in-depth analysis of various times frames. But as we have already mentioned, to learn how to assess the context, you will need to study on live markets with the help of experienced traders.

If you combine a favorable context, that is, a setting showing you the likely direction of the market, and a zone of confluences where the market can support and continue to favor the context, you would be able to build very powerful setups.

Categories

## SMA Crossover Strategy with a twist

### Introduction

Some centuries back, Karl Friedrich Gauss showed that an average is the best predictor of stochastic series.

Moving averages are employed to grade the price.movements. It acts as a low-pass filter, taking out the fast changes in price, regarded as market noise. The period of the moving average controls how smooth is this low pass filter. A  three-period MA levels the action of three periods, while a 200-period MA produces a single value of the last 200 price values.

Usually, it is determined using the close value of the bar, but there can be made also of the open, high or low of the of bars, or a weighted average of all price points.

### Simple Moving Average(SMA):

This average is computed as the sum of all prices on the period and divided by the period.

The main drawback of the SMA is its abrupt change in value if a significant price move is cut off, particularly if a short period has been chosen.

Averages with different periods result in different measures that can be thought of as a fair price during that period. Thus, if we observe two averages, a long-term and a short-term MA, and the short-term average moves above the long-term average, we might conclude that the new opinion about the price is changing, so it’s a good time to buy.  The converse holds if a short-term average falls below the longer-term one.

### The Parameter Space

Let’s analyse the parameter space of a moving average crossover strategy. This strategy has only two parameters: The fast-MA period, and the Slow-MA period.

We use a simulator on a EUR-USD 15-min chart over a historical record of nearly 14 years and computed the returns using a constant one-lot trade, and the result is shown in the figure below. We go long when the fast MA crosses over the slow MA and price is above the fast MA. The opposite holds for short positions.

We observe that the map is somewhat un-smooth, with its better performers at about 60-70 periods for the slow MA and less than five periods for the fast MA.

The other fact is that only 48 out of 304 simulations deliver positive results, this shows us that the strategy is questionable without other parameters that might improve its performance.

### Testing  the popular 5-10 Periods SMA

I have seen some people boosting a system that goes long when the 5-period MA crosses over the 10-period MA,  and short on opposite crosses, but as far as I had seen when I tested it, this strategy loses 32,000 Eur at the end of 14 years ( below its equity curve)

The use of trail-stops and targets can make this strategy positive, but the equity curve is hopelessly untradeable:

### So what may help to improve this strategy?

Well, I thought about two ways. The first one is to move the slow MA period to about 70.

Well, that is a good improvement, although we have losing periods, it, definitely, is much better to use a longer-period parameter on the slow average.

What happens, if we add the condition that the slow MA should be pointing UP and prices above the slow MA?

When applying these rules, we observe that the better-performing slow-MA period moves around 80 bars, and the fast MA period stays at less than 5. Another point we observe is that the slow MA surface is smoother around 80 periods. This is a sign that we’ve found a right place for our parameters. Finally, in this simulation, 500 out of 735 simulations are in positive territory. That shows us that we have found a more robust strategy because 80% of the parameter values deliver positive outcomes.

So, that will be the basis of our moving average crossover strategy.

### The Rules of the strategy:

Periods: Slow MA: 75, fast SMA: 3

Initial Stop-loss: 0.18%. This mean, we cut our losses if it crosses 0.18% away from our entry price.

Trailing stop-loss: 0.38%. We let the trade room to catch the trend.

### For long entries:

1.- We define a bull market when the Fast SMA crosses over the Slow SMA

2.- We allow long positions only when the slow SMA points upward, meaning its current value is higher than its previous one.

3.- We buy when the price closes above the Slow SMA.

### For short entries:

1.- We define a bear market when the Fast SMA crosses under the Slow SMA

2.- We allow short positions only when the slow SMA points downward, meaning its current value is smaller than its previous one.

3.- We sell short when the price closes below the Slow SMA.

The equity curve is much better, although it shows the typical equity curve of a trend-following system.

The Total Trade Analysis shows why. The system’s percent winners are 27.33%, and the reward-to-risk ratio is 3.5 (Avg Win/Avg Loss ratio). That tells the system is robust, by priming profitability over the frequency of winners.

### Main metrics of the Donchian System, on the EUR-USD:

It’s not usual but, from time to time we may expect a streak of up to 20 losing trades, therefore we need to apply proper money management.

As an example, let’s say, you don’t like to have a drawdown higher than 25% of your running capital, then you need to divide that figure by 20, and that must be your maximum risk for a single trade, therefore, in this case this is 1.25% of the current capital allocated for this strategy.

Adding a moving average to a naked candlestick chart is simple:

A popup window appears after clicking “Moving Average”:

There you are able to set the period and MA method, Price to apply. We change just the period, and select the “Weighted Close (HLCC/4)” We may, also change the color of the Slower MA to a different color, so every MA has different colors.

Categories

## The MACD Crossover Strategy

### Moving Average Convergence Divergence: MACD

Moving Average Convergence-Divergence, MACD, was developed in 1979 by Gerald Appel as a market-timing tool, and It’s an advanced derivation of moving averages.

MACD consists of two exponential moving averages (EMA’s) of different periods that are subtracted, forming what is called the fast line. There is a second, slow line, that’s a short-period moving average of the fast line.

### How to compute the standard MACD:

1. Compute the 12-period EMA of prices (usually the closing price)
2. Compute the 26-period EMA of prices
3. Subtract 2 from 1. That is the fast MACD line.
4. Compute the 9-period EMA of 3. That is the slow Signal line.

Almost any charting software allows the user to modify these periods and the kind of price (Open, High, Low, Close, or the average of all).

According to LeBeau and Lucas, on their classic book “Computer analysis of the Futures Market,” Gerald Appel had two setups: One for the entry side and another one for the closing side.

The entry side is 8-17-9, while the relatively slower closing side is12-26-9, that became the standard for commercial charting software.  This seems to indicate that Gerald Appel had a preference for getting in early in the trend and letting profits run.

My preference for intraday trading is 6-26-12, smoothing the signal line with a 12-period EMA. That reduces the indicator’s lag and having a faster signal that gets entries earlier, while a trailing stop keeps track of the trade at the exit side.

It’s not a good idea to optimize the MACD for a particular market, but, I think that a quicker formula is suitable for less than average volatility markets, and those with higher volatility require more extended period EMA’s. Pivot

### Interpretation:

Price represents the consensus of value at a particular moment. A moving average is an average consensus over a period of time. The long-period EMA on a MACD reflects the longer-term agreement, while the short period EMA represents a fresher consensus that is arising.

The subtraction of the moving averages that shapes the fast MACD line reveals shifts in the short-term opinion in comparison to the longer-term (older) view.

### Signal Crossovers

The usual MACD signal is a crossover between the fast MACD line and the signal line. When the fast MACD line rises above the slow signal line, it means a bull cycle has begun. If the fast MACD line crosses under the slow signal, a corrective period has started.

On Fig. 1, we show an example of a EUR/USD 1H chart. There we may observe that pink – unproductive- areas are usually crossovers going against the trend, which happens in reactive segments with ranging price movement. In spite of these failures, a MACD crossover is an efficient way to detect a trend change.

### Testing the MACD over 14-year historical data on  a 15-min chart of the EUR-USD

To test this system, we use two separate MACD modules. One for the long signals (MACD LE), and one for the short signals (MACD SE).

We will keep a constant 26-period MACD slow MA on both sides, and we will test the map space of the fast MA and the smoothing period to obtain the slow MACD signal.

Below, is shown on both, Long and short signals.

Based on the above figure, we see that the best performing combination is around 6,26,10 settings. Below we show its Equity Curve. That is the raw strategy, without stops nor targets.

It’s great to see this kind of curve with almost no modification because it shows this trading system is robust, and we know it will improve by merely adding a trailing stop. And we’ll get even more improvement if we add proper profit targets. Below, Both equity curves.

As we can see, there is a slight improvement in the results using targets. But it’s very small and might be a by-product of the optimization process rather than a real improvement.

I would recommend the use of this system just using a trailing stop, because, since this is a trend following system, it follows the well-tested advice “let profits run.” Thus, starting from now, we will present the system numbers using just trailing stops. As usual, we show the system with a constant one-lot trade.

The Total Trade Analysis table shows that the percent winners is at 34.23% and the Ratio Avg Win/ Avg Loss, which shows the reward-to-risk ratio is 2.17.

### Main metrics of MACD, on the EUR-USD:

After clicking the MACD on the menu window, another popup window with several tabs appears. In the Parameters tab, change Fast EMA to 6 and MACD SMA to 10. The Fast MACD line in this platform appears as a histogram, but it’s easy to spot MACD line crossing the fast line. See figure, below:

Categories

## Volatility Expansion Strategy

### Overview

There are two main measures we use routinely: The center of our observations and the variability of the points in our data set from that mean.

There’s one main way to compute the center of a set: the mean.

Mean: It’s the average of a set of data. It’s computed adding all the elements of a set and divide by the number of elements.

The variability of a data set may be calculated using different methods. One of the most popular in trading is the range.

Range:  The range is the difference between the highest and lowest points in a data set. On financial data, usually, a variant of the range is calculated: Average true range, which gives the average range over a time interval of the movement of prices.

### The Strategy

The Volatility Expansion Strategy rationale is that a sudden thrust in the volatility in the opposite direction of the current momentum predicts further moves in the same direction.

For this strategy, we are going to use the Range as a measure of volatility. Specifically, we are going to use the Average True Range indicator to spot volatility sudden changes.

The rules of the strategy are:

### Long Entries:

Set a buy stop order at Open + Average( Range, Length ) * NumRanges  next bar

### Short Entries:

Set a stop sell short order at Open – Average( Range, Length ) * NumRanges next bar

The parameters are the Length of the average and the NumRanges for longs and shorts.

Let’s see how an un-optimized system performs under 14 years of EUR_USD hourly data:

The standard parameters are:

Length: 4

NumRanges: 1.5

As we can observe, the actual raw curve is rather good, showing a continuously growing equity balance. ( click on the image to enlarge)
The Total Trade Analysis for single-contract trades shows a nice 2:1 Reward to risk ratio (Ratio Avg Win/Avg Loss) and a 35% winners.

### Analyzing the Parameter map:

As we observe in fig 5, there are two areas A and B where to locate the best parameters for this strategy. The surface is smooth, thus, guarantying that a shift in market conditions won’t harm too much the strategy. For the sake of symmetry we will choose the A region, thus, the Long ATR length will be 10 and the short ATR length is left at 13.

Fig 6 shows the map for the NumRanges That weights the ATR value and sets the distance of the stop order from the current open. The surface is, also, very smooth. Therefore we can be relatively sure that setting the NumRages value to 1.3 in both cases we will get good results.

The new equity curve has improved a lot, especially in the drawdown aspect, and in the overall results, as well, although we know this isn’t a key aspect because this equity result was achieved with just a single-contract trade.

This kind of strategy incorporates its stops because it’s a reversal system. Therefore there is no need for further stops or targets.

In fig 8 we observe that the percent winners are close to 39% while the risk to reward ratio represented by the ratio Avg win/ Avg loss is 1.9. Also, we see that the average trade us 28.5 euros which is the money expected to gain on every trade. That shows robustness and edge.

### Main metrics of the Volatility Expansion System, on the EUR-USD

(click on the images to enlarge)

As a final note, one way to perform semi-automated trading using a volatility  expansion is the free indicator Volatility Ratio, from MQL5.com

When you click on the Yes,  this indicator is installed automatically in your MT4 platform. To use it on a chart you just go to Insert -> Indicators -> Custom-> Volatility Ratio, as shown below:

The Options window for this indicator allows you to toy with the parameter values, but I advise you to keep the default values and paper trade them, so you get the idea about how it works and how parameter changes may affect its effectiveness and the number of trade opportunities.

Finally, this is the type of chart annotations of this indicator:

(click on the image to enlarge)

Categories

## Williams Percent R Scalper Strategy

### Introduction

Williams Percent R is a momentum indicator developed by Larry Williams, which is similar to the Stochastic indicator. The Williams %R shows the position of the Close in relation to the highest high of the period.

Therefore, this oscillator moves from -100 to 0. Values below -80 are oversold levels while from -20 to 0 are overbought.

Some charting packages shift these values to positive 0 to 100 by adding 100 to the formula. In this case, oversold levels are between 0, and 20 and overbought condition happens from 80 to 100.

%R is noisier than Stochastic %D, but with less lag, so together with the confirming candle pattern, it allows for a better reward to risk ratio and tends to show more trade opportunities than Stochastic does.

Intraday trading is a dangerous profession. More than 85% of traders fail because they buy when they should sell and sell when they should buy. To those new to mean reverting markets, please welcome the Williams Percent R system!

### The system rules are rather straightforward:

Use the 10-14 period % R indicator, as in the above figure.

##### For long entries:

1.- Wait for the %R line to enter the oversold territory ( -80 to -100)

2.- Go long the next candle whose %R line is above -60

3.- let it run until % R reaches overbought then tighten your trail stop, but let the market take you out.

##### For short entries:

1.- Wait for the %R line to enter the overbought territory ( -20 to 0)

2.- Go short the next candle whose %R line is below -30

3.- let it run until % R reaches oversold then tighten your trail stop, but let the market take you out.

### Backtesting a Williams %R system

We used the 10-period Williams %R signal, a 0.37% Trail stop and a 0.8% target on a 14-year 1h data of the EUR-USD. Below, the total trade analysis table and the equity curve using a constant one lot trade. That is the standard way to assess the quality of a system. The important parameter here is not the amount won, but its statistical characteristics and curve smoothness.

This system delivers close to 4 million euro along 14 years, using a proportional 1.5% risk sizing strategy, with about 35% drawdown. In the case of a one-lot contract, the drawdown is just 7%.

The percent profitable is very good, with an overall 48.11% of positive trades, although we observe that this grows to 58.27% on long trades and shrinks to 42.25% on short trades.

The ratio win/loss that measures the reward we get for the risk we hold is not spectacular, but it’s fairly good on a system with no filter to allow only trades with the primary trend.

### The use of a trending filter.

Ideally, the use of a trending filter might improve the system, because it avoids trades against the main trend, and it does, but the results are a bit surprising. Although It improves the overall results, the percent of winning trades goes down to 41%. That figure is compensated with an increase in the ratio Win/loss to 1.8%, from the original 1.55%, Overall.

### How to use Metatrader 4 to trade the Williams %R scalper:

The Williams %R is an indicator that comes together with the basic MT4. To add it to a chart, we select that chart and then click Insert -> Indicators -> Oscillators -> Williams Percent Range

Then a popup window appears to allow range selection:

After that you’ll get everything configured to start working with this technique:

It’s not usual but, from time to time we may expect a streak of up to 10 losing trades. Therefore we need to apply proper money management.

As an example, let’s say, you don’t like to have a drawdown higher than 25% of your running capital. Then you need to divide that figure by 10, and that must be your maximum risk for a single trade, Therefore, in this case, this is 2.5% of the current capital allocated for this strategy.