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ForexTrading3ProvenStrategiesYouCanStartUsing
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Today
ByJonMcFarlaneCo-Authors;NigelPriceand“Forex”
John
http://forexuseful.com/
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DISCLAIMERTradinganyfinancialmarketinvolvesahighlevelofriskandmaynotbesuitableforeveryone.Youshouldonlytradewithmoneyyoucanaffordtolose.Youshouldfullyunderstandtherisksinvolvedinanyformoftradingandbewillingtoacceptthem.Thecontent
withinthisbookisprovided
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forgeneralinformationalpurposesonlyandnopartofitshouldbeconstruedas
advice,investment,financialorotherwise.
Thisbookisnotintendedfordistributionto,oruseby,any
personorentityinanyjurisdictionorcountrywhere
suchdistributionorusewouldbecontrarytothelaworregulationorwhichwould
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subjectthepublishertoanyregistrationrequirementwithinsuchjurisdictionor
country.
Thisbookmaycontainlinkstoexternalwebsites.Thepublisherisnotresponsibleforanycontentofthose
websites.
Althoughduecareandattentionhasbeentakeninpreparingthisbook,the
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publisherdisclaimsanyliabilityforanyinaccuracies
oromissions.
Byreadingthisbooktheuseracceptstheseconditionsandagreesthatthepublishershallinnowaybeliableforanylosscausedeitherdirectlyorindirectlyasaresultofusing
anypartit.
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COPYRIGHTNopartofthisbookmaybereproducedinanyformwithoutpermissionin
writingfromtheauthor.Reviewersmayquotebrief
passagesinreviews.
Copyright©JonMcFarlane2014
ForexUseful-http://forexuseful.com/
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TABLEOFCONTENTS
AboutThe3LittlePigsTrading
StrategyThePriceActionSwingTrading(PAST)StrategyTradingWithConfluence–
TheFoundations
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About
TheAuthor
Thisbookhasbeenwrittenbyme,JonMcFarlane.Ihavebeensuccessfullyinvestingandtradingmyownmoneyonafullorpart-timebasisfor
over20years.
In2008IsetupSystemsFor
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Traders,anindependentreviewsitefortradingrelated
products.
Theaimwasto,inmysparetime,basedonmy
experience,helpthosenewtotradingavoidthemanyuselessproductsbeing
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peddledacrosstheindustry.Withover120reviewsof,inthemain,useless,Trading
systemsandSignalservices,Iconcludedthatachangeindirectionwasneeded.
Withanewfocus,toprovidequalitytradingrelatedcoursesandresources,togetherwithotherqualifiedtraders,in2013,IfoundedForex
Useful.Twoofthosetraders,
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whoIhavegreatrespectforandamentirelygratefultoknow,NigelPriceand
“Forex”John,areco-authorsofthisbook.
AllForexUsefulauthorsarerealtraderswhotradeona
fullorparttimebasisandcanbecontacteddirectlyviathe
ForexUsefulwebsite.
OurFREEstrategies(detailedinthisbook)havebeen
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downloadedover10,000timesbytradersacrossthe
entireglobe.
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ThisBook
DuetomanyrequestsfromForexUsefulmembersandratherthanpublish3separate
books,thisbookisaconsolidationofthe3FREETradingstrategiescurrentlyavailableontheForexUseful
website:
The3LittlePigsTradingStrategy,
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byJonMcFarlane
ThePriceActionSwingTrading(PAST)StrategybyNigelPriceTradingWith
Confluence–TheFoundationsby“Forex”John
The3LittlePigsTradingStrategyisatrendfollowing
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swingtradingstrategybasedonMultipleTimeFrame
(MTF)analysis.ByusingtheWeekly,Dailyand4Hourtimeframesitiscompletelypossibletoapplythe3LittlePigsTradingStrategyacrossmanymarketsinlessthan10minutesaday.The3LittlePigsisaformerwinneroftheBabyPipsBestFREE
ForexTradingSystemofthemonth!
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ThePriceActionSwingTrading(PAST)Strategyisdesignedtogiveyouaclearsetofguidelinesthatcanbeusedtomakesureyourwinningtradesarebigger
thanyourlosingones.Itusescandlestickreversalsignalsonthelonger“anchor”time-framechartsandthentrendlinebreaksonthelowertime-
framechartstomakeprecisionentries.Improve
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yourForexfuture,learntotradethePAST!
TradingWithConfluenceisabouttakingsoundtradingfoundationsandbringingthemalltogether.The‘Analysis’foundations
providearealtimeviewofthemarket.Whencombined
withthe‘Trigger’and‘Awareness’foundationsatechnicaloutlookofthe
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marketisformed.TheresultisaTradingplanwithclearlydefinedhighprobabilitytradingopportunities.
Confluence:Agathering,flowing,ormeetingtogetheratonejunctureorpoint
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IhopeyouenjoythisbookandIwelcomeyoutovisit
ForexUseful(http://forexuseful.com/)
Asamember(it’scompletelyFREE)youwillbeabletodownloadandprintthe3strategiesinthisbook
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andyouwillalsohaveaccessto:
Viaournewsletter,FREEweeklyupdates
onallthestrategiesinthis
bookFREELive
marketsessions(usuallyevery
Monday
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morning)
Aswellasaccesstotheproducts,updatesand
sessionsyouwillalsobeinformedoffuturebook
releasesincludinglaunchanddiscountoffers,before
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anyoneelse!
TounderstandandimplementthestrategiesdefinedinthisbookobviouslyrequiresatleastsomebasicknowledgeofForexandCurrency
Trading.ThoseneworevenrelativelynewtotradingmayfindmybookForexFor
Beginners–AnIllustratedIntroductionToCurrency
Tradingofinterest.
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ThoseofyouconsideringtradingBinaryOptionsyoumayalsofindmyotherbook
BinaryOptions–AStrategyGuaranteedToBeatTheBrokersIn15MinutesFlat,ofinterest.
Ireallyhopeyouenjoythisbookandifyoudothenpleasedotakethetimetoleaveareview,ittakeslessthanaminuteandyour
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feedbackispersonallyappreciatedbyme.
JonMcFarlane
ForexUseful
(http://forexuseful.com/)
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The3LittlePigsTradingStrategy
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By
JonMcFarlane
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Introduction
The3LittlePigsTradingStrategyisatrendfollowingswingtradingstrategybasedonMultipleTimeFrame
(MTF)analysis.
ByusingtheWeekly,Dailyand4Hourtimeframesitiscompletelypossibletoapplythe3LittlePigsTrading
Strategyacrossmanymarkets
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inlessthan10minutesaday.
IuseittotradetheForexmarketsbutintheoryitcanbeappliedtoanyfinancial
market.
The3LittlePigsisaformerwinneroftheBabyPipsBest
FREEForexTradingSystemofthemonth!
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InTheFairyTale...
The1stLittlePig
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UsedcommonsenseHewantedtoprotecthimself
fromthewolfAndhewantedtodoitquicklyandeasily
Hebuilthishousefromstraw
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The2ndLittlePig
Usedcommonsenseandlogic
Healsowantedtoprotect
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himselffromthewolfButheneededsomething
strongerthanstrawHebuilthishousefromsticks
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The3rdLittlePig
Usedcommonsense,logicandexperience
Healsowantedtoprotect
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himselffromthewolfButheneededsomething
strongerthanStraw&sticks
Hebuilthishousefrombricks
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WhenTrading...
The1stLittlePig
Usescommonsense
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TotradeinthedirectionOftheLongtermtrendby
ObservingPriceactionontheWeeklychart
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The2ndLittlePig
UsescommonsenseandlogicTotradeinthedirection
OftheLong&Mediumterm
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trendsbyAlsoobservingPriceaction
ontheDailychart
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The3rdLittlePig
Usescommonsense,logicandexperience
Totradeinthedirection
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OftheLong,Medium&Shorttermtrendsby
UsingPriceactiononthe4HourchartforEntry
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BasicPrinciples–Part1
The3LittlePigsisa:TrendFollowing
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SwingTradingstrategy
BasedonMultipleTimeFrame(MTF)trading
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MultipleTimeFrame(MTF)tradingwasmadepopularbyMarcelLinkinhisexcellentbooktitled“HighProbability
Trading”:
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The3LittlePigshastakentheMTFtradingconceptand
addedsoundtradingprinciplestoestablishasolidstrategythatcan,intheory,be
appliedtoanyfinancialmarket.
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BasicPrinciples–Part2
The3LittlePigsisbasedon3time
framesThe1stLittlePigusesARedSMA(55)ontheWeeklytimeframe
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TotradeinthedirectionoftheLongtermtrendbasedontheAverageClosingpriceduringtheLASTYEAR
Longwhenpricecloses
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abovetheRedSMA(55)ShortwhenpriceclosesbelowtheRedSMA(55)
![Page 54: Forex Trading Strategies - DropPDF1.droppdf.com/files/NVhsL/forex-trading-3-proven-strategies-you-c... · Co-Authors; Nigel Price and “Forex ... Strategy The Price Action Swing](https://reader031.vdocuments.net/reader031/viewer/2022012314/5ad7efd97f8b9a6b668d9f01/html5/thumbnails/54.jpg)
The2ndLittlePigusesAnAmberSMA(21)onthe
Dailytimeframe
Totradeinthedirectionofthe
![Page 55: Forex Trading Strategies - DropPDF1.droppdf.com/files/NVhsL/forex-trading-3-proven-strategies-you-c... · Co-Authors; Nigel Price and “Forex ... Strategy The Price Action Swing](https://reader031.vdocuments.net/reader031/viewer/2022012314/5ad7efd97f8b9a6b668d9f01/html5/thumbnails/55.jpg)
LongandMediumtermtrendsbasedontheAverageClosingpriceduringthe
LASTMONTH
LongwhenpriceclosesabovetheAmberSMA(21)Shortwhenpricecloses
belowtheAmberSMA(21)
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The3rdLittlePigusesAGreenSMA(34)onthe4
Hourtimeframe
Toenteratradeinthedirectionofthe
![Page 57: Forex Trading Strategies - DropPDF1.droppdf.com/files/NVhsL/forex-trading-3-proven-strategies-you-c... · Co-Authors; Nigel Price and “Forex ... Strategy The Price Action Swing](https://reader031.vdocuments.net/reader031/viewer/2022012314/5ad7efd97f8b9a6b668d9f01/html5/thumbnails/57.jpg)
Long,MediumandShorttermtrendsbasedonthe
AverageClosingpriceduringtheLASTWEEK
LongwhenpriceclosesabovetheGreenSMA(34)Shortwhenpricecloses
belowtheGreenSMA(34)ThedirectionofthetrendoneachtimeframeisbasedonPricerelativetoaspecificSimpleMovingAverage
![Page 58: Forex Trading Strategies - DropPDF1.droppdf.com/files/NVhsL/forex-trading-3-proven-strategies-you-c... · Co-Authors; Nigel Price and “Forex ... Strategy The Price Action Swing](https://reader031.vdocuments.net/reader031/viewer/2022012314/5ad7efd97f8b9a6b668d9f01/html5/thumbnails/58.jpg)
(SMA).
![Page 59: Forex Trading Strategies - DropPDF1.droppdf.com/files/NVhsL/forex-trading-3-proven-strategies-you-c... · Co-Authors; Nigel Price and “Forex ... Strategy The Price Action Swing](https://reader031.vdocuments.net/reader031/viewer/2022012314/5ad7efd97f8b9a6b668d9f01/html5/thumbnails/59.jpg)
TheSimpleMovingAverage
TheMovingAverageisanindustrystandardindicator
andtherearemanyvariations;Simple,
Exponential,Smooth,Weighted,tonamebutafew.
![Page 60: Forex Trading Strategies - DropPDF1.droppdf.com/files/NVhsL/forex-trading-3-proven-strategies-you-c... · Co-Authors; Nigel Price and “Forex ... Strategy The Price Action Swing](https://reader031.vdocuments.net/reader031/viewer/2022012314/5ad7efd97f8b9a6b668d9f01/html5/thumbnails/60.jpg)
MovingAveragesreflectTheAverageClosingpriceofaMarketOveraspecific
Numberofperiods
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ForthepurposesofThe3LittlePigsANDtokeep
thingssimple:
TheSimpleMovingAverageisused
TheSimpleMovingAverageiscommonlyreferredtoastheSMA
SMAiscommonlywrittenasSMA(Numberofperiods)
Thisexamplehasbeentaken
![Page 62: Forex Trading Strategies - DropPDF1.droppdf.com/files/NVhsL/forex-trading-3-proven-strategies-you-c... · Co-Authors; Nigel Price and “Forex ... Strategy The Price Action Swing](https://reader031.vdocuments.net/reader031/viewer/2022012314/5ad7efd97f8b9a6b668d9f01/html5/thumbnails/62.jpg)
fromtheDailyGBPUSDchartin2012.TheSMA(5)hasbeenmanuallycalculatedtoshowhowitworks–TheSMA(5)shows,eachday,theAverageClosingpriceforGBPUSDduringthelast5
periods(Days).
![Page 63: Forex Trading Strategies - DropPDF1.droppdf.com/files/NVhsL/forex-trading-3-proven-strategies-you-c... · Co-Authors; Nigel Price and “Forex ... Strategy The Price Action Swing](https://reader031.vdocuments.net/reader031/viewer/2022012314/5ad7efd97f8b9a6b668d9f01/html5/thumbnails/63.jpg)
AND...
Hereitisonthechart
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TheSMA(5)isshownasaBlackLineAutomaticallycalculatedanddisplayedBy
theChartingpackage
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Why55,21And34?
TheFibonaccisequence(ofnumbers)
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TheFibonaccisequence(ofnumbers)isfrequentlyobservedinnatureandis
commonlyreferencedintheworldoftrading.
TheNumberofperiodsforeachSMAusedbyThe3LittlePigsisderivedfromtheFibonaccisequence.
![Page 67: Forex Trading Strategies - DropPDF1.droppdf.com/files/NVhsL/forex-trading-3-proven-strategies-you-c... · Co-Authors; Nigel Price and “Forex ... Strategy The Price Action Swing](https://reader031.vdocuments.net/reader031/viewer/2022012314/5ad7efd97f8b9a6b668d9f01/html5/thumbnails/67.jpg)
The1stLittlePigusesARedSMA(55)ontheWeeklytimeframe
ThisreflectstheAverageClosingPrice
![Page 68: Forex Trading Strategies - DropPDF1.droppdf.com/files/NVhsL/forex-trading-3-proven-strategies-you-c... · Co-Authors; Nigel Price and “Forex ... Strategy The Price Action Swing](https://reader031.vdocuments.net/reader031/viewer/2022012314/5ad7efd97f8b9a6b668d9f01/html5/thumbnails/68.jpg)
DuringtheLASTYEAR–GiveortakeaweekortwoTheLONGTERMTREND
canbeconsidered:
UPifpriceclosesabovetheRedSMA(55)
DOWNifpriceclosesabovetheRedSMA(55)
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The2ndLittlePigusesAnAmberSMA(21)onthe
Dailytimeframe
ThisreflectstheAverageClosingPrice
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DuringtheLASTMONTH–GiveortakeadayortwoTheMEDIUMTERM
TRENDcanbeconsidered:
UPifpriceclosesabovetheAmber
SMA(21)DOWNifpriceclosesbelowtheAmberSMA(21)
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The3rdLittlePigusesAGreenSMA(34)onthe4
Hourtimeframe
ThisreflectstheAverageClosingPrice
![Page 72: Forex Trading Strategies - DropPDF1.droppdf.com/files/NVhsL/forex-trading-3-proven-strategies-you-c... · Co-Authors; Nigel Price and “Forex ... Strategy The Price Action Swing](https://reader031.vdocuments.net/reader031/viewer/2022012314/5ad7efd97f8b9a6b668d9f01/html5/thumbnails/72.jpg)
DuringtheLASTWEEK–GiveortakeanhourortwoTheSHORTTERMTREND
canbeconsidered:
UPifpriceclosesabovetheGreen
SMA(34)DOWNifpriceclosesbelowtheGreenSMA(34)
![Page 73: Forex Trading Strategies - DropPDF1.droppdf.com/files/NVhsL/forex-trading-3-proven-strategies-you-c... · Co-Authors; Nigel Price and “Forex ... Strategy The Price Action Swing](https://reader031.vdocuments.net/reader031/viewer/2022012314/5ad7efd97f8b9a6b668d9f01/html5/thumbnails/73.jpg)
BuyingStrategy–The1stLittlePig
The1stLittlePigMUSTconfirmthat
TheLONGTERMTRENDisUP
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PricemusthaveclosedaboveitsAverageClosingpriceduringtheLASTYEAR
ItmusthaveclosedabovetheRedSMA(55)ontheWeeklytimeframeToconfirmthat:TheLONGTERMTREND
isUP
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BuyingStrategy–The2ndLittlePig
The2ndLittlePigMUSTconfirmthat
TheMEDIUMTERMTRENDisalsoUP
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PricemusthaveclosedaboveitsAverageClosingpriceduringtheLASTMONTHItmusthaveclosedabovetheAmberSMA(21)ontheDailytimeframeToconfirmthat:TheMEDIUMTERMTRENDisalsoUP
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BuyingStrategy–Confirmation
TheLONGTERMTRENDandtheMEDIUMTERM
TREND
MustBOTHbeUPbeforelookingforBuyingopportunities
InthisexampletheLONGTERMTRENDwas
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confirmedasbeingUPwhentheWeeklycandle19-08-2012closed–Weekly
candlestypicallyopenonaSundayandcloseonaFridaysoitmeansthatthefirst
tradingdayafterthiscandleclosedwouldhavebeen(Monday)27-08-2012–
Markedonthe4Hourchartthatfollows.
![Page 81: Forex Trading Strategies - DropPDF1.droppdf.com/files/NVhsL/forex-trading-3-proven-strategies-you-c... · Co-Authors; Nigel Price and “Forex ... Strategy The Price Action Swing](https://reader031.vdocuments.net/reader031/viewer/2022012314/5ad7efd97f8b9a6b668d9f01/html5/thumbnails/81.jpg)
Onthe27-08-2012therewasnoneedtowaitforthe
MEDIUMTERMTRENDtobeconfirmedasbeingUPasitwasalreadyconfirmed
whentheDailycandleon08-
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08-2012closed.
InthisexampleitisOK,fromthe27-08-2012,whentheLONGTERMTRENDand
theMEDIUMTERMTRENDwerebothconfirmed
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asUPtolookforBuyingopportunities–The3rdLittle
Pig.
NOTE:Sometimesthisisthecase,theLONGTERMTRENDisconfirmedaftertheMEDIUMTERMTREND,sometimesthe
MEDIUMTERMTRENDconfirmsfirst(seeSellingexamplelater).Itdoesnotmatterwhichwayround
![Page 84: Forex Trading Strategies - DropPDF1.droppdf.com/files/NVhsL/forex-trading-3-proven-strategies-you-c... · Co-Authors; Nigel Price and “Forex ... Strategy The Price Action Swing](https://reader031.vdocuments.net/reader031/viewer/2022012314/5ad7efd97f8b9a6b668d9f01/html5/thumbnails/84.jpg)
theconfirmationoccursjustaslongasbothare
confirmedbeforelookingforBuying/Sellingopportunities.
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BuyingOpportunities–The3rdLittlePig
IMPORTANT!
TheLONGTERMTRENDandtheMEDIUMTERM
TRENDMustBOTHbeUP
BeforelookingforBuyingopportunities
The3rdLittlePigMUST
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confirmthatTheSHORTTERMTRENDisalsoUP
Buyingopportunitiespresentonthe4Hourchartwhen:
Pricefirsttouches(orhasbeen
below)theGreenSMA(34)
AndthenclosesabovetheGreen
SMA(34)
![Page 87: Forex Trading Strategies - DropPDF1.droppdf.com/files/NVhsL/forex-trading-3-proven-strategies-you-c... · Co-Authors; Nigel Price and “Forex ... Strategy The Price Action Swing](https://reader031.vdocuments.net/reader031/viewer/2022012314/5ad7efd97f8b9a6b668d9f01/html5/thumbnails/87.jpg)
(ItsAverageClosingprice
duringtheLASTWEEK)
Toconfirmthat:
TheSHORTTERMTRENDisalsoUP
![Page 88: Forex Trading Strategies - DropPDF1.droppdf.com/files/NVhsL/forex-trading-3-proven-strategies-you-c... · Co-Authors; Nigel Price and “Forex ... Strategy The Price Action Swing](https://reader031.vdocuments.net/reader031/viewer/2022012314/5ad7efd97f8b9a6b668d9f01/html5/thumbnails/88.jpg)
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SellingStrategy–The1stLittlePig
The1stLittlePigMUSTconfirmthat
TheLONGTERMTRENDisDOWN
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PricemusthaveclosedbelowitsAverageClosingpriceduringtheLASTYEAR
ItmusthaveclosedbelowtheRedSMA(55)ontheWeeklytimeframeToconfirmthat:TheLONGTERMTREND
isDOWN
![Page 93: Forex Trading Strategies - DropPDF1.droppdf.com/files/NVhsL/forex-trading-3-proven-strategies-you-c... · Co-Authors; Nigel Price and “Forex ... Strategy The Price Action Swing](https://reader031.vdocuments.net/reader031/viewer/2022012314/5ad7efd97f8b9a6b668d9f01/html5/thumbnails/93.jpg)
SellingStrategy–The2ndLittlePig
The2ndLittlePigMUSTconfirmthat
TheMEDIUMTERMTRENDisalsoDOWN
![Page 94: Forex Trading Strategies - DropPDF1.droppdf.com/files/NVhsL/forex-trading-3-proven-strategies-you-c... · Co-Authors; Nigel Price and “Forex ... Strategy The Price Action Swing](https://reader031.vdocuments.net/reader031/viewer/2022012314/5ad7efd97f8b9a6b668d9f01/html5/thumbnails/94.jpg)
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PricemusthaveclosedbelowitsAverageClosingpriceduringtheLASTMONTHItmusthaveclosedbelowtheAmberSMA(21)ontheDailytimeframeToconfirmthat:TheMEDIUMTERMTRENDisalsoDOWN
![Page 96: Forex Trading Strategies - DropPDF1.droppdf.com/files/NVhsL/forex-trading-3-proven-strategies-you-c... · Co-Authors; Nigel Price and “Forex ... Strategy The Price Action Swing](https://reader031.vdocuments.net/reader031/viewer/2022012314/5ad7efd97f8b9a6b668d9f01/html5/thumbnails/96.jpg)
SellingStrategy–Confirmation
TheLONGTERMTRENDandtheMEDIUMTERM
TREND
MustBOTHbeDOWNbeforelookingforSelling
opportunities
InthisexampletheLONGTERMTRENDwas
![Page 97: Forex Trading Strategies - DropPDF1.droppdf.com/files/NVhsL/forex-trading-3-proven-strategies-you-c... · Co-Authors; Nigel Price and “Forex ... Strategy The Price Action Swing](https://reader031.vdocuments.net/reader031/viewer/2022012314/5ad7efd97f8b9a6b668d9f01/html5/thumbnails/97.jpg)
confirmedasbeingDOWNwhentheWeeklycandle26-08-2012closed–WeeklycandlestypicallyopenonaSundayandcloseonaFridaysoitmeansthatthefirst
tradingdayafterthiscandleclosedwouldhavebeen(Monday)03-09-2012.
![Page 98: Forex Trading Strategies - DropPDF1.droppdf.com/files/NVhsL/forex-trading-3-proven-strategies-you-c... · Co-Authors; Nigel Price and “Forex ... Strategy The Price Action Swing](https://reader031.vdocuments.net/reader031/viewer/2022012314/5ad7efd97f8b9a6b668d9f01/html5/thumbnails/98.jpg)
TheLONGTERMtrendwasmostrecentlyconfirmedasDOWNwhentheDaily
candleon19-09-2012closed.
![Page 99: Forex Trading Strategies - DropPDF1.droppdf.com/files/NVhsL/forex-trading-3-proven-strategies-you-c... · Co-Authors; Nigel Price and “Forex ... Strategy The Price Action Swing](https://reader031.vdocuments.net/reader031/viewer/2022012314/5ad7efd97f8b9a6b668d9f01/html5/thumbnails/99.jpg)
InthisexampleitisOK,fromthe20-09-2012,whentheLONGTERMTRENDand
theMEDIUMTERMTRENDwerebothconfirmedasDOWNtolookforSelling
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opportunities–The3rdLittlePig.
NOTE:Sometimesthisisthecase,theMEDIUMTERMTRENDis
confirmedaftertheLONGTERMTREND,sometimestheLONGTERMTRENDconfirmsfirst(seeBuyingexampleearlier).Itdoesnotmatterwhichwayround
theconfirmationoccursjust
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aslongasbothareconfirmedbeforelooking
forBuying/Sellingopportunities.
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SellingOpportunities–The3rdLittlePig
IMPORTANT!
TheLONGTERMTRENDandtheMEDIUMTERM
TRENDMustBOTHbeDOWNBeforelookingforSelling
opportunitiesThe3rdLittlePigMUST
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confirmthatTheSHORTTERM
TRENDisalsoDOWN
Sellingopportunitiespresentonthe4Hourchartwhen:
Pricefirsttouches(orhasbeen
above)theGreenSMA(34)
AndthenclosesbelowtheGreen
SMA(34)
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(ItsAverageClosingprice
duringtheLASTWEEK)
Toconfirmthat:
TheSHORTTERMTRENDisalsoDOWN
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Entries,StopsAndTargets
The3LittlePigsTradingstrategymakestheTradeidentificationprocessmechanical–Iteasily
identifiesLowRiskHighProbabilityBuyingandSellingopportunitiesfor
SwingtradesinthedirectionoftheLong,Mediumand
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ShortTerm(Yearly,MonthlyandWeekly)
trends.
However-AlthoughtheTradeidentificationprocessismechanicalThe3LittlePigsisNOTandCANNOT
be100%mechanicalbecause...
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Yes,it’safact,wearealldifferent.Itmeansthat
dependingonexperience,circumstancesandattitudeto
riskwewillallchoosedifferentcriteriatousewhendecidinghowwemanageour
ownEntries,StopsandTargets.
Entry,StopandTargetmanagementis
DISCRETIONARY...
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ItmeansYOUchoose!
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Entries
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Ofcoursethesearejustsuggestions,othersuggestionsinclude:
Anadditionalcandleclose
Above/BelowtheTriggercandleHigh/Low
Anadditionalindicatorconfirms,e.g.RSI,MACD,Stochastic...
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Thefactis...EntrymanagementisDISCRETIONARY...
Itwillbedependentonyourpersonalexperience,
circumstancesAndattitudetorisk
ItmeansYOUchoose!
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Stops
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Ofcoursethesearejustsuggestions,othersuggestionsinclude:
AFixedStop,e.g.50PIPs
Anadditionalindicatorcanbe
used,e.g.ParabolicSAR,Bollingerband...
Thefactis...
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StopmanagementisDISCRETIONARY...
Itwillbedependentonyourpersonalexperience,
circumstancesAndattitudetorisk
ItmeansYOUchoose!
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Targets
Fixed
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Thiscanbe:
Asetamount,e.g.50,100,200
PIPs...Basedon
differencebetweenEntryandStop
Open/Trailing
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Above/BelowthemostrecentSwing
High/LowWhenprice
touchesSMA(34)
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WhenpriceclosesAbove/BelowSMA(34)
Active
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ActivemanagementbasedonPriceaction
Support/Resistanceand/orTrendlinesLongertermbasedontheDailytime
frameTakinghalfprofits/Runningsome
profits
Again,thesearejust
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suggestions,thefactis...TargetmanagementisDISCRETIONARY...
Itwillbedependentonyourpersonalexperience,
circumstancesAndattitudetorisk
ItmeansYOUchoose!
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MoneyManagement
Thissubjectisoftencomplicatedbutyoucankeepitsimplewiththesesimple
rules:
Neverriskmorethan2%onany
onetradeNevertrademorethan5marketsatanyonetime
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Sticktothesesimplerules
NeverRiskMoreThan2%OnAnyOneTrade
Thismeansifyouhavea£10,000balanceyouwill
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neverriskmorethan£200onanyonetrade.Ifyouare
placingatradeandyourStoplossis50PIPsawaythat
meansyouwilltradeat£4aPIP.IfyourStoploss(whichis50PIPsaway)ishityouwillloseamaximum2%ofyourbalance,£200(50PIPs
multipliedby£4).
NeverTradeMoreThan5MarketsAtAnyOneTime
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Ifyoulimityourtradingto5marketsatanyonetimeandyou“Neverriskmorethan2%onanyonetrade”yourmaximumexposureinthemarketatanyonetimewillbe10%.Thisismorethan
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enoughforeventhemostexperiencedtrader.
StickToTheseSimpleRules
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Summary
UseThe3LittlePigsToIdentify
LowRiskHigh
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ProbabilityBuyingandSelling
opportunitiesForSwingtradesinthedirectionof
TheLong,MediumandShort
term(Yearly,MonthlyandWeekly)
trends
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Entries,StopsandTargetsAllow
Experience,Circumstancesand
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Attitudetorisktoguideyou
ChoosecriteriathatsuitsYOU
MoneyManagementStickToTheRules
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Neverriskmorethan2%onany
onetradeNevertrademorethan5marketsatanyonetime10%maximumexposureinthe
marketAtanyonetime
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Remember,asamember(it’scompletelyFREE)ofForex
Useful(http://forexuseful.com/),youwillbeabletodownloadandprintthe3strategiesinthisbookandyouwillalso
haveaccessto:
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Viaournewsletter,FREEweeklyupdatesonthe3LittlePigsTrading
Strategyandallotherstrategiesin
thisbookFREELive
marketsessions(usuallyevery
Mondaymorning)
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Aswellasaccesstotheproducts,updatesand
sessionsyouwillalsobeinformedoffuturebook
releasesincludinglaunchanddiscountoffers,beforeanyoneelse!
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Nextup,ThePriceActionSwingTrading(PAST)StrategybyNigelPrice...
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ThePriceActionSwingTrading(PAST)Strategy
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ImproveyourForexFuture
LearntoTradethe
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PAST!
ByNigelPrice
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ChapterOne
“It’snotwhetheryou’rerightorwrongthat’simportant,it’showmuchmoneyyoumakewhenyou’rerightandhowmuchyoulosewhenyou’rewrong.”
-GeorgeSoros
TheabovequoteisthefoundationofthePAST
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Strategy.Astraders,wetendtoconcentratemuchofourenergiesonattemptingtopredictthefuturedirectionofthemarket.Unfortunately,oureffortstoforecastfuturemarketpricesonaconsistentbasisusuallyfail,nomatterhowexperiencedwemightbe.
Asaconsequenceofthis,wefrequentlyfindourselves
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caughtupinawildgoosechaseoftryingtofindatechnicalchartingindicatororacombinationofindicatorsthatwillhelpuspredictwhatpriceisgoingtodonext.Wemistakenlythinkthatifwecandothis,successandprofitswillautomaticallyfollow.
Oftenourprogress,asnewtradersatleast,dependson
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howquicklywecancometoacceptthatwehaveverylittlerealideaofwhatpriceisgoingtodointhefuture,andnoamountoffancyindicatorsonourchartsisgoingtochangethat.Ifyoufollowfinancialcommentatorsandanalystsyouwillnoticethattheyarepronetoshoutingveryloudlyaboutthecallstheygetrightandtheykeepcomparativelyquietaboutthe
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callstheygetwrong.Giventhattheyarestartingoutwithaoneinthreechanceofbeingrightinanyevent,(themarketcanonlymoveup,down,orsidewaysafterall)theycan’thelpbutbecorrecteverynowandagain,nomatterhowterribleaforecastertheymightbe(andsomeare).
Putslightlydifferently,they
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makethemostoutofthecorrectpredictionsandlimitthedamagefromtheonesthatdidn’tworkout.
That’swhatwetradersshouldbedoingtoo.Wemightnotbeverygoodatpredictingthefuture,butwedon’tneedtobe.Wejustneedtomakesurewemakeasmuchprofitaswecanwhenwearecorrectandwemitigatethelosses
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whenwearewrong.ThatistheessenceofgoodtradingandthatiswhatthePASTStrategyisallabout.
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ChapterTwo
“Thedesiretomaximisethenumberofwinningtrades(orminimisethenumberoflosingtrades)worksagainstthetrader.Thesuccessrateoftradesistheleastimportantperformancestatisticandmayevenbeinverselyrelatedtoperformance.”
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-WilliamEckhardt
Mostreaderswillhaveencounteredthephrase“riskversusrewardratio”atsomestageinrelationtotheirtrading.Essentiallyitmeanstheratiobetweenhowmuchyouarewillingtoloseonagiventradeandtheamountyouaretargetingtogain.
Somepeoplearehappytoriskafewhundredpipsto
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gain10or20pips.Thesetraders,ifprofitable,willhavetowinmostoftheirtrades-theywillhaveahighpercentagesuccessrateandahighriskvrewardratio.Othertradersprefertoriskasmalleramountthantheyaimtoprofit-theycanoperatewithalowerpercentagesuccessrateandstillbeveryprofitable.Itisworthnotingthatsomeofthebesthedge
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fundmanagersintheworldhaveatradesuccesspercentagerateofaround5%.Althoughtheyarewrong95%ofthetime,theystillmakemillions,ifnotbillions,ofdollarsfortheirclients,consistently.Theirwinningtradesareverylargeandtheirlosingtradesareverysmall.
Thereisnorightorwrongapproachtothis.Some
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tradersdonotliketakingregularlossesbecauseitaffectstheirtradingemotions.Consequently,theyarenaturallyattractedtohighsuccesspercentagestrategies.Othersarewillingtotakelotsofsmalllosses,safeintheknowledgethatwhentheirwinnerscometheywillmakesurethattheyarebig.Whattypeoftradingapproachtouseislargelyamatterfor
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personalpreference.
ThePASTStrategyfallsfirmlyintothesecondofthetwocategoriesabove.Italwaystriestokeeplosingtrades(risk)verysmall,andtriestoallowwinningtrades(reward)togrowaslargeaspossible.Becauseofthisapproach,thestrategycansustainsignificantlymorelosingtradesthanwinners
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andstillreturnanoverallprofit.
HowdoesthePASTStrategydothis?Well,ofprimaryimportanceisourconstantemphasisonthestrictcontrolofrisk;thiscomesfirstandforemost.Then,oncewehaveapositioninthemarket,ourconcentrationshiftstowardsfindingtechniquesthatallowittogrowaslargeaspossible.
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ChapterThree
“Thefundamentallawofinvestingistheuncertaintyofthefuture.”
-PeterBernstein
ThePASTStrategyaimstotakeadvantageof“swings”thattakeplaceinthemarkets.Weattempttogetintothemarketsomewherenearthetopofamarketmove,asitis
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rollingover,andgetoutsomewherefurtherdown,closertothebottom.Orviceversaforanupwardmarketmove.Theswingslooklikethis:
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Althoughtheseswingstake
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placeonallmarkettimeframes,theonesthatinterestusmostarethosethathavethepotentialtobethebiggestandrunforthelongestperiodoftime.Thebestplacestolookforareaswherealargepotentialmovemightbeoccurringarethelongertermcharts,suchastheweeklyormonthlycharts.Irefertotheseasmy“anchor”charts.Swingsthat
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occurontheselargetimeframesareseenassignificantbylargeparticipantsinthemarkets,likeinstitutionaltraders,banksandhedgefunds.Thesearethepeoplethatreallydrivemarketdirectionandsoweshouldwanttopositionourselvesalongsidethemwheneverwecan.OnrareoccasionsImightlookatthedailychartforswingsto
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develop,butcertainlynolowerthanthat.
ThechartbelowisaweeklychartoftheAustralianDollar/SwissFranccurrencypair,whichhasbeenshowingsomeniceswingsrecently.
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Sohowcanwetradeswings
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likethese?Ofcourseitisveryeasytoopenupapricechart,scrollbackandpickoutniceswingsthatwouldhavebeenveryprofitabletotrade.Anyonecandothat.Theproblemishowcanweidentifyinadvancewhereandwhenanewoneisgoingtostart?
Welltheansweristhatwedon’tknow-noonereally
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does.Allwecandoistradeinsuchawaysothatwearepositionedtoprofitifanewswingdoesoccur,andtolimitourlossesifitdoesn’t.
Nowitistimetoanalysehowwecanidentifywhereanewswingmightbebeginningtoemergeonalongertimeframechart.
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ChapterFour
“Ibelievetheverybestmoneyismadeatthemarketturns.Everyonesaysthatyougetkilledtryingtopicktopsandbottomsandyoumakeallyourmoneybyplayingthetrendinthemiddle.WellfortwelveyearsIhavebeenmissingthemeatinthemiddlebutIhavemadea
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lotofmoneyattopsandbottoms.”
-PaulTudorJones
InthePASTStrategyweusetwoverysimplecandlestickchartingsignalstoindicateanareawherethemarketmightbebeginningtocontemplateturningaroundandstartinganewswing.Wecanrefertotheseastrendreversals.
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Butbeforewelookatthesesignals,itisimportanttorememberthatinorderforatrendreversaltooccur,weneedtohaveatrendinthefirstplace.Aprecedingtrendiseasytoidentify,infactitshouldbeobvious.Ifyouhavetolooktoohardfortheprecedingtrend,itprobablyisn’tthere.
Onthenextpagewewilllook
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atsomeexamplesofwhatprecedingtrendslooklike.
Hereisabearishtrend.Noticethatitismainlycomprisedoflargelongbearishcandles.Priceisobviouslymovinginadownwarddirection.
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Wecanseeanexampleofabullishprecedingtrendonthesamechart:
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Theprecedingtrendisimportant.Thisisbecausereversalsoccurabitlikea
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ballbouncingoffawallorsomeonebouncingoffatrampoline.Theharderandfasterpriceismovingintothereversal,themorelikelyitistosnapbackharderandfasterawayfromit.Itismucheasiertotradepricethatismovingniceandquicklyratherthanpricethatismovingslowlyandnotreallygoinganywhere.Itisnotimpossibletotradeweak
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reversals,buttheycansometimesbealittlebitmoredifficultthanstrongones.You’llusuallyneedabitmorepatiencetotradeweakreversals.Ifyouarejuststartingoutyouwouldbebestadvisedtostickwiththestrongreversalsuntilyougainmoreexperienceinthisstyleoftrading.Soalwayslookforgoodlongcandlesandanicestrongpreceding
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trend.
Oncewehaveidentifiedagoodprecedingtrend,eitherbullishorbearish,wethenlookforcluesthatareversalmightbebeginningtotakeplace.Wewillexaminewhatthesesignalslooklikeinthenextchapter.
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ChapterFive
“Tolearnaboutthemarket,askthemarket.”
-HommaMunehisa
Candlestickanalysisisoneoftheoldest,simplestandbestwaystoidentifyareaswherepricemightbecontemplatingachangeindirection.Thefirstcandlesignalwelookforisonewhere,inabearish
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trend,astrongbullishcandleappearsthatclosesabovetheopeningpriceofthemostrecentbearcandle.Thismightsoundcomplicatedbutitreallyisn’t.Hereisanexample:
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Let'slookatthebullish
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reversalcandleitselfabitmoreclosely:
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Hereisanexampleofabearishreversalcandle:
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Noticehowthelargebearish
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reversalcandleformingattheendofthebullishprecedingtrendhassparkedasell-offtothedownside.
Again,let'slookatthereversalcandleitselfabitmoreclosely:
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Thesecondsignalwelookfor
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thatwarnsusthatthemarketiscontemplatingareversalisacandlethathasalongwick(sometimescalleda“shadow”)whencomparedtothesizeofitsbody.Longwicksshowthattheprecedingtrendcouldbebeginningtorunoutofsteamandthatthemarketisthinkingabouttryingtoreversedirection.Again,thismightsoundcomplicatedbut
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it’snot.Withalittlepracticeyouwillbeabletoidentifythesesignalsveryquicklyandeasily.Itbecomessecondnatureafterawhile-likeridingabike.
Hereareacoupleofexamplestogettheballrolling-firstabullishlongwickcandlereversal:
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Andalittlebitcloser:
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Candlesticksthathavelongshadowscanbeextremelypowerfulatalertingustoareaswherepricemightbethinkingaboutchangingdirection.Butlikeanyformoftechnicalanalysis,theydonotworkallthetime.Youshouldneverjustidentifyalongwickcandleandthenblindlyenteratradeintheoppositedirection.Longwicksarejustoneofthetools
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weusetoanalysepotentialmarketturningpoints.Whenweseeacandlewithalongwickonaweeklyormonthlychartforinstance,weshouldbethinkingtoourselvesthatthemoveintheoppositedirection,ifitmaterialises,couldbequitelarge.Oneweeklycandleisoftenafewhundredpipsinrange.Weshouldbethinkingaboutwayswecantakeadvantage
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ofthis.
Hereisanexampleofabearishlongwickreversal:
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Readerswhohavecomeacrosscandlestickanalysisbeforewillprobablyrecognisesomeofthesecandlepatternsandknowtheirnames.Isupposethelongwickwouldbesomethingakintoadojipattern,andthefirstreversalpatternwelookedatwasprobablyalongthelinesofanengulfingpattern.
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Althoughthereisnothingwrongwithconventionalcandlestickanalysis,Isometimesthinkthattherulesareveryrigidaboutwhatconstitutes“valid”or“invalid”patterns.Insteadofworryingtoomuchaboutlearningtheexactconstituentcriteriaofacandlestickpattern(anditsfunny-soundingname),weshouldconcentrateonreadingprice
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actionasawhole,asifwearereadingabook.Asentencedoesn’tloseitsmeaningbecauseofaspellingmistake,justlikeareversaldoesn’tstopbeingareversaljustbecauseitisnotidenticaltoanexampleinatextbook.
Hereisthechartexamplefromaboveagain,zoomedinabitthistime:
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Atthisstageitisimportanttoreiterate,aswesaidin
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ChapterThree,wearenottryingtopredictthefuturewiththesecandlesignals.Wearejustanticipatingwhatthemarketmightbeabouttodo.Ifwegetitwrongafewtimesinarowitisnotnecessarilyapoorreflectiononourskillsasatraderorareaderofpriceaction.Itisjustthatthemarketdidnotactaswethoughtitmightontheseparticularoccasions.
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Soonerorlaterthemarketwillperforminlinewithourexpectationsanddevelopintoanicelongswing.Remember,themarketcanonlygoup,downorsideways,sowealreadyhavea33%chanceofbeingright,evenifwedonoanalysisatall!
Whenthemarketdoesmoveinaccordancewithour
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expectationsourjobissimplytomakesurethatwemakethemostoutoftheopportunity.Whenthemarketmovesagainstourexpectationswegetintodefensivemodeandquicklyclosetradesiftheyareshowinglosses.That’sthenameofthisgame-thereisnothingmoretoitthanthat.
Youshouldtakesometime
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nowtoscrollbackthroughyourchartsandpracticeidentifyinggoodprecedingtrendstogetherwithcandlestickreversalsignals.Youwillfindthatthesesignalsdonotalwayswork;infacttheymightonlyworkoutperhaps50%ofthetime,maybeevenless.HopefullybynowyouwillhaverealisedwhytradersofthePASTStrategywouldbeextremely
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happywitha50%tradesuccessrate.Ifyouhaven’t,youwillberemindedagaininthecomingchapters!
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ChapterSix
Inthelastchapterwelookedatwaysofidentifyingwhereaswingmightbebeginningtooccuronalarge(“anchor”)timeframe,suchasaweeklyormonthlychart.Whenthesesignalsaresuccessful,theyoftenresultinamoveofhundredsorpossiblyeventhousandsofpips.Howeverifwewantedtoenterthemarket
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usingtheseanchorchartsalone,wewouldhavetoriskalotofpipstomakesurethatourstopwasinanappropriateplace.Mostlyforthesetypesofreversalcandlesticksignalsitisrecommendedthatastopisplacedabovethehighofthesignalcandle,whichforaweeklyormonthlysignalcouldbehundredsofpipsfromourentryprice.
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But,aswehavesaidalready,wewanttokeepriskverytightlycontrolled.A300pipstopissimplytoomuch.Soinsteadofenteringthemarketandsettingastopontheanchortimeframe,wedropdowntoalowertimeframetoseeifwecanmakethesameentry,butwithtighterrisk.
Whenmovingtoalowertimeframeweshouldtryto
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adoptaflexibleapproachinrelationtowhichoneweuse.Sometimestraderstreatdifferenttimeframesalmostasiftheyaretotallydifferentinstruments.Thepricetracesthesamepathnomatterwhattimeframeyouarelookingat,orwhetheryouusecandles,OHLCbarsorjustlines.Theyareallsimplydifferentwaysofdisplayingthesameinformation.
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Ipersonallyliketojustflickaroundlotsofdifferenttimeframestogetagoodoverallperspectiveonwhatpriceisdoing.HoweverIalsoliketodomyanalysisonthebasisthatthehigherthetimeframe,themoreimportantthesignal.Iftheweeklytimeframeisshowingastrongreversalsignalthatsuggeststhatpriceislikelytomovetothedownsideover
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thecomingsessions,Iwon’tbesecond-guessingmyopinionjustbecausethe5minutecharthappenstolookdecidedlybullish.
Ifnovicetradersfindatthebeginningthatconstantlyjumpingbetweentimeframesisabitconfusing,theycouldsimplysticktousingtheweeklytimeframeastheanchorchart,andthenjust
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takingentrysignalsfromeitherthe4hourorthe1hourcharts.Thesethreetimeframestogetherwillgiveyouaverygoodoverallideaofcurrentpriceaction.
So,wehavenowlookedatthefirstpartofthetradingstrategy,whichislocatingacandlestickreversalsignalonalargeanchortimeframechart.Wewillnowlookat
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thesecondpartofthestrategy,whichistodropdowntoalowertimeframetomakeanicetightentryforsmallandcontrolledrisk.
Fortheseentriesweuseanothersimplebutveryeffectivepriceactionpattern-thetrendlinebreak.
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ChapterSeven
“Iabsolutelybelievethatpricemovementpatternsarebeingrepeated;theyarerecurringpatternsthatrepeatoverandover.Thisisbecausethestockswerebeingdrivenbyhumans–andhumannatureneverchanges.”
-JesseLivermore
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Youwillnoticethatwhenamarketistrending,inanytimeframe,ittendstomoveinazig-zagfashion,likethis:
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Whenweseeamarketbehavingliketheabove,wejustseeifwecanconnectthelowswithastraightline,andifwecan,wehaveourselvesatrendline.Etvoilà:
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Wecandrawtrendlinesbetweenanytwoormorepointsonachart.Generallythemoretouchesbypriceoffthetrendline,thestrongeritis.Quiteoftenthestrongerthetrendlineis,thebiggerthemoveiswhenitdoeseventuallybreak.Somoretouchesarebetter,butdon’ttotallyignoretrendlineswithonlytwoorthreetouches,theycanproducegoodtrades
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too.
Inaddition,weshouldn’tgettoodistractedbywhetherthetrendlinematchesupexactlyateachlowornot.Somepeoplewhentheyaredrawingtrendlinesgetslightlyobsessedbywhetheryoushouldonlydrawfromthepreciselowofthecandle,orthecloseprice,orwhatever.Asisthecasewithsomuch
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intrading,thereisnorightorwronganswer;itissimplyamatterofstyle.Practiceanddevelopyourownwayofdrawingthem-it’syourtrendlineafterall,drawithoweveryouthinkisbest!
Oncewehaveourtrendline,wewanttoenteratradetotheshortsideifandwhenitbreaks:
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Now,thiswillnothappeneverytime,butquiteoftenwe
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willnoticethatwhenatrendlinebreaks,pricewillmovequitequicklyawayfromit.ThisisagreatfeatureoftrendlinebreaksandisthemainreasonwhytheyformpartofthePASTStrategy.Whenpricemovesquicklyintoprofit,itgivesustheopportunitytocontrolriskverytightly;ifpricemovesawayfromtheentrypointquickly,thismeansthesize
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ofthestoplossrequiredismuchsmaller.
Youoftenheartraderstalkingaboutgivingpositions“spacetodevelop”or“roomtobreathe”.ThePASTStrategyrejectsthis;stopsshouldneverneedtobeanybiggerthanwhatisabsolutelynecessary.Itisperfectlypossible,withsomepractice,toenterthemarketina
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preciseandaccuratefashionandexpectpricetomovequitequicklyintoprofit.Ifpricemovesquicklyintoprofitweknowwewerecorrect.Ifpricegoesnowhereormovesagainstus,weshouldlistentowhatthemarketistellingus,acknowledgethatonthisoccasionwewerewrong.Weclosethetrade.Thereisnoneedtoallowatradego100
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pipsintotheredbeforewestartwonderingwhetheritisgoingtoworkoutornot!
Inthelastexampleinthegraphabove,pricebrokethetrendlineandmovedawayfromitquickly.It’sgreatwhenpricedoesthisbecauseitmakesforacleanandsimpletrade.However,unfortunatelysometimesthemarketlikestomakeuswork
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alittleharderforourmoney.Afteryouhavebecomefamiliarwithtrendlinebreaksyouwillnoticethatsometimesafteritbreaks,pricecomesbackuptotestthetrendlineagainfromunderneath,beforethenmovingaway.
Thisisperfectlynormalandweshouldexpectitandbepreparedforittohappen
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regularlywhenwearetradingtrendlinebreaks.Onceweknowthatthisoccurswecanbereadyforittohappenandadjustourtradingaccordingly.
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Somepeoplegetfrustratedat
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retraces.ThePASTStrategylovesretracestobeneathatrendlinethough-theyallowyoutogetinataverynicepriceandoftenmakethebesttrades.
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ChapterEight
“1.Cuttinglosses
2.Cuttinglosses
3.Cuttinglosses
Ifyoucanfollowthesethreerules,youmayhaveachance.”
-EdSeykota
Aswehavesaidalready,our
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primaryobjective,firstandforemost,istocontrolrisk.Thatmeanssettingtheappropriatestoplossordersforourtrades.
Itisnotpossible,orindeedpreferable,tostrictlydefinewhereastoplossshouldgo,orhowmanypipsitshouldbefromyourentry.Everysingletrendlinewillbedifferentandsoweneedto
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learnhowtodealwitheachoneasitpresentsitselftous.Insteadoffrettingoverwhetherourstopisinthe“correct”placeornot,justkeepinmindtheoverallobjective.Wewanttoputthestopinaplacethatwillcontrolriskastightlyasispossible,butitneedstoberealistictoo.Settingastop3or4pipsfromentrywillalmostdefinitelygethit,
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whereasasensiblyplacedstop15or20pipsawayfromentrymightbequiteunlikelytobehit,dependingonthechart.Havingsaidthat,ifwearetradingona1hourchartandwehavea100pipstopwearecertainlynottightlycontrollingrisk-wecandomuch,muchbetterthanthat.Itisaboutstrikingagoodbalance.
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Althoughtherearenohardandfastrules,thereareafewguidelineswecanbearinmindwhenwearedecidingwheretoputastop.Insimpleterms,wewanttosetthestopatalevelthatifitgetstriggered,themarketisloudlyandclearlytellingusthatitisnotreadytobehavequiteaswewouldlike.Themarkettellsuswearewrongwhenitmanagestoovercomelevels
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thatitreallyshouldn’tbeabletoifitwasmindedtobemovingintheoppositedirection.
Onasimpleandstraightforwardtrendlinebreak,weshouldtrytoseeifwecanplacethestoplossabovethetrendlineitself:
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Anotheroptionthatmightbeavailabletous,dependingon
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theindividualtrendlinebreakconcerned,istolocateastopaboveboththetrendlineandarecenthigh.Remember,wewanttolocatethestopinaplacethatifpricemanagestotriggerit,priceistellingusthatwearewrong.Ifpricehastheabilityandstrengthtorecovertotheextentthatitcanmakeitbackaboveboththebrokentrendlineandarecenthigh,thereisnodoubt
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thatthemarketistellingusthatitisnotreadytomovetothedownsidejustyet.
Ifthemarketisn’tbehavingasweexpectwhatshouldwedo?Leavethetradeopenandsweatitout?Waitandwatchthepricemovehigherandhigher,takingwithitchunksofouraccountequity?No,ofcoursenot.Wecloseoutthetrade,takethelosswhileitis
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smallandmanageableandthenwaituntilthemarketisbehavinginaccordancewithexpectationsagain.
Therearedayswhenthemarketdoesexactlywhatwewant-asweet,clean,fasttrendlinebreakwhenpricemovesintoprofitstraightawaywouldbeoneofthosedays.Weshouldbeactiveinthemarketonthese
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days.Therewillalsobedaysthatthemarketbehaveslikeaspoilt,angrychild-itwillbreak,retrace,jumparoundandgenerallyfrustrateyou.Onthosedays,itisfarbettertosimplytakeastepbackandletthemarketgetwhateveritisoutofitssystem.
Hereisanexampleofsettingastopaboveboththetrendlineandarecenthigh:
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ThischartshowsanexampleofwhereImightconsiderputtingmystopifIwasenteringonaretestoftheunderneathofthetrendline:
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Tosummarisethen,therearetwowayswecantradetrendlines:eitherontheinitialbreakoronaretestifitoccurs.Thesetwomethodshoweverwillinevitablysometimesoverlap.
Forexample,sayweenteredonaninitialbreakandputourstopabovethetrendlineandaprevioushigh.Pricemovesintoprofitinitiallybutthen
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startstoretracebackupthetrendline.Butbecausethetrendlineisslopingupward,thestopweplacedaboveitwhenweopenedthetradecouldbebelowitnow.Soitgetstriggeredforaloss.Butwethennoticethatpriceisstrugglingattheundersideofthetrendline,sowecoulddecidetoenteragain,attheretest.
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Thismightsoundalittlebitcomplicatednow,butonceyoustarttopracticetheseentriesyouwillbecomebetteratnoticinghowpricemoves.Ifyouareunsure,themainpointtorememberisthatyoumustkeepyourriskundercontrolatalltimes.Ifyouaredoingthatwell,whereexactlyyouenterthemarketinrelationtothetrendlineisnotsoimportant.
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Wemustremindourselves,whenwearelookingattheseexamples,ofthedifferencebetweentheoryandpractice.Intheory,priceshouldbouncenicelyofftrendlines,andthenwhenitbreaksitshoulddosocleanlyandprofitably.
Intherealworld,themarketmightdecidetocompletelyignoreournicelydrawn
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trendlineandthereisnothingwecandoaboutthat.Thereisnomagicintrendlinesintheexactsamewayasthereisnomagicinanytechnicalanalysis.Thetrendlineissimplyatooltosuggestwhatmightbeagoodentrypointandagoodplacetosetastoplosstomanagerisk.Itisnothingmorethanthat.
Pricesometimesovershoots,
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reverses,hesitates,oftenitjustgoesnowhere.Italsohasthisprofoundlyannoyingtendencytojusttriggerourstopandthenmoveoffsmartlyinthedirectionweoriginallyexpectedtogo.Wehavetoacceptthatthisissimplywhatthemarketdoes.Wecan’tchangeit;ifwearetohaveanychanceofsucceedingintradingwehavetorecognisethatit
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happensandworkaroundit.Whenthemarketisn’tplayingalongtoexpectations,wegointodefensivemode,weconservecapitalandwedon’tletlossesbuildup.Wecertainlydon’ttrytoforcetrades.Ontheoccasionsthatthemarketitisbehavingitself,wegoontheoffensive,andmakeasmuchmoneyaswecanwhiletheopportunityremainsopen.
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ChapterNine
“ItrytoassemblefactsanddecidewhatkindofscenarioIthinkwillunfold.”
-BillLipschutz
Sofarwehavelookedatlongertermcandlestickreversalsignalsandthenshortertermtrendlinebreaks.Let’snowlookataworked
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exampleofhowweputthetwotogethertolookforpotentialtradeentries.
Step1:Identifyagoodprecedingtrendonalongertimeframechart
Hereisagoodoneonaweeklytimeframe:
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Priceintheabovechartisveryobviouslyinastronguptrend.Alltrendscometoanendatsomepointthough.Ifpricewastoshowsignsofchangingdirection,wecouldconsiderstartingtolookforopportunitiestoshortit,intheanticipationthatacorrectioncouldbeabouttooccur.Perhapseventheverystartofanewbeartrend
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couldbeforming.Thetruthisthatwedon’tknow,eitherway.Ifthesignalturnsouttobecorrectandaselloffoccurs,wewillaimtoputourselvesinapositiontoprofitasmuchaspossible.Ifthesignalfailsandpricejustcontinuestotheupside,wewanttocontrolourriskandlosetheleastamountpossible.
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Step2:Waitforareversalsignaltooccur
Themarketasshowninthechartaboveshowsnosignwhatsoeverofturningaroundjustyetandthereforeifwestarttryingtoshortitnow,wearejustfightingastrongtrendandwillmostlikelylosemoney.Thisisveryimportant-manytradersfailtoheedthisruleandtrytotrade
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reversalsbeforethemarketactuallyshowsanyrealsignofturningaround.Weneedtowaitforthemarkettogiveusafirmsignalthatitcouldbeturningbeforewedoanything.
Donottradebeforethemarketgivesyouasignal-therewillbeplentyoftimetogetinvolvedafterithasturned.Waitforthemarketto
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showwhatitisintendingtodofirst,thengetinvolved,nottheotherwayround!
So,confrontedwiththechartabovewewouldkeepaneyeonitbutnotdoanythinguntilwesawoneofthereversalsignalswelookedatinChapterFive.Wewantthemarkettogiveusanindicationthatitiscontemplatingachangein
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direction.
Afterthenextweek’spriceactionthechartnowlookslikethis:
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HopefullyifyouhavebeenpracticingbeingabletoidentifythereversalsignalsthatwediscussedinChapterFiveyouwillrecognisethatthelatestcandleissignalingthatthebearshavewokenupandhavestartedtostruttheirstuff.Thesellersthinkthatthebulltrendhasbeengoingforlongenoughanditistimethattheyfoughtback.The
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candleisalargestrongbearishoneandhasclosedbelowtheopeningpriceofthepreviousbullcandle.Wearenowstartingtogetinterested,asthemarkethasgivenusagoodfirmsignal.
Asweusuallydo,let’stakeacloserlook:
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Onceasignalliketheaboveoccurs,wecanthenbegintopositionourselvestotakeadvantageifthepricedeclinesfurtherinthecomingweeksasweexpectitmight.Evenifthisweeklysignalonlyresultsintwoorthreemorebearishcandlesbeforearesumptionofthepreviousbulltrend,therecouldbeatleastafewhundredpipsavailabletousifweknow
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whatwearedoing.
Beforewemoveonitisimportanttonotethatonceweseeabearishsignallikeontheabovechart,wearenowinsellmodeandareonlylookingtoplaythemarkettothedownside.Wearenotinterestedinbuyingopportunitiesrightnow.
Onceweseeareversalsignalliketheoneabove,wethen
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dropdowntoalowertimeframecharttolookfortrendlinestoform,andgettingshortwhentheybreak.
Solet’ssee,ifwehadbeentradingtheaboveexampleinrealtime,whatwewouldhavebeenconfrontedwith.
Step3:Dropdowntoalowertimeframe
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Hereiswhattheweeklyreversalsignallookslikeonthehourlychart.Thetwoshadedareas,greenandred,arethetwocandlesthatcomprisetogetherthereversalsignal.Wecanseethatpricewasmovingupcautiouslyduringthefirstcandlebutduringthesecondcandleitfellawayquitesharply.Theopenpriceofthefirstcandleismarkedingreenontheleft
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handsideofthechartandtheclosepriceofthesecondcandleismarkedinredontherighthandsideofthechart.Wecanseethatthesecondcandleclosedbelowtheopenpriceofthefirst,whichisafactorwelookforwhensearchingforreversalsignals.
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Aswementionedbefore,thereisnorightorwrong
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timeframetodropdownto,justwhateverwefeelgivesagoodperspectiveonwhatpriceisdoing.PersonallyIliketomakesurethatmychartiszoomedoutatfirstsoIcangetagoodlookatpreviouspriceaction-attheveryleastweshouldbeabletoseeallofthepriceactionthatformedthereversalsignalitselfonthechart.
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Sometimestraderstendtozoomrightinandconcentratealmostonindividualcandles.That’sfineformakingpreciseentries,butintermsofgettingagoodoverallfeelforwhatpriceisdoing,weshouldtrytofitasmuchpriceactiononourscreenaspossible,atthebeginningatleast.Forthisexamplewearegoingtosticktothe1hourchart.
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Step4:Trendlines
Solet’sfastforwardpriceonabitnowsowecanseehowitbehavedduringtheweekfollowingthesignal,whichiscolour-codedinblue.Remember,wearelookingforlowsthatwecanjointogethertoformtrendlines.Oncetheybreakwethencanthenthinkabouttradingshort.
Thefirsttwolowsthatjump
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outarehighlightedwithyellowarrowsinthechartbelow-let’sseehowtheyplayedout:
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Sothefirsttradeoftheweekwasaloser.Nottoworry,as
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longaswearecontrollingourlossesandkeepingthemassmallaspossiblewearedoingourjob.
Wecanusethenewlownowtodrawanothertrendline:
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Thistimewegetanicer
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break,andpricemovesawayabitmorequickly.Thatiswhatweshouldbelookingfor-whenatrendlinebreaksproperly,weshouldknowaboutit.Howeveralthoughpricebreaksnicelyonthisoccasion,andourtradeshouldbeinprofit,thereislittleinthewayoffollow-throughafterwardsandpricestartstoconsolidatesideways.Thisisperfectly
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naturalandweshouldbereadyforthistooccurregularly,especiallyduringquietertradingsessions,suchaswhentheAsianmarketsareopen.
Afterpricehasfinishedconsolidating,lookwhathappensnext:
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Duringtheperiodofconsolidation(betweenthe
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redandgreenarrows)thepricehasbeeneyeinguptheundersideofthetrendline.Whenyoubecomemorefamiliarwiththepriceactionofmarketsgenerally,youwillnoticehowpricelovestomovebacktoretestalevelthatithasbroken.Iliketothinkofitinthesamewaysomepeoplewillgothroughadoor,lockit,thentheytrythehandletomakesureitis
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locked,andthenleave.Priceoftendoesthesamethingwithbrokentrendlines,notallofthetime,butsomeofthetime.Sometimesitisintoomuchofahurrytocheck!Bereadyforit,andbepreparedtotakeadvantageofitwhenithappens.
Aftertestingtheundersideoftheprevioustrendline,pricefallsaway.Itthenbreaks
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anothertrendlinewecouldhavedrawnbyjoiningthelowsoftheconsolidationfromthenightbefore:
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Hopefullyreadersarebeginningtoseeapattern
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emergehere.Thesetrendlinebreaksoccuroverandoveragaininthemarkets.Whenwenoticepatternssuchastheseweshouldbealwaysthinkingofwayswecantakeadvantageofthem.
Afterweidentifiedthereversalpatternontheweeklytimeframe,wethoughtthatitwaspossiblethatthemarketmighttaketoturntothe
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downside.Areversalonaweeklychartcaneasilybeafewhundredpips,ifnotmore.However,insteadofriskingperhaps300pipstosetastoplossontheweeklychart,wecanzoominandmakeprecisionentriesonthelowertimeframechartswithourtrendlinebreaks.
Aswecontinueonthroughtheweek:
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Priceconsolidatesandthen
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moves,consolidatesthenmoves.Inadowntrend,likewhatweareobservingabove,thedownsidebreakscanbequitequickandaggressive.Theseareverygoodtradingconditions.Also,onsomeoccasions,wenoticethatpriceretracestotestthebrokentrendlinefromunderneathandthencontinuesinadownwarddirection.
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Now,theaboveweek’spriceactionwasselectedbecauseitisagoodexample,noteveryweekwillhavesuchnicecleanpriceactionlikethis.Oftenwemighthavetoendureafewlosingtradesbeforewegetonethatmovesintoprofitnicelyforus.Orwewillmisssometrades,simplybecauseweareworkingatsomethingelseorawayfromthetradingscreen.
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Thisislargelybesidesthepoint.Thekeythingtorememberhereisthatoncewehaveidentifiedareversalsignalonalargetimeframewhichissuccessful,thepriceactionwilloftengiveusampleopportunitytogetinonthemovewithverylittlerisk,perhapsaslittleas10-20pips.
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ChapterTen
“Bepatientwithwinningtrades;beenormouslyimpatientwithlosingtrades.”
-DennisGartman
Itisclearthatthepriceactionwelookedatinthelastchapterofferedatleast2or3opportunitiestoenterthemarketandmakesomepips.
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Thesetrendlinebreakscancertainlybeprofitableintheirownright.Itcouldbeaperfectlyplausiblestrategytosimplytradethesetrendlinebreaksalone,targetingperhaps20–30pipsoneachbreak.
HoweveracoreobjectiveofthePASTStrategyisnotonlytocontrolriskbuttoalsotrytostretchoutrewardasmuch
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aspossible.Wemeasureriskonasmalltimeframebuttargetrewardonalargertimeframe.Inthiscontexttherefore,aswedidouroriginalanalysisontheweeklychart,wecouldhavereasonablyexpectedpricetocontinuefurthertothedownsideafterthefirstweek,andpotentiallyforfurtherweeksthereafter.Thisisnotluckorfluke,itisalegitimate
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expectationbasedonsoundweeklycandlestickanalysis.
Veryoftenyouseetradersusinglongertimeframestogaugemarketdirectionandthenmovingdowntoalowertimeframetomakeanentry.ThePASTStrategyisnotuniqueinthisrespect.However,mostofthetimewhenyouseetraderstakedirectionfromadailyor
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weeklychart,theythenclosetheirtradesat30or40pipsprofit!Ifthemarketismovinginaparticulardirectiononalargetimeframe,thatmeansthatitiscoveringalargenumberofpipstodoso-weshouldbetryingtotakefulladvantageofthemovementandmakingasmanypipsaspossible.
Thechartbelowshowsthe
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firstprofitabletradingset-upencounteredduringthetradingweekthatwehavebeenusingasanexample.Pricebrokeatrendline,retesteditfromtheunderside,andthenfellaway.It’saverynicetrade.Wecouldhaveeitherenteredontheinitialbreak,orindeedontheretest.Somepeopletradingthissetupmighthavehadatightstopsetaftertheinitialbreak
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andgotstoppedoutforaverysmallloss,andthenre-enteredontheretest,withastopabovethetrendline.Thereisnowayweshouldbetradingthissetupwithanymorethan,sayforargument’ssake,20pipspertrade,or40pipsintotal.Soourrisk,setonthehourlytimeframe,is40pips.
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Soourriskismeasuredonthehourlytimeframe-butwecanseebelowwhatcan
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happenifrewardismeasuredontheweeklytimeframe.Remembertheweeklychartonpage34showingthereversalsignal?Hereitisagainonthenextpage:
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Thetradethatwastakenonthehourlytimeframedevelopedontheweeklytimeframeintoamoveofnearly600pips,orapotentialriskvrewardratioofalmost1:15.
Do600pipopportunitiesoccuraftereveryweeklyreversalsignal?No,ofcoursetheydon’t.Sometimespricemightonlymoveacoupleof
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hundredpips.Oftenpricewon’treallymoveforusatallandwemighttakealoss.Onstillotheroccasionspricecouldmoveathousandpipsinourdirection.Thekeypointisthatwhenweenteratrade,weshouldalwaysbethinkingabouthowfarcoulditpossiblygo,andhowcanwetakeadvantage.
Althoughitmakeslittle
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sense,thedefaultsettinginourbrainsencouragesustokeeplosingtradesopen,allowingthelossestoaccumulate.Andthenassoonasawinningtradebeginstodevelopandgrow,werushtocloseitasquicklyaspossible.
Weneedtotrainourselvestodoexactlytheopposite.
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ChapterEleven
“Thewaytobuildsuperiorlong-termreturnsisthroughpreservationofcapitalandhomeruns...Whenyouhavetremendousconvictiononatradeyouhavetogoforthejugular.Ittakescouragetobeapig.”
-StanleyDruckenmiller
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Wehavespentaconsiderablelengthoftimeinthelastfewchapterslookingatwaystoenterthemarketinanticipationofalargemove.Weliketheideaofenteringthemarketontrendlinebreaksorretests,allocatingrisk(stoplosses)onalowertimeframe,butalwaysremainingmindfulofthelargemovethatcouldbecoming.Ifweareanticipating
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thatpriceisgoingtomovetothedownside,welookforbreaksofbullishtrendlinestosell;ifnoneoccur,thenwesimplydon’ttrade.
Noteverytradewetakewillturnouttobeonethatcanreturnhundredsofpips,butwebelievethataslongaswecontrolrisk,opportunitiestomakelargegainswillinevitablyarrive,sooneror
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later.Thegainsfromthelargewinnersshouldbemorethanenoughtonotonlycompensateusforthesmalllosses,buttoreturnagoodprofitalso.
It’stimenowtobegintolookmorecloselyattechniqueswecanadopttoletthesewinningtradesstretchtheirlegs.
Oncewehaveasuccessfultrendlinebreakorretest,and
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pricehasmadeitswaysomedistanceawayintoprofit,thefirstthingweshouldconsiderdoingistakingriskoffthetablecompletelyforthetrade,andsettingastoplossorderattheentryprice,i.e.atbreakeven.Thisissensibletradingpractice;atleastifpriceretracesandtriggersthestopwewillhavelostnothing.Remember,thefirstruleofgoodtradingiscapital
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preservation.
Ofcourse,howfarweallowthetradetogetintoprofitbeforewebringastoptobreakevenisamatterforeachindividualtradertodecide.Youwillfindthataftersomepracticeyouwillgetagoodfeelforit.Ifweweretospecifyagoodruleofthumb,perhapsallowthetradetogetthesamedistanceinprofit
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fromyourentryasyourstopwas.Soifyourstopwas20pips,onceyourtradeis20pipsintoprofit,thinkaboutbringingyourstoptobreakeven.Again,thisisjustasuggestion,aftersomepracticeyouwillbeabletogetagoodfeelforwhenthetimeisrighttotightenrisk.
Secondly,weneedtodefineinadvancethecriteriathat
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willneedtobemetbeforewewillclosethetrade.Sometimestradersusecriteriathatarebasedonwhattheyarefeelingordoingratherthanwhatthemarketisdoing.ThePASTStrategyencouragesusalwaystolistentothemarketfirst-wedonotgetintothemarketunlessthemarketgivesusasignal(longertermcandlestickreversalsignal)
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andweshouldnotgetoutunlessthemarketgivesusasignal.
Whatshouldthesignalbe?Tradersarelargelyfreetodecidewhatthecriteriaisthemselves,buttherecommendationmustbethattheprimaryobjectiveistogivethetradeeverychancetodevelopintoasbigawinneraspossible.
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MyownpersonalpreferenceistokeepmytradeopenuntilIseeareversalcandleontheanchortimeframe-i.e.ifIamtradingaswingtothedownside,Iwillwaituntilabullishcandleformsthatclosesabovetheopenofthemostrecentdowncandle.Aswitheverythingintechnicalanalysis,thereisnomagicinvolvedinthissignal-itisjustanobjectiveoccurrence
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thatonceithappensIcannotarguewithit.
Takingtheweeklyexamplewewerelookingatinthelastchapter,areversallookslikethis:
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Thereareothermethodsthattraderscouldusetodeterminewhetheraswingiscomingtoanend-somemightconsiderusingamovingaverageforinstance-whenamovingaverageflattensoutitcouldbeanindicatorthatthetrendislosingmomentum.Anotherwaytopotentiallydeterminewhentotakeprofitmightbetojoinconsecutivelower
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highstoformdowntrendlines.Similartothewayweusebreaksofupwardtrendlinestogetintothemarket,wecouldusebreaksofdecliningtrendlinesasanindicatorforwhentogetout.
Thereisnosuchthingasaperfectindicatortotellyouwhentogetout,butthatisnotwhatwearelookingfor.Wesimplychoosean
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indicatortouseasatooltoachieveanobjective.Inthisparticularinstance,theobjectiveisrunningwinnersforalongaspossible.Ifanything,ifyouarefindingitdifficulttomakeyourmindupwhetheryouareclosingatradetooearly,thedefaultpositionshouldalwaysbetoerronthesideofleavingthetradeopen.Ifyouareunsure,leaveitopen.You’llfindin
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timethatifyoulookafterthelosers,thewinnerswilltendtolookafterthemselves.
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ChapterTwelve
“Ihavetwobasicrulesaboutwinningintradingaswellasinlife:Ifyoudon’tbetyoucan’twin.Ifyouloseallyourchips,youcan’tbet.”
-LarryHite
Wehavealreadyacknowledgedthatwhenweareanalysingouranchor
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timeframechartswereallyhaveaverylimitedabilitytodeterminewhatdirectionthemarketisgoingtotake.Insteadoftryingtodosomethingweareunlikelytosucceedat,weprefertoconcentrateondoingsomethingthatiswithinourcontrol-namelytradingmoreaggressivelywhenthemarketbehavesaswehopeitwill,andtradingdefensivelywhen
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itdoesn’t.Thisstyleoftradingdemandsthatwearepreparedtoacceptthatwewillencounterquiteanumberoflosingtrades,however,aswearetradingwithagoodrewardtoriskratio,wecancomfortablysustainsomelosingstreaksbeforeourabilitytoreturnaprofitiscalledintoquestion.
Insteadoftryingtoavoid
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losingtradesorpretendingthattheydon’texist,weadoptamorepragmaticattitude;werecognisethatlosingtradesaresimplyafactoftradinglifethatwemustacceptandgetonwith.Losingtradesareinevitable,butwinningtradesareinevitabletoo-allwehavetodoisbepatientandwaitforthemtocomealong.
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Withthisinmind,let’stakealookatanotherweeklyreversalsignal.However,thistimeitisasignalthatdoesn’tplayoutaccordingtoexpectations.AsIamsureyouhavegatheredbynow,thePASTStrategycanbetradedeitherlongorshort.Sothistimewewilllookatanexampleofabullishreversal-sowewillbelookingforbuyingopportunitieson
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trendlinebreakstotheupside.
Takealookatthefollowingchart:
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KnowingwhatyoudoabouthowthePASTStrategy,whatareyourthoughtsregardingtheaboveweeklychart?
Frommyownpersonalperspective,ifIencounteredthischartonmyscreenIwouldbelookingforwardtothecomingtradingweek.Thestrongprecedingtrendisthere,priceisobviouslymovingdown,anditfinishes
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offwithaverynicereversalcandleatthebottom.Thebearscouldberunningoutofsteamandthebullsarethinkingabouttakingashotatpushingthemarketbackup.IwouldbegettingreadytozoominonMondaymorningtoseeifthereareanygoodtrendlinesthatIcouldwatchforbreakstotheupside.
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Beforewemovetothelowertimeframecharts,let’stakeacloserlookatthepotentialreversalitself:
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Aswebecomemoreusedtolookingatpriceaction,wewillbecomebetteratrecognisingwhenthemarketismovingwithmomentumandwhenitisbecominglesscertainaboutdirection.Thefirstthreebearishcandles,withtheorangearrowspointingtowardsthem,aregoodexamplesofamarketmovingwithmomentum.The
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candlesareniceandlong,andthewicksareshort.Assoonasthecandleopensthebearsareincontrolfromthebeginningrightthroughtotheend,whenthecandlecloses.
Thenexttwocandles,withtheyellowarrowspointingtowardsthem,areexamplesofamarketbeginningtolosemomentum.Therearewicksinbothdirectionsandthe
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candlesareshorter.Thebearsarestillwinning,becausethecandlesaremovingdown,buttheyarenotwinningthebattlesconvincinglyanymore.Doesitmeanthatthebearswingcan’tcontinue?Absolutelynot.Butitdoesgiveusadvancewarningthatthebullsareconsideringmountingachallenge.Weshouldbeawareofthisandtrytopositionourselvesto
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profitiftheydomanagetotakecontrolofthemarket.
Let’szoominnowandlookabitcloser.Forthisexamplewearegoingtousethe4hourchart.Thereversalcandleiscolourcodedinredandtheprecedingcandleingreen.Theopeningandclosingpricesarealsomarkedinredandgreen.Wecanseethattheopeningandclosing
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pricesarealmostequal.
Wecanfastforwardonnowthroughthenextweek’spriceaction.Remember,wearenowlookingoutfortrendlinesthatwecanhelpusdefineentrypointsforlongtrades.
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Thenextweekiscolourcodedinblue.Doyouseeanypointsthatyoucouldjointogethertoformatrendlineyet?
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Remember,thetrendlinesareamatterofpersonalstyle;notwopeoplewilldrawidenticaltrendlines.YoumightdrawatrendlineontheabovechartthatIwouldn’t,andviceversa.
Ifthereistobeoneguidingprinciplewhenitcomestotrendlines,itwouldbetotrytodrawtheonethatlookslikeitwouldbethemost
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obvioustoeveryonelookingatthechart.Don’ttrytoohard.Whenlotsofpeopleareplacingtheirordersaroundthesametrendline,that’swhatcausesthemovementinpricewhenitbreaks.
Here’smyfirsttrendlineattempt:
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Noticeabovehowwhenthetrendlinebreakspricemovesawayfromitsmartly-thisiswhatwewanttoseehappen.Unfortunatelyhoweveronthisparticularoccasion,despitetheinitialjumppricedoesnotcontinuetofollowthroughinabullishdirection;iteventuallyretracesbackdowntobeneaththetrendline.Despitethis,weshouldhavehadample
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opportunitywhilethetradewasinprofittotightenriskandsetastoplosstobreakevenoratleastonlyaverysmallloss.
Traderscouldalsohavepotentiallyconsideredtakingalongpositionontheretracetothetrendline.Inthisparticularexampletherewasinfactaweakbounce(lookatthecandlethebluearrowis
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pointingto)fromitbutthebullscouldn’tgetanytractionandpricethencontinuedtofall.Again,ifwedidtakeapositionfromthistrendline,weshouldbeaimingtoeitherhavetakenasmalllossorperhapstohaveastopsettobreakeven.Eitherway,thelossshouldneverbeallowedtobecomealargeone.
Howdoestheweek’sprice
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actionlooklikebackontheanchorchart?
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Ok,soweexpectedpricetomovetotheupsideoffthereversalcandle,butthishasn’toccurred.Wehavehadtwopotentiallongtradesduringtheweek;oneoffatrendlinebreakandthenanotheronaretest.Neitherhaveworkedout,butwelosteitherverylittleornothingatall.That’sexcellent,becauseitmeanswearecontrolling
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risk.Whenasignaldoesn’tworkoutexactlyaswehope,weneedtoaskourselvesthefollowingimportantquestion:
Doesthislatestanchorcandlestickcallourbullish(orbearish)outlookintoquestion?
Forme,inthisinstance,theanswertothatquestionisno.Thepriceactioncouldbeseenasconsolidativein
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nature,andgranted,thebullshaveyettotakecontrolofthemarket.Howeverthereisnoevidencefromtheweek’spriceactionthatsuggeststhatthebearshavethepowertopushpricedownmuchfurthereither.Eachtraderwillformtheirownviewonthis,butifIweretradingtheabovechart,Iwouldstillverymuchbeopentotheideaoftakingmorelongopportunitieson
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trendlinebreaks.
Let’sfastforwardoncemoreandlookatthenextweek’spriceactionontheweeklychart,colourcodedinorangethistime.
Whatareyourthoughtsonthelatestcandle?Wouldyoustillbebullishnow?
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Asreferredtointhechartabove,themarkethasjusttoldussomething,loudandclear.Thebullsareoutofthegamenow.Thereversalcandlewasjustaresultofthebearsstoppingtotakeabreathandnowtheyarebacksellingagain.Weneedtolistentothemarketwhenitgivesussignalslikethis.Thecasetobuynowisover,and
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weshouldlookelsewhereforotheropportunities.Whattradersshouldneverdoisignorethemarketwhenitisgivingthemaclearsignalthattheirdirectionalviewisincorrect.Themarketisspeakingtousconstantly-theabovechartisagoodexampleofitscreamingatthebullstogetoutoftheway.Unfortunatelyalotofthetimetradersareproneto
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makingthemistakeoftradingwhattheythinkandnotwhattheysee.
Butwhataboutourtrades?Surelybeingsoutterlywrongonourpredictionofthefuturedirectionofthemarketmusthavehitushardinourpockets?Wellwealreadyknowthatwearecarryingeithernolossorasmalllossonourattempttoenterlong
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thepreviousweek.Let’slookatthelastestweekonthefourhourchart(colourcodedorange):
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Wecanseeherethatbyzoomingdowntoalowertimeframeandwaitingforatrendlinebreakbeforetrading,wemanagedtoavoidtakinganylossesatall,becausewedidn’ttakeanytrades.
Let’sjustreflectforamomentonwhatwecanlearnfromtheaboveexample.Thatwetradedfortwoweeksand
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madenoprofits?No.Thekeytakeawayhereisthatweidentifiedapossibletrade,which,ifitwassuccessful,hadthepotentialtoreturnalotofpips.Toputthisincontext,intheaboveexamplethedistancethatthemarketfellfromthemostrecenthighstothereversalcandlewas730pips.Whatwemanagedtodowasgiveourselvestheopportunityto
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realisesubstantialprofitbutatvery,verylowrisk.Inthisparticularcase,therealisedlosseswereeitherverysmallorquitepossiblyzero.
Bydefinition,becausethesetradesthatwearetakingusingthisstrategytargethighreward,wedonotgetbigwinningtradeseveryday.Infact,enduringastringofsmalllossesorbreakeven
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tradesisabigpartofthetradingroutine.Sometimestradersaretooimpatientoremotionaltoendureaperiodoftimewhentheiraccountequityisflatliningordecliningslightly.Theyarestillintheframeofmindofa“normal”job,i.e.Ihavesatatthiscomputerfor9hours,andnowthemarketowesmemypay.Forthoseofuswhocanseepastthisandbealittlebit
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morepatient,themarketholdssignificantlymorepotential.
Thereisnothingbetterthangettinganicetightentryatthebottomofaweeklyswing,gettingtherisktakenoffthetablewiththestoplosssettobreakeven,andthenjustcheckingitmaybeonceadayforthenextmonth,orevenlonger,astheweekly
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signalplaysoutandtheprofitsteadilyaccumulates.Tome,thatisinfinitelymoreappealingthansittingatascreenfor18hoursaday,tryingtoscalpafewpipshereandthere.Perhapssomeofthereadersherewillagreewithme.
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ChapterThirteen
ThefinalpartofthePASTStrategyisthemostimportant.Ithasnocharts,noexamples,notechnicalanalysis.Itisaboutthedifferencebetweenfollowingastrategyandtrading.
ReadersmighthavenoticedthatthroughoutthisbookIhavebeenquitevaguewhen
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itcomestooutliningstrictcriteriathattellsuswhentogetinandoutofthemarket.Idon’tdictatetoyouwhatavalidcandlestickpatternlookslikeortellyouhowtodrawyourtrendlines.Idon’tspecifyhowmanypipstosetyourstopatorwhereyoushouldtakeyourprofits.Intruth,thePASTStrategycanbesummarisedinasinglesentence-lookforareversal
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onalongtimeframe,enteronatrendlinebreakonashortertimeframe,keepatightstopandrunthepositionsforaslongasyoucan.
Somereadersmighthavebeenslightlyannoyedatthislackofclarity,butitisdeliberate,andthebookiswritteninthiswayforverygoodreason.Weshouldrealisethatwearenaturally
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inclinedtogolookingforthesimplesetofrulesthatwecanjusttrytoapplywithouthavingtothinktoomuchaboutwhatwearedoing.Theproblemisthatthisapproachisflawed,andyouarefightinganuphillbattletoachievelastingsuccessasatraderifyouadoptit.HopefullyIcangosomewaynowtowardsexplainingwhy.
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Ifyouarelookingforsomethingthattellsyouexactcriteriaabouthowtogetintothemarketandwhentogetout,youarestillblindlyfollowingatradingstrategy.
Youhaveyettomakethejumptobecomingatrader.
Whyisitthatwhenpeoplereadaboutastrategyonaforum,orbuyonefromatradingsystemvendor,and
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theydecidetouseit-itrarelyeverseemstoworkoutforthem?Theygetaperiodofdrawdown,theylosefaith,theystarttotinker,itgetsworseandthentheygiveup.Theydismissthestrategyasunprofitableandthepersonwhodeviseditasanefariousscamartist.Theymoveontothenextforumthread,lookingforthenextsetofrulesthattheyaregoingtotry
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toadhereto.Andthecyclecontinues.Forsometradersthispatterncanlastaverylongtimeduringwhichtheymakelittleornoprogressinthemarkets.
Similarly,whyisitthatyouhavepeoplewhoareveryexperiencedinthemarkets,theyknowtheirtechnicalanalysisorfundamentalanalysisbackwards,butyet
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stillcan’tmanagetomakeaprofit?
ThroughoutthisbookIhavetriedtorepeatedlystresstheimportanceoftherelationshipbetweenriskandrewardinyourtrading.Propertradersaren’tpeoplewhoblindlyfollowtechnicalrulesorsystemstotradethemarkets.Theyareriskmanagerswhousetechnicalsortheir
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strategyrulesastheirtoolstodefineandcontrolriskandtargetreward.
InthePASTStrategyIhaveintroducedyoutoagoodframeworkoftechnicaltoolswithinwhichyoucancontrolyourriskandstretchoutyourreward.Butcandlesticksandtrendlineswon’tmakeyouprofitablebythemselves.Neitherwillmoving
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averages,stochasticsoranythingelse.Givingatechnicalsystemtosomeonewhodoesn’tunderstandtheroleofriskmanagementintradingisthesameastakingastrangeroffthestreet,givinghimorherahammer,sawandachiselandtellingthemtogoandknockupasetofstairs.Theyhavethecorrecttools,butunlesstheyknowwhattheyaredoingwith
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them,itissimplynotgoingtowork.
Thebesttraderisnottheonewhocanrecitethelast12monthsNonFarmPayrollfiguresorsitatascreenfor24hoursstraight.He’snottheonewhocandrawthemostbeautifultrendlinesorinventanewfancyindicator.Thebesttraderistheonewhoconsistently,dayin,dayout,
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controlshisriskinthemarketandtakesmaximumadvantageofthegoodopportunitieswhentheypresentthemselvestohim.
Thefirststeptosuccessfultradingistounderstandyourgoalsinthemarketandthentounderstandthetoolsyouintendtousetoachievethem.Itdoesn’treallymatterwhetherthecandlestick
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patternwasspot-onperfect,orthatthetrendlinewasdrawnatthewrongangle.Whatmattersisthatyouaretrading-ifyouaredoingthatwell,youwillseethegains,soonerorlater.
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ChapterFourteen
ThereareafewthoughtsthatI’dliketoleaveyouwithbeforeIwrapthisbookup.AsIhavesuggestedthroughout,thereisalotmoretotradingthanenteringwhenthiscrossesthat.Infact,ifIweretorankinorderofimportanceskillsthatIthinkpeoplewhowanttobesuccessfultradersshould
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develop,theorderwouldprobablybesomethinglikethis:
1.Anunderstandingoftheimportanceofriskandrewardintrading
2.Everythinginthischapter
3.Technicalanalysis(orfundamentalanalysis,sentimentanalysis,anythingelsereally)
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It’sfunnyhowifyouweretomeasuretheamountofmaterialavailabletonovicetradersintermsofcontent,theorderoftheabovelistwouldprobablybeinreverse.I’mprettysurethereisalessontobelearntintheresomewhere.
Expectations
No-onewantstotalkaboutrealisticexpectations.The
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retailtradingindustryisbuiltonsellingdreamstoinvestors.Realisticexpectationsdon’treallysellthatwell.
Whatdoyoureallyexpecttoachievefromyourtrading?Thinkaboutithonestlyforafewmoments.Wecanallsaywhatwewouldliketogetfromtrading,butwhatdoweexpecttoget?
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Whatreallyarethechancesofanyofusreadingatradingbookoveraweekendandthenturningathousandpoundsintotenmillionpoundsinayear.Notimpossible,obviously,butlet’sfaceit,itisunlikely.Andifwearegoingtodoit,isitreallygoingtohappenwithusspendingnomorethan15minutesadayinfrontofthecomputerinourpants?
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It’slikethelottery;thechanceisundeniablythere,butitisvery,verysmall.
Whatisarealisticexpectationthen?Withabitofworkandpatience,couldwelearnaskillthatwecanhavefortherestofourlives,thatwecanusetomakeasolidfew%returnonaverage-monthaftermonth,yearafteryear?Youbetitis.Absolutely
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possible.
Let’sstartbygrowingatradingaccountbyafew%monthonmonthconsistentlyforawhilefirst,thenwecanthinkabouttheyachts.It’samarathon,notasprint.
Losses
Everyonehateslosses.Theyhurt,theyreallydo.Thelastthinganyonewantstoseeisa
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stoplossgettingtriggered.It’slikealittlepieceofyoudies.NassimTalebreckonsthatalosshasanegativeimpactonusthatissignificantlygreaterthanthepositiveimpactwederivefromawinofanidenticalsize.Traderswillgotoallsortsoflengthstoavoidthepainoftakinglosses,oftenwithprettycatastrophicconsequences.Takeanyof
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thefamousroguetradingscandalsasanexample–thedislikeoflossesisnotjustconfinedtoretailtraders,thebigboysfeelittoo.
Thefirstthingtodoistoacceptthatlosseshappenintrading.Wehavealreadydiscussedthisinapreviouschapter.Ratherthanrunningawayfromthemortryingtoavoidthem,weshouldbe
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readyforthemwhentheycomeandsetaboutdealingwiththeminawaythatwillcontrolandmitigatetheirimpact.
Ipersonallyliketoputlossesinacontextthathelpsmelookatthemmoreobjectively.Iviewthemasasimplecostofbusiness.Ifyouopenedasweetshopyouwouldhavetopayrent,rates,
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salaries,stock,insurance,energy,etc.,beforeyoucansellyourgoodsandreturnaprofit.Anybusinessendeavourwillcomewithcosts,andpersonaltradingisnodifferent.
Shoportrading,itdoesn’tmatter-youkeepatrackofyourexpenses,andprovidedthatyouareresponsible,disciplinedandfollowyour
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strategy,youcanexpecttoreturnaprofitovertime.
Ontheflipsideofthis,asweetshopownerwhopayshiscleanerahundredgrandayear,turnsuptoworkdrunkandeatshalfhisstockisunlikelytoreturnmuchofaprofit.Thesameappliestoyourtradingbusiness.
EmotionalCapital
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Theideaofemotionalcapitaltiesinnicelywiththeparagraphonlossesabove.Astradersweallhaveanaccountwithourbrokerinwhichweholdourcapital.Weusethiscapitaltospeculateinthemarkets.Itislimited–ifitrunsout,wecan’ttrade.Buteachofusalsohasanaccountinourmindsinwhichweholdouremotionalcapital.Justaswe
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arealwaysinterestedinwhatouraccountbalanceiswithourbroker,weneedtoremainmindfulofthebalanceinouremotionalcapitalaccounttoo.
Ouremotionalcapitalisrunninglowifthesizeoftheloss,orindeedgain,thatwestandtorealiseinthemarketsislargeenoughtoaffectourdecision-making.Thisvariesforeveryoneandsotherecan
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benoclearone-size-fits-allrule.Sometradingguruswilladvise-“neverriskmorethan5%ofyouraccountonasingletrade”.Thisisplainlyrubbish,becauseitassumesthattheleveloflossorgain,eitherinpercentagetermsorindeedcashterms,hasthesameeffectoneveryone.
Forsomepeople,carryinga40%drawdownmightnot
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affectthematall,theyarestillthinkingclearlyandimplementingtheirtradingstrategywithdiscipline.Theyhavealargeemotionalcapitalaccount.Otherpeoplecouldbeanemotionalorindeedphysicalwreckatthethoughtatcarryingevena5%drawdown.Iftheyfoundthemselvesinsuchasituationtheycouldbeengaginginallsortsofdestructiveactivity-
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doublinglotsizes,martingale,sleeplessnights,runninglosingtrades,breakingrules,etc.Theyaregettingamargincallintheiremotionalcapitalaccount-whenthathappens,amargincallinthecashaccountoftenfollowssoonafter.
Thepersonwhoisemotionallycapableofdealingwithlargerriskisnot
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necessarilyabettertraderthanonewhopreferstokeeprisksmall.Theyjustwillhavedifferentstyles.Thekeyistobeabletorealisewhenwemightbebeginningtostrayoutofourcomfortzoneandhavethedisciplinetotaketheappropriatestepstobringourselvesbackonside.
Ifyoufeelthatyouaregettingangryoremotionalat
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themarket,youshouldsimplyloweryourpositionsize,lowertheleverage.Itcanalwaysbeincreasedagainatalaterstageifyouarefeelingmorecomfortable.What’sgreatabouttradingisthatitispossibletogetinandoutofthemarketatthedropofahat-it’snobigdeal.Orclosetheplatformandtakeabreakforafewdaysifyouneedto.Themarketwillstill
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betherenextweek,butyouraccountmightnot.Dowhateveryouneedtodotopreserveit.
What’sthebiggestobstaclestandingbetweenusandconsistentlyprofitabletrading?Thetrendlinewedrewthatwasslightlyoff?Thatthecandlestickpatternwasn’t“valid”?No,thebigdamagegetsdonewhenwe
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losecontrolofouremotionsandstarttotradeinarecklessanddestructiveway.Weneedtotakealltheprecautionswecantoensurewekeepouremotionsincheck.
Leverage
Youhaveprobablyreadabouthowleverageisadouble-edgedsword,increasesyourprofits,butalsoyourlosses,etc.,a
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milliontimes.IknowIhave.
Theuseofleveragedoesincreasethesizeofyourprofitsandthesizeofyourlosses.Inthatrespect,itisusuallypresentedasabenignforce,i.e.potentiallygoodandpotentiallybadinequalmeasure.HoweverI’djustliketodrawyourattentiontoacoupleofpointsthatarerarelydiscussed:
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Whenyouleverageyouraccountyouleverageyouremotionstoo.Theuseofbigleveragewillmagnifythosepotentiallydestructiveemotionsthatwetalkedaboutinthepreviousparagraphandweneedtobemindfulofthis.Ifyourequitycurveisjumpingaround,30%down,swingingto100%up,backto70%down,thechancesofyoulosingyourdiscipline
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somedayandblowingyouraccountareincreased,exponentially.Ifyouareusingsizeableleverageandputtingachunkofyouraccountontheline,watchhowyouarefeelinglikeahawk.Ifthepalmsaregettingsweatyandtheheartisbeatingfast,youareoverextendingyourself.Youarenottrading;(i.e.controllingrisk)youaregambling.And
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ifyouwanttogamble,Icanthinkofwaybetterplacestodoitthaninfrontofalaptopbyyourselfathome.Atleastgosomewherewhereyoucangetafewfreedrinksorsandwicheswhileyouloseyourmoney(yes,Iamtalkingaboutthecasino!).
ThesecondtopicthatIrarelyseeincludedindiscussionsaboutleverageisthatof
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transactioncosts.Theleveragemultipliesthesizeofthewinners,itmultipliesthesizeofthelosers,anditalsomultipliestheamountofmoneyyoupaytoyourbrokereverytimeyouenteratrade,thespread.Thisisoneofthereasonswhybrokersloveseeingtraderscomingtotradeat200:1leverage,itvastlyincreasestheircashflow.Thebrokersdon’t
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careifthetraderissuccessfulornot,theywillhaveanyriskwellhedged.Tradersrarelydothesumsonthis-Iwouldencourageyoutoworkitout-howmuchpermonthdoyouhavetomakejusttocoveraveragetransactioncosts?50:1leverageintheretailforexworldwouldoftenbeconsideredtobequiteresponsible,sowhatabout50:1leverage,20tradesper
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month,witha2pipspread–soundsreasonable?
Asimple,roughcalculationwouldbeasfollows:
Ifyouhavea$1,000accountandareleveraged50:1,youwillbecontrolling$50,000,($1,000*50=$50,000)or5minilots.Aminilotpipisusuallyworthabout$1,althoughthiscanchangedependingonthecurrency
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pairbeingtraded.
Ifyourspreadis2pipsandyoutrade20timespermonth,yourtotaltransactioncostswillbe2pips*20trades*5lots=$200.
$200,or20%ofyourcapital,willbespentjustontransactioncosts!Canyoureturn20%permonth,everymonth,andthenmakesomeprofitontopofthat?Now,
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thisfiguremightfluctuatebasedonavarietyofdifferentfactors,forinstanceifyouclosemostofyourtradesinprofit,youmightnotnoticethecost,butthegeneralpointstillstands-leveragedtransactioncostscanbeenormous.Weneedtobeawareofthem.
Tradingversusaconventionaljob
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I’mawarethatpartsofthisparagraphmightbeconstruedasconflictingwiththeprinciplesmentionedinthesweetshopexampleabove,butIthinkthisisimportantsoIamgoingtomentionitanyway.Peoplewhostarttradingafterworkingelsewhereinamoreconventionaljobwillusuallyhaveadifferentmindsetinrelationtowhatworkisand
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howitisappliedtotrading.Intheconventionalworkplace,moreeffortexpended,moretimespent,isgenerallyagoodthingandwecanreasonablyexpecttoberewardedforhardwork.
Thisisnottrueinthetradingsphere.Yes,workisrequiredtolearnhowtotrade,thatmuchistrue.Buttimespentinfrontofthescreenactually
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tradingdoesnotnecessarilypositivelycorrelatewithtradingprofits.IfanythingIwouldsuggestthattheoppositeistrue;themoretimeyouspendtrading,theworseyourresultstendtobe.Thisisdifficultforpeopletowraptheirheadsaroundsometimes;itgoesagainsteverythingwearetaughtaboutworking.
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Sometimesthemarketonaparticulardayorweekissimplynotmoving,orweareonthewrongsideofthemomentum,orwhatever,itcouldbeanything.Maybewearetiredorwehavesomethingelsegoingoninlifethatisdistractingusoraffectingourconcentration.Thesearethedaysthatweneedtostepback.Ourday’sworkissimplyhavingthe
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disciplinetorecognisethatwearenotonformandclosedownthescreen.Thiscanoftenbemuch,muchhardertodothanitistoputinalongdayinyourdayjob.Thedaysthatwespendtryingtoforcepipsoutofamarketthatisnotplayingballwithusarethedaysthatwewillrealisethebig,unnecessarylosses.Weneedtocontrolthisdownsiderisk.
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Patience
“Itneverwasmythinkingthatmadebigmoneyforme.Itwasalwaysmysitting.Gotthat?Mysittingtight!”
-JesseLivermore
Patienceisatoughone.Themarket,contrarytowhatmanypeoplethink,movesfarmoreslowlythanwewould
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likeitto.Thenaturalmovementofthemarketissplitbetweenshortburstsofmovementandthenlonger,oftenfrustrating,periodsofranges.
Partofthebattleistoknowingtostayoutofthemarketwhenitisnotperformingaswewant,andhavingthepatiencetostayoutuntilitis.Remember,the
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marketdoesnotexisttoprovideuswithentertainment.
However,thegoodthingisthatthemarketusuallyrewardspatienttraderswithbigmoves:
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RecordingandMeasuring
“Ifyoucan’tmeasureityouprobablycan’tmanageit-thingsyoumeasuretendtoimprove.”
-EdSeykota
IlostcountofthenumberoftimesIreadaboutthemeritsofkeepingadiaryorarecordofmytrades.Ialwaysthoughtthatitsoundedlikea
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usefulideabutIneverreallybotheredtodoit.Nowhowever,havingkepttradingrecords,thereisnothingthatIknowofintradingthatwillhavesuchapositiveimpactonyourperformanceinreturnforsuchlittleeffort.
Wemeasuresomuchinourday-to-daylives,itisinconceivablereallythatsomepeopledonotmeasure
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theirtradingperformance.AndbymeasureitIdon’tmeancheckingwhetheryourprofitandlossaccountispositiveornegative,Imeankeepingproperstatisticsandmonitoringthemregularly.
Ifyouaregoingonadiet,youweighyourselffirstandthenperiodicallythereafter-that’showyouknowifyouaremakingprogressornot.
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Athletesmeasureallsortsofdifferentthingsastheytrain,inanefforttoidentifysomethingthatcouldshaveanextraprecioussecondofftheirtime.Wemeasureourperformanceatschool,college,oruniversitybydoingexams.Theyareabenchmarkagainstwhichtomeasureprogress.
Ifwewanttomeasureand
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improveourtradingweneedtokeepgoodrecords.Thereareavarietyofservicesavailableonlinenowthatwilltakethedatageneratedfromyourtradingdirectlyfromyourbrokerandspitoutallsortsofstatisticsforyouautomatically.Ifyoudon’twanttolinkyouraccounttooneoftheseservicesforwhateverreason,youaregoingtohavetofireupyour
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excelspreadsheetandstartrecordingyourtrades.
Reviewthesestatisticsregularly.Iwouldrecommendatleastonceaweek.Whenthemarketisclosedontheweekendcanbeagoodtimetoreviewperformance.Attheveryleast,youshouldknowthesizeofyouraveragewinner,thesizeofyouraverageloser
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andyourpercentagetradesuccessrateoffbyheart.Ifyouhaveyourstatisticsinyourhead,yourbrainwillprocessthisinformationandimplementitintoyourtradingsubconsciously.Afterreviewingyourstatsoveraweekendyoumightnoticethatyouraveragelosingtradeisgettingalittlebiggerthanitusedtobe.Inresponseyouwillfindthatyouwill
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automaticallystarttobemorecarefulwithyourentries,tighterwithstops.Youwillbemakingallsortsofimprovementswithoutevenrealisingit.
PerseveranceandDetermination
"Allofold.Nothingelseever.Evertried.Everfailed.Nomatter.Tryagain.Failagain.Fail
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better."
-SamuelBeckett
Weallknowthestatisticthatisquotedeverywhere,that95%oftradersfail.Well,Ihaveseentheallegedfailureratequotedasbeingaslowasa90%,andashighas99%,soIsupposepickingafiguresomewherenearthemiddleislikelytobethefairest.
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Inanyevent,ifaccurate,afailurerateofanywherenorthof90%isaprettydauntingprospectfortheaspiringtrader.
Ihaveaproblemwiththisstatistic,onanumberofdifferentfronts.Iwouldliketoseeadefinitionoftheterm“trader”tostartwith.Issomeonewhothrows£100intoaspreadbettingaccount
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andlosesitonafew£1perpointForexbetsreallydeservingoftheterm“trader”?
Inaddition,inordertofailatsomething,youmustfirsttrytosucceedatit.Whathavethesepeopledonetoattempttoactuallysucceedattrading?I’dalsoliketoseewhatfailureisdefinedasbeing,andwhilewe’reatit,
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I’dliketoseewhatsuccessisdefinedastoo.
IfIpickupatennisracket,trytohitaball,miss,andputtheracketdownagain,haveIfailedattennis?HaveItriedtosucceedattennis?
Iamnotsayingthattradingiseasy;itcertainlyisnot.ButIdon’tthinkthatthefailurestatisticssoundaccurateeither.Ifyouaretodefinea
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traderassomeonewhohasactuallytakenthetimeandefforttoreallystudyandlearnaboutthemarkets;andifyouaretodefinesuccessasthemreturningaconsistentandsustainableprofitoveracertainperiodoftime,Ithinkthefailurerateisalotlowerthan95%.
Ontheotherhand,ifatraderissomeonewhohasread
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aboutfinancialmarketsontheinternetforaweekendandthenthrownsomesparecashintoabrokeraccount;andsuccessisdefinedasretiredsittingonayachtintheMedwithinayear,Iwouldn’targueifyousuggestedthefailureratewas100%.
Beinggoodatanythingworthbeinggoodattakestime,
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effortanddedication.Yougetoutwhatyouputin.Successinanythingrequiresdiscipline,motivation,passion.Ifyoudecidetotradethemarket,itwilltestyou,provokeyou,punishyou,rewardyou.
Ifyouarepreparedtoriskthetimeandeffortrequiredtolearnhowtotradethemarkets,thepotentialfor
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rewardislimitless.Everythinginlifeisatradeononeleveloranother.
Goodluckwithyourtrading.
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Remember,asamember(it’scompletelyFREE)ofForexUseful(http://forexuseful.com/),youwillbeabletodownloadandprintthe3strategiesinthisbookandyouwillalsohaveaccessto:
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Viaournewsletter,FREEweeklyupdatesonthePriceActionSwingTrading(PAST)StrategyandallotherstrategiesinthisbookFREELivemarketsessions(usuallyeveryMonday
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morning)
Aswellasaccesstotheproducts,updatesand
sessionsyouwillalsobeinformedoffuturebook
releasesincludinglaunchanddiscountoffers,before
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anyoneelse!
Nextup,TradingWithConfluence–TheFoundationsby"Forex"John...
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TradingWithConfluence–
TheFoundations
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TheFoundations
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Introduction
Asatraderwithyearsofexperience,Iknowthattotradeconsistently365daysoftheyear,throughthehighsandlows,theupsanddowns,andthesidewaysmarkets,youneedasetofsoundtradingfoundations.
TradingWithConfluence(TWC)isanunderutilised
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tradingapproach.Many‘athome’traderssearchfortheHolyGrail,thesystemthatpromisesmillionsortheonethat“evenatwelveyearoldcantradeonceaday”!Most(ifnotall)ofyouhavebeenthere.
Realisticallythough,asIhavealreadysaid,allyoureallyneedisasetofsoundtradingfoundationstoallowyouto
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formarealtimeviewofthemarketandatechnicaloutlook(Tradingplan).Youdon’tneedanythingfancy,whenyoubringyourfoundationstogetherandTradeWithConfluenceyouwillhaveasolidplanthatwillenableyoutoprofitinallmarketconditions.
Myfoundationsaresplitinto3categories,Analysis(Pre-
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Entry),Trigger(Entry)andAwareness.
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The‘Analysis’foundationsallowmetoformarealtimeviewofthemarket.Whencombinedwiththe‘Trigger’and‘Awareness’foundationsIamabletoformaTradingplanANDatechnicaloutlookofthemarket.ThisTradingplanisthecoreofmytrading,myTWCStrategyandmyTWCDailyAnalysisreports,bothofwhichareincludedin
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theTradingWithConfluence(TWC)DailyAnalysisserviceavailableexclusivelyatForexUseful.
MyfoundationshavestoodthetestoftimeandtheyareusedinsomeformbyALLmajortradinginstitutions.InthisbookIaimtoteachyoumyfoundationsandhowIusethemtoTradeWithConfluenceconsistentlyand
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profitablyinallmarketconditions.
Mypersonalstrikeratetargetis80%+andIalwayslookforaRisk:Rewardofatleast1:1orhigheronallmytrades.
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Confluence
Confluence:Agathering,flowing,ormeetingtogetheratonejunctureorpoint
Beforewegoanyfurther,pleasetakeamomenttoreadthischapterinfull.
UntilyoureallyKNOWwhatTradingWithConfluenceisallabout,youwon’tbeabletoutiliseitinyoureveryday
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trading.
Weallknowforafactthatthemarketsaremadeupofavarietyofstrategiesthatallowatradertoformanopinionandinstigateamarketorder.Wealsoknowthatthesestrategiesofferthatspecifictraderaninformeddecision.Onethingwealllikeismakinganinformeddecision,whateverthe
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circumstanceinlife!
Likethefoundationsofabuilding,thefoundationsofamarketwillallowyoutogivereasonastowhythemarketdoescertainthingsandmakescertainmovements.Amuchunderutilisedapproachisusingthesefoundationsinconfluence.
HaveyoueverseenamarketcutthroughSupportor
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Resistancelevelslikebutter?HaveyoueverseenaChartpatterngetbrokenlikeitwasnoteventhere?NowcoupletheChartpatternwithSupportandResistance,Trendlines,Dailypivots,etc.Doweseeanythingdifferent?YESwedo,TradingWithConfluenceisallaboutbringingfoundationstogether,allowingustomakeaSTRONGERmore
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informeddecisionofwhereamarketislikelytomove.
Thinkofthefinancialmarketsasa200ftbuilding.Whatgoesintokeepingthisbuildingfromblowingoverinhighwinds?Onaverybasiclevel,thestructureofthebuildingstartswithdrawings,followedbythemathematicsforweightandloadbearing,thefoundations,
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theinternalstructureandsupports,requiredmaterials,etc.,etc.
Tobecomeaconsistenttraderyouneedtothinkinasimilarway,youneedtoconsiderthebefore,thenowandtheafter.
TradingWithConfluenceisabouttakingsoundtradingfoundationsandbringingthemalltogethertocreateaTradingplanwithmuch
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higherprobabilitytradingopportunities.
Lookingattheseaspectsindividuallynevergivesyouthe‘full’marketview.Bringthemtogether,and,asyouwillsee,youstarttoseetherealreasonbehindmarketmovements.
Donotgetcaughtupinlookingfora‘perfectsetup’butdobeawarethatgood
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moves(profitableones)willalmostalwaysoccurwhentherearemultipletradingfoundationsworkinginconfluenceacrossmultipletimeframes.
Ihopeyouenjoythebook.
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Foundations-Introduction
Asmentionedabovemyfoundationsaresplitinto3categories:
Analysis(Pre-Entry),Trigger(Entry)andAwareness
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My‘Analysis’consistsofthefollowingfoundationsandmainlyassistsmeinformingarealtimeviewofthemarket:
1–Support&Resistance,
2–FibonacciRetracements,
3–TrendLines,
4–DailyPivots,
5–BigRoundNumbersand
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6–ATR
My‘Entry’consistsofthefollowingfoundationsandmainlyassistsmeinformingaTradingplan(atechnicaloutlookofthemarket).
7–ChartPatterns,
8–CandlestickPatterns,
9–Stochastics,
10–BollingerBandsand
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11–Divergence
‘Awareness’assistsinbothstagesasIincorporate:
12–Newsand
13–MultipleTimeFrames(MTFs)
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Foundations-Overview
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TheresultingTRADINGPLANisthecoreofmytrading,myTWCStrategyandmyTWCDailyAnalysisreports.
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Foundations–Analysis(Pre-Entry)
The‘Analysis’consistsofthefollowingfoundations:
1–Support&Resistance,
2–FibonacciRetracements,
3–TrendLines,
4–DailyPivots,
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5–BigRoundNumbersand
6–ATR
Thesefoundationsmainlyassistmeinformingarealtimeviewofthemarket.Iwillworkthroughthesefoundationsbybuildingonanexamplechart,onewhereIcreatetheidealTradingWithConfluenceenvironment,simplytoaidthe‘teaching’process.
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LET’SSTARTWITHTHE‘NAKED’CHART
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1–Support&ResistanceIsometimessimplyrefertothisasSRandthisiswhereitallstarts.Fromthemorninganalysistothetradeentry,everythingrevolvesaroundSupport&Resistance.Thisiswhatthebigbanksandinstitutionsrefertoas‘value’.Support&Resistanceiswhereaspecificmarketis
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givenavalueandarisk(longorshort).Dependingonwherethisvalueisplaced,willbewhereweoftenseeSupport&Resistancelevelsandzones.
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Herewecanseethatthe1.4000levelwasResistance(nolessthan5times)onthewayupandhas,sincebroken,providedSupport.Thisisoftenthecase,asthesayinggoes,previousResistanceoftenbecomesSupportandviceversa.
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2–FibonacciRetracementsFibonacciretracementsformpartofthe‘marketcycle’.Fromthemonthlydowntothe1minutetimeframeyouwillfindFibonacciretracementseverywhere.AllFibonacciretracementsfrom23.6%,38.2%,50%,61.8%arevalidlevelsthatIusetoderiveareasofpotential
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Support&Resistance.
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Confluence–Herewecanseethatthe50%Fibonacciretracementlevelat1.3999tiesinwiththeSupport&Resistancelevelat1.4000.
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3–TrendLinesIuseTrendlinesacrossMultipleTimeFramestogenerateanopiniononmarketdirection,bothimmediateandlongterm.IusethemtoonceagainidentifyareasofSupport&Resistance,wherethemarketmayreverse.
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Confluence–HerewecanseethattheTrendlineislookingatprovidingsomeformofsupportanywherefromthearea1.3985to1.4020.Dependingontimingitcouldtieinwiththe50%Fibonacciretracementlevelat1.3999andtheSupport&Resistancelevelat1.4000.
Lookingatthisfroma‘confluence’stateofmind,
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wecanalreadyseeSUPPORT
LEVELSworkintandemwithatrendline.TradingWithConfluenceanyone?
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4–DailyPivotsTheDailypivot(PP)willconsistentlyofferalevelofinterestforme.Idonotonlyuseittojudgecurrentmarketsentimentanddirection,buttoalsoidentifypotential‘bounce’areas.IalsoobservetheassociatedDailyPivotSupportandResistancelevels1,2and3.
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Confluence–HerewecanseethattheDailyPivotSupport1(S1)levelat1.3997tiesinwiththe50%Fibonacciretracementlevelat1.3999andtheSupport&Resistancelevelat1.4000.Itcouldalso,dependingontiming,tieinwithourTrendline.
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5–BigRoundNumbersMarketswilloften‘respect’BigRoundNumbers(BRNs),e.g.1.6700,0.9000,etc.Oftenthemorezero’stheyhavethemorerespecttheycommand.Thus0.9000willcommandmorerespectthan1.2300.
TheseBigRoundNumbers
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oftenprovidesomeformofSupport&Resistance.
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Confluence–BycoincidencetheBigRoundNumber(BRN)onourcharttiesinwiththeDailyPivotSupport1(S1)levelat1.3997,the50%Fibonacciretracementlevelat1.3999andtheSupport&Resistancelevelat1.4000.Itcouldalso,dependingontiming,tieinwithourTrendline.
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6–ATRATRstandsforAverageTrueRangeanditisamuchunderutilisedfoundationthatmanypeoplefailtoacknowledge.
Let’ssaysomeonetoldyouthatthereisagreatpre-tradingwaytoidentifyanexpectedmarketmovementinPIPs,youwouldthinkthey
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arecrazy!Well,withATRyougetexactlythat.Ipersonallyusethepast10daystradingperiodandtaketheaveragemovementofthemarketduringthisnumberofdays.ThisgivesmeafairindicationofhowfarIcanexpectthemarkettomovetoday.
Whenusedinconfluencewithotherfoundationsthe
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ATRcanreallyhelpmeidentifykeyreversalsinthemarkets(whereitmaybecomeexhausted).
Seeadditionalexampleattheendofthisbook.
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Analysis(Pre-Entry)FoundationsSummary
Wejustcoveredthefollowingfoundations:
1–Support&Resistance,
2–FibonacciRetracements,
3–TrendLines,
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4–DailyPivots,
5–BigRoundNumbersand
6–ATR
AsyoucanseebystartingwithSupport&Resistanceandworkingourwaythroughtheotherfoundationsweareabletoquicklyandeffectivelyformarealtimeviewofthismarket.Thisallowsus,byusing
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confluence,toidentifypotentialareasofSupport&Resistance(zones)forpotentialtradeentries.
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Foundations–Trigger(Entry)
The‘Trigger’consistsofthefollowingfoundations:
7–ChartPatterns,
8–CandlestickPatterns,
9–Stochastics,
10–BollingerBandsand
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11–Divergence
ThesefoundationsmainlyassistmeinformingaTradingplan(atechnicaloutlookofthemarket).
OnceagainIwillworkthroughthesefoundationsbybuildingontheexamplechartfrombefore,wherewehavecreatedtheidealTradingWithConfluenceenvironment,simplytoaid
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the‘teaching’process.
Pricehasnowbeenrolledforwardsothatwecanobservethe‘Trigger’foundationsinaction.
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7–ChartPatternsA‘Doubletop’anda‘Doublebottom’aretheprimarychartpatternsIfocuson.Bothprovideacluetopotentialmarketrejectionareas.Theyaresimpletospotandtheyareleadingindicators,soprovideastrongweightingforbothanalysisandpotentialtradeentries.
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Herewecanseethe‘Doublebottom’Chartpattern.
Note:Ifyoudohaveagoodknowledgeoffurtherchartpatterns,thenpleaseincludetheseintoyourowntrading,astheywillcertainlynothinderyou.
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8–CandlestickPatternsDespitetherebeinganumberofcandlestickpatterns,IhaverefinedmyknowledgetofocusonaHammer(bullishmove),andaShootingstar(bearishmove)askeysignalsformarketdirection.Candlesticksareusedforbothimmediatedirectionandforpotentialentries.Longer
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timeframesoftenprovidemorereliablesignals.
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Herewecanseethe‘Hammer’Candlestickpattern.
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9–StochasticsTherearemanyindicatorsouttherebutmypersonalpreference,afterusingthemforover10years,istouseStochasticsandBollingerBands(seethenextsection).However,anythatsuitYOUasatradercanbeusedsolongasyoulooktousetheminconfluencewithotherfoundations.
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IuseStochastics(andBollingerBands)todeterminepotentialreversalareasinthemarket.Stochastics(andBollingerBands)weredevelopedtoidentifypivotpointsinthemarket,aswellasareasforpotentialexpansion.Theyofferaquickvisualofwhatthemarkethasbeenandiscurrentlydoing.Forbothanalysisandlivetrading,for
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me,thesearecrucialtools.
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HerewecanseetheStochasticin‘Oversold’territoryindicatingapotentialreversalareainthemarket.
IusetheStochasticsettings(14,5,2)andconsiderOversoldbeinglessthan20andOverboughtasgreaterthan80.
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10–BollingerBandsAsmentionedabove,BollingerBandsistheotherindicatorIusetodeterminepotentialreversalareasinthemarket,byobservingpriceinrelationtotheUpper/Lowerbands.
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HerewecanseetheLowerBollingerbandhasbeenpiercedindicatingapotentialreversalareainthemarket.
IusetheBollingerBandsettings(18,2).
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11–DivergenceThelastfoundationIconsiderisdivergence.Divergenceprovidesanindicationthatpriceandanindicator(IuseStochasticsastheyarealreadyonmychart)areoutofsyncthusthereispotentialforacorrectioninthemarket.
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Herewecanseeanexampleof“hiddenbullishdivergence”.
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Trigger(Entry)FoundationsSummary
Wejustcoveredthefollowingfoundations:
7–ChartPatterns,
8–CandlestickPatterns,
9–Stochastics,
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10–BollingerBandsand
11–Divergence
Beingawareofandapplyingthesefoundationsinconfluencemeans:
Wecanformatechnicaloutlookofthemarket,Anticipatepotentialentries
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andVerifytheminreal-timeasandwhenthey‘trigger’
AswehavecreatedtheidealTradingWithConfluenceenvironment,simplytoaidthe‘teaching’process,herewecanseeallthe‘Trigger’foundationscomingtogether.
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Foundations-Awareness
‘Awareness’assistsinbothstagesasIincorporate:
12–Newsand
13–MultipleTimeFrames(MTFs)
Intomyplan.
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12–NewsJustviewNFP(NonFarmemploymentfigures)onthefirstFridayofeverymonthandyouwillseewhyNEWSissomethingwhichshouldalwaysbeconsidered.HerewecanseeSupport&Resistancehavingnomeaningduringthisnewsannouncement(a100PIPmove).Pleasealsonotethat
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theBigRoundNumberwas‘ignored’bythemarkettoo,notimetoTradeWithConfluence!
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MypersonalopinionistoavoidtradingaroundhighimpactNEWSareas(atleasthalfanhoureitherside).Thatsaid,IdouseNEWStoprepareforpotentialmomentumthatitcanbringtothemarket.
IalwayscommentonNewsinmyTradingplanandincludereferencetoitintheTWCDailyAnalysisreport.
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13–MultipleTime-Frames(MTFs)TradingWithConfluencewouldbeincompletewithoutincludingMTFanalysis.Asimpleglanceacrossmultipletimeframes(Iuse3)offersacompletelydifferent,indepthmarketprofile.
Thinkofasingletimeframelikea1mpcameraorsimply
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anoldstylewebcam.Picturesarepixelatedwithlittlecolourandsharpness.Nowaddinothertimeframes(thelatestdigitalDLR20mpcamera)andweseethingswecouldn’tdreamofseeingacrossthatsingletimeframe.Couplemarketfoundationsacrossmultipletimeframesandwegethighprobabilitytrades,timeaftertime.
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IpayconsiderationtothefollowingfoundationsontheDaily,4Hourand1
Hourtimeframesasindicated:
1–Support&Resistance(ALL)
2–FibonacciRetracements(ALL)
3–TrendLines(ALL)
4–DailyPivots(1hour)
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5–BigRoundNumbers(1hour)
6–ATR(1hour)
7–ChartPatterns(ALL)
8–CandlestickPatterns(ALL)
9–Stochastics(ALL)
10–BollingerBands(ALL)
11–Divergence(ALL)
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Lookingatthesefoundationsindividuallyoranytimeframeindividuallynevergivesyouthe‘full’marketview.But,bringthemtogether,and,asyouwillsee,youstarttoseetherealreasonbehindmarketmovements.
Remember:Donotgetcaughtupinlookingfora‘perfectsetup’butdobeawarethatgoodmoves
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(profitableones)willalmostalwaysoccurwhentherearemultipletradingfoundationsworkinginconfluenceacrossmultipletimeframes.
IoftencommentonMTFsinmyTradingplanandincludereferencetothemintheTWCDailyAnalysisreport.
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ItAllCameTogether
Obviously,asmentionedaboveIcreatedtheidealTradingWithConfluenceenvironment,simplytoaidthe‘teaching’process.Thisishowitallcametogether.
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Seehowweusedconfluence.Our‘Analysis’includedtheconfluenceofourSupport&Resistance,FibonacciRetracement,TrendLine,DailyPivotandBigRoundNumberfoundations.Our‘Entry’includedtheconfluenceofourChartPattern,CandlestickPattern,Stochastic,BollingerBandandDivergencefoundations.
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Ofcourseintherealworldwewouldalsohavepaidattentiontoour‘Awareness’foundations,NewsandMultipleTimeFrames(MTFs).
Note:OntradeslikethismytypicalStoplossisabout10–20PIPsandmytypicalTargetis20–30PIPs,aimingforausual1:1.5Risk:Rewardtradeprofile.
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AdditionalExample
Inthisexampleweseeadifferentkindofreversalandadifferentsetoffoundationsmakingupourconfluence.
Our‘Analysis’thistimeincludestheconfluenceofourDailyPivot(atS2(0.8905)),BigRoundNumber(at0.8900)andATR(extension)(at0.8902)
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foundations.
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Our'Entry'thistimeincludestheconfluenceofourCandlestickPattern,Stochastic,BollingerBandandDivergencefoundations.
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And,hereishowitallcametogether.
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Onceagain,Iwillmentionthatintherealworldwewouldalsohavepaidattentiontoour‘Awareness’foundations,NewsandMultipleTimeFrames(MTFs).
Note:Also,withtradeslikethis,again,mytypicalStoplossisabout10–20
PIPsandmytypicalTargetis
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20–30PIPs,aimingforausual1:1.5Risk:Rewardtradeprofile.
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Remember,asamember(it’scompletelyFREE)ofForex
Useful(http://forexuseful.com/),youwillbeabletodownloadandprintthe3strategiesinthisbookandyouwillalso
haveaccessto:
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Viaournewsletter,FREEweeklyupdatesontheTradingWithConfluenceStrategyandallotherstrategiesin
thisbookFREELive
marketsessions(usuallyevery
Mondaymorning)
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Aswellasaccesstotheproducts,updatesand
sessionsyouwillalsobeinformedoffuturebook
releasesincludinglaunchanddiscountoffers,beforeanyoneelse!
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TounderstandandimplementthestrategiesdefinedinthisbookobviouslyrequiresatleastsomebasicknowledgeofForexandCurrency
Trading.ThoseneworevenrelativelynewtotradingmayfindmybookForexFor
Beginners–AnIllustratedIntroductionToCurrency
Tradingofinterest.
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ThoseofyouconsideringtradingBinaryOptionsyoumayalsofindmyotherbook
BinaryOptions–AStrategyGuaranteedToBeatTheBrokersIn15MinutesFlat,ofinterest.
Ireallyhopeyouenjoythisbookandifyoudothenpleasedotakethetimetoleaveareview,ittakeslessthanaminuteandyour
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feedbackispersonallyappreciatedbyme.
JonMcFarlane
ForexUseful
(http://forexuseful.com/)
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TableofContents
AboutThe3LittlePigsTradingStrategyThePriceActionSwingTrading(PAST)StrategyTradingWithConfluence–TheFoundations
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