Methodology

Date: May 2010

Development of day trading system, trade duration hours.

European Open false move  GBP/USD…………………First trade of the day.

Between 7:45 and 9:30 am GMT, cable often moves in one direction and then reverses until just before the US session opens.

The setup, price moves up (for this example) during the asian session, then around 6:00 am GMT the move accelerates.

15 min chart ATR (14) starts heading upward, ie. starts at 9 pts per bar and extends toward 20 pts per bar.

Entry occurs on the 5 min chart when / if  the currency pair shows signs of reversal, ie. shooting star, 2 bar reversal, outside bar, piercing pattern, tweazer top.

Often the reversal occurs near 8 am GMT, and at level of resistance.

Strength of idea is confirmed on the hourly charts, via a reversal pattern ie. shooting star, 2 bar reversal, outside bar, piercing pattern, tweazer top.

Stops place above the swing high.

Profit targets calculated by average daily range targets, with a minimum 1:2 risk, reward ratio.

Stops move in direction of trade at swing points on 5 min. chart.

Trades closed if only just in profit or loss, 10 minutes before red flag economic announcement.

European Session Trend Trade……………………….Second trade of the day.

After a few hours of the european session a trend usually occurs.

The setup, 5 min chart, 64 SMA, Bollinger bands 27,2.0 deviation. Standard daily pivot points ( Daily pivots are calculated from previous day’s high, low, close which ends 21pm GMT.) and recent swing fibs.

Direction of SMA determines direction, in this example down.

Wait for Cable to rally, back toward SMA while still pointing down, price can cross over as long as slope is down.

Entry look for candlestick reversal on 5 min chart, at resistance, typically a fib, TL or mid /  upper Bollinger band, always looking for confluence of two or more levels.

Hourly chart candlestick patterns can not be conflicting with idea.

Time scale of retracement needs to be 1.5 to 2hrs.

Stop at recent swing high or previous swing high on 5 min chart.

Profit targets, minimum of 1:2 risk reward, using pivot points, S&R as targets, within Average daily range calculated over 20 days.

Trade Management,  if trade moves in favour 20 + pts. move stop to latest swing high on 5 min chart.  Close trade if any major economic announcements are due within next 10 mins, unless 40 + pts in the money.

Close trade when in profit of greater than 1:1.5 risk reward, if candle stick patterns show signs of reversal at key support levels on any time frame.

When trade has move 30 + pts in the money, never let trade turn into a loss.

If two losses occur during the day, stop trading.

If first trade wins greater than 1:3 risk reward, don’t push it, unless perfect setup.

Reduce risk when trading badly, increase risk only for perfect setup, Standard risk 1% per trade.

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Date: May 2009.

Development of medium term system, trade duration days.

The method behind all the trades recorded in this blog has been developed over the past 3 years, and has evolved from my first teachings from a trader called Wayne Jackson or Jacko, whom I spent 1 year trading under his mentor program.

I have then altered and added simple ideas that suit my own style of trading. In most cases I needed to make descions more systematically than intuatively as Jacko does. In order to stop second guessing myself.

The development of the way I trade is on going, with regular testing and paper trading of various ideas, most of which will be recorded in this blog.

The method is in 6 parts in order of operation as follows:

1.  TRADE DIRECTION: Is based on 4 different time frames (Daily, 240min,60min,15min) all with a 12 EMA weighted to the close plotted on the charts. If price is above the EMA’s only buy, and if below only sell.  Ideally price is above the upward pointing EMA in the case of buying on all time frames. In which case I will refer to 4 greens lights equalling a strong trend. While 4 is ideal 3 green lights are acceptable. The longer the time frame the more influence.

Other considerations to direction are based on market sentiment and thoughts from Elliot Wave International Short Term Update. EWI’s opinion on trade direction is only used when the market is ranging and moving above and below the EMA’s daily and I’m flipping from long to short. This provides an important independent opinion, when in doubt.

2. STOP LEVEL: The level at which the trade idea is proven wrong. Placed above/below a significant technical level. For instance it may be the high/low of the day/week/month. It could be 10-20 pts above a ascending/descending Trend Line (TL)

3. RISK LEVEL: The percentage amount to be risked per trade, calculated from stop level to entry level. Always keeping in mind slippage, depending on the market being traded. Actual % is determined by the amount of profit in the account, not including open trades, only money in the bank can be risked.

4. MOMENTUM LEVEL: Relative strength is monitored on all time frames starting with Monthly,Weekly,Daily, 240m,60m,15m.  Trades are not entered if the market is oversold/overbought on the higher time frames, and divergence is shown between price and RSI.

Momentum easing warns of change.

5. PROFIT LEVEL: The price to get out of a trade is by far the most important aspect in any trade. Testing is on going in this area. Every trade situation is different, and you never know how far or for how long the market will move.

The basic principle is to use stop loss orders to lock in profit. When a trade moves into profit by 25% of the ATR(20) {average true range over 20days), stop is moved to break even +1 to +10 pts.

The idea is to never let a winner become a loser.

After the trade has moved 50% ATR(20) a trailing stop is used calculated as 50% ATR(20). Trades are often closed at support/resistance levels, depending on momentum, price action, and most importantly screen time. (ie. you can’t watch the markets 24/7).

On the rare occasions when the entry is timed well and the market moves big time in the desired direction, the trailing stop tracks 10-20 pts above/below the Daily chart 50 EMA, usually for longer term trades (weeks/months) ie. equities.

6. ENTRY LEVEL: Breaks of trend lines (TL) are used. TL’s are drawn starting from the right hand side of the chart, moving left into previous history, always selecting the steepest point that qualifies.

For a point on the chart to qualify as a start or end point, in the case of a ascending TL the point must have at minimum 2 bars with higher lows, on each side. (tolerance of 1-2pts). The more bars on each side the more significant the point. The further back in time the TL extends the more significant the TL. 60m time frame is the minimum to be used.

At no point along the TL is price allowed to cross the line. So the TL is always at the extreme of the most recent price action.

Trade is entered when a 15m candle closes on the opposite side of the TL.

A trade is not taken if the RSI is overbought/oversold on the 240m time frame or higher. Or divergence is shown on the shorter time frames.