MARKET MODEL – a general model of price behavior. There are three types of price action:
- Price follows the main trend – day after day the price is higher (or lower). It usually lasts 2-5 days (2-5 candles of the same color) without any significant retracement. I call it ‘trend impulse’.
- Sometimes price has a break in its rally for a couple of days. It moves inside a narrow range (about 1 % of its value) from boarder to boarder. I call it ‘small range’.
- From time to time, after several cycles of trend impulses and small ranges, there is a grater retracement. This retracement usually takes off 4-5 % of the price and forms a wide range that last a couple of weeks or even months. I call it ‘big range’.
Eventually big range ends, price begins a new rally towards the previous or opposite direction, and all the game begins from the very beginning.
SYSTEM DESCRIPTION:
FIRST: I look for the market that behaves as described. I use weekly and daily charts. If a market doesn’t behave my way, I do not use it for trading! REMEMBER! – It’s not the point to build a trading system that works good on any market. The point is to find the market on which you can earn money!!!
Now I trade EUR/USD only, but USD/CHF is good as well.
SECOND: I identify trading conditions – what type of price action we are currently in. I use weekly and daily charts, too, but look at them from closer perspective.
Some experience, ADX(13), MACD(8,21,5) and OsMA(12,26,9) can be helpful in this point.
THIRD: I adjust my trading method to the trading conditions.
- In trend impulse I am in the game towards the trend direction. If I’m not, I look for any small retracement to enter. I use 15m charts, RSI(5) and/or Bulls/Bears Power(6). No SL or TP here! I get out when the impulse is coming to an end.
- In small range I trade from boarder to boarder, in both directions. I use 30m charts. RSI(5) and Bulls/Bears to get in, RSI(5) or TP close to the opposite range boarder to get out. No SL or TP towards the main trend; SL and TP when trading against it.
- In big range I also trade from boarder to boarder. To get in and out I use:
- Daily charts with RSI(5)
- 240m charts with MACD(8,21,5) - to confirm the reversal. Divergences of price and MACD or OsMA may also occur useful
- 30m charts – to have a close watch on price action, especially in the boarder neighborhood.
I use no SL in big range, even when trading against the main trend. I use a hedging order instead – how it works I’ll describe sometime in future.