Hello FF,
Its been about half a decade since I first dropped in here and have never looked back since. Met some wonderful people all along and progressed leaps and bounds with my trading education.
Here's some of it right back:
A bit about me and my style
I am 23 years old and downloaded my first demo mt4 at 18. Since my time here at FF, I have gone through many different trading systems, some of which are still active today and kicking along as they should. The real breakthrough came about when I dropped by the James16 thread and the rest is really memorable history.
For quite some time I wouldn't consider myself a true trader if I wasn't looking at my charts 6 hours a day with at least 10-15 trades per day. It was not until a couple of years that I realized I wasn't meant to be a trader on the m5.
I trade the daily the 4H and the 1H TF. I don't need 10 hours a day in front of charts anymore. In fact 2-4 hours is all I need. I am no longer fighting the "noise" of news spikes and short term order flow. I am no longer exposing my capital to 10 trades a day. I have on my watch list as many pairs as my broker offers. Around here you will find charts ranging from majors to the most exotic pairs. Well price is price and it doesn't change its course of action in exotic markets and for that matter even in the non-FX markets.It is not uncommon for me to be watching 50+ pairs at any given time and yeah I still need a handful of hours to take/manage trades.
I primarily trade Support and Resistance as taught at the James16 group. However I only use the knowledge in an indirect way in validating and managing trades. My "system" is different to the conventional james16 stuff to an extent yet its still a pure modification of the material itself through ideas and research work of the very senior members at the group and at Forex Factory forums in general.
The Basics of the method
Foreword
By putting the material contained in this post I have assumed that my audience has had at least some kind of exposure to the James16 group either at the public thread at forex factory or at the private forum. While this system is not about a direct application of the James16 material it is primarily a modification of it with the core still very much intact and in its original form. This method will be best assimilated by someone who has a good idea of how we look at our charts at the James16group.
Identification of swing points
These are defined, in plain and simple terms as points in the market where price took a U turn, either for the longer term (reversal) or for an elongated correction/pull back.
These are not difficult to spot on the chart at all. Here's a chart to get you going...
Simple enough?
Introduction to the fake out
We know there are two types of traders participating in these markets. The novice trader that is under capitalized and is pretty naive when it comes to trading knowledge. And then there are the real big pros, the hedge funds, the banks and other institutions who know their stuff and have really big accounts. These 'cool' traders however suffer from a major problem that stems from the size of their account. The problem of liquidity. The FX markets are amongst the most liquid markets in the world yet there still is a problem when a hedge fund wants to sell 10,000,000 units of EUR/USD at resistance where obviously others are willing to short as well. You see why? How many traders do you think want to long in a market that is heading towards resistance? This poses a serious problem and these guys will then take some measures to get rid of this problem. These are smart people BTW. They break their position sizes into smaller lots and execute it at closely bound price levels instead of clicking a 10,000,000 position size at a single price level.They also artificially create buy side liquidity in the market by targeting the novice traders.
Small positions selling into support and buying into resistance, create the "buzz". Or just simply pulling off all orders leaving a vacuum for retail traders to push price through. Enough manipulation to lure traders into thinking price is headed for a break of support/resistance. The breakout traders start jumping in. At resistance for instance, traders short in the market who most likely will have their stops above resistance or below support (the pros know it all!) start to freak out and their stops start getting hit creating more buy side liquidity (a stop loss on a short order is actually a long). By creating an artificial scenario in the market the pro traders have managed to, like a sheep dog, get the herd where they want them to be.
They can now pull out their long positions and start dumping their huge short orders on traders willing to now buy into a breakout that is going to be a fake one. Now guess what? All those traders that jumped in long will start hitting their stop losses because the big orders are propelling price south and which creates more selling in the market to take price down (long traders will close their trades by selling their positions), but the pros are already in and any selling pressure now is just adding cash to their wallets. Some smart folks and james16 are probably looking at pin bar showing this very information and are short too WITH THE BIG BOYS. DO you now see how the 95% of losing traders are filling up the pockets of the remaining 5%? The naive trader lost when he was short at resistance. He also lost when he thought he could catch a smooth break out.
These pros have nothing against retail traders. Its like a huge ocean where survival for the big fish means consuming smaller fish. Its a zero sum game after all.
So what does a fake out look like on a chart?
At a strong area of support or resistance you'll often see price moving sharply to notify a breakout and either on the same bar or on the next few bars will sharply pull back into the swing point. It will either leave behind a wick or a few dead bars (low range indecision bars) showing a strong move up (like you would see in a break out) followed by a complete reversal back into res/supp.
What I said above is good knowledge for someone really interested in going behind the backdrop to take a sneak peak of "behind the scenes" but its perfectly ok to be comfy in an audience seat ready and tuned in for the action as and when it happens.
Enough of the details of the chemical composition of bread and butter...let's get down to earning some.
The system explained
How do you convert this market knowledge into a consistent solid trading method:
You simply wait for price to approach a major swing point. A point in the market you know a bunch of traders will have their eyes on. They may be anticipating different things though hence the "market imperfection" and that is what gives you the edge.
For a short setup price must make a move higher than the highest high in that period of resistance (I call it the HHR - short for Highest High of Resistance) and fail to close above resistance, preferably on the same bar i.e leaving behind a "wick".
Similarly for Long I am looking for a move below the LLS (Lowest Low of Support) that fails to sustain itself and closes back above leaving behind a wick.
ENTRY
Entry would be at the close of the fake out bar. Since it can some times be far away from the source itself (in case of a long spike where price closes further away from the HHR/LLS) a good idea is to wait for a pull back (happens often) to the HHR/LLS via a pending order once the fake out bar forms. Obviously the latter strategy might lead you to missing a few trade setups because while price will often pull back at least once to the HHR/LLS after the fake out bar forms it won't do it all the time. For me, It almost always boils down to the grade of the setup itself and the distance from the source that is in question. If I find its a setup off of a great area I might not wait for a pull back and enter on the close itself, other times I will wait with a pending order at the HHR/LLS. Of course the case where you get a fake out close, close enough the HHR/LLS an entry on the bar close itself is totally justified.
STOP LOSS
A fake out setup, as per this method is NOT over unless you get a close beyond the fake out bar high/low. period.
Enough literature out there and your charts too, if you do your homework, spell out that a fake out is most meritorious up to the point where price fails to respect the order flow that created the fake out. Most often this is illustrated by a strong close beyond the fake out bar high/low. Other times price literally does just this (i.e close beyond the fake out high/low) and totally reverse right back so as to comply with the order flow that created the fake out.
There really is no way to say for sure when exactly is a fake out setup invalidated. Its important to understand that a certain level of ambiguity and grey areas have to be deliberately left out to make the market imperfect enough to allow for the edges to exist. Think about it, if fake outs as a phenomena was exactly repetitive each time "the edge" for the pros that it represents would be gone. Remember a lot of small fish need to be wrong to feed a single large fish.
Again -> A fake out setup, as per this method is NOT over unless you get a close beyond the fake out bar high/low.
This is probably a good benchmark to give your method the rules it rests on. It is is usually unlikely for a fake out to work out if price goes against the direction of the fake out and closes strongly. NOT ALWAYS...I said USUALLY.
Interestingly it poses another major problem. Waiting for a bar to actually close beyond the fake out bar high/low is essentially keeping your stop loss totally open until you get a close beyond the fake out bar high/low. This could be detrimental specially if you are day trading. Furthermore it obviously makes position sizing calculations complex because you are unaware of the exact pips and you can only roughly guesstimate a position size.
My stop loss (a hard literal one) is placed arbitrarily a few pips beyond the high/low of the fake out bar. Again there are no hard and fast rules here, I could go a bit tight or a bit loose depending on the situation and also on the size of the wick of the fake out bar. Foe example if my HHR/LLS lines line up with a RN I can use it as an additional cushion and go real tight on the stop loss to enjoy a better R:R.
As far as stops go you have to go with your gut feel driven by your evaluation of the setup itself and the ongoing market action. This is easier said than done because decisions on stops are usually the ones that involve the most emotions. Where gut feel is involved experience comes in big time, and I can't stress this enough, that you must practice, practice and practice this method till you start to anticipate market action over and above your emotions.
Being an order flow method, how good you do with it depends not on the rules as much as it does on your grasp of price action and order flow dynamics. This is why I feel knowing the James16 stuff is such a HUGE ADVANTAGE!
EXIT
Another crucial aspect. Depending on the strength of the setup I will either exit at the first MAJOR S/R area in the way or prefer to hold on to see if it can blow through (for stronger setups)
At the James16 group we discuss the concept of "space vs traffic". The idea that a trade that is running into fewer bar highs and lows and HCR/LCS levels has far more potential than a trade in traffic. Traffic here is defined as cramped up space with close by trouble areas specially when you're trading straight into a period of consolidation or into a major PPZ.
"Decent space" is a crucial requirement for me, and unless the other factors are tipped heavily in my favor (very STRONG swing point, large fake out bar wick) a setup that is heading into traffic is rejected.
Link to the video channel:
GFX Trading - Mastering the Art of Trading
Links to Important posts:
Explanation of the "fake out phenomena" through a past trade --> post#45
Hazards of trading in a strong trending market --> post#46 , post#221
Dealing with different 4H/Daily bar closes on different feeds --> post#48
What is a "First Trouble Area" --> post#64
Understanding the "Bigger Picture" --> post#68
Space - An important consideration for your trades --> post#84
Using the idea of "multiple confirmations" on fake out setups on lower time frames --> post#101 , couple of good examples of the same --> post#111
I am purely a technical trader -->post#198
How far to the left should one look for a swing point to take a fake out trade off of --> post#242
I am giving away the tricks of the pros, this should agitate them and importantly stop the system from working, or will it? --> post#249
Dealing with spread issues on exotic pairs --> post#255
Is a setup dead when price hits the SL? --> post#300
Important posts compilation from a group member Max Pain --> post#334
Liquidity Equilibrium vs disequilibrium --> Post#460
Trading off of Single bar swing points vs multiple highs/lows (i.e an S/R "zone") --> post#615 , post#616
Its been about half a decade since I first dropped in here and have never looked back since. Met some wonderful people all along and progressed leaps and bounds with my trading education.
Here's some of it right back:
A bit about me and my style
I am 23 years old and downloaded my first demo mt4 at 18. Since my time here at FF, I have gone through many different trading systems, some of which are still active today and kicking along as they should. The real breakthrough came about when I dropped by the James16 thread and the rest is really memorable history.
For quite some time I wouldn't consider myself a true trader if I wasn't looking at my charts 6 hours a day with at least 10-15 trades per day. It was not until a couple of years that I realized I wasn't meant to be a trader on the m5.
I trade the daily the 4H and the 1H TF. I don't need 10 hours a day in front of charts anymore. In fact 2-4 hours is all I need. I am no longer fighting the "noise" of news spikes and short term order flow. I am no longer exposing my capital to 10 trades a day. I have on my watch list as many pairs as my broker offers. Around here you will find charts ranging from majors to the most exotic pairs. Well price is price and it doesn't change its course of action in exotic markets and for that matter even in the non-FX markets.It is not uncommon for me to be watching 50+ pairs at any given time and yeah I still need a handful of hours to take/manage trades.
I primarily trade Support and Resistance as taught at the James16 group. However I only use the knowledge in an indirect way in validating and managing trades. My "system" is different to the conventional james16 stuff to an extent yet its still a pure modification of the material itself through ideas and research work of the very senior members at the group and at Forex Factory forums in general.
The Basics of the method
Foreword
By putting the material contained in this post I have assumed that my audience has had at least some kind of exposure to the James16 group either at the public thread at forex factory or at the private forum. While this system is not about a direct application of the James16 material it is primarily a modification of it with the core still very much intact and in its original form. This method will be best assimilated by someone who has a good idea of how we look at our charts at the James16group.
Identification of swing points
These are defined, in plain and simple terms as points in the market where price took a U turn, either for the longer term (reversal) or for an elongated correction/pull back.
These are not difficult to spot on the chart at all. Here's a chart to get you going...
Simple enough?
Introduction to the fake out
We know there are two types of traders participating in these markets. The novice trader that is under capitalized and is pretty naive when it comes to trading knowledge. And then there are the real big pros, the hedge funds, the banks and other institutions who know their stuff and have really big accounts. These 'cool' traders however suffer from a major problem that stems from the size of their account. The problem of liquidity. The FX markets are amongst the most liquid markets in the world yet there still is a problem when a hedge fund wants to sell 10,000,000 units of EUR/USD at resistance where obviously others are willing to short as well. You see why? How many traders do you think want to long in a market that is heading towards resistance? This poses a serious problem and these guys will then take some measures to get rid of this problem. These are smart people BTW. They break their position sizes into smaller lots and execute it at closely bound price levels instead of clicking a 10,000,000 position size at a single price level.They also artificially create buy side liquidity in the market by targeting the novice traders.
Small positions selling into support and buying into resistance, create the "buzz". Or just simply pulling off all orders leaving a vacuum for retail traders to push price through. Enough manipulation to lure traders into thinking price is headed for a break of support/resistance. The breakout traders start jumping in. At resistance for instance, traders short in the market who most likely will have their stops above resistance or below support (the pros know it all!) start to freak out and their stops start getting hit creating more buy side liquidity (a stop loss on a short order is actually a long). By creating an artificial scenario in the market the pro traders have managed to, like a sheep dog, get the herd where they want them to be.
They can now pull out their long positions and start dumping their huge short orders on traders willing to now buy into a breakout that is going to be a fake one. Now guess what? All those traders that jumped in long will start hitting their stop losses because the big orders are propelling price south and which creates more selling in the market to take price down (long traders will close their trades by selling their positions), but the pros are already in and any selling pressure now is just adding cash to their wallets. Some smart folks and james16 are probably looking at pin bar showing this very information and are short too WITH THE BIG BOYS. DO you now see how the 95% of losing traders are filling up the pockets of the remaining 5%? The naive trader lost when he was short at resistance. He also lost when he thought he could catch a smooth break out.
These pros have nothing against retail traders. Its like a huge ocean where survival for the big fish means consuming smaller fish. Its a zero sum game after all.
So what does a fake out look like on a chart?
At a strong area of support or resistance you'll often see price moving sharply to notify a breakout and either on the same bar or on the next few bars will sharply pull back into the swing point. It will either leave behind a wick or a few dead bars (low range indecision bars) showing a strong move up (like you would see in a break out) followed by a complete reversal back into res/supp.
What I said above is good knowledge for someone really interested in going behind the backdrop to take a sneak peak of "behind the scenes" but its perfectly ok to be comfy in an audience seat ready and tuned in for the action as and when it happens.
Enough of the details of the chemical composition of bread and butter...let's get down to earning some.
The system explained
How do you convert this market knowledge into a consistent solid trading method:
You simply wait for price to approach a major swing point. A point in the market you know a bunch of traders will have their eyes on. They may be anticipating different things though hence the "market imperfection" and that is what gives you the edge.
For a short setup price must make a move higher than the highest high in that period of resistance (I call it the HHR - short for Highest High of Resistance) and fail to close above resistance, preferably on the same bar i.e leaving behind a "wick".
Similarly for Long I am looking for a move below the LLS (Lowest Low of Support) that fails to sustain itself and closes back above leaving behind a wick.
ENTRY
Entry would be at the close of the fake out bar. Since it can some times be far away from the source itself (in case of a long spike where price closes further away from the HHR/LLS) a good idea is to wait for a pull back (happens often) to the HHR/LLS via a pending order once the fake out bar forms. Obviously the latter strategy might lead you to missing a few trade setups because while price will often pull back at least once to the HHR/LLS after the fake out bar forms it won't do it all the time. For me, It almost always boils down to the grade of the setup itself and the distance from the source that is in question. If I find its a setup off of a great area I might not wait for a pull back and enter on the close itself, other times I will wait with a pending order at the HHR/LLS. Of course the case where you get a fake out close, close enough the HHR/LLS an entry on the bar close itself is totally justified.
STOP LOSS
A fake out setup, as per this method is NOT over unless you get a close beyond the fake out bar high/low. period.
Enough literature out there and your charts too, if you do your homework, spell out that a fake out is most meritorious up to the point where price fails to respect the order flow that created the fake out. Most often this is illustrated by a strong close beyond the fake out bar high/low. Other times price literally does just this (i.e close beyond the fake out high/low) and totally reverse right back so as to comply with the order flow that created the fake out.
There really is no way to say for sure when exactly is a fake out setup invalidated. Its important to understand that a certain level of ambiguity and grey areas have to be deliberately left out to make the market imperfect enough to allow for the edges to exist. Think about it, if fake outs as a phenomena was exactly repetitive each time "the edge" for the pros that it represents would be gone. Remember a lot of small fish need to be wrong to feed a single large fish.
Again -> A fake out setup, as per this method is NOT over unless you get a close beyond the fake out bar high/low.
This is probably a good benchmark to give your method the rules it rests on. It is is usually unlikely for a fake out to work out if price goes against the direction of the fake out and closes strongly. NOT ALWAYS...I said USUALLY.
Interestingly it poses another major problem. Waiting for a bar to actually close beyond the fake out bar high/low is essentially keeping your stop loss totally open until you get a close beyond the fake out bar high/low. This could be detrimental specially if you are day trading. Furthermore it obviously makes position sizing calculations complex because you are unaware of the exact pips and you can only roughly guesstimate a position size.
My stop loss (a hard literal one) is placed arbitrarily a few pips beyond the high/low of the fake out bar. Again there are no hard and fast rules here, I could go a bit tight or a bit loose depending on the situation and also on the size of the wick of the fake out bar. Foe example if my HHR/LLS lines line up with a RN I can use it as an additional cushion and go real tight on the stop loss to enjoy a better R:R.
As far as stops go you have to go with your gut feel driven by your evaluation of the setup itself and the ongoing market action. This is easier said than done because decisions on stops are usually the ones that involve the most emotions. Where gut feel is involved experience comes in big time, and I can't stress this enough, that you must practice, practice and practice this method till you start to anticipate market action over and above your emotions.
Being an order flow method, how good you do with it depends not on the rules as much as it does on your grasp of price action and order flow dynamics. This is why I feel knowing the James16 stuff is such a HUGE ADVANTAGE!
EXIT
Another crucial aspect. Depending on the strength of the setup I will either exit at the first MAJOR S/R area in the way or prefer to hold on to see if it can blow through (for stronger setups)
At the James16 group we discuss the concept of "space vs traffic". The idea that a trade that is running into fewer bar highs and lows and HCR/LCS levels has far more potential than a trade in traffic. Traffic here is defined as cramped up space with close by trouble areas specially when you're trading straight into a period of consolidation or into a major PPZ.
"Decent space" is a crucial requirement for me, and unless the other factors are tipped heavily in my favor (very STRONG swing point, large fake out bar wick) a setup that is heading into traffic is rejected.
Link to the video channel:
GFX Trading - Mastering the Art of Trading
Links to Important posts:
Explanation of the "fake out phenomena" through a past trade --> post#45
Hazards of trading in a strong trending market --> post#46 , post#221
Dealing with different 4H/Daily bar closes on different feeds --> post#48
What is a "First Trouble Area" --> post#64
Understanding the "Bigger Picture" --> post#68
Space - An important consideration for your trades --> post#84
Using the idea of "multiple confirmations" on fake out setups on lower time frames --> post#101 , couple of good examples of the same --> post#111
I am purely a technical trader -->post#198
How far to the left should one look for a swing point to take a fake out trade off of --> post#242
I am giving away the tricks of the pros, this should agitate them and importantly stop the system from working, or will it? --> post#249
Dealing with spread issues on exotic pairs --> post#255
Is a setup dead when price hits the SL? --> post#300
Important posts compilation from a group member Max Pain --> post#334
Liquidity Equilibrium vs disequilibrium --> Post#460
Trading off of Single bar swing points vs multiple highs/lows (i.e an S/R "zone") --> post#615 , post#616
I believe . . .
