A Basic Trading System (BTS)

Quoting BenQ

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Nicely laid out. In your example above, you have four short set-ups. If a correction is a penetration of the MA, aren't the arrows I've drawn in also set up bars? If so, why did you pick the particular ones you did? Thanks.

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Quoting effilang

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Hello everyone,

I’d like to share a basic trading system with you.
I recommend you read the following post, before or after you read this thread are both options.

A. http://www.forexfactory.com/showthread.php?t=67190
B. Trading Divergence

Now, let’s setup our charts.
Open up a fresh Daily, H4 or H1 chart, and then add the following indicators to it:

1. Stochastic 5,3,3
2. MACD 12,26,9
3. 5 EMA (HIGH) - Red
4. 5 EMA (LOW) - Green

If you’ve had the time to read through link A, then by now you should be informed on how I perceive price movement. We will be trading in trending environments, attempting to stay out of consolidation the most we can.

The underlying expectations in a trend moving up are Higher Highs, followed by successive Higher Lows. Conversely for a continuing downtrend we require and expect Lower Highs, followed by successive Lower Lows.
The expectations in this environment I have explained before vary from that of a ranging movement and more buying or selling pressure is evident around the lower and higher extremities of the price in direction of the trend movement.

METHODOLOGY

This is a system created by request with regard to the persons specific needs. I got my inspiration from something I came across.

It read;

“If you trade with the trend, you can be wrong only once, at the top or the bottom”

Now, I know that’s the most basic of all rules, trade with the trend, the trend is your friend. You hear it all the time if you’re a trader, but there was something about the simplicity of those words that struck me with a unique clairvoyance. My own little eureka moment in regards to my perception of trends.

FINDING THE TREND

Let’s begin to gradually move on to understanding how we will be trading.
The first thing that we are going to do is find a correction on the chart. I define a correction here by any price movement which permeates the moving averages. The reason for doing this is to establish the direction of the counter trend movement, thusly defining the opposite direction of the trend, or the larger impulsive movement we are interested in capturing. This is not to conclusively say that, once a correction is located, the trend is necessarily down or up respective to the counter trend direction, but it gives us a much higher probability of being correct in that assumption.

Below is an example of corrections in a downtrend and an uptrend.
Every time we have the price retrace to the immediate proximity of the EMA we have a valid correction.

(Picture 1) (GBP/USD H1)
Locating a correction
http://img108.imageshack.us/img108/3...ectionsnx6.jpg

It is not by accident that we transition from bearish trades to bullish trades. Every correction pointed out is a potential trading signal, apart from one which I have not drawn between the last short and the first long. I will explain its significance shortly; let’s take things step by step.

If you review picture 1, after you’ve covered this tutorial you will notice that all 9 out of 9 available trades were successful


FINDING THE TRADE

In this section, we are going to dissect picture 1 and look at each of the signals and introduce the criteria for entry, exits and profit taking. Before we go over them accordingly, I will show you an independent example so you can understand how to set up for a trade.

(Picture 2) (GBP/USD H4)
Finding the Setup Bar, Analyzing your Trade and Executing
http://img441.imageshack.us/img441/5946/setupfd4.jpg


This is what you are going to do:

1.Find a valid correction (Wait for the candle to close)
2.Calculate your Risk in Pips by determining the difference from the low to the high (1:1)
3.Project your profit taking level 1:1, 1:2, 1:3 etc.
4.Set a Sell STOP order 1 Pip under the low of the Setup Candle
5.Place your Stop Loss at the high or 5 pips above the high of the Setup Candle
6.Use lot multiples of 2 or 3 e.g.: 10K, 20K, 30K / 40K, 80K, 240K

Elaboration of the above:

-Unless we have a correction we do not have a valid entry signal. Rules are Rules.
-You want to make at least as much as you’re risking. Since you’re riding impulsive movements, chances of greater returns are common.
-Your entry point. What you see on the chart may in fact just be a once single candle, but do not neglect the dimensional depth of the market and the intricacy of its sophisticated functions. From the 1 minute chart to the monthly or the yearly chart, independent trends coexist on all levels. You may be a scalper trading an uptrend on the minute chart, while another trader is waiting for what seems to him to be a mild bearish correction on the 5 minute chart. There is a trend on every time frame and no one trend, which is why I disagree with constantly switching between time frames to determine trend as an efficient practice in trading. Having said this, the psychology behind trading of a violation of the lows of our Setup Candle is because we are in fact catching the consolidative breakout on a lower scale. We want to abstract ourselves from the irritation of the indecisive market on the lower time frames, but still take advantage.

-When I create trading systems I place a lot of emphasis on my SL, not just as a protective measure, but as an integral information feedback system. Getting stopped out, to us is part of this system and we need that information, if you alter the precision and swiftness at which we can receive the information provided by the SL, we delay our reaction time and decision making process, flawing the efficiency of our adaptivity to the chaos of the market. 5 Pips is the Maximum you should place your SL above the high/low of your Setup bar.

-Profit taking with this system is based on your pre-calculated risk. If your 1:1 is 50 Pips, then you will look for at least 50 Pips or 50 less your brokers spread, on a pair like GBP/USD that would be 45, on GBP/JPY in most cases 41 Pips. Once you reach your target, you want 50% of your lots to cash out. At this point your SL should A: either be moved to breakeven or B: be minimized by half; you just have to move your SL lower in a short and higher in a long to accommodate this. The remainder of your position is left to trail until you have a Change in Polarity.

Change in Polarity:
It is common knowledge that R once violated, turns to S and S once broken should turn to R respectively.
With this system we will apply a similar strategy, thusly:

-If trading long and your SL is violated, start trading short
-If trading short and your SL is violated, start trading long

This rule defines the direction in which you are going to look for signals. Although exceptions occur in the market place on which we can also equally rely to define a predicted change in polarity, like technical patterns etc, this will be our base for determining directional bias.

The most common exception that overrides this rule is a divergence in the market.

Below is an example of corrections in a downtrend and an uptrend.

(Picture 3) (GBP/USD H4)
Divergence Override
http://img441.imageshack.us/img441/5175/divergesf7.jpg


In this instance as you can see. We were taking short trades. Our bias was down. In all cases it should remain such until you are stopped out and your polarity changes. However, in the presence of a divergence in the market we have an override and negate all prior rules. If we were short and have a bullish divergence we automatically start looking for long signals. You should start looking for new signals the moment a divergence is identified.

For those of you who are not familiar with divergences. The straightforward definition is; an occurrence during which the direction of the price differs from that of a technical indicator. Since direction is defined by LL, LH and HH, HL, we use them to gauge the difference between the two factors.

As you will note in the chart above Stochastic was quicker to accent the divergence in the price while the MACD tool a little while longer. My advice is that you wait for the MACD to have at least one or two bars in the direction of the divergence to start setting up for a signal. The more odds you have in your favor, the better.

The most common problem with this strategy is the existence of divergences during which a continuous display of differential is evident for a prolonged period of time, thusly making it harder to pinpoint the exact point of reversal in the market; the absolute pivot. There are several approaches to tackling this.

Some traders find this method so accurate that they are willing to add to their loosing positions on every occurrence of a diversion, because they strongly believe the price will eventually adjust, and so it does almost all of the time. Adding to your losses doesn’t sound to attractive to everyone of course.

Other traders will wait for confirmation of divergence from a confluence of indicators to strengthen the signal and some use trend lines to define the actual reversal in price.

In the presence of serial divergence I recommend that you continue taking signals in the direction of the trend by FINDING THE TREND. Eventually when the divergence starts taking place, you will get stopped out at the top of the trend. A price that is worth paying in order to filter out the premature divergences.

(Picture 4) (GBP/USD H1)
Trade Examples
http://img169.imageshack.us/img169/1572/trades1bj1.jpg


The first candle in each box is our setup candle. Once the low is violated we enter a signal. From 1 to 4 everything was fine and dandy, but we get stopped out at 5. The moment we get stopped out we start looking for long signals, if you’re there when you get stopped out I recommend going short on the SL violation, but only if you see a retracement candle in the new direction (long) , prior to getting stopped out. E.g: If the candle that stops you out retraced, you can long it and vice versa.

FINDING YOUR SELF

Perhaps the most difficult task any trader will undertake through his triumphant or failed career.
It’s hard…. Oh yes. It’s very hard, but you can do it if you want it bad enough.

When I started trading, I understood there were risks. Financial risks. Nobody said anything about going crazy though, I wish they did : ), but I wonder would it have made any difference? I can’t be more thankful for finding this hobby, this discipline, this art form, this way of life. It has changed me in many ways and made me grow in others I never knew I could. Finding yourself is a difficult battle and you will have to face many of your demons and voluntarily move out of your comfort zone, breaking your limits to push further. We are very lonely people traders, because nobody but us really knows or understands our battle, it’s not just success anymore, or money, it becomes a path to self betterment and enlightenment. I’ve gone through very many systems since I started trading. The good ones, the bad ones, the utterly crappy ones. I hear people say, use some indicators, others; use none. I use to walk the fence for a while, but at the end I realized as everything else, it’s a battle of survival and you should do whatever is necessary to guarantee success. If your chart needs to look like a bowl of spaghetti bolognaise to justify that, then so be it, hell add some cheese and extra chilly sauce. If it works, there is no shame in that. Do not care about the opinion of those who do not care about you, do not let it hinder your intuition.

I squeezed a thousand oranges, to get the perfect juice and at the end all I had was a barrel of unwanted seeds. So… I got tired, of the failure and the disappointment and I went to the market and bought a carton of the most perfect orange juice ever, for 3.99 can u believe that ?… so tasty, so yummy, so smooth, not a seed in sight or taste. That box-carton of juice, was not labeled juice. It was labeled CONSISTENCY, and it was all I had been looking for and it tasted so much better than the combination of anything before. I no longer bought oranges from different market places in order to discover the holy grail, because I realized there is far too much to sift through, so much, that landing the holy grail would have to rely on chance; now what sort of a trader would i be relying on chance hmm ?? So I stopped and with the same will I used to create the mindset towards perfection, I satisfied myself with that which was simple, that which was clear, which was always there.

You can have the mindset to know all, to conquer all and to be the best and you can push on forever, but, we tend to best perform when we concentrate on a singular task. Not to say we have the inability to do more, yes we can, but, one by one. One little perfect brick of success at a time and we can build a fortes of personal perfect. Personal, yes. Because, we need to set our limits, if we don’t, we will never succeed. The path to success here, is almost never the same with anyone. There is no unified Forex school where everyone goes and graduates, it’s a perfect reflection of the chaos of the market itself. It’s all on you, nobody else.

Take your time and ask yourself what you really want. Ask yourself how you would be happy and then prepare to work your ass off day in and day out, and you WILL succeed. It is impossible that you don’t, because it is that one factor which is the main reason why so few actually make it. Because like with everything else in our world, all forms of success and achievement, it is only those who outstayed and outperformed others through repetition and strenuous practice that succeed. Quitters… NEVER win and Winners NEVER QUIT! – This is a lonely battle and if you quit, there is none else to back you up.

Good luck.
E. Lang

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Quoting eagle_eye

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hi, did you buy this system off someone?. i think its called the 5ema system.

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Quoting eagle_eye

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hi, did you buy this system off someone?. i think its called the 5ema system.

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Quoting Gnat

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Eagle ... Effi is well known to buy all his systems off somebody else, then tie the inventers up and put them into his dungon!
http://www.jubailforums.com/vb35/ima...s/Jawdrop2.gif

If you put up allegations, you may not be able to cope with the echo, so please go somewhere else.

And if you just wanted to market something really sneakyly... have this:
http://www.jubailforums.com/vb35/ima...es/diespam.gif






Ciao
Matt

If that was too friendly, I'll be back for a second round, even if you are wearing a frock!

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Quoting Oromis

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Hi eagle_eye...I have no problem with you asking any question, but I don't think it is necessary to repost the whole of effi's first post? untities a thread things like this. A simple reference unless specific discussions of a chart, is all that is needed.

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Quoting eagle_eye

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I'm saying that because I actually bought this system few months ago. Tried it for few weeks, there were too many false signals. I think theres even an EA for it. Google it and you will find it. Anyways, I hope its profitable for you guys.

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