Pulling Pips with Strategy

Tight Pips 1.1

This thread is for discussion and development of a mashup strategy between three strategies. These strategies are as follows.

The core: http://www.forexfactory.com/showthread.php?t=11854
The additions: http://www.trading-naked.com/Woodie.htm
The additional Confirmation: Price action and patterns. If you need these explained to you, please go through the entire school at http://www.babypips.com

Before you begin posting here, please become very familiar with the core. The core is a strategy developed by Phillip for use on the 5 minute intraday charts.

The additions as used from the Woodie CCI strategy will be explained here, but reading up on some of them will help you out anyway, so have at it. Realize though that this is Forex, not the markets that Woodie used his CCI strategy on. I tried using the CCI alone before as prescribed by Woodie without success. I always loved the tools that it offered, but struggled to find confirmation for the signals, until I tried the core system.

The additional confirmation should be self explanatory.

A little background about my trading experience. I trade full time unprofitably. I have been unprofitable ever since I started trading and have only made several actually good trades. Every day after I trade and update my books(I am still on demo), I look at what trades I made for the day and where I screwed up. Most trades, I can still pick out several things that I blew it on. Even the profitable ones.

Since this is the case, I have identified one of my main weeknesses. I do not know when to enter the market. Sure I have used strategies that have had clearly defined entrys but they were not my style, too slow. I like fast paced action or I will lose attention. A probably better idea would be to learn to read price action, but I feel that I can do that while trading a well defined strategy. Also, I pretty much believe Systems Theory: http://en.wikipedia.org/wiki/Systems_theory

Right, first things first. Lets get your chart setup.

Chart Setup

I would list everything but I am about to go meet a friend. So I will just post the template and the indicators.

Version 1.1
Removed - SMAAngle, it is not longer used(I was never able to figure out what it was showing me)
Added - Volumes_Per_Close, this indicator shows volume and colors the bars according to whether the close of the bar was Above/Below/The Same as the open.

PLEASE DON'T POST HERE YET. I HAVE SEVERAL POSTS THAT I NEED TO MAKE BEFORE I WILL BE READY TO ANSWER ANY QUESTIONS.

TLB(Trend Line Break)

The TLB comes in two forms, the first is where the CCI forms a significant high/low followed by a significant bump that a trendline can be drawn on. Take a look at fig. 1. We have a high in the oversold area. Next the CCI turns to a sort of flat movement on the 100 level for several candles, then it finally falls, this is our hump. In this case, the TLB in this instance ended up in a 70 pip move up.

The second form that the TLB comes in is when the CCI moves in a nearly straight line. Take a look at fig. 2. The CCI has drawn its own trendline. When this happens we really don't need to draw a trendline, but it may help make it more clear.

Now that we know how to draw a trendline, what actually defines the break of that trendline? Lets look at figure 2 again. See that first trendline on the chart? When the CCI breaks it, its not really a convincing sharp break. This is less than ideal. If we move to the next trendline, we see that the break this time is a sharp break. Perfection. That is exactly what we want. A sharp, convincing move.

TLC(Trend Line Continuation)

Lets look at figure 3. The two contact points with the trendline that the CCI makes at the number 1's. That is our original trendline. After the second point of contact, the CCI continues moving up again. Well once it gets past 0 it decides to make a beeline for the trendline, and looking at this live, this would look like the CCI is trying to break the trendline. Well it gets to it and just stops. It obeys the trendline, for 6 candles in this case. This is TLC. Simple. The distance between the D-S1 and D-
P lines in this chart is 100 pips.

ZLR(Zero Line Reject)

OK, figure 4. The highlited box on the the CCI shows a ZLR. The price simply moves from overbought territory to the zero line, and gets rejected. the important bits to remember is the price has to come from oversold or overbought territories and needs to come close to the zero line, whether above or below it doesn't matter that much.

A Note on the CCI.

Look at the price, the 21EMA(the red moving average) and the CCI on all the charts. Do you see the correlation? All the CCI is really doing is telling us the relationship of the current price with the 21EMA. Well, that means that by using trendlines we are basically drawing a trendline on the price. When we use a ZLR on the CCI, all we are identifying is that the price found support/resistance on the 21EMA. If you throw a 50 CCI on the chart just to experiment you will find the same thing occurs with the 50SMA.

So in a sense, all we are doing is studying price action with line study's, except that it is expressed as an oscillator instead of a candlestick chart.

What is a MACD?

The MACD is an indicator that shows you the difference between two EMA's. In our case it is the 5 and the 13 EMA. So, when the 5 EMA is above the 13 EMA, the MACD on our chart will be above the 0 line. Vice versa when the 5 is below the 13.

Now, lets analyze what exactly is happening when a TC forms on the MACD in accordance to Phillips 5 minute system. In fact, this may be the best way to show it. Pull up your charts and change 2 of the moving averages, one to a 5EMA and the other to a 13EMA.

The first thing we are going to look at is what happens when the MACD crosses the zero line. The moving averages have crossed also.

Next find a TC pattern. Find a couple in the same view if you can, it doesn't matter if they were profitable or not for this. Take a look at what the moving averages are doing at the same time as those TC's. They are squeezing together, and when the TC triggers on the MACD, the moving averages have begun spreading apart again.

What we have just established here is that the MACD is simply an easier way to look at the distance between two moving averages.

We now know that two of the indicators on our chart are not even required. The CCI and the MACD. So why do we have them there? It is another way to see the relationship of the current price to historical price. This allows us to have multiple viewpoints on history, enlarging our chances to spot important signals as to what kind of mood the market is in now.

I will get on to signals here soon enough, in the meantime read this.

http://www.forexfactory.com/news.php?do=news&id=175674

For the market to move there needs to be volume. I trade mostly 5 minute charts myself and at this timeframe, low volume is very dangerous. You may make a good trade but the volume could be low enough that its not going to move anywhere. That said, the volume rule is that on the 5 minute timeframe:

Volume must be greater than 50 for 10 bars before an entry is safe.
The times that can be traded: Between 0500 and 1900 GMT.

The only pairs that I trade this on are EURUSD, GBPUSD, USDJPY, EURJPY.

That does not mean that it won't work on other pairs, in fact, this probably works on most pairs and most timeframes.

1. These plays actually crossed into the slow lane between the 50SMA and the 21EMA before the entry. For these plays they can not be in the slow lane for more than 5 bars. Once in the slow lane, the entry candle must cross beyond both the 21EMA and the 10EMA into the fast lane. Its almost as if the price got boxed in between some semi trucks and had to wait until it was able to get passed them, at which point it shoots over to pass them with the peddle to the floor.

1.1 Both of these trades are confirmed with TLB. The second one we were actually able to preempt the TLB because of how strong the move the CCI made towards the trendline was. The first one we need to be careful though. Look at how close it is to the Weekly support level and also how close the horizontal trendline is to the weekly support.

1.2 The CCI on this trade is not quite as clear. But what we actually have here is a ZLR. The CCI is a little garbled, but it is near the zero line and when the rejection happens, we have a nice sharp move up.

2. These trades are starting to get a little iffy. The CCI on both of them has done nothing particularly convincing to give confirmation to an entry.

2.1 This trade, the CCI was just weak with its move. It broke below 100 but never quite made it very close to the 0 line. Also, the move up that the CCI made when it turned was really weak. What confirmation that we have though is the convincing bounce off of the Horizontal Trendline from the previous significant high. This trade I would suggest avoiding for the time being. This one did happen to move 40 pips though...

2.2 We have the same situation as 2.1 here except that the CCI made a pull back even farther toward the zero line. Unfortunately the turn up was just as slow and unconvincing as 2.1 Again the price bounced off of the newest significant high though. So by that argument and looking at the results of the previous trade it might turn out to be a good trade. Unfortunately it petered out after 8 pips. I still say avoid taking this trade until it is tested further.

3. Here on the CCI we have a TLB AND a ZLR. The price pulled back into the WarZone and formed a nice two candle entry. The only thing that is not perfect about this trade is that when the price pulled back into the WarZone, it was a relatively sharp pullback, making this trade a little iffy. The good news is that the StopLoss here could have been really tight, making it worth the riske.