Background. I am coming up on the 5th year anniversary in December of taking my first Forex trade. I have, for the most part, been a silent participant of Forex Factory for the better part of the last 5 years and so I thought it time I give back by sharing something I have been working on for quite some time.
I don't pretend to be the best trader on this forum. My trading plan combines a whole host of components that I have gleaned over the years from many of you here and in other venues. Additions, suggestions, and positive comments are welcomed. Negative, insulting, or otherwise inappropriate comments are best kept to yourself.
Objectives. Keep in mind; I came into this wanting a system that I could use to build a retirement. I was not looking to trade full-time. I was ready for a 10 year commitment that would far outperform any retirement account out there. In building this system I took the following specific objectives into account:
1. A system that would not require me to lose sleep at night (EST) or commit more than 30 minutes each day to its management.
2. A swing trading system with fewer than 15 trades per month across 8-12 pairs.
3. A system that was not drastically impacted by the noise of regular economic news releases or weekend price movements.
4. A trading plan that would limit maximum drawdown to no more than 16% and generate at least 30% yearly returns.
5. A trading plan that was simple to explain and even simpler to execute.
Note about the system. This system is for swing traders. I trade it because I don’t have a lot of time to watch charts. Scalpers may consider moving the rules to a shorter time frame and see if they still work. Keep in mind, this system loses about 45% of the time with an average R:R of 1.34:1. You have to be a disciplined trader willing to having losing quarters and watch trades that often last weeks and sometimes months. The beauty of the system is that it works in most market conditions and is profitable over yearly periods unlike many systems that only work because of specific market circumstances.
General Rules. Many of my general trading rules are specific to me and my own trading mojo.
1. All rules are made to be broken. Emotionally I must act like a machine but I also have a brain and as such there are circumstances where common sense must prevail.
2. 10-15 minutes of Fundamental analysis each day.
3. No trading on major U.S. holidays (for no other reason than to have days off for my family).
Chart Setup. (See attached default MT4 template)
1. 4 Hour Candlesticks
2. 89 SMA (Close)
3. 21 EMA (Close)
4. A Simple Custom MACD Indicator (HT:MACD 4 Hour strategy indicator – Download here)
5. Currency Pairs: EURUSD, GBPUSD, AUDUSD, USDCAD, EURGBP, EURAUD, EURJPY, GBPJPY, USDJPY, GBPCHF, USDCHF, EURCHF.
6. Optional: MA cross alert indicator (click here) - Hats off to Dargane for sharing.
Money Management.
1. Maximum risk per trade of 1% - 2% of account balance (Depending on Risk Appetite).
2. Profit target per trade of 1% - 2% of account balance (Equal to max risk per trade).
3. Minimum capitalization of $5000.
4. Use a broker that allows micro lots (min 0.01).
5. Max peak to trough drawdown of 16% (17 full losing trades in a row or 25 average losing trades in a row).
Long Entry Signal.
1. 21 EMA crosses above 89 SMA (21 EMA > 89SMA) indicating a change from a bearish to a bullish trend. This signals a “pending long trade”
2. Price climbs and then retraces (usually back to the 21 or 89) with MACD turning red.
3. Enter on 1st closed 4H candle after MACD turns back to green.
4. Long Entry Rules:
a. Price of the closed 4H entry candle must be greater than the 21 EMA. If not, wait for next MACD long entry signal (price climbs, retraces changing MACD from green to red and then climbs again changing MACD to green thus signaling a long entry).
b. 21 EMA must be greater than 89 SMA.
c. Only one trade per 21/89 cross.
6. Long entry Take-Profit is placed at a distance equal to the number of pips as the stop-loss (example: 200 pip SL = 200 pip TP). Once TP has been triggered, no new entry until 21/89 short cross.
Short Entry Signal.
1. 21 EMA crosses below 89 SMA (21 EMA < 89SMA) indicating a change from a bullish to a bearish trend. This signals a “pending short trade”
2. Price drops and then retraces (usually back to the 21 or 89) with MACD turning green.
3. Enter on 1st closed 4H candle after MACD turns back to red.
4. Short Entry Rules:
a. Price of the closed 4H entry candle must be less than the 21 EMA. If not, wait for next MACD short entry signal (price drops, retraces changing MACD from red to green and then drops again changing MACD to red thus signaling a short entry).
b. 21 EMA must be less than 89 SMA.
c. Only one trade per 21/89 cross.
6. Short entry Take-Profit is placed at a distance equal to the number of pips as the stop-loss (example: 200 pip SL = 200 pip TP). Once TP has been triggered, no new entry until 21/89 long cross.
Close Position. In the event of a 21/89 cross prior to taking profit or getting stopped out, close the position on the close of the candle where the cross occurs. 2 out of 3 losing trades are closed out this way rather than hitting the SL which is the reason that the average winning trade is 1.34 times the average losing trade.
I have included a handout of the system’s trades from Jan 2009 – Oct 2010.
Here is what a potential entry looks like right before it happens (my chart on 11/25/2010 before a potential short entry on the GBPJPY).
UPDATE: I have added a link to the trade tracking, lot size calculator template spreadsheet that I created for this system. Feel free to use the template if you so wish. Here are the instructions. And here is the offline version.
UPDATE II: Also, here is a link to my online trade log spreadsheet if you would like to watch my progress. I began trading this live demo in early September of this year. I plan to go live with real money on or around the 1st of the year following a losing streak. My goal is to trade this for the next 10 years. I would like to realize a 48% average yearly return and build up a nice nest egg over those 10 years. With compounding, if I were to start with $25,000 and if I hit my goal each year, I would have $1.26mil by the end of those 10 years. If I were to continue through year 12 it would hit $2.76mil and at year 15 it would reach $8.95mil. It is going to take iron discipline and commitment but it will be worth it.
