RBT - Reality Based Trading

Reality - the state of things as they actually exist as opposed to an idealistic or notional idea of them.

Reality is the basis for success in trading any market. I'm assuming that the potential benefits of trading forex is why we're here in the first place - freedom, a good living and the knowledge that we're among the few who've mastered one of the most challenging professions in existence.

Reality requires us to be honest with ourselves, when confronted with reality, we need to be willing to jettison our preconceptions in order to embrace reality.

So what is RBT about? It's a trading paradigm that causes us to be in harmony with and not in conflict with the markets. A paradigm is a model of something, so RBT is a trading model. All good models allow us to adapt to changing circumstances while staying true to the principles of the model.

Let's consider the markets for a moment; we know that the markets change every day as people make new decision and act in slightly different ways from yesterday, we also know that the markets do not fundamentally change. Therefore a model that allows us to change (adapt) without fundamentally changing (constant principles) is a real model for approaching the markets.

RBT allows us to SEE what the market is doing and to profit from opportunities the market offers instead of forecasting what the market will do!

Let me share a little of my background - i was first introduced to forex in 2006 when i was seeking a way to make money online, i confess to being put off and turning to other things. In 2008 i took another look at forex and was hooked. Like the majority of noobs, i spent a while chasing the holy grail and wasting time and money fortunately that phase didn't last long as i'm naturally pragmatic and quick to dump whatever isn't logical and realistic.

It quickly became evident to me that the system wasn't the problem but myself, i first read 'Trading in the Zone' late 2008 and it changed my world. I began to focus more on psychology/philosophy as well as risk/money management while i continued to seek systems that would be a good fit for my personality.

I started developing my own trading systems in 2009 using various combinations of indicators, later settling on 2 main day trading systems based on a combination of either Moving Averages+ADX+OsMA or Moving Averages+ADX+Stochastics. I confess to doing quite well and eventually moved to managing funds with a partner. That didn't work out well and we had a falling out in 2011. I became disillusioned for a while, but picked myself up and returned to forex early 2012.

This time i wanted to do things different because i 1) didn't want to spend the rest of my life glued to the screens 2) didn't want to give up the benefits of forex 3) wanted to trade in a way that was independent of platform and 4) wanted to trade with much less stress and effort.

These reasons led me to review my studies since 2008 and refine and simplify my knowledge to develop what i call - the RBT Paradigm and DiLoTi/OSAME System.

The goals of the RBT Paradigm and the DiLoTi/OSAME trading system are 1. To allow me to clearly and objectively see what is thappening in the markets… i.e. to allow me to see REALITY and 2. To allow me to swiftly and unhesitatingly make trading decisions… in, out, stand aside. In other words, the RBT Concept aids me in executing REALITY BASED TRADING Decisions…

Remember that my 3rd condition was to be able to trade in a way that was independent of any trading platform especialyy MT4 with it's custom indicators - so i decided that a true test of the principles of the RBT Paradigm would be if i was able to move away from trading based on indicators to trading based on price action.

The bad news is that it took me a while, was a harrowing painful process and the result was a long streak of losses as i had to relearn how to see the markets and how to interprete what i saw accurately.

The good news is that it was worth it as since August of this year when i achieved maturity in my understanding and application of the entire RBT Paradigm i now trade the markets in a way which is based on the reality of the markets and allows me to be in harmony with the ebb and flow of the markets.

Since the proof of the pudding is in the eating i've linked my live account to myfxbook http://www.myfxbook.com/members/telios/mt4-36535/757201 and also attached the detailed account statements from August till November 2013 for comparision.

Subsequent posts will cover (not in any particular order) 1. the reality of retail forex trading 2. the reality of the forex markets 3. the internals of the RBT Paradigm and the DiLoTi/OSAME System 4. the core skillset required to trade successfully 5. what trading success truly is.

While i'm very proud to say that i've never blown up an account and even when i was a noob i was able to recover from a steep drawdown (greater than 75%) i do not view my self as a trading guru, but i know that i do have valuable experience to share with those who can benefit from it. My goal is to share and to learn and therefore i ask that all posts be respectful and focused on the issues we all deal with as traders. i welcome you all!

Success in Trading starts first with a Philosophy, a Way of Thinking, a Belief System… a Paradigm. This Paradigm informs the strategies and systems we will deploy to achieve our trading goals.

Any other way of structuring an approach to trading is doomed to failure, because the greatest traders do not trade systems, tips or tricks… they trade their Beliefs, their Philosophies, their Paradigms.

Consequently, the more “Accurate” your Paradigm, the more “successful” you will be as a trader. Accuracy allows us to be Effective, Precision allows us to be Efficient. Thus a combination of Accuracy and Precision will result in a high win-loss ratio as well as a high risk-reward ratio… this is the master skill of great traders, this is what separates good traders from great traders.

RBT is a Belief System, DiLoTi(Direction Location Timing) is a trading Strategy, OSAME (Observe the market, Spot opportunities, Assume positions, Manage the positions to profit or loss and Exit) is a trading Process.

The goals of the RBT (Reality Based Trading) Paradigm and the DiLoTi/OSAME trading system are 1. To allow me to clearly and objectively see what is happening in the markets… i.e. to allow me to see REALITY and 2. To allow me to swiftly and unhesitantly make trading decisions… in, out, stand aside.

We achieve these results by first seeking to be on the right side (Direction/Location); then by process of improvement we seek to do right in a consistently reproducible fashion so as to produce consistent results.

So we seek Accuracy first, and then attain Precision by eliminating unforced errors and flawlessly executing the DiLoTi/OSAME process.

ACCURACY in INTERPRETATION; PRECISION in EXECUTION and CONSISTENCY in PERFORMANCE – This is the heart and soul of the DiLoTi/OSAME Trading System.

RBT demands unambiguity in the making of trading decisions...

There are 3 questions that I must ask myself when viewing any opportunity, inability to answer these questions in a way that gives a GO means I must sit out the opportunity:

WHAT IS HAPPENING?

WHAT DOES IT MEAN?

WHAT MUST I DO?

Sounds good! I'm in.

I am all ears ..

Welcome guys, glad to have you onboard... FF has moved this thread to the commercial forum, i don't know why. I have another thread here for commercial purposes called RBT-Reality Based Trading Live Trading. The threads serve different purposes, this thread is focused on sharing my experience and growing together while the other thread is focused on offering my fund management/training services... i just wanted to get that out of the way.


Great then, let's continue...
[please bear with me if i seem a bit long winded, recall from the previous post that i said one needs a paradigm before other things. What i'm trying to do at this point is lay the foundations of the RBT paradigm]...

Let's examine the realities we're faced with as retail traders (RT), The FOREX Market is an economic phenomenon which was created to facilitate International Trade by making it possible to convert the national currencies of one country to the other. This conversion is actualized as a ratio called the FOReign EXchange (FOREX) Rate.


WHO ARE THE PARTICIPANTS IN THE FOREX MARKET?


The participants in the FOREX Market are all Commercial Businesses which participate in International Trade regardless of their size, International Banking and Financing Corporations regardless of their size, Sovereign Governments in the form of Central Banks and lastly Speculators from all walks of life regardless of size.


HOW DOES THE FOREX MARKET WORK?


Recall that the FOREX Market exists to facilitate International Trade, as an economic phenomenon created to facilitate the conversion of national currencies its operations are driven by the forces of Demand and Supply. Consequently, the major Transnational Corporations and the Banks and Financial Institutions which make their activities possible are the backbone of the FOREX Market; it is the Demand and Supply dynamics of these entities which drives the exchange rate of one currency with respect to the other. All speculators seek to make a profit from these dynamics and so they play a vital role in providing liquidity and volatility. Governments in the form of Central Banks play a disruptive role in the FOREX Market by manipulating the exchange rate for their national purposes using various tools of intervention.


HOW CAN PROFITS BE MADE BY SMALL SPECULATORS IN THE FOREX MARKET?


Profits can be made by small speculators if they understand the dynamics of the FOREX Market, their role and position in the dynamics as small speculators and very importantly how to protect themselves from being crushed by larger Market entities.


WHAT ARE THE DYNAMICS OF THE FOREX MARKET?


The basis for exchange rate (price) movement is the Supply-Demand (SD) flow of the Major Transnational Commercial entities (Commercials), as initiators and facilitators of national, international and transnational economic activities - these commercials are “consumers” of foreign currencies. The SD dynamics of these commercials lead to imbalances in the exchange rate equilibrium which is reflected as price movements.
These commercials place orders for various tranches of foreign currency with the major transnational and international banking and finance corporations (Interbank). The interbank fulfills the requests of the commercials by placing orders with one another for the required counterparty foreign currency.
Since, 1.) The interbank knows the orders which are currently being filled, pending and contemplated and 2.) They also have large sums available for their “investment” purposes; the interbank strives to get the best deal possible for their customers and themselves, knowing that the successful conclusion of a deal will have the effect of moving the exchange rate in one direction or the other. Thus they endeavor to make extra profit by “buying low” and “selling high”... this is manifested by temporarily finessing (read manipulating) the markets to get the best deal possible for themselves as well as their clients, it's a complex dance of tradeoffs between commissions from their deals and profits/lossess from finessing versus profits/lossess from the directional movements of concluded deals. This finessing is responsible for stop runs etc which we're all familiar with as RTs.
Large speculators on the other hand while not all equipped with the same “war chest” as the interbank nevertheless have access to the same research as the interbank and commercials and from their conclusions they are able to take positions in the FOREX Markets in anticipation of being proved “right”.
These 3 entities are the Big Boys (BBs) of the FOREX Market, they can be compared to elephants; there is a saying… “When elephants fight, the grass suffers”. Small speculators are the ants in the grass and an uninformed and unwary ant is always crushed when the elephants fight. A smart ant on the other hand seeks to climb aboard an elephant as it moves through the forest in order to move from one point to the other without fear of being crushed.
Thus a small speculator who seeks to profit from the FOREX Market must always remember who and what he is… an ant. The ant doesn’t tell the elephant where to go, the ant steps aside from the trail until an elephant comes by headed in the direction the ant wishes to go, then the ant seeks to climb this elephant for a safe ride. The danger to the ant is that it may suffer several falls while attempting to latch on to an elephant but a fall is better than being crushed... (these falls are the effects of finessing).
This therefore is how a small speculator can make profits from the FOREX Market… develop a means of latching onto an elephant which allows you to fall off relatively early and safely if it’s the “wrong” elephant while allowing you to cling securely to the “right” elephant till you arrive at your destination. The ability to do this consistently and safely is the difference between successful small speculators and the vast majority who fail.

We are the small account holders who trade through Forex Brokers. Our individual and often times collective positions have little effect on the Trend of a particular instrument. In fact RTs don't trade on the multi Trillion Dollar Interbank market but on the relatively smaller multi Million Dollar markets offered by our Brokers! Our duty as RTs if we desire long term success is to see Reality; we must use Reality to position ourselves on the same side as the BBs and to make our profits within the directional push of the BBs. This is because the prices offered by our Brokers must be in alignment with the prices on the Interbank, thus if we're aligned with the Interbank in the first place it makes our work much easier.
Therefore we must be able to clearly discern 1) The direction which the BBs are focused on moving [this direction forms our Trend], 2) The regions which the BBs will choose to enter their positions [these regions form our Location] 3) The time period when the BBs choose to enter their “true” positions [this informs the Timing of our entries]. Success in performing these activities leads to success in trading.

The preceding is a major reason why the use of the Daily charts in one form or the other is a key component of the RBT paradigm... because only at the end of the day or series of days can the true direction which the BBs want to go become clear!

Hi guys,

I was looking thru my stuff in preparation for today's post... i came across an ebook i wrote in 2009, i thought you might like to review it.

I'll be back later with today's post...

Have a good day all.

So far we've examined the realities of the Forex Markets, the realities of Retail Trading along with an overview of the RBT Paradigm. Lets consider the core skillset required or success as a trader.

Every profession has one skill set for entry, another for competence and a third for mastery!


The “tools” may be the same in all cases but the understanding and application of these tools is the difference between masters and novices, professionals and amateurs.


What are the critical skills required to become a successful Forex trader?


There are three critical skills which all masters of Forex trading employ and continuously sharpen.


The first skill is Information Processing. This is the most basic skill and forms the starting point for entry, competence or expertise. Unless and until you can recognize, analyze and structure the information you receive or are exposed to as a Forex trader – you trade in vain. This covers all forms of information processing and analysis – charts, statistics, quantitative models; technical, fundamental and sentiment analysis and all forms in between. The form of information you utilize is irrelevant, what is important is your ability to process this information and extract what is “true” and “real” from it.


The second critical skill is Decision Making. Information processing is wonderful but it is ultimately useless if it does not allow for clear, realistic and efficient decision making. The difference between novice/amateurs, merely competent and expert/master Forex traders is the quality of their decision making. Experts continually fine tune their decision making process to allow for swift and effective decisions. Experts can tell from one glance at their processed information whether or not an opportunity is worth it or not.

Einstein said perfection is attained when nothing else can be removed. This is what the experts have achieved, they have removed all the “noise” and clutter from their Information Processing/Decision Making system so that the decisions they make are based on reality and allow for opportunities to be clearly and accurately assessed.


The third critical skill is Unhesitant Action. It’s no use arriving at the “right” decision and then failing to act on it. Experts have mastered the skill of Unhesitant Action; this means they know when to sit and wait, when to place a trade, when to tweak and when to get out completely. Unhesitant Action is a function of maturity and poise. Consider experts you know in other fields, if the novice uses 6 actions to complete a task, the competent may use 4; the expert will always use the minimum necessary to achieve the task – not too much and not too little.


Acquiring, mastering and refining these three critical skills is what will determine your success or failure as a Forex trader.

very nice,i like,Im in

Hi Guys,

From this post onwards we'll be exploring the internals of the RBT Paradigm and the DiLoTi/OSAME System. We'll work with charts, analyze the markets and scrutinize ourselves as traders. Recollect that RBT is a Belief System, DiLoTi is a trading Strategy, OSAME is a trading Process.

Also the goals of the RBT (Reality Based Trading) Paradigm and the DiLoTi/OSAME trading system are 1. To allow us to clearly and objectively see what is happening in the markets… i.e. to allow us to see REALITY and 2. To allow us to swiftly and unhesitantly make trading decisions… in, out, stand aside.

A core tenet of RBT is that we do not attempt to forecast price movements nor need to know the future. RBT is based on the heart and soul of Technical Analysis; according to James Chen in his book “The Essentials of Technical Analysis” – Trends are the Heart of Technical Analysis, and Support/Resistance is the Soul of Technical Analysis. Our experience has borne this maxim out.

Trends can be clearly determined from Observation, Retracement/Locational opportunities can be Spotted and by patience and experience entries can be Timed and positions Assumed.

RBT determines the Directional Bias for any Markets by examining the prevailing Weekly Trend, the Locations for entry are determined by examining the regions of Support/Resistance clearly defined by Price Structure, and Timing of entry is achieved through Multiple Time Frame Analysis. RBT is a simple, robust, complete and powerful Trading Paradigm based on the fundamental principles of Technical Analysis.


THE 3 FOUNDATIONS OF THE RBT PARADIGM


1. Principle of Trend: PA continues in the same established direction unless extrinsic pressures are applied to cause a reversal of direction. A trend is established by the consensus directional bias of market participants mainly the BBs. It is their continual assumption of positions in a certain direction that allows the market to trend.


2. Principle of Sentiment: Because these instruments are pairs –one base and the other the counter, it follows that if a particular movement is caused by the base then all pairs with that base should show similar formations and movements i.e. bullish or bearish against the USD/JPY/CHF. likewise for movements caused by the counter. Thus RBT seeks to always trade strong:weak or weak:strong pairs in order to achieve the highest probability outcomes in the direction of the trend.


3. Principle of Structure: Human beings need reference points in order to operate in regions of uncertainty; thus Market Structure (previous Highs, Lows, Closes and Mid Points) as well as Price Structure (Swing Highs and Lows) serve as the universal reference points within which prices move in the markets. These structure points aren't derived from any subjective or mathematical process and are 100% objective.

RBT is simply trading what is and not what we wish; Accuracy in Interpretation, Precision in Execution.

The instruments we trade are EU, GU, AU, NU. EJ, GJ, AJ, NJ, ECHF, GCHF, ACHF and NCHF.

The time frames we use are Weekly, Daily and 1 Hour timeframes.

.... to be continued

Hi Guys,

Let's dive deeper into the foundations of the RBT Paradigm, the DiLoTi Strategy and the OSAME Process. We'll also discuss why we use the timeframes we do and how they're used.

RBT PARADIGM

1. The Principle of Trend. The Law of Trend states that a trend in place is more likely to continue than reverse. RBT allows us to take advantage of this powerful law by aligining our directional bias with that of the BBs. We get the TREND from the Weekly time frame, the reason for this is because it's the lowest timeframe that shows a clear consensus of directional bias of all the market participants. Recollect that the BBs 'know' where they want the price to move to, we don't. Also recollect that as RTs we're literally 'ants' compared to the BBs. So it's important for us to be aligned in the prevailing direction of market movements. This allows us to benefit from the BBs transactional flow, its like dipping our cup into the stream of the BBs cashflow.

The best time to join a trend is when it's beginning to manifest it self, in RBT we call this the 'phase shift'. [pls be patient as we'll have opportuinty to do some chart examples later on]. To understand phase shift think of what happens when you're mixing water. 1st the water is cold because the cold tap is on, as you turn the hot tap the temperature begins to change. This is what happens in the markets, a bullish move is never purely buying just as a bearish move is never purely selling; there's always selling during a bull move and buying during a bear move. The reason the bull move is bullish is because the bullis tap is wide open while the bearish tap is open just a little and vice-versa.

We want to short just after the phase has shifted from bullish to bearish and vice-versa. Continuing with the taps analogy, we want to be hot just after the hot tap is increasingly opened and the cold tap is increasingly closing i.e. as the temperature passes from lukewarm to warm! This ensures that we don't jump the gun by being bulls before the BBs are fully bulls and vice-versa; everytime we jump the gun we can be sure that we'll experience the famous 'stop hunts' and market reversals which frustrate so many RTs.

In summary, the principle of the trend allows us to align ourselves with the newly dominant trend just as it begins to dominate. We can therefore expect that before the trend runs out of steam it should carry us a good way in the direction we wish to go!

2. The Principle of Sentiment. When the BBs are short the EURO they aren't short the EURUSD they're short the EURO! This holds for any currency, this is the power of the principle of sentiment - it allows us to see what the BBs are doing by showing us the strengths and weaknesses of various currencies in pairs. If the BBs are short the EURO this will be manifested in various ways, we'll notice signs of EURO weakness aginst the USD, JPY. CHF and other counters. Our task then becomes simple, we ask ourselves... against which counter is the EURO weakest? The answer allows us to more confidently go short IF the trend for the pair is bearish!

This pinciple is why we focus on the instruments we do... EU, GU, AU, NU. EJ, GJ, AJ, NJ, ECHF, GCHF, ACHF and NCHF. We are able to clearly discern the BBs sentiments for any single currency and then pair strong:weak for a long trade or weak:strong for a short trade. We have no interest in 'iffy' pairs, we want a clear difference which supports directional flow... the ability to grasp this gives us immense power and makes our selection that much more effective. THis leads to increasingly higher quality trades as we make increasingly better quality decisions. [we'll see examples of this later]

3. The Principle of Structure. I guess we all know that the future is unknowable. It's this uncertainity that eats away at the average RT. While the BBs don't know the future any better than we do, they have the advantage of knowing the intentions of their customers and at least on a transaction -yb- transaction basis they have a certain assurance of potential outcomes. For the RTs, there's no such 'safety net' to give us comfort, for this reason we need reference points to allow us operate with a degree of confidence in an environment of uncertainity.

Many methods have been put forward and adopted to provide these points of reference... they all revolve around the 'soul' of TA i.e. Support/Resistance. Thus we have Supply/Demand, Pivot Points, Fibonaccis, Bollinger Bands and so forth. While these tools all have their uses with the RBT Paradigm we have chosen to follow another path. Instead of using subjective tools or mathematically derived locations we work with reality - the clear, unambigious and indisputable regions which the markets give to us.

Thus we embrace previous Highs, Lows, Mid-Points and Closes (Market Structure or MS) and Previous Swing Highs and Lows (Price Structure or PS). This is nothing new, however the simplicity of structure is deceptive in hiding its power!

In RBT (at least the way i use it), MS is derived from a yearly and monthly perspective; where is the market now with refernce to last year's HLMC? Where is the market now with reference to last month's HLMC? From MS we understand that there are bullish regions of reference and bearish regions. From M-H is bullish, from M-L is bearish. Market Closes above M indicate bullishness, below M indicates bearishness. Again this is nothing new, but it's real and powerful when embraced and implemeted skillfully.

PS is the sequence of swing highs and lows, bullishness isn't a sequence of Higher Highs (HH) but of Higher Lows (HL); bearishness isn't a sequence of Lower Lows (LL) but Lower Highs (LH).

Thus in RBT MS and PS shows us the clear footprints of BBs in terms of structure. [again please be patient, we'll do examples soon].

This concludes for now our theory of the RBT paradigm.

THE DiLoTi STRATEGY

Forex trading is a human activity, it is human beings who take positions in the markets and it is human beings who program machines to act on their behalf. The Forex Market reflects human traits of fear, greed, hope, expectation and uncertainty.


All human activities are based on principles whether we recognize them or not these principles determine who will succeed and who will fail. These principles can be divine or human devised, but they must exist.


Ask yourself, what principles govern my trading? Do you understand what makes the Forex market work? Do you understand the players and their interests? Do you know and clearly understand your role in the Forex Market and how that “limits” or “empowers” you? Sun Tzu said – “he who knows himself and knows his enemy is victorious in a hundred battles, he who knows himself but not his enemy is defeated in fifty battles, he who knows neither himself nor his enemy is defeated every time”.


So what are the true principles of Forex Trading?


First, in order to profit you must buy low and sell high; or buy high and sell higher. This is elementary. How is this accomplished? You must be in position before others who will take the same action as you have but only later. It’s like catching a wave to surf; you have to be in position and in front of the wave and faced in the right direction so that it takes you where you want to go (actually you must want to go where the wave wants to go). So you must interprete the direction the market will take.


Second, in order to profit you must be in position to profit from the move. A core principle of combat is positioning - you must position your forces in such a way that at that time and in that place you have the advantage. Likewise for us as traders, we must position ourselves to take advantage of the direction the market is moving. To position yourself to profit, you must identify the right location from which to place entries in the direction of the market flow (trend).


Third, even if you have correctly interpreted the direction the market is moving, and you have identified the right location to profit from the move; it’s no use being too early or too late! Timing is the third vital principle for successful trading. You must be in the right location, pointed in the right direction at the right time!


Every successful trading system is built around these three principles – DiLoTi for short. Analyze five top traders you know, I guarantee that they’ll have different “systems”; if you break the systems down you’ll find that it’s based on the DiLoTi principles.

The beauty of understanding DiLoTi is that it simplifies our decision amking and allows for clarity in the midst of uncertainity. It's a system and a strategy combined as well as having elements of process... 1st direction, then location and lastly timing. This is KISS, this is powerful, this is Reality!

THE OSAME PROCESS

Dr Stephen Covey became acclaimed for his best selling book 'The 7 Habits of Highly Effective People'... the core message is simple - the difference between successes and failures isn't in knowledge or riches or background etc... it's simply in habits!

What are habits? Ingrained processes which have become assimiliated into our subconcious so we perform them almost 'mindlessly'! Habits come from processes. RBT and DiLoTi will be nothing more than a nice academic activity without the OSAME Process to allow us to implemet them over and over again with precision. Only by repeatedly and consitently, flawlessly executing the edge which RBT and DiLoTi give us can we enjoy the benefits over time.

The 1st step is simple, Observe what the markets are doing! We see the markets through the lens of RBT. This allows us to accurately interprete what the markets are doing... interpretation not prediction is the key!

Next based on clearly seeing what the markets are doing we are able to Spot opportunities to profit. Understand that as RTs we can't force the markets to give us opportunities neither can we impose our desires on the markets and even if we're 'right' unless the market is willing to 'play ball' there's nothing we can do! So we observe first and the if available we can prepare ourselves to take advantage of the opportunities the markets present to us.

Once opportunites have been spotted, we Assume positions in the markets in accordance to the tenets of RBT/DiLoTi [examples to come soon]; the rest is simple - we Manage our positions to profit or loss and 'after the party' we leave (i.e. Exit our positions), either because we're automatically stopped out for a profit or loss, or because we intervene maually in response to a change in the circumatnces under which the position was initially entered!

OSAME is a simple, straightforward and clear process which if executed flawlessly allows us to use the power of RBT/DiLoTi to benefit immensly from the markets... over time we become what we all long for - consistently profitable traders able to operate with confidence and poise in the markets despite the uncertainty that prevails!

ON TIMEFRAMES

In the implemetation of RBT on this thread we will use the Weekly (W1), Daily (D1) and 1 Hour (H1) time frames as our operating terrain.

Why?

Earlier in this post i shared the significance of the W1 timeframe (TF), for our purposes its the lowest TF that allows us to clearly see the consensus direction the BBs are moving the markets. Changes in the direction of W1 will alert us to potential changes in the dominant trend. [examples later].

Why D1? From the first couple of posts in which we discussed the realities facing us as RTs we touched on how the BBs need to finesse the prices in order to get the best deals for themselves first and then their clients. For this reason, D1 allows us to see the commitments of the BBs at the end of a trading day (yes i know 4x is a 24hr market and there is no 'end' nevertheless end of NY session is conventionally taken as end of a 24hr trading day).

Why H1? As far as we're concerned on this thread, H1 is the lowest logical TF for market entry, this is because the positions of the BBs are tallied/synchronized every hour on the hour! Whereas different 4x Brokers have different weekly starting times, you can be assured that a single H1 candle on any platform of any broker looks just the same as that for any other broker!

So how do we use these TFs in executing our trades? Unlike the conventional methods which use a Trend, Setup and Entry process; in essence using W1 to determine trend, then D1 for setup (read confirmation) with H1 as entry - we use W1 for Trend then drop down to H1 for Setup/Entry before moving up to D1 for Confirmation i.e. the validity of our entries can only be confirmed after we have assumed a position, if we wait for confirmation before taking a position not only does the amount of risk increase, bu the potential rewards diminish also.

This method of using TFs for direction, entry and the confirmation is counter intuitive for the vast majority of RTs but its based on reality and solid principles of trading. The best opportunities to enter a trend are near the beginning i.e. near the turning points and not during the middle (just ask Paul Tudor Jones or Sam Seiden)!

So in this post, we've accomplished the following:
1. Expounded on the principles of the RBT Paradigm,
2. Expounded on the rationality of the DiLoTi Strategy,
3. Expounded on the habit forming power of the OSAME Process and,
4. Explored the reasoning behind the selection of the TFs we will use and why/how we'll use them.

I'm grateful to all of you who've posted so far Darryl, Neziah and Brandy711; and also to all of you who've viewed this thread and taken the trouble to download the account statement and book and also gonbe to myfxbook. You're participation to this point has been encouraging, i trust the info i've shared to this point has been helpful and/or thought provoking.

So i respectfully ask for questions/comments at this stage before we go into examples using historical charts. I won't be posting my live trades on this thread that's on my other thread http://www.forexfactory.com/showthread.php?t=458817 which i invite you to follow, alternatively you can check the myfxbook link from time to time to keep up with new trades.

I await your feedback.... Do have a profitable day!!!

Ok then... now for some examples. I'll be using the following notation:

HLCM = previous High, Low, Close and Midpoint
YH, YL, YC, YM = Previous Year High, Low, Close, Midpoint
MH, ML, MC, MM = Previous Month High, Low, Close, Midpoint
W1 = Weekly Time Frame
D1 =Daily Time Frame
H1 = One Hourly Time Frame
TF = Time Frame
GU= GBPUSD
TL = Trend Line
RBT = The entire Reality Based Trading paradigm/DiLoTi Strategy/OSAME Process from the previous posts.
MS = Market Structure
PS = Price Structure
PA = Price Action
SL = Stop Loss
TP = Take Profit

How do we begin to implement the entire RBT paradigm to our trading? We start off with a naked chart. We will consider a GU W1 chart as below :



Next we mark the beginning of the new year with a vertical line as follows:



In MT4 each periodic division for a W1 TF chart represents one years worth of market action. So from the preceding year (2012) we determine the High, Low, Close, and Midpoint and mark it on the D1 TF with horizontal lines. I use crimson for high, lime for low, deep sky blue for close and black for midpoint (just my preference) for 2012 the values are H = 1.63085, L = 1.52330, C = 1.61770, M = 1.577075. This gives us our overarching MS for the year 2013.The GU D1 Chart now looks like this:



NB: We notice 2012 closed bullishly i.e. above the midpoint, therefore for 2013 we expect the year to be bullish unless an external force causes a change in the trend (if i recollect correctly, GBP did have a crisis early 2013 which led to a prolonged sell off!!!) As long as PS is above YM we can consider the underlying long term trend to be bullish.

Next from the D1 TF we determine the HLCM for the previous month (December 2012), we use the same colours as for yearly levels to avoid confusion but with thinner lines. The values for December 2012 are H = 1.63057, L = 1.60013, C = 1.61770, M = 1.61535. The GU D1 Chart now looks like this:



NB: MS from December 2012 gives us the framework for January 2013,we notice that PS dropped below MM this indicates bearishness for the medium term trend.

Note that since this is the past we use a 2nd vertical line to show the end of January 2013.

Our Chart is now set. Our next task is to go back to W1 to see if a 'phase shift' has taken place, we find that it has - the phase shift looks like this:



The red vertical line marks the week which activated the phase shift, the red horizontal line marks the closing price for the week (1.58633) - note that this week is the first bearish week to close below the open of the highest closing bullish candle marked by the green vertical line. Therefore from the 'new' week marked with a blue vertical line we wish to go short on GU.

We drop down to the H1 TF to seek our setup/entry (remember that under RBT we first seek Direction from W1, Location/Timing from H1 then confirmation from D1), the H1 chart fro the period in view looks like this:



Unfortunately, for the period in view there's no clear opportunity to go short for the first 6 days after the phase shift has occured. You can see the rough looking price action between the blue and red vertical lines, and although price truly is moving downwards yet from RBT we know that the best 'time' to get into a bearish trend is when there is a turn around from bullishness to bearishness in other words, we want to go short only after a period of bullishness.... therefore we have to wait on the sidelines for the whole period under review while the bearishness lasts... however from 29:01:2013 (the other blue vertical line) we notice something interesting, there is a bullish run in the markets,



this corresponds to the bullish candle marked with a blue vertical line on the W1 TF as below, notice how it failed to breach the close of the phase shift candle (red horizontal line):



Now back on the H1 TF we switch to line chart and draw a trend line as below:



Please note that the TL begins from before the blue vertical line, and clearly touches multiple times after the blue vertical line - this TL isn't curve fitted but exactly how we would have drawn it if we were trading live!

Switching back to candlesticks, we wait for a break of the TL (a bearish close below it) and we enter short on the candle immediately after the break (green vertical line) as below:



Nest post we will consider stop loss placement and trade management.

Cheers...

Right...

Notice some interesting things from the entry... we entered short (just coincidentally) around YM, we'll place our SL (blue horizontal line) above the close of the phase shift week (red horizontal line) for 140 pips buffer. This is how it looks below:



To set the TP we move up to the W1 TF, seeing how PS and PA have dropped below YM an objective target would be YL, the TP (light green) is placed before YL as below:



We can clearly see the entry (thick green vertical), SL (thin blue horizontal) TP (thick light green horizontal) and phase shift (thin red horizontal).

We now move down to D1 to watch the trade unfold and for PS and PA to confirm the 'rightness' of our entry:



This time around, we're favoured by the markets and the trade turns out a winner. TP was a value of 390 pips, SL 140 R:R 2.78 a good trade by any standards.

I'm sure you notice that much profit was left on the table, an alternative trade management scenario could be to allow the trade to run as you adjust the SL from week to week... this is my preferred way of trading when market conditions are 'trending' other times we'll need to set a TP because the markets aren't trending!

Comments and questions welcome...

Cheers.