The Free Trade on Chart Patterns

The Free Trade on Chart Patterns

I'm finally making a pause after a long EA development and while I was going back cleaning and reading some notes on my paper journal I was intrigued by a note saying The Free Trade in which I explain a kind of pyramiding which if executed properly could provide such a thing but I just wasn't capable in remembering how and my notes were awful.

I remember that I got that technique from some trading system, course or article on the internet so no credit is due to me here, but It was impossible to find the original paper containing all the explanations so if you find the original source or some article explaining it better than me, don't hesitate to share it here. Personally, with what I had on hand, I went on an Excel sheet and reconstructed it step by step.

I also think that this kind of trading technique must be well known among a majority of traders, if this is your case, sorry for repeating it here but I think that this can still be useful for people not knowing it yet. If that is the case, don't expect neither something spectacular nor new here but instead something interesting to know and to add to your trading toolbox.

I added Chart Patterns to the Free Trade title with the aim of improving their recognition and trading. This means that I will periodically post current chart patterns on which I will try to deploy the Free Trade technique described here.

This is a journal

I consider myself not a good trader, meaning that I could say that through my glasses I see a graceful giraffe coming to me when instead its an awful elephant. So don't trust what I say and don't hesitate to discuss the charts and the technique itself, the only thing I ask you is to be courteous and respectful.

A trade explorer will be attached to backup the charts.

What is described here is a technique, not a system


Unlike a proper system which provides clear rules for entering the market, there is no such a thing here and I will rely only on chart patterns for that. On the contrary, once that I have the entry and target, all other trade levels are mathematical.

Altogether, when executed properly the technique provides a trade setup with a risk reward ratio of 1 to 6, meaning that 1 setup executed properly out of 6 will compensate the 5 losing and add profits to the account.


Usage Considerations

Instruments (pairs) to trade:
Any.

Time frames to trade:
The trade requires a target which must be, if possible, several hundreds of pips away, so large time frames will be needed for that. I'm talking about the daily and weekly time-frames. I will concentrate on daily and weekly time-frames only.

Swap:
Swap must be considered on high swap cost currencies.

Risk to take on each setup:
1/6 of account will be used for each position.
This means that each lost trade will wipe out 17% of account while each winning one will earn 100%.

Usage of indicators:
Pattern trading is almost price action trading and given the large time-frames traded, there is no need for surgical entries, so no indicator will be used.

Special Trader Abilities:
Mainly Patience as large time frames are traded.

Building the Free Trade

Here we are...

The Free Trade is a composite of 3 trades of equal size that are situated at equidistant intervals almost like in a rigid grid. Each trade is entered in the direction of the price, so we add positions on winning trades only. The initial Stop Loss of the first trade is entered at the same interval distance from the entry point. When a new level is reached in our direction we move the stop loss of precedent trades to the previous level and we enter the following trade. When the last (4th) level is reached, we take our profits and go for some beers. If you prefer wine, it's also OK.

Lets illustrate this with an example. Lets say that we have identified a trade which has a potential target, or potential move of 330 pips on the long side.

To calculate the distance between each level which is also the Stop Loss distance from the Entry Point, we simply divide the target distance from the entry point, in our case 330 pips by 3, so 330 / 3 = 110. I will call this variable DX, which is the distance between price levels. So in total, we have 5 important price levels at 110 pips interval:

<SL> DX <EP> DX <T2> DX <T3> DX <TT>

where: SL=Stop Loss, EP=Entry Point, T2=Trade 2, T3=Trade 3, TT=Target, DX=110 pips.

For our example, lets put the entry point at 1.2000 and calculate the different price levels, remember that this is a long trade :

Stop Loss = 1.1890 (1.2000-110 pips)
Entry Point = 1.2000
Sencond Entry = 1.2110 (1.2000+110 pips)
Third Entry = 1.2220 (1.2000+220 pips)
Target = 1.2330 (1.2000+330 pips)

With our price levels in place, lets write down all the possible scenarios:

First scenario, we loss right from start:

1. We enter long at 1.2000, SL at 1.1890
2. Stop Loss reached => We lose 110 pips.
3. P/L = -110 pips.

Second Scenario, we reach 2nd level and then, price retracts to first level:

1. We enter long at 1.2000, SL at 1.1890
2. Price moves to 1.2110.
3. We move SL of Trade 1 at BE.
4. We enter long at 1.2110, SL at 1.2000
5. Price retracts to 1.2000
6. Trade 1 is closed at BE, Trade 2 is closed at -110 pips
7. P/L = -110 pips.

Third scenario. we reach 3rd level and price retracts to 2nd level:

1. We enter long at 1.2000, SL at 1.1890
2. Price moves to 1.2110.
3. We move SL of Trade 1 at BE.
4. We enter long at 1.2110, SL at 1.2000
5. Price moves to 1.2220
6. We move SL of Trade 1 at +110
7. We move SL of Trade 2 at BE
8. We enter 3rd trade at 1.2220 SL at 1.2110
9. Price retracts to previous level at 1.2110
10. Trade 1 is stopped out at +110, Trade 2 stopped out at BE, Trade 3 stopped out at -110
11. P/L = 0, THIS IS THE FREE TRADE !

Fourth Scenario, we reach our target:

1. We enter long at 1.2000, SL at 1.1890
2. Price moves to 1.2110.
3. We move SL of Trade 1 at BE.
4. We enter long at 1.2110, SL at 1.2000
5. Price moves to 1.2220
6. We move SL of Trade 1 at +110
7. We move SL of Trade 2 at BE
8. We enter 3rd trade at 1.2220 SL at 1.2110
9. Price moves to our target which is 1.2330
10. We close Trade 1 at +330, Trade 2 at +220 and Trade 3 at +110
11. TOTAL GAIN = 330+220+110 = 660 pips

You can see that at any time between Entry Point and Level 2 the maximum risk is -110.

If Level 3 is reached,the maximum risk becomes zero, the setup is now a free or riskless trade !
And finally, if target is reached, we collect all the gains which are 6 times what we risk during the whole process.


What's next ?

Live Entries and targets on chart patterns, Let's see how far I can go on this...

Update 1.
Please disregard charts from post 2 to 13 included.

Update 2. Recycling a Trade.
As a general rule, when a pattern clearly fails, there is no need to continue the trade if we still have several tens or hundreds pips to go before reaching the SL. This allows to "recycle" the trade and eventually change direction on the same instrument or just save the pips for another trade.

Hi BT,

Today was a perfect example in the usd/cad. Both the technicals and the fundamentals were suggesting that a nice reversal could happen IF the priced reached anything above 1.3615. So any sell at that level or above would be the original entry point - with the additional trades structured (1 above, and 2 below that price) in whatever increments the trader likes.

I tried to add a picture (jpg) to this to show you the charts but I can't figure out how to add the file.

What you are describing is very similar to a "trade stacking" method I developed years ago, whereby you try to find a high (or low) that should become a reversal and you stack your trades with the new price direction as soon as it becomes evident to maximize the potential for the new move.

The mistake most traders make is trying to stack into a trend that has been evident for a while already.

Cheers,
mindy

Hi Mindy,

What is interesting in forums is that we can express our contrarian views.

Actually, I entered a long position in USDCAD, I will show my chart and explain why I took such a position.

Here is my USDCAD weekly chart showing a strong up channel.



I was a little late here as the right entry is at the limit of the channel but I entered the trade anyway for test purposes. The setup should not be taken as an example.

I now switch to the daily chart to zoom where price is living. My hypothesis is that the price will reach the top of the channel, so this was my target as shown in the picture below.



I modified the Fibonacci tool levels to show my trade levels so all is easy shown on the chart. It remains to see how the trade will unfold...

I think you may be right with the weekly - in the bigger picture - as my weekly chart is suggesting a top of this move to be somewhere between 1.3750 and 1.3900 - - but a lot can happen in a week!! I was trading today from the daily, 4 hour, 15 minute and 1 minute. @ entries - both stopped out - but booked 50 pips and am now waiting to see if I can enter again today. Tomorrow's sell targets will begin probably around 1.3700 if the price continues the longer term up trend. If I can't get in for a new sell today (above 1.3615) within the next 2 hours (2 hours prior to daily close), I will be done with this pair until I see what happens tomorrow.

I love that you share so much of your thoughts about trading. It is so important I think that we all continue to see how others view a situation especially when it is completely oppposite of what we see ourselves.

Thanks BT, you are the greatest!
m

I will let aside USDCAD for a moment, and would like to talk on a current AUDUSD trade. See picture below.



We see clearly the recent months downtrend on AUDUSD which is now forming a FLAG (in yellow).

This time I was not too late but my entry was still not perfect.
The idea here is being short at the top of the flag, here is how I entered the trade.




My entry point is at 0.7287 and the target is at 0.7100 which is the lower bound of the channel.

The Stochastics are also going south but this is less important than the price action.

I was confident and a bit aggressive on this one as my explorer will show later...

I could be right but that's not important, I have anyway to put my hypothesis on the fire.

The problem here (on the USDCAD trade) as I entered too late is the spacing within the trades which could be too small, I'm talking here about ~150 pips and it's not uncommon to have such a retracement on the weekly chart, so if my second trade is triggered, I could be stopped out by a retracement as the stochastics are also suggesting...

Hi bt,

Good luck with your trading journal.

I like the idea, and it reminds me of the "Ladder System" I worked on a year ago.
latest EA here at the Robots Lab. (Source Code included if you are into development).

The best use of such a method/system would be

1. at anticipated tops or bottoms after price retraces, where risk will be at the minimum and rewards can be huge.
2. OR at main support/resistance areas where a pull back, and main trend continuation is expected.

Watch out on the audusd trade - when it hit the 50 moving average today on the dialy chart - that is what started a bounce back up - which so far has only gone back up about 20 pips though and could easily go back to at least 0.7275ish. If the down trend continues tomorrow the price should go down to about 0.7135 and if it breaks below that number we could see 0.7050 or lower by Thursday. My weekly on this one has the price currently smack in the middle of the potential weekly range in which case I say it could just as easy go either way from here. How's that for a prediction... the price will go up, or go down, or go nowhere! lol

cheers,
m

Thanks abokwaik ! For the comments and the links.

For the moment I will concentrate in patterns. That's difficult enough and should provide enough opportunities.

Another beautiful ascending triangle on CADJPY, everything is on the chart.

Great predictions here lol.

I must not take into account the MA50 or any other, I just trade price action on well known patterns. I have to stick to my rules and keep things the simplest possible.

But in all cases such kind of comments are always welcome, Thanks !

Another FLAG on AUDCHF weekly, the distance between levels is here ~178 pips, you know what the profit can be...

Another ongoing trade AUDJPY.

Entry point = 89.07, Target = 81.18, Distance between levels = 264 pips

My AUDUSD high risk trade stopped out and so did the little account I was playing with, with some leftover dollars.

New account created with $100 (cent account=10k$) to start from scratch. Explorer attached.

Also, to run the experience at full speed as the trades are long term (days and certainly weeks) I have decided to allocate the maximum capital to each trade. Knowing that the system has a RR of 1:6 the max risk per trade is then obtained by dividing the balance by 6.

Example for 10K = 10K/6 = 1666 which is ~17% of account.

Maximum Loss is 17%, Maximum Profit is 100% (6x17%)

Edit: I just have to be good enough to have 1 good trade out of 6 before being stopped out.

First trade documented on next post.

Hello,
I think there is a problem regarding the set up that compensate 5 losing trades. Ok i dont have the technical jargon so im gonna use my own words to explain. Thanks.
So in your ultimate trade you stack 3 orders in the trend direction like : B-B-B or S-S-S and your tp = 6 sl . But how many losing trades can you get ? 6 not 5.
How many scenarios when you enter 3 times ? 8 and here they are :

BBB - BBS - BSB - BSS (1)
SSS - SSB - SBS - SBB (2)

Now lets take the example of your 110 pips grid, pretending you enter a BUY this is the result of each possible sequence if i understand well your technique :

BBB = 660 ; BBS = be ; BSB = -110; BSS = -110
SSS = -110; SSB = -110; SBS =-110 ; SBB = -110


In all these sequences,pretending you want to enter a long, then you win only when BBB appears , be with BBS, and lose with the 6 others sequences.
So yeah although the rr is 1 to 6 , the winning trade will have to compensate for not 5 but 6 losing trades + 1 be.
So the timing given by the trading system has to have an edge if not it will be 50-50
I hope i did not make any mistake here, its easier to understand it graphically though.

Here is my current trade on USDCAD.

The identified pattern is a rising pennant on the weekly chart.

The hypothesis here is that the price will broke the pennant on the upside and that's it seems to be doing right now.
The B line which is of equal length of A line, shows what could be the final target, it's a 1474 pips trade !

Trade parameters:
EP = 1.3568, SL=1.3077, T2=1.4055, T3=1.4548, TT=1.5042
DX = Distance between levels in pips = 491

Chart:

Hi metta,
Thanks for your post.

If not mistaken, your calculations and mine are right. The slight difference is that in your calculation with six losses (not counting the BE) you are at BE from the profit point of view. While I was talking of adding profits to the account:

"... 1 setup executed properly out of 6 will compensate the 5 losing and add profits to the account."

hello Broketrader,
sorry Im not sure that i understand what you just wrote. Anyway, I like everything related to grids since its more my style so i ill be watching your thread with interest.

Just wanted to drop a note. I don't know if somebody noticed the adam & eve double bottom on my previous USDCAD chart...

New Trade.

It looks like CAD is the currency to short these days...

Half Staff Flag on the weekly chart. I'm being a bit late on this one but decided anyway to play it as there is still some 1k pipes to target if the pattern completes.

Trade Parameters:

EP=2.0658, SL=2.0289, T2=2.1015, T3=2.1382, TT=2.1750, DX=367 pips.

I have also removed the oscillator and the charts are drawn using the weekly or daily line, no more than pure chart pattern and price action.

Chart:



Updated post 1. (Please disregard charts in posts 2 to 13 included).