The London Trade

The London Trade

Introduction

I have a vague idea where London is, somewhere in England, United Kingdom. I also know that when traders there make their trades, the market moves. This is why I want to trade with them. This thread is a fairly comprehensive description of a trading methodology that I am currently working on. I am not going to say its an easy strategy, just that its in the works.This is a long post, over 1,600 words.

I am not going to get into who I am or where I've been or any of that David Copperfield stuff, I am just going to say I've been in the industry over eight years now and I'm in my late 20's.

The simple objective of this thread is to create a trade-able, profitable system. This thread, I hope, will document the birth, growth, mutation and evolution of a strategy from infancy to being a very deadly soldier in the markets.

This system is my idea but a lot of the tools I use are free on the web . The concepts I bring together are widely written about and all I am doing is bringing all of these to form something simple to understand and profit from.

As with any system, I will state my observations, the hypothesis and will get into the jist of developing the system . I will then give the entry and exit rules followed by my position sizing and money management techniques.

The end product should be a trading method that instills confidence in a trader; an execution plan that the trader can follow without the worry of losing money, knowing fully well that losses are inevitable but that the system will make money at the end of the day.

I will refer to many authors during the life of this thread and hopefully this will inspire traders to read widely and gather lots of information. I hope this thread makes us better learners and better traders.

The Observation


Pair and chart

My observation has been made on the 30 mins GBPUSD charts over the last few months

Indicators
Sessions(auto) v 1.7
5 EMA
SR_Zones
Bollinger Bands (34,3)
TDI Red Green (26,2,26,2,2,42,2)
Stochastics(13,3,4)
MACD (12,26,14)

I have observed this chart for quite a while and I think I see a trading opportunity at the London open, or within two hours within the open.

I have noticed that the market makes a sustained move right after this open consistent with the current trend as established by this system.

The Hypothesis

The London session traders respect the trend and will move the market a minimum of 40 pips in the direction of trend at least 80% of the time upon the London open

Measuring the Hypothesis
I have attached a pdf file showing my observation over the last three months.

Developing the System

Everything comes at a price. This strategy is free to all members and guests here on Forexfactory, but for me its been very expensive. It has cost me endless hours of chart time and accounts. I hope that cost will be worth it.

Basics

Trend
This is trend-following strategy. It is imperative that you trade in the direction of the overall trend. Every other day the market will move in the direction of the major trend and that move will be our bread and butter. This system is designed to capture these moves.

Among the many ways of determining the overall trend, here is a simple trick I use. If we are breaking previous days highs on the daily chart, we are an in uptrend and vice versa. Of course the definition of an uptrend is higher highs and higher lows.

I also watch out for the days previous sessions and lows as they act as support and resistance.

I have attached a template file to this thread to show you how I see my charts.

I also use the ichimoku clouds but thats just to get a different view, clear my head.

Indicators

The Bollinger Bands encompass over 99% of all price action if we use a deviation of 3. For this reason I have used a BB with the settings 34 and 3. This allows me, together with the stochastic, to see overbought and oversold areas and to avoid the temptation to chase price and buy into resistance and vice versa.

I respect the Fibonacci series and you will notice I use the Fibonacci numbers a lot in my indicator settings as well as using the Fibonacci retracements as targets.

The MACD is optimized for this strategy as well as the stochastic

The TDI Red Green is a big part of this system as we only take trades in the direction of this indicator.

We have the support of the sessions indicator and the support resistance indicator since we are day traders so that we don't get over optimistic.

The Concept

Unless a trader understands the reasoning behind every trade, they will find it hard to hold onto that position whatever the conditions. They might get out with a loss while it could have been a profit, take little profit or hold on to a loss too long. Unwavering confidence is needed for a trader to trust a system. This confidence can be gained by having an unambiguous system that spells out every possible scenario and how to react to it. This way, the trader has the peace of mind in knowing that every contingency is accounted for.

I cannot account for every contingency with this plan at the moment, which is why I have opened this thread; so that I can forward test this system and find out those unique situations and the appropriate response to them.

However, here is the original concept: The GBPUSD, upon the London open, moves in a manner consistent with the current trend. Note I said a manner and not the direction. This is because the markets are not linear. So you will see me making some counter-trend trades that are consistent with the overall trend.

The concept of sessions is important and I have used a sessions indicator in my template. This system advocates trading during the London session but there might be good opportunities arising in other sessions. Secondly, though I advocate trading at the open, sometimes there is no signal as the market might be too far from the mean. The best thing to do is wait for a better opportunity.

Trades will mostly be closed within the session but that not a rule cast in stone. There will be trades that will carry over to the New York session and some even
overnight.

I respect Technical Analysis and I consider myself a technical analyst because I believe there is hope for those who practice it. It is for this reason that I can enter a trade using signals generated by these indicators and analysis and be confident I have made the right decision. This belief is key to my trading.

I love trading divergences and will be on a constant look out for them on the stochastic.

Entry rules

1. The TDI, MAs cross and MACD are the pillsrs of this system. The MA cross tells us the dayss trend. The TDI tells us the direction of the trades to take. The MACD and stochastic gets us out and in quickly.
2. Because the BB encompass over 99% of the price action, we can tell when price has gone too far for the day. Also keep in mind that price, on average, ranges about 70% of the time. The BB is also a volatility indicator and will allow us to get in when there is enough volume in the market.
3. We will also trade divergences off the stochastic.
4. We want to trade in the direction of the 34 SMA. We would also love to get in as close as possible to this average so that we get out with optimum returns; small loss if we are wrong and maximum gains if we are right.
5. The break of a previous days high or low could trigger a signal with the target at 161.8 fib level of the previous days range.

Set-ups

1. In the direction of TDI
2. In direction of MACD signal line
3. In direction of 34 SMA
4. In direction of MAs cross.

Trigger

We want to trade on the London open. We want to trade to the above set ups. We will want to take a trade in the direction of these set-ups as close as possible to the SMA or support and resistance levels.

We might also want to trade in the direction of these setups as close as possible to the BB Bands but in the opposing side. Hence if all set ups point up, we might want to buy at the lower bands.

An excellent trigger is the MA's cross.

We might also trade if previous days highs are broken.

These triggers will be listed with time as we continue forwarding testing the system

Exit rules

1. MAs crossover
2. TP or SL
3. TDI reversal
4. Fibonacci levels and support and resistance
5. MACD reversal for TP
(To be edited with clearer info)

Position Sizing and Money Management

This is an remarkably important part of this trading system. A good position size has to be determined based on your profile and risk appetite. I recommend using a true leverage below 10:1.
I use fixed fractional on a weekly basis basis with a true leverage of 40:1. Thats 500:1 on 10% of my account.

My stops wont be more than 60 and my targets are between 30 to 120 pips based on circumstance.

Back-testing and forward-testing

I have attached a copy of my visual backtest as a pdf file. This thread will be used to forward test this system with the trade explorer attached.

Objectives

1. To develop a simple profitable trading system
2. To become a better trader making more correct and disciplined decisions
3. To make some money
4. To create a network of good traders.

(attachments to follow)

Just entered a long trade here, the TDI going long as well as the MA's cross and MACD. Pair in an uptrend.

so, bb standard deviation of 3 or 4 as per your text? also, the sto settings in your chart are different from your text.

use the template. Thats the system.

Todays trade garnered +41 pips. Nice start. More details to follow.

The GBPUSD is in an uptrend and we might be buying it for a while

I have just linked a trade explorer to this thread starting off with yesterdays action in a bid to forward test this strategy.
Looking at the pair, as we await the London Open, its going down nicely to give us a buying opportunity. However, we have to wait for our indicators to align since the market might turn for the day. Its all about discipline and patience.

Some info on the BB.

http://www.traderplanet.com/

At the moment there is little volatility on our chart and we stay out. Its a good idea to stay out of the market when the bands are converging. Look at yesterdays trade, the bands are diverging, indicating some volatility. We do not want to stay in the market too long, watching paint dry, we want action

Watch out for yesterdays high, if we break, we buy. 161.8 fib level of yesterdays range would be our target

Our targets on the upside once we have a confirmed buy.

price is at previous session highs. This is the high of the Tokyo and Sydney sessions. if we break above them, its significant, thats 4508

Bands diverging, previous highs broken, TDI and MA's cross long. Buying at close of candle.

Just bought the cable based on TDI cross, previous days break, stoch and MACD agree as well and we are in an uptrend. Target is the verified support area

Really Nice work

Is this right?

Thank you josh11. The charts are okay. I see you used Fibonacci expansion. I use Fibonacci retracements. I think they are different. But I might just look into using the expansion with 100% as target 1. Its already hit for today.

As long as 0 and 100 are in the same place it the same, here are retracements of previous day!

okay, use the previous days range to get the target levels

Can I ask how you deal with days like this?
Want to understand your system fully TY

This is The London Trade system. We are looking to trade the London open in a manner consistent with the trend.
On that day for instance, when the London session opens, our system,based on the MA's cross and TDI are reading short. It is imperative that you trade with the TDI on your side.
When the buy MA crossover happens, price is at previous sessions high plus we are not convinced the TDI is buy yet so we wait for the next candle to close. This is the importance of waiting for closes. We were right and price reverses. But we cant sell, the MA cross is long and stochastic looking up.
That level must have had a resistance line. We trade short on the NY session when the MA cross comes back down supported by stochastic and MACD. we wouldn't have bought into resistance.
All in all BB shows its a low volatility day and volatility is seen during the NY session when the bands diverge.

Hope that helps a bit