First thing, this pattern is not suitable to day traders. It is a trend following system, but the most evolved you will come across. Only read on if you are willing to hold a trade for anywhere from a week to a quarter.
So most trading teachers will show you a similar picture in their courses. It is all you need to know about price movement. They would tell you price is either trending or ranging. You can only trade profitably when it’s it’s trending. trending. Then they show this picture to explain the trend; an up move (impulse move), which retraces to a higher-low then creates a new, higher-high and so on. Every trading system existed plays on a variation of this p icture. A support-resistance mentor would say the first hi gh is resistance, so trade a break of that resistance. Or trade a bounce of that support. So you try that but it doesn't nearly work; you can never work out where the exact resistance or support are. Additionally, sometimes support or resistance fail causing you massive losses. So you look for another method. So you meet another mentor and he tells you about RSI. He would tell you when price makes a higher-higher but RSI doesn't, you should sell as this is a sign of reversal. Besides the fact this is plain wrong and that divergences don't foreshadow a reversal (they actually confirm the trend). RSI divergences don't tell you when to exit. Actually most of the time the divergence is completely neglected and price continues to move in the same direction. So you move on to try trendlines, fibonacci, bollinger bands, harmonic pattern or moving averages. Nothing ever works consistently. So they tell you trading is hard and its money management is all that matters. Well yes money management is very, very important. But those mentors also know nothing and
they teach you bits and parts, a half-truth. That's why their systems don't work out. I will show you a trend following system that works. And its not a b reakout system, my trend following is much more accurate. All you need is a 20 Exponential moving average, 50 exponential moving average and a stochastic oscillator. Lets move on... Last edited by PhilipPirrip; 02-15-2015 at 12:03 PM. nppetkov,, bioshock nppetkov bioshock,, fzqflash and 6 others like this. Reply With Quote
02-15-2015, 12:07 PM#2 PM #2
ImBatman Newbie
Join Date Jan 2015 Posts 11
Sounds good Excited for more details ~ImBatman Reply With Quote
02-15-2015, 12:27 PM#3 PM #3
PhilipPirrip Master Contributor and Member
Join Date May 2014 Posts 699
In this post I will share the system's rules and then post an example in a following post. I want to point out that the picture I shared in the opening post is an important one; price does trend in that way. Its just that mentors have never helped us trade that movement properly. This is what this system will do. Entry Step 1: Plot the 20 Exponential moving average (ema), the 50 ema an d the stochastic oscillator. Step 2: Wait for the 20 ema to cross over or below the 50 ema. Now any moving average system tells you when (the 20 crosses above 50 goes long. when 20 crosses below 50 go short.) THIS IS WRONG! The 20 ema crossing above the 50 ema indicates a very strong upward move that is about to correct soon. The 20 ema crossing below the 50 ema indicats a strong bearish b earish move that is about to retrace. So how do we know when does the retracement end and when will it continue? This is where the stochastic kicks in. Step 3: If the 20 ema crossed above the 50, the stochastic will be OVERBOUGHT (indicating that a fall in price is near. If 20 ema crosses below the 50 ema, the stochastic will be oversold. This is the pattern I'm sharing with you; stochastic will be overbought with an upward cross over and vice versa on all trading instruments i nstruments on all higher timeframes. Step 4: Keep a close eye on stochastic, wait for it to go all the way to the other extreme. Place your entry when stochastic crosses over in the other direction.
ex: 20 ema crosses above 50 ema. Stochastic will be overbought (80+). Wait for stochastic to become oversold. When stochastic crosses up at oversold, by the next candle open. It may sound confusing, but bear with me and things will become clearer in the example. All we did is traded the picture I shared in the first post. Price went from a low point to a high point (so 20 ema crossed above 50 ema.) price then retraced (stochastic went from overbought to oversold.) We entered when stochastic crossed over from oversold because we anticipate that price will go on to make a higher now. This is the most profitable trading pattern you will encounter.
Exit I use trailing stops. Once we enter. I draw a fibonacci extension from the low point to the high point if it’s a buy signal or from the high to the low if its a sell signal. I use the following levels: 1, 1.272, 1.618, 2, 2.618, 3, 3.618, 4, 4.618, 5... and so on. When price closes above 1, I move stops to break even. When it closes above 1.272, my stop becomes a close below 1. Then when it closes above 1.618, my stop is a close below 1.272. A close above 2, sees me moving my stop to a close below 1.618 and so on. In the next post I'll share a number of examples to clear it up. Bucketman, nppetkov, bioshock and 4 others like this. Reply With Quote
02-15-2015, 03:31 PM#4
PhilipPirrip Master Contributor and Member
Join Date May 2014 Posts 699
So here is an example. This is USDJPY in 2015 on the 4H chart. (It’s important to note I prefer that time frame. Trading on the daily could keep you in trades for years! On the other hand using a shorter time frame is not advisable for many reasons.) I doubt anyone tried shorting USDJPY this year. But the system clearly shows you a short opportunity that yielded 250 pips in five days (fundamentally, this is a countertrend trade.) Most analysts told you it was ranging early on (by the way a buy signal in USDJPY just flashed on Friday.) In the picture, you notice the yellow line (20 ema) crossing the blue line (50 ema). We now establish that the trend is bearish, USDJPY should make at least one lower low. At that time, the first circle at the bottom, stochastic was indeed oversold. This confirmed to us that we are about to see a retracement. We kept following the stochastic until it got overbought, that told us that the retracement is almost over and now we will go on to make our anticipated lower low. We entered as soon as the stochastic crossed over to the downside (the second yellow circle). This happened to be at the closing of the shooting star formation on the chart, marked with the green arrow and the red horizontal line. Once we entered. We now have our high point (that is the highest point immediately before the crossing of the moving averages) and a low point (the lowest point before the retracement.) We plot a fibonacci extension from the high to the low. As soon as price closed below the fibonacci 1 level, we moved the stop to break even. It proceeded to close below the 1.272. We moved our stop to a close above the 1 level and so on.
