WELCOME TO Trading Boot Camp Day 2

Transcription

1 Icoachtrader Consulting Service WELCOME TO Trading Boot Camp Day 2 David Ha Ngo Trading Coach Phone: icoachtrader@gmail.com The information presented is for education purposes only. The coach does not give trade advice. Copyright 2010 Icoachtrader Consulting Service. All rights reserved. Icoachtrader reserves the right to change without notice

2 Trading Boot Camp

3 Seminar Agenda Day 1 Section 1: IPC of Traders Section 2: A Complete Mechanical Trading System 8:00 AM 11:00 AM 2:00 PM 5:00 PM Section 3: Swing Trading Section 4: Technical Trading Section 5: Fundamental Factors Section 6: Truth of Day Trading Section 7: Trade for Life Section 8: Trading Psychology Section 9: Team Trading Section 10: Intraday Trading Day 2 Day 3 Day 4 Day 5 8:00 AM 11:00 AM 2:00 PM 5:00 PM 8:00 AM 11:00 AM 2:00 PM 3:30 PM 3:30 PM 5:00 PM 8:00 AM 11:00 AM 2:00 PM 5:00 PM 8:00 AM 11:00 AM

4 Recap Section 1 IPC of traders Section 2 - A Complete Mechanical Trading System Section 1 Trading is a career Why Traders Fail? Three types of traders: Scalp, Day, and Position Traders Section 2 A completed Mechanical Trading System Markets What to buy or sell Position Sizing How much to buy or sell Entries When to buy or sell Stops When to get out a losing position Exits When to get out of a winning position Tactics How to buy or sell Last Change to become an Enlighten Super Trader

5 Section 3 Swing Trading

6 Swing Trading What is Swing Trading? Swing trading usually involves holding a trade for around 1 4 days, typically less than a week. OK, that sounds great but what or how does a swing trader trade? Swing trading typically involves a trader to trade in the direction of the major trend. Generally speaking, they do not trade against the overall trend. Their trades are held for several days and as such they usually watch the higher time frame charts (1 hour and higher) when monitoring and placing trades. There are many different ways of trading. The most common practice is to wait for price to retrace and enter a trade before it continues onwards. Entry is usually based on price bouncing off of support or resistance levels, trend lines or in some cases indicator confirmation. Swing traders are looking to enter on pullbacks as price retraces and then continues in the direction of the major trend. By observing the higher time frame charts and only entering trades in the direction of the major trend, swing traders have the odds stacked in their favor making this the best style of trading regardless of your market.

7 Swing Trading Swing High and Swing Low A swing high is a point where the market completes an upward move, then falls. A swing low is a point where the market forms a new low before rallying.

8 Swing Trading Swing Trading Strategies The goal of swing trading strategies is to enter high probability trades in the direction of the major trend. Swing traders typically do not counter-trend trade, or go against the flow. By going with the major trend, you are following the smart money. Following the smart money greatly increases your chances of placing winning trades. There are three main processes of any swing trading strategy. Step 1 - Identify the Trend: Trades should ideally only be placed in the direction of the main trend. Trends can be identified using a variety of different tools from price action to indicators. Step 2 - Wait for a Pullback: Once the main trend has been identified, you should be waiting or looking for some kind of pullback. Swing traders want value, they are looking to enter a trade when they believe the market has dropped down in price to a level that they see as good value before entering. By trading pullbacks to an area that offers better value, swing traders once again increase their odds of entering a profitable trade by making sure they get in at a good price. Step 3 - Place the Trade: With the trend correctly identified price at a level which is in your favor, you can now place your trade. It may sound simple, but this is exactly what the major banks and market movers do. This is how they manage to stack the odds in their favor and survive longer in the markets and make more money than 90% of other traders.

9 Swing Trading Learn How To Swing Trade If you want to learn how to swing trade, you must first master the basic elements of trading. All of the information below forms the building blocks for trading and is the reason why professional traders are so successful.] These areas cover: Trading psychology Psychology is an important part of being able to trade successfully. Money management Money management allows a trader to reduce risk and maximize the return on their winnings. Market analysis Technical and fundamental analysis are the two main styles of market analysis. Japanese candlestick charts Being able to read and understand Japanese candlestick formations gives you an insight into market sentiment. Trend Identification Swings traders greatly increase their odds by primarily trading with the trend. Correctly identifying the trend is a core component of swing trading. Trend lines A core component of any swing traders arsenal. Support and resistance levels These levels allow a trader to pinpoint crucial levels in the market where the odds are in their favor. Fibonacci retracement levels Much like support and resistance levels, Fibonacci retracement levels may offer a good entry point. Trading indicators Which indicators are the best for you. Stop loss Stop losses are often ignored by new traders with nothing but detrimental results. Trading hours Discover the best hours to open and close trades. This is need to know information and you should spend sometime familiarizing yourself with it. Once you have mastered the basics of swing trading, only then are you ready to implement what you have learned and begin on your journey to becoming a profitable swing trader.

10 Swing Trading Main Indicators for Swings Don t over complicate your trading by placing multiple indicators on your charts. Keep it simple. The main indicators commonly used by professional traders are: Simple Moving Average: SMA Stochastic Indicator: STOCH Relative Strength Indicator: RSI Fibonacci Lines: FIBS Average Directional Index: ADX Use the indicators large market players use. If these indicators help big players earn billions each year from swing trading, why aren t you using them also?

11 Swing Trading Main Indicators for Swings Simple Moving Averages (SMA) Simple moving averages are perhaps one of the oldest and most widely used swing trading indicators. Many traders use simple moving averages for trend identification. The most common for swing trading are the 150 and 200 simple moving average on the daily chart to identify the long term trend. There are other kinds of moving averages, such as EMA, but they are rarely used by banks and large players. Moving averages are typically used for two purposes: Trend identification Support & Resistance The 150 and 200 day simple moving average are typically used to identify the major trend. When price is above the 150/200SMA, the trend is up. When price is below, the trend is down. It may be hard to believe, but that is how many professional traders identify the major trend in many markets. When price is above the simple moving average, they are looking only to buy or go long. When price is below, they are only ever looking to sell or go short. In addition to trend identification, simple moving averages are used by many traders as possible areas of support and resistance. Swing traders use price bouncing off of the moving averages as part of their entry criteria.

12 Swing Trading Main Indicators for Swings Relative Strength Index (RSI): Overbought & Oversold RSI is a momentum indicator that helps identify the trend and potential overbought and oversold areas in the market. The indicator s scale ranges from 0 to 100. When the RSI fails below 30, indicated oversold, a bullish signal is generated. When the RSI rises above 70, indicated overbought, a bearish signal is generated. When the indicator is showing the market as overbought or oversold, a top or bottom may be forming. It is during these times that traders typically look to enter trades, close any open trades or tighten their stop losses. The middle 50 line of the RSI is also used to identify a potential trend. When the indicator should be above the 50 line, it is considered as UPTREND. When the indicator should be below the 50 line, it is considered as DOWNTREND.

13 Swing Trading Main Indicators for Swings Stochastic Overbought and Oversold Stochastic measures the momentum of the market and can warn as to when a market is perceived to be overbought or oversold. Any reading above 80 is considered overbought and below 20 is considered oversold. Swing traders use the stochastic indicator to buy when the indicator is showing that the market is oversold and sell when the indicator is showing that the market is overbought. This follows the idea that price moves in waves, and a trader should wait for a pullback (entering overbought/oversold) before entering a trade. In addition to warning of possible overbought and oversold areas, the stochastic indicator can be used to monitor the momentum of a market. If price continues to climb higher, but the stochastic indicator fails to make higher highs, it may be a warning that the market is running out of momentum and is preparing to undergo a pullback or retracement. Divergences (when market trends go in a different direction than market indicators predicted, usually signifying the onset of a trend change) occur when the price makes a new high (or low) that is not confirmed by a new high (or low) in the indicator. Prices usually correct and move in the direction of the indicator.

14 Swing Trading Main Indicators for Swings Stochastic Divergence What Does Divergence Mean? When the price of an asset and an indicator, index or other related asset move in opposite directions. In technical analysis, traders make transaction decisions by identifying situations of divergence, where the price of a stock and a set of relevant indicators, such as the RSI is moving in opposite direction. Positive and Negative Divergence: In technical analysis, divergence is considered either positive or negative, both of which are signals of major shifts in the direction of the price. Positive divergence occurs when the price of a security makes a new low while the indicator starts to climb upward. Negative divergence happens when the price of the security makes a new high, but the indicator fails to do the same and instead closes lower than the previous high.

15 Swing Trading Main Indicators for Swings Average Directional Index ADX ADX is used to quantify trend strength. When the +DMI is above the -DMI, prices are moving up, and ADX measures the strength of the uptrend. When the -DMI is above the +DMI, prices are moving down, and ADX measures the strength of the downtrend. ADX values help traders to identify the strongest and most profitable trends to trade. The values are also important for distinguishing between trending and non-trending conditions. The direction of the ADX line is important for reading trend strength. When the ADX line is rising, trend strength is increasing and price moves in the direction of the trend. When the line is falling, trend strength is decreasing, and price enters a period of retracement or consolidation.

16 Swing Trading Pullback Trading & Entries Once swing traders have confirmed the trend, they are looking to place trades in the direction of the trend. Can you trade against the trend? Sure, it can be done but doing so increases the chances that the trade will be a loser instead of a winner. Follow the smart money and only trade with the trend until you are confident you can counter-trend trade effectively. Swing traders typically are waiting for price to pullback and retrace. Why? They want to get into the market at a good price. By getting in at a good price, this only adds to the odds that are already stacked in their favor. What this means is that you won t be placing trades to enter randomly, even if they are in the direction of the main trend. Timing is important. You are looking for value in the market and when you believe there is value you enter your trade. Value, or a good price, is usually available when price retraces down after it has been moving with the trend. It is at these times when price retraces that swing traders are looking to enter the market. Even if price has retraced, you are not looking to enter the market hazardly. There should be confirmation or signs that you believe price will continue from its current point of retracement in the direction of the trend. This is where support and resistance, trend lines, Fibonacci and to some extent indicators can come into play. These tools allow traders to examine the market and decide if there is enough reason to confirm that price is expected to bounce from its current point of retracement and continue with the trend.

17 Swing Trading Pullback Trading & Entries (continue)

18 Swing Trading Trading Plan on Gold (12/30/10-01/05/11) - Homework Specification Product Position Strategy Day in the market Time Frames Indicators Patterns Prediction Enter Exit Profit Target Stop Loss Trailing Stop Outcomes Probability Trading Plan Spot Gold 10% of the Equity Swing Trading 1 < d < 5 (before and after New Year) H1 - Primary Chart Trading M15 - Secondary Chart for Verification D1 - Baseline Chart for Reference SMA, RSI, FIBs, Trendlines and Patterns SMA= 20, SMA = 50, SMA =200 Use Fib lines as S/R and depth of the market 2 x double bottoms in 12/16 12/23 a possibility of 3rd bottom forming up Based on Trend Reversal Signal Based on Trend Reversal Signal > $3.00 or $4.00 per entry < $1.5 per entry < $1.5 per entry >70% down trend based on trend reversal

19 Swing Trading Trading Plan on Gold (12/30/10-01/05/11) - Report # of trades: 6 Long: 1 Short: 3 Cancelled: 2 Trading any financial instrument on margin involves considerable risk. Therefore, before deciding to participate in margin trading, you should carefully consider your investment objectives, level of experience and risk appetite. Most importantly, do not invest money you cannot afford to lose. Consulting with your investment counselor, attorney or accountant as to the appropriateness of an investment in margin trading is recommended.

20 Swing Trading A Swing Trade on Gold (an excellent set up, entry, and exit). Using SMA, RSI, Fibs, Trend Lines and Patterns. H1 Time Frame Primary Chart for Trading

21 Swing Trading A Swing Trade on Gold (an excellent set up, entry, and exit). Using SMA, RSI, Fibs, and ATR. M15 Time Frame - Secondary Chart for Verification

22 Swing Trading A Swing Trade on Gold. D1 Time Frame Baseline Chart for References

23 Section 4 Technical Trading

24 Your Trading Coach Says The principle is competing against yourself. It is about self-improvement, about being better than you were the day before.

25 Trading with Technical Analysis Market Trend Trend Lines Support Time Frames Candlesticks Chart Patterns Cycles Trading Strategies In a shopping mall, a technical analyst would sit on a bench in the mall and watch people go into the stores. Disregarding the intrinsic value of the products in the store, his or her decision would be based on the patterns or activity of people going into each store.

26 Market Trend Never go against the trend. The trend is your friend. A market trend is a putative tendency of a financial market to move in a particular direction over time. A market trend is simply overall direction in which prices are moving UP, DOWN, or FLAT. Up Trend Down Trend Sideways Trend

27 Trend Lines A trend line is simply a momentum indicator. It measures the rate of increase in the share price over time and alerts you to any acceleration or deceleration of the trend. The difference between trend lines and other momentum indicators is that you use a supercomputer (the human brain) to visually identify the trend, rather than a simplistic formula calculated on your PC.

28 Trend Lines (continue)

29 Support and Resistance

30 Time Frames What is the best time frame? What is the most profitable time frame? How to control money management and tolerance for losses? What is the best time frame? Each time frame displays same data, but in different intervals. The choice of time frames is wide. Are you willing to monitor charts every 5 minutes for several hours a day? Are you comfortable taking decisions fast and like quickly changing prices? If yes, try trading 5 minutes charts. Or may be you prefer a slower pace at 1 bar per hour. You also believe that hourly charts are more reliable in the way they depict the market since much of the noise produced on smaller time frames can be eliminated. Then 1 hour time frame might be your winner What is the most profitable time frame? Each time frame can be traded successfully and yield opportunities for profitable trading. The smaller the time frame the smaller the profit goals set by traders for each trade. E.g. while on 5 minute charts, Forex traders would see reasonable targets at the next support/resistance level pips away from the entry point. On the daily time frame profit goals will be extended several days into the future with expectations of banking or more pips in one trade. A trader can make same pips trading 5 min time frame, but it would require a lot of trades to be taken, hours of price monitoring, which is not an easy task. How to control money management and tolerance for losses? Forex trading is not always about wins or losses. They are part of the trading process. Managing losses on 5 min time frame would be the easiest thing to do. Firstly, because a trader is able to monitor charts all the time, secondly, because losses are usually small due to the nature of 5 minute trading: price ranges are smaller and it is easy to tell when the market starts turning against your position. Hourly charts have wider price ranges and therefore require wider stops to be placed, and in case of being wrong on a trade, larger losses to be taken. If to speak about daily charts, losses there if occur are even larger as the market requires wider space to swing the price. So here you have: smaller profit targets and smaller losses or larger profit targets and larger risks. Making profits with more price action and more trading opportunities, but also a lot of time spent in front of the monitor every day, or making profits with less price action and opportunities and less time spend trading Forex.

31 Candlesticks Doji (important) Forms: The open and close of the candle is the same or almost the same. The importance of Doji is only significant on charts where there are few Doji. The more Doji there are on a chart the less significance they have. While they can be useful for calling both tops and bottoms, they are more useful at tops Applications: Doji candles show that the market is currently exhausted and has temporarily lost its sense of direction. Perhaps the best use of Doji candles is to warn that a current move may be coming to an end or be exhausted and a trader may consider tightening his stops or closing out positions.

32 Candlesticks Bullish Engulfing (important) Forms: Their real body must engulf the previous candles real body. The real body should be the opposite color of the previous candle. If the previous candle s real body is very small and the bullish engulfing candle s real body is very large, the stronger the formation. Applications: Bullish engulfing patterns show that the buyers overcame sellers and this can be seen by the candlestick completely engulfing the previous candlestick body. Due to them offering less reliable signals, it would be best to wait for some confirmation before using it to enter a trade.

33 Candlesticks Bearish Engulfing (important) Forms: Their real body must engulf the previous candles real body. The real body should be the opposite color of the previous candle. If the previous candle s real body is very small and the bearish engulfing candle s real body is very large, the stronger the formation. Applications: Bearish engulfing patterns show that the sellers overcame buyers and this can be seen by the candlestick completely engulfing the previous candlestick body.

34 Forms: Candlesticks Hanging Man (important) The upper shadow will be small or non existent. The lower shadow should be twice the length of the real body. Best to wait for confirmation on the following candle. Applications: The hanging man shows that price met with strong selling in the market but was pushed back up by buyers. It does not carry as much strength as a pin bar and it is recommended that you should wait for bearish confirmation on the following candle. Never jump the gun and get in early without confirmation first.

35 Forms Candlesticks Pin Bar (important) One shadow will extend out while the other should be very small or non existent. The extended shadow should be twice the length of the real body. Best played at swing highs or swing lows. The longer the shadow the stronger the signal. Applications: Pin bars should be very obvious due to their large extended shadow. This large shadow shows that price met strong resistance/support at this level and was rejected and there is chance of a reversal. Pin bars are best played at swing highs/lows or at points of support/resistance. Spend sometime looking at charts and look for pin bars at swing highs and swing lows. They are excellent at signaling the possibility of a change in trend. This candlestick formation is possibly one of the BEST formations and once mastered should provide a trader with extremely reliable and rewarding trades.

36 Candlesticks Inverted Hammer (important) Forms: The upper shadow should be twice the length of the real body. The lower shadow will be small or non existent. Best to wait for confirmation on the following candle. Applications: The inverted hammer shows that price met with strong buying in the market but was pushed back down by sellers. It does not carry as much strength as a pin bar and this is why it is recommended that you wait for bullish confirmation on the following candle.

37 Forms Candlesticks Piercing (important) The first candle closes below its open (i.e. a down candle), a continuation of the existing trend. The second candle opens below the low of the first candle and closes more than midway up the first candle s body, near or at its high. Applications: The Piercing Pattern is composed of a two candle formation in a downward trending market.

38 Candlesticks Dark Cloud Cover (important) Forms The first candle in the pattern is a long up candle at the top end of a trend. The second candle opens higher that the high of the first candle. It closes at least half way down the first candle, and the further down it closes, the more convincing the reversal. Applications: The Dark Cloud Cover is the bearish in a trending market.

39 Forms Candlesticks Shooting Star (important) The Shooting Star is comprised of one candle and is found at the top of an uptrend. Applications: It alerts to the possibility that the top is near. The Shooting Star Formation, at the bottom of a trend, is a bullish signal and is known as an inverted hammer. It is important to wait for additional bullish confirmation signals before entering a long position.

40 Candlesticks Morning Star (important) Forms The Morning Star is comprised of three candles and is a bottom reversal signal. Like the planet Mercury, it foretells a new dawn is about to occur, and that prices are likely to go higher. Applications: It alerts to the possibility that the trend is changed. The Morning Star Formation, it is formed after an obvious downtrend and is formed with a long red body, usually a capitulation candle at the bottom of a long decline. The following candle will normally gap down; however the trading range of this candle should remain small. This candle is the star of the formation. The third candle has a strong upward move and represents the fact that the bulls have now stepped in and seized control. The optimal Morning Star signal would have a gap before and after the star candle.

41 Candlesticks Evening Star (important) Forms The Evening Star is comprised of three candles and is a top reversal signal. Like the planet Venus, it precedes darkness and indicates that prices could be about to go lower. Applications: It alerts to the possibility that the trend is changed. The Evening Star Formation, It is formed after an obvious uptrend and is made by building a long green body at the top of such an uptrend. The next candle should gap up, with its trading range remaining. Again, this is the star of the formation. The third candle should move strongly down, which alerts to the probability that the bears have seized control. This candle should close at least halfway down the green candle which formed prior to the star (i.e. two periods ago). The optimal Evening Star signal would have a gap before and after the star candle.

42 Chart Patterns Continuation Patterns Symmetrical Triangle Ascending & Descending Pennant Flag Price Channel Falling Wedge Rising Wedge Cup with Handle Reversal Patterns Head and Shoulder Bullish or Bearish Double Bottom or Double Top Triple Bottom or Triple Top Parabolic Curve Megaphone Top or Bottom Island Bottom or Top Short Term Upside Breakout, Rectangle, Slim Jim Continuation patterns are chart patterns which set up the trend for a follow through move in the direction of the prior trend. Reversal patterns are chart patterns which reverse the trend once the pattern is confirmed.

43 Chart Pattern Profitable Pattern 1 Symmetrical Triangle Pattern (continuation) Observation: At least 2 points are required to form a trend line and 2 trend lines are required to form a symmetrical triangle. a symmetrical triangle BULLISH required at least 4 points. The second high (D) should be lower than the first (B) and the upper line should slope down. The second low (C) should be higher than the first (A) and the lower line should slope up. Ideally, the pattern will form with 6 points (3 on each side) before a breakout occurs. A symmetrical triangle BEARISH is opposite with the above desciption. Pattern: The pattern contains at least two lower highs and two higher lows. When these points are connected, the lines converge as they are extended and the symmetrical triangle takes shape. Target Profit: Entry price plus the pattern s height for an upward breakout. Entry price minus the pattern s height for a downward breakout.

44 Chart Pattern Profitable Pattern 2 Ascending & Descending Triangle Pattern (continuation) Observation Ascending Triangle Pattern: It has a series of increasing troughs and the price is unable to break through a price barrier, chances are you are witnessing the birth of an ascending triangle pattern. Descending Triangle Pattern: It has a series of decreasing troughs and the price is unable to break through a price barrier, chances are you are witnessing the birth of an descending triangle pattern. Pattern: Ascending Triangle Pattern: Confirm your ascending pattern by drawing a horizontal line tracing the upper price barrier and a diagonal line tracing the series of ascending troughs. Descending Triangle Pattern: Confirm your descending by drawing a horizontal line tracing the lower price barrier and a diagonal line tracing the series of descending troughs. General: The pair meets a level of support or resistance (the horizontal trend line) several times before breaking out and continuing in the direction of the developing up or down pattern. Target Profit: Entry price plus the pattern s height for an upward breakout. Entry price minus the pattern s height for a downward breakout. Ascending and descending triangles are short-term investor favorites, because the trends allow short-term traders to earn from the same sharp price increase that long-term investors have been waiting for. Rather than holding on to a trade for months or years before you finally see a big payday, you can buy and hold for only a period of days and reap in the same monster returns as the long-time owners.

45 Chart Pattern Profitable Pattern 3 Pennant Pattern (continuation) Observation: Pennants look very much like symmetrical triangles. But pennants are typically smaller in size (volatility) and duration. Pattern: As same as symmetrical pattern Profit: As same as symmetrical pattern

46 Chart Pattern Profitable Pattern 4 Flag Pattern (continuation) Observation: Flag patterns look very much like symmetrical triangles. But flags are typically smaller in size (volatility) and duration. Pattern: Bullish flags are characterized by lower tops and lower bottoms, with the pattern slanting against the trend. But unlike wedges, their trend lines run parallel. Bearish flags are comprised of higher tops and higher bottoms. "Bear" flags also have a tendency to slope against the trend. Their trend lines run parallel as well. Profit: As same as symmetrical pattern

47 Chart Pattern Profitable Pattern 5 Price Channel Pattern (continuation) Observation: They are indecision areas that are usually resolved in the direction of the trend. Supply and demand seems evenly balanced at the moment. Buyers and sellers also seem equally matched. The same 'highs' are constantly tested, as are the same 'lows'. The price vacillates between two clearly set parameters. Pattern: Bullish flags are characterized by lower tops and lower bottoms, with the pattern slanting against the trend. But unlike wedges, their trend lines run parallel. Bearish flags are comprised of higher tops and higher bottoms. "Bear" flags also have a tendency to slope against the trend. Their trend lines run parallel as well. Profit: As same as symmetrical pattern

48 Chart Pattern Profitable Pattern 6 Falling Wedge Patterns (continuation) Observation A falling wedge is generally considered bullish and is usually found in up trends. But it can also be found in downtrends as well. The implication however is still generally bullish. This pattern is marked by a series of lower tops and lower bottoms.

49 Chart Pattern Profitable Pattern 7 Rising Wedge Pattern (continuation) Observation A rising wedge is generally considered bearish and is usually found in downtrends. They can be found in up trends too, but would still generally be regarded as bearish. Rising wedges put in a series of higher tops and higher bottoms.

50 Chart Pattern Profitable Pattern 8 Cup with Handle Pattern (continuation) Observation The cup and handle is a longer term continuation pattern, normally observed on weekly charts. The cup pattern should take a minimum of 7 weeks to form. There is no upper limit with some patterns taking as long as a year. The handle may form over one or two weeks but may also take several months. "Cups" with a sharp "V" bottom. The more "U" shaped the cup bottom is, the stronger the signal. Handles which are too deep. The handle should form in the top half of the cup pattern.

51 Chart Pattern Profitable Pattern 9 Head and Shoulder Pattern (reversal) Observation: A Head and Shoulder Top is considered a BEARISH signal. It indicated a possible reversal of the current uptrend into a new uptrend. A Head and Shoulder Bottom is considered a BULLISH signal. It indicated a possible reversal of the current downtrend into a new uptrend. Pattern: The neckline is a key element of this pattern. The neckline is formed by drawing a line connecting the two high price points of the formation. Profit: Price minus the pattern s height (distance from the top of the head to the neckline). Short sell as soon as the price moves below the neckline after the descent from the right shoulder Buy long as soon as the price moves above the neckline after the ascend from the right shoulder

52 Chart Pattern Profitable Pattern 10 Double Bottom or Double Top Pattern (reversal) Observation: When you see a W or M pattern forming, you may have just discovered a money-making double bottom or double top pattern. These patterns are common reversal patterns used to suggest the current trend may be likely to shift. But don t panic if your double bottom or double top patterns do not develop as you had originally thought. You haven t lost your chance for cash. If your W or M pattern reverses for a fourth time, you could now be working with the profitable triple bottom or triple top. Double Bottom Pattern: A price increase of 10% to 20% from the first trough to the middle peak. Two equal lows, not to differ by more than 3% or 4%. Double Top Pattern: A price decrease of 10% to 20% from the first peak to the middle trough. Two equal highs, not to differ by more than 3% or 4%. Profit: Double Bottom Pattern: Entry price plus the pattern s height (distance from the peak to the bottom of the lowest trough). Double Top Pattern: Entry price minus the pattern s height (distance from the trough to the top of the highest peak).

53 Chart Pattern Profitable Pattern 11 Triple Bottom or Triple Top Pattern (reversal) Observation: Triple Bottom: A series of three identical troughs at the end of a prolonged downtrend. Triple Top: A series of three peaks at relatively the same level. Triple Bottom Pattern: The price exceeds the resistance established by the prior peaks. Triple Top Pattern: The price falls below the support that formed from the prior troughs. Profit: Triple bottom pattern: Sell your trade at a target price of entry price plus the pattern s height (distance from the resistance to the bottom of the lowest trough). Triple top pattern: Buy trade at a target price of entry price minus the pattern s height (distance from the support to the top of the highest peak.

54 Observation: Chart Pattern Profitable Pattern 12 Parabolic Curve Pattern (reversal) This pattern can yield you the biggest and quickest return in the shortest possible time. Generally you will find a few of these patterns at or near the end of a major market advance. The pattern is the end result of multiple base formation breaks.

55 Chart Pattern Profitable Pattern 13 Megaphone Top and Bottom Classic Pattern (reversal) A Megaphone Top is considered as a bearish signal, indicating that the current uptrend may reserve to form a new downtrend. A Megaphone Bottom is considered as a bullish signal, indicating that the current downtrend may reserve to form a new uptrend.

56 Chart Pattern Profitable Pattern 14 Island Bottom or Top Short Term Pattern (reversal) An Island Bottom is a bullish signal indicating a possible reversal of the current downtrend to a new uptrend. This pattern is an indication of a financial instrument's SHORT TERM outlook. The Island Bottom occurs when the price "gaps" below a specific price range for a number of days and then is confirmed when the price "gaps" above the original range. An Island Top is a bearish signal indicating a possible reversal of the current uptrend to a new downtrend. This pattern is an indication of a financial instrument's SHORT TERM outlook. The Island Top occurs when the price "gaps" above a specific price range for a number of days and then is confirmed when the price "gaps" down below to the original range.

57 Chart Pattern Profitable Pattern 15 Upside Breakout, Rectangle, Slim Jim Pattern (reversal) An Upside Breakout is considered a bullish signal, marking a breakout from a trading range to start a new uptrend. An Upside Breakout occurs when the price of a financial instrument breaks out through the top of a trading range. This technical event indicates that prices will rise explosively over a period of days or weeks as an almost vertical uptrend appears.

58 Chart Pattern Profitable Pattern 16 Continuation Diamond (Bullish) A Continuation Diamond (Bullish) is considered a bullish signal, indicating that the current uptrend may continue. Diamond patterns usually form over several months in very active markets. Volume will remain high during the formation of this pattern. The Continuation Diamond (Bullish) pattern forms because prices create higher highs and lower lows in a broadening pattern. Then the trading range gradually narrows after the highs peak and the lows start trending upward. The technical event occurs when prices break upward out of the diamond formation to continue the prior uptrend.

59 Trading Strategies Multicollinearity Multicollinearity is a statistical term for a problem that is common in technical analysis. That is, when one unknowingly uses the same type of information more than once. Traders need to be careful and not utilize technical indicators that reveal the same type of information.

60 Trading Strategies Elliot Wave Theory R. N. Elliott believed markets had well-defined waves that could be used to predict market direction. In 1939, Elliott detailed the Elliott Wave Theory, which states that stock prices are governed by cycles founded upon the Fibonacci series ( ). According to the Elliott Wave Theory, stock prices tend to move in a predetermined number of waves consistent with the Fibonacci series. Specifically, Elliott believed the market moved in five distinct waves on the upside and three distinct on the downside. The basic shape of the wave is shown in the 1 st diagram. Waves one, three and five represent the 'impulse', or minor up-waves in a major bull move. Waves two and four represent the 'corrective,' or minor down-waves in the major bull move. The waves lettered A and C represents the minor down-waves in a major bear move, while B represents the one up-wave in a minor bear wave. Elliott proposed that the waves existed at many levels, meaning there could be waves within waves. To clarify, this means that the chart above not only represents the primary wave pattern, but it could also represent what occurs just between points 2 and 4. The 2 nd diagram shows how primary waves could be broken down into smaller waves.

61 Trading Strategies Elliot Wave Theory (continue) Elliott Wave theory ascribes names to the waves in order of descending size: 1. Grand Super cycle 2. Super cycle 3. Cycle 4. Primary 5. Intermediate 6. Minor 7. Minute 8. Sub-Minute The major waves determine the major trend of the market, and minor waves determine minor trends. This is similar to the way Dow Theory postulates primary and secondary trends. Elliott provided numerous variations on the main wave, and placed particular importance on the golden mean, 0.618, as a significant percentage for retracement. Trading using Elliott Wave patterns is quite simple. The trader identifies the main wave or Super cycle, enters long, and then sells or shorts, as the reversal is determined. This continues in progressively shorter cycles until the cycle completes and the main wave resurfaces. The caution to this is that much of the wave identification is taken in hindsight and disagreements arise between Elliott Wave technicians as to which cycle the market is in. Here is an example of an Elliott Wave cycle. Ideally, Wave Two would not retrace more than 66%, but you can get a real sense of the wave patterns in action from the chart, just as well.

62 Trading Strategies Fibonacci Retracements Fibonacci Retracements are used to estimate likely reversal points during an up or down trend.

63 Trading Strategies Trading with the Trend Trading in the direction of the dominant trend is one of the best ways to make money in the Forex market. There is almost always a trending currency pair to be found in Forex and as a result many traders strictly employ trend trading strategies due to the fact they simply have a higher probability of success than trading in other market conditions. However, no market trends vigorously forever, so it is a good idea to have a back up strategy in case your favorite currency pair enters into a period of consolidation for a long time. In any case, trend trading is one of the most fun, accurate, stress-free, and lucrative ways to trade the Forex market. One great way to learn how to trade with the trend is by combining simple candlestick trading strategies with bounces off a trend-line or support and resistance levels within the trend. Notice in the chart GBPUSD, the down trend on the daily chart of the GBPUSD that lasted about 3 months. There were multiple candlestick signals that formed near the trend line; these signals provided very high probability entry setups that led to great risk to reward ratios. It is a great idea to learn all about trading candlestick patterns in trending markets, there are many intricacies involved which take some time to learn. In the GBPUSD chart, we can see two patterns that look similar, the Harami and the inside bar, however, Japanese candle patterns like the Harami contain many more variations than other forms of candlestick price action, so it is important to learn the differences and decide which version makes the most sense to you.

64 Trading Strategies Trading with the Trend (continue 2)

65 Trading Strategies Trading with Moving Averages While it is important to learn how to draw support and resistance levels manually, moving averages provide a great method of locating dynamic support and resistance levels within the Forex market. Moving averages show a moving picture of the most active price levels for the last X period of time. For example, a popular moving average is the 200 day moving average, this indicator shows traders the average (open, close, high, or low) price over the last 200 trading days, as opposed to just a static level drawn across the high or lows that you see on your chart. Most traders set their moving averages to calculate the average closing prices over X days, as closing prices are typically the most significant to any security. There are various ways to trade with moving averages. Some traders like to use them in trending markets and trade off of pullbacks to the moving averages), while other traders prefer to design a rule-based trading system off moving averages and enter once price closes above or a below their favorite moving average. However you decide to implement them just make sure you do proper research on moving average Forex trading before plowing further ahead. Some of the more popular moving averages are the 8, 21, 50, 150, 200, and 365 moving average, but you will need to determine for yourself which ones you prefer. Another way to trade with moving averages is to wait for a cross-over of one moving average over another and then enter on pullbacks to the moving averages. For example, in the chart below we see the 50 period moving average in blue and the 200 period moving average in red on the 4hr chart of the GBPJPY Forex currency pair. Notice on the far left of the chart the 50 period moving average crosses up over the 200 period moving average; this was the signal to start watching for buying opportunities. Subsequently, price pulled back to the area of the 50 or 200 moving average on multiple occasions providing numerous high probability entries in the direction of the dominant 4 hr market momentum.

66 Trading Strategies Trading with Moving Averages (continue)

67 Trading Strategies Trading Consolidating Markets Learning to trade markets that are consolidating can be a very important and effective tool to add to your trading repertoire. Markets spend more time consolidating than they do trending on average; therefore if you wish to remain continually active in the Forex market it is crucial that you understand some basic strategies of trading range-bound market conditions. One effective trading strategy is to simply mark a horizontal line across the highs and lows of a consolidating market and trade off of these levels (see the EURUSD daily chart example). After this is done, you then can buy when price reaches the bottom of the trading range or sell when it reaches the top, preferably with confirmation from a candlestick pattern or some other signal, rather than just a blind buy or sell. Eventually trading ranges breakout, and this provides another great opportunity for keen traders. Markets will typically move a distance equal at least to the width of the trading range after breaking out, most of the time they will go further than this. Therefore, trading range break outs can be great entry methods, this Forex strategy is also known as a Box Break Out Forex strategy.

68 Trading Strategies Trading Consolidating Markets (continue)

69 Strategy: Trend Lines Breakout Currency Pair: GBP/USD or EUR/USD Time Frame: 1 hour Indicator: None Trend Line: Yes Swing: Use swing high and swing low Session: Mid-night to 4:00 am EST Entry: Based on the break out of either one of the trend lines and is immediate without waiting for a current candle to close Stop: It is placed just above/below the candle that broke thru the trend line. Profit: Based on the next three candles (we have three hours or three candles to trade, after that we will exit with whatever profit is made) Rules: Using Pivot points and Timing. Our profit target is going to be the nearest level of support or resistance according to Pivot point levels. Trading Strategies Trending Breakout System

70 Trading Strategies Ten Rules of Technical Trading 1. Map the Trends 2. Spot the Trend and Go With It 3. Find the Low and High of It 4. Know How Far to Backtrack 5. Draw the Line 6. Follow That Average 7. Learn the Turns 8. Know the Warning Signs 9. Trend or Not a Trend? 10. Know the Confirming Signs