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P2: A batch of FX market trades

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peter2

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12 January 2008
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In the spring a young trader's fancy lightly turns to thoughts of the fx markets.
(my apologies to Alfred Tennyson).

It's spring in Aust and the normally slumbering fx markets wake up and make a dash for the EOY. Not so this year. Pres Trump has kept the fx markets buzzing through the US summer with his statements and negotiating tactics.

I'm going to post a batch of trades focussed on the fx markets. These are mostly currency markets but include various indicies. Providers of MT4 trading platforms are slowly increasing the number and variety of available markets. I'll be looking at ~25 fx markets and 7 indices.

In order to do this properly we need to consider many aspects of a trading business. I'm going to be brief on these aspects and say that we're trading for growth and the trade results will be expressed as R multiples. If you're considering trading fx markets and don't understand my use of the terms "R multiple" and fixed fractional position sizing, please ask. It's vitally important to know how to position size consistently when trading leveraged markets.

I will spend a little more time outlining the trading methodology. This is a collection of systems or guidelines that we may use to create distinct trading plans. I'm a discretionary trader but I hope you'll notice the structured process that is important to ensure consistency.
 
The trading methodology uses 4H candlestick charts and a simple interpetation of the price trend and price action of these bars. Why use this 4H period?

(i) My trading business (and life) keeps me busy. There are only 6x4hr bars in each day. Pretty basic but I had to say it. This means that I only need to check the fx markets 4-5 times each day (depends on when I sleep). For me that 11am, 3pm, 7pm, 11pm, 03am.

(ii) The 4H charts provide enough movement to trade both price action bars and trend. Let me show you what I mean using the last three weeks of the AUDUSD 4H chart.

Chart indicators:
(i) 4H trend is shown by the Blue 8EMA(Close) and Red 9EMA(Open). This trend is also shown by the top ribbon which is created by the same moving averages.
(ii) The bottom ribbon shows this trend in the daily time frame.
(iii) The other moving averages are 50ema, 100ema, 200ema. They indicate the trend in larger time frames and have no relevance for this threads TPs.

The reason for this chart is to show that there is enough movement in the 4H time frame to trade the 4H trend. The MT4 platform shows the 4H charts with weekly period separators.

 
The trading methodology has two parts. I've called them System 4B and 4T.
The "4" refers to the 4H time frame, "B" refers to bars, "T" refers to the 4H trend.

System 4B (based on the indicated price action of specific 4H bars):
There are a few specific type of bars that indicate that there's a high probability that price will go in a definite direction soon. We can use these bars to create a trade and await the outcome.
(i) Outside reversal bars
(ii) Doji's and two bar doji patterns (HCD, LCD)
(iii) Pinbars
(iv) Engulfing bars
(v) Large bars (marabozu's)

I'm not going to describe them now. Look them up if you can't wait to know what they are.

What interests me with these bar patterns is their location. I'm only interested in them if they form at prior highs/lows, at support/resistance levels or at 50-62% fib pull-back/retracement levels that are also at a high/low of a trading session. This will require lots of explanation, I expect, but you're not going to get it now. I'll explain soon after I take a trade that sets up in accordance with these ideas.

Trades based on System 4B are placed immediately you notice them. This may be near the end of a bar or at the open of the next bar.

 
System 4T (based on the current 4H trend):
This system trades the 4H trend and we want to get involved as soon as it starts. Most of my setups into this trend happen after a pull-back or a retracement forms. Terminology: pull-backs form in up trends, retracements(rallies) form in down trends. I prefer to trade either the 1st or 2nd pull-back/retracement because they provide the better RR. It's possible to anticipate these entries and place them in the market before they trigger.



Note: System 4T1: A slight variation. Once the trend is defined it's possible to use smaller time frames charts (eg 1Hr, 15min) to find smaller sized risk setups. You can only do this if you're watching the chart at the time the market sets up. If I'm at the computer I may monitor a few markets (1hr charts) for setups into the 4H trend. That's why I've got the 4H trend ribbon on the smaller time frame charts.
 
That's the broad trading methodology. I look at each 4H bar initially for 4B setups, then check the trend for 4T opportunities to get into the trend. There's enough detail there to create many specific systems. I haven't mentioned anything about exits. I create a positive expectancy by allowing the average winner to get bigger than the average loser. I place a basic +2R target in the market. I may modify this target to account for nearby support/resistance levels, but they'll be at least +1R.

I add to winning trades if the 1st trade stop is at BE or better and the trend looks promising.

That's enough for now and I'll add more details using specific trade setups OR if someone asks a specific question.

I know fx trading is only a sideline here at ASF, but I'd like to think we can foster a small group who use similar techniques and who can encourage each other with the opportunities each of us identify.

If I end up talking to myself I'll close the thread.
 
No trades today because of the Labour Day holiday in the US. However two examples setup while I was writing the thread.

AUDUSD long, using System 4B: 4H reversal pinbar.
(Buy 0.7195, iSL 0.7172 23p risk)
Target is the trend moving averages and +1R (0.7118) Trails stop is now at BE.

GBPUSD short, based on System 4T: trend is down and there's a 1st retracement(rally) opportunity.
Sell 1.2916, iSL 1.2936, 20p risk Target prior lows near 1.2868 (or in this case +2R target 1.2876)



Ka ching! GPBUSD +2R, AUDUSD at BE still open.

If you're keen to follow along, then think about what the GPBAUD chart would look like. Would we consider a long or short on this chart?
 
I'll get involved whenever I can Pete, so hope you don't feel alone in this Fx space. And happy to help each other in a small group since a few brains combined can see things clearer.
 
Thanks for the effort here Pete …. I am a closet FX trader …. Unfortunately my personal trading habits don't suit FX so I'm still in the closet ….. Just to clarify … I am married … It's not that kind of closet

That aside, I am super keen to watch anything you have to say and do regarding FX trading so good luck with it … I'm sure there are a lot here who are in the same boat as I am and watching with interest.
 
Thanks guys. There'll be a few others that will join in once we start making some "R's".

My morning procedure will include looking at a currency relative strength indicator to see which currencies are strong or weak. Currently this is what it looks like.

Strongest: CHF,
Weakest: AUD, NZD
Others are near the middle which means their charts are probably going sideways.
No trades in AUD until after today's RBA announcement. Nothing to do until the next update (3pm).
 
@peter2 Naturally I'm following along to soak up what I can in this area so my thanks also Peter.

Looks like I'll have to get MT4 from somewhere to follow along, is the currency chart above also constructed on the MT4 Platform? Maybe a silly question but what are these currencies being compare to, as a base? I know I compare the ASX Sectors to the XAO to see what's moving.
 
Tues 3pm update: AUD popped after the RBA non decision. I prefer to fade these pops, but this idea doesn't fit with either of this thread's system.

T01: GBPNZD short: System 4T.
The trend is down and the last bar went higher but ended lower.
Sold 1.9485, iSL 1.9526, 41p risk Target +2R, 1.9403

 
T01: GBPNZD short: This trade bombed but was actively managed to a loss of 0.6R.
The cross pairs are a little trickier to get right but I liked the setup. They move quickly and when we get them right +2R is easy.

AUDUSD has reversed nicely from it's pop and I profited by this quick reversal (but not this thread).
 
The systems that I've outlined will provide plenty of opportunities. Too many, probably. We won't be able to take them all and we're going to miss heaps of valid setups.

It's better to reduce the number of opportunities and ensure you trade them as well as you can. The easiest way to reduce the opportunities is to reduce the number of markets you're looking at. Keep it to a manageable number. 25 - 30 markets is far too many to trade consistently well. It's especially hard with currency markets as they tend to move together. They're significantly correlated and when you see a setup to go long AUD, chances are there'll be a corresponding long setup in EUR, GBP and NZD (CAD). Not always, but if the underlying sentiment concerns the USD this will probably be the case.

I've already mentioned that the cross pairs are tricky. These should be the first ones avoided until you've got a consistent procedure for monitoring your markets.

Another way to reduce the number of opportunities is narrow the number of setups that you'll trade. Instead of trying to trade both System 4B and 4T. Focus on one. I'll be trading System 4T much more than 4B. System 4B requires more experience with the interpretation of the bars and their significance in situ.

I should set the example and focus on System 4T and reduce the number of markets I'll monitor.

What made me write this post?
Let me show you a couple of charts that I didn't notice at the right time.

Clearly, XAG (silver) was the weaker and provided the better RR that I didn't get.
 
7pm update: I won't be available for this one.
I do notice that many of the major markets have moved nicely in the current 4H bar. This will produce plenty of setups for System 4B. However I don't like chasing prices once they've moved significantly. I'll be waiting for pull-backs to enter the trend via the 4T system. If these swings are serious there'll be follow up movement that we can catch.
 
A good example of why I look at the 15min chart as well as the 1H for setups into an established 4H trend.


This latest swing on the USDJPY started with a classic break-out setup (4H chart). If you miss this then the next opportunity is to wait for a pull-back to join the trend. I normally use the 1H chart for this. However sometimes the candles do not present an acceptable RR setup. The 1H chart of the USDJPY last night did not present a good setup as the bars were too big and messy.

The third chart is a 15min chart. There you can see the perfect doji setup (at the low of the US session). The bar patterns that I use for my intra-day setups are the same as the patterns I've already listed in System 4B.

To be fair I should also point out that there was a good opportunity to start a trade slightly earlier. This is marked by the line (doji followed by a bar with a close above the doji high). This trade would have been stopped out for a -1R loss if your iSL was just below the low of the UK session.

When we use intraday setups we're starting trades within the noise of the 4H chart. So the possibility of a quick loss is increased with intraday setups. We've got to be prepared to have a second go and this means we have to manage our money carefully in order to have these couple of chances.
 
I've probably posted too much detail and confused a few with too many options. To beginning fx traders. I'd suggest sticking to System 4T on the 4H charts and monitor a comfortable number of markets. You can increase the number of markets as you become more confident that you're applying the system properly.

I know that many of you work and can't sneak a look at the markets during the day. Don't let this be an excuse that you can't trade. Yes, you'll miss a lot of setups. So what. There are a lot of setups in the evening (AEST) as this coincides with the heavily traded UK session. If you're passionate about trading set aside some time that coincides with the end of a 4H bar (7pm AEST) and trade all the setups that form at that time.

If a trend started earlier and you missed it, well you know what to do. Select four markets where the trend started earlier and is established and watch the 1H (or 15min) charts for a pull-back /retacement setup into that trend.

If you keep things simple you'll have a better chance of doing it consistently.
 
T02: EURUSD short: System 4T
Sold 1.1578, iSL 1.1603, 25p risk, target +2R 1.1528

T03: GBPUSD short: System 4T
Sold 1.2842, iSL 1.2867, 25p risk, target +2R 1.2792


As both trades have started well, the TS are lowered to just above the top of the entry bar.
 
Always check for scheduled news reports before placing fx trades. There a few reports due in the next few hours that may impact the trades.

Trades based on 4H charts are only impacted by "red" news items. The GBP services PMI may help or hinder our GBPUSD trade.

If the trade is >+1.5R before the report I can choose to grab the profit or "let it ride".
 
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