Dude! So you've read just about everything you could possibly get your hands on about the Forex. Now you want to get your feet wet but aren't sure where to start. Well then this blog is for you! Follow along as I take a simple system and apply it to an unsimple market. If you're new to the blog you should So You've Finished The School Of Pipsology...Now What?
Taking the Next Step
Graduation day is here! You've finally finished reading and re-reading every page of the School of Pipsology and have passed all the quizzes. The only problem now is that you don't know what to do next. You want to jump in the market but aren't quite sure where to start. If you fit into this category, then this blog is for you.
Introducing the Pip My System blog!
Here I will take a simple system and apply it everyday to the Forex market. By following along, I hope that you'll be able to use this as a guide for following your own trading system each and every day. But before you follow along, here is a little background on the system that I will be trading.
About The System
The system is mostly based on the example given in the 11th grade of our School of Pipsology, but I've added a few tweaks that I think will help filter out those whipsaws and increase our win percentage. While the title of the system in the lesson is called the "So Easy It's Ridiculous" system, actually applying it is not. The point I try to stress is that a trading system can be simple and profitable at the same time. This blog will attempt to guide you on the application part of it
The Main Trend Is Your Friend
The main concept of the theory is to catch small trends during the day while avoiding fakeouts. Simple right? Wrong! It's easier said than done. I will be making my trades off of a 15 minute chart, but I will be using a 4hr. chart to give me my main trend. If my 4hr. chart is trending up, then I will only be looking to go long on the 15 minute chart. On the other hand, if my 4hr. chart is trending down, then I will only be looking to go short on the 15 minute chart. By looking at the main trend first, I will have a better chance for a winning trade by moving along with the current market direction.
4hr. Chart Settings:
- 5 EMA applied to the close
- 10 EMA applied to the close
- Stochastics (10,3,3)
- RSI (9)
The 15 Minute Chart
After establishing the main trend , it's time to look for trade entries on the 15 minute chart. The 15 minute chart looks similar to the 4hr. chart, except for the fact that I have added a MACD histogram. The trade entry rules are simple:
Long trades:
- 5 EMA must cross above the 10 EMA (Indicated on my chart by a black candle)
- RSI must be greater than 50
- Stochastics must be headed up and not in overbought territory
- MACD histogram must go from negative to positive OR be negative and start to increase value. (We want to catch trends early so the MACD histogram must be negative)
Short trades:
- 5 EMA must cross below the 10 EMA (Indicated on my chart by a purple candle)
- RSI must be less than 50
- Stochastics must be headed down and not in oversold territory
- MACD histogram must go from positive to negative OR be positive and start to decrease in value. (We want to catch trends early so the MACD histogram must be positive)
15 Minute Chart Setup:
- 5 EMA applied to the close
- 10 EMA applied to the close
- RSI (9)
- Stochastics (10,3,3)
- MACD Histogram (12,26,9)
Stop Losses
There is not a hard number that I use for a stop loss. Instead I use either the most recent swing low (for long trades) or the most recent swing high (for short trades) as my stop loss. Using the examples above, this is where I would place my stops:
In these examples, the stop losses were not that wide. However, there will be times when the most recent swing high or low is several pips away from your entry. This is where you must be careful. If the stop is too wide for you to keep within your money management rules, simply stay out of the market! Trust me, there will always be another trade later. Even if that trade happens to win a gazillion pips, you should never compromise or doubt your decision to follow strict money management.
Exits
Here's where things get a little hairy. You'll have to use your brain for this one. What's that? A trading system that actually requires you to think?! But don't worry; it's really not that hard. Generally 50 and 00 levels will be your targets. What is a 50 or 00 level? It's simply any price that ends in 50 or 00. For example, 2550 and 2600 are examples of a 50 and 00 level respectively.
However, if you are too close to a 50 or 00 level you can also choose to set your target for the same amount of pips you are risking. For example, if your going long and your entry is at 2445 and your stop loss is at 2425 you would be risking 20 pips. You could then set your target for 20 pips away from your entry. So in this example your target would be 2445 + 20= 2465.
Record Keeping
I will have a dedicated post that will constantly be updated as we go along. I'll list total number of trades, number of wins/losses, average winners, average losers, max drawdown, and max winning streak. That way we can track the progress of the system as we go along.
Conclusion
If you're sharp, you may have noticed that I use RSI and Stochastics which both measure overbought and oversold extremities. Referred to as multicollinearity, it's often frowned upon to use 2 indicators that pretty much tell you the same thing. However, in this case I am using RSI as more of a trend confirmation tool rather than an overbought/oversold tool.
I also must mention that I will only be trading the GBP/USD. If you're starting out in the Forex, it's best that you stick to one pair so that you can focus all of your concentration on it. After a while, you'll start to get a feel for its movements, and it will help build your "intuition" on future moves. This is something that will come in handy as you become a more experienced trader.
I will never trade a news candle or the candle before it. If I am in a trade and a major news event is coming up, I will exit my trade before the report is released. I will however trade a candle after the news provided all my criteria are met.
Signals that occur before 12 midnight ET should be taken with caution. While you can still take them, you should be cautious because market volume is very quiet before the Euro session. As of 3/5/07 I am only taking signals that occur after 12 midnight ET.
I will close my trade whether I'm in the money or not at 4pm ET because market volume is very low at this time. Trade signals that you see before 12 am ET (midnight) should be taken with discretion because market volume is also low at this time. Optimal signals usually come after 1am ET.
Rules are made to be broken! Yes it sounds like a direct contradiction of what we preach but you have to remember that you are not a robot. There will be times when you will have to adjust to the market conditions and *gasp* break your rules. In the rare occasions that this happens, I will put out an update post to let you know of any split decisions I have to make and why I made them.
In conclusion, I wanted to give this system a name. After all, I don't just want to refer to it as the "So Easy It's Ridiculous" system since we've already established that applying a system to the Forex is far from simple. So as I thought about it, I tried to come up with a name that is relevant to the system's characteristics and at the same time, have it be a really cool name. Since the system attempts to ride the waves of the market I thought it would be appropriate to name it using the language of the surfers. So without further ado...I present to you:
sabaifx- sometimes the best systems are the simplest :) I'm glad you found a system that's working for you!
edd2000uk- Moving any lower than a 15 minute chart is dangerous because you are basically just trading more “noise”. For example, if you attempt to trade a 5 minute chart, you’ll be getting signals left and right which may lead to some winning trades, but in the long run you will be whipsawed many times because of the knee jerk reactions that a shorter time frame will give you. I think that even 15 minute charts is borderline, but I’ve tested the system and it seems to work just fine on this time frame. I highly recommend that you stick with a 15 minute chart or higher. I say higher because the longer the timeframe you use, the more reliable your indicators become. You’ll get fewer signals but the ones you do get will be a little more reliable. So if you would like to try this system on a higher time frame, that would be ok. Just be sure to demo it first.