PART (I) Version I - Basic of Trend Based & Indicator Based Trading System
(A) Objective Of Trend Based Trading System
The purpose behind having and using a trading system is to receive consistent answers to these critical questions:
Trend identification: Selecting a currency pair that is trending and
suitable for trading
Position sizing: The quantity to trade
Entry signals: When to execute a trade
Stop loss signals: When to exit a losing trade
Exit signals: When to exit a winning trade
A trading system doesn’t guarantee that you will never have a losing trade (although you should be able to make money over time if you have a positive expectancy). It simply guarantees that all of your trades will be consistent and that your trading decisions will not be influenced by anything other than the rules of the system.
(B) Understanding the nature of price movements
Some models are based around an assumption of price movements being normally distributed, or Gaussian. For example, if a price has moved from a base by 3 standard distributions, based on statistical principles and assuming that price movements are normally distributed, it is unlikely to move further but revert to the mean.
However, if you actually chart price movements, you will find that they have a “fat tailed” distribution. There are a lot of large up and down price movements. If you build a model based on normal distributions, it is likely that you will suffer significant losses.
(C) Identifying trends by removing noise using Indicators
>Any successful trading system must have the ability to let you to distinguish an actual trend from normal market “noise”. Noise is price movement that does not indicate a trade-able trend.
Most technical indicators use some sort of filtering, typically a moving average or exponential moving average.
My prefered Setting :-
A Simple Moving Average SMA of 50 +
Exponential Moving Average EMA of 10 +
Exponential Moving Average EMA of 21
(D) Momentum Trading using Indicator/Oscillators
Oscillator like Shotastic + MACD are commonly used to confirmed the Momentum of the Curreny Pair.
> On the Higher Time Frame (Daily) Chart, Identify the Trend as on Part (B)
> On the Lower Time Frame (1H) Chart, you can either
Trade with the Trend OR
Trade on Correction.
(It is recommended to Trade with the Trend)
(i) Trading With Trend
> Ensure the Trend on Lower Time Frame is same as
Higher Time Frame
> Ensure that the Momentum is still strong
(best it is beginning of the momentum indicator)
towards to trend identify.
> If trend is UP, Long the Pair. If Trend is DOWN, Short the Pair
(ii) Trading With Correction
> Ensure the Trend on Lower Time Frame is against that as
in Higher Time Frame
> Ensure that the Momentum is still on direction of that in the
Lower Time Frame (Correction Direction)
If Correction Direction is UP, Long the Pair.
If Correction Direction is DOWN, Short the Pair
Note :
- Trading with the Trend can Hold Position for Longer period and
earn more times of Profit.
Exit Position can be predicted by using Elliot 5 Wave to help predict
the ending of the Wave for next Correction or Trend Change
- Trading with Correction can Hold Position for Shorter period and
earn lesser times of Profit.
Can Use either ABCD Correction Wave OR Fibonnaci level,
to predict when to Exit Position
Trade with CARE here, cause you are trading with narrower Range ,
and can easily result in LOSS instead..
