Today we shall be covering the system rules and live examples…Click Here To Read The Part 1 of This Tutorial,so we can all be on the same page…As soon as you’re done,you can come back to this page to complete the reading!
Let’s run through the simple rules of this entry technique and then look at some trade examples:
1. Monitor your pairs for an obvious up/down trend (check the 30ema for slope direction).
2. Once you have a trend in place look for consolidations, support in a down trend and resistance in an up trend.
3. Wait for a break of the consolidation, this is usually in the form of a large bar indicating volume.
4. Watch for a retrace back to the support/resistance line that was just broken (sometimes it may happen fast so keep an eye on the lower timeframes if you can).
5. If you get a retrace enter on the touch of the support/resistance line that was just broken (you can use pending orders if you are not able to be at you pc).
6. Place your stop well behind the support/resistance line.
7. Move your stop to break even after you are in profit by the same amount you risked.
8. Stops can be trailed by a pip amount or trailed manually behind bar lows in a up trend and bar highs in a down trend.
The first thing we need to know is if price is in an up trend, down trend or going side ways. The gauging of the trend direction is not mechanical, you need to look at the overall picture, stick to the 4 hour chart and just look to see where price is in relation to the 30ema.The 30ema is where price tends to be around on a breakout.
Lets look at a 4H chart of the EURUSD so I can explain a little further.
As you can see the above chart is in a clear up trend, price is moving away from the 30ema and staying above it most of the time indicating a strong trend. Once we have a clear picture of the trend direction we look at support/resistance areas for consolidation, this can be trend lines or horizontal lines for double tops/bottoms.
If you are not familiar with trend lines and support and resistance then please do a quick search on Google, you will have plenty of reading on the subject too keep you busy for hours.
Look at the bottom red line on the chart above, this is the resistance created at the double top. After many attempts price finally made a break of the double top and we had ourselves a trade opportunity.Sometimes you will have to take the trade on a lower time frame as the retrace is too fast to notice properly on a 4H chart. Lets see the 30M chart of the trade above.
The chart above is still the same trade as the previous chart except now we have moved to the 30M timeframe. Normally I would not have bothered to do this, I would have taken the trade from the 4H chart however it is simply easier for you to see the retrace on this particular trade. Not long after the break there was a retrace back to the resistance line which has now become support at the red line.
Once price touches the red line its time to pull the trigger, enter a buy trade and place your stop 20-25 pips behind the red support line. Are you starting to see the $ signs yet? The beauty of this setup is the risk reward ratio is huge at around 1-3, so what does this mean to us?
1-1 = 50% wins to break even.
1-2 =33% wins to break even.
On the above chart there is a lovely upwards sloping trend, price is clearly above the green 30ema and is consolidating below the trendline. If you look carefully at the breakout on this chart you will see that price shot up then retraced as the candle closed. On the opening of the next candle price took off to the moon, lets checkout the lower time frame again.
Above is a 30M chart of the same setup, now you can see the breakout and retrace perfectly.
This entry technique requires a lot of patience as many times you will miss a huge move because price didn’t retrace back before taking off in the direction of the trend.
At these times there is nothing we can do but look for another setup, remember we are in this business to make money not give it away, don’t get caught up in the moment and start trying to trade the initial breakout!
The beauty of this entry technique is that your trade generally moves into profit very quickly. Once you gain experience trading this setup you will be able to spot them a mile off.
When you enter a trade at the retrace you should be in profit within the next couple of candles if not sooner, if there seems to be no movement then get out with a very small loss. Try to keep you losses as small as possible on trades that don’t look right.
Below is a trade on the USDCAD I would like to show it to you because it is a great example of the setup I am explaining.
Above was a live trade example on the USDCAD, as you can clearly see the pair is in a downtrend and below the 30ema.
I have been keeping an eye on this pair for the past few days since there was enough low points to create a trend line (you need at least 2 points to create a trend line, 3 is better). Price broke down yesterday during a news announcement, and then retraced today back to the trend line where I opened my position.
The green dashed line is my entry and the red dashed link is my stop, I placed the stop further away than I normally would on this trade due to the fact that price could test the major trend line that is drawn on the chart. The trade rocketed into 23 pips profit and then came back against me a little when I took the screen shot of the trade.
News is due out following morning so once I’m in profit by 30 pips I will move my stop to break even. I am targeting the previous low point on the chart which is 90 pips away and if that is broken then I think the down trend will continue and I will hold on for a few hundred pips.
This setup can also be used on daily charts with very good results although I tend to stick to double tops as they perform far better than trend line breaks. This is due to the fact that every trader place’s a trend line in a different place so the breakouts are less reliable with everyone seeing the breakout in a different place where as a horizontal line can not be misinterpreted so easily.
Ok more examples you need to learn this stuff, let’s check out a setup on a daily chart to see what I’m talking about.
This is a recent trade I took on the EURUSD, a very clear double top was formed a while back and I have had my eye on it ever since.
After a huge drop off price fought back and broke through the resistance created by the double top. Two days later price fell back to the support line (resistance becomes support once price breaks through) where I had my buy position waiting with a small stop loss of 40 pips. The trade only went against me by about 20 pips before making my trading account much happier.
I would like to point out that with horizontal support and resistance lines you can use smaller stops than with a trend line I find that if the horizontal line is severely broken I get out of the trade as soon as possible because the chance of the trade being a success is almost none existent….
I am going to stop for now,my next post will be on the concluding part…
So feel free to use the comment box below!