Welcome to my Masterclass.
In this lesson you will learn what the foreign exchange market is all about and how we are able to take advantage of the worlds biggest exchange.
The Advanced Pullback (AP)
Welcome to the second strategy of our Masterclass which is called: the 'Swing Reversal Advanced Pullback' strategy. This strategy is based upon the same setup criteria as the "normal" Swing Reversal strategy we teached in the previous lesson. However this time the entry is quite different from the set-and-forget order style of the swing version of this strategy.
With the previous strategy, we would place our orders as the daily candle closes and walk away. With this strategy however, we wait for the trade to work out in our favour, and then take a live "market order".
This has two advantages:
Our trade idea has already proven itself to be correct
We get in the trade at a price point where our RR is greater than on a swing trade
Since the setup criteria are the same as with a normal swing reversal setup we are looking for:
Key support & resistance level
Daily price action pattern (double top-bottom / H&S / Wedge etc)
4 hour price action pattern with MACD divergence (double top-bottom / H&S)
Before we dig any deeper into it, lets look at some examples. Take a look at this daily chart of NZDUSD, can you see the key SR levels that we drew in? If so what does price action tell you when it decelerates and touches our SR level the way it does?
Lets zoom in a little bit:
This looks like a clear 'normal' Swing Reversal setup right? Correct is does. This is a trade that ticks all the boxes, including testing the dynamic SR of the daily 50 EMA (red line). When we draw in our RR tool and set our profit target at the previous low we get a trade with a RR of 1:4,3%
Pretty decent right? What if you took this trade and waited until the trade worked out and price dropped as anticipated. Lets forward a few days and see what happens:
As you see the next day after we placed our order, we got tagged into the trade. However it took 5 more days for price to fall and get us into a 1%+ winning position. Once we are running at 1% we move our stops below the most recent candle and look for a 'swing reversal advance pullback' entry.
Since this is a day trading strategy, it requires us to have instant access to our charting platform and brokerage account. This can be done on a PC or laptop, but with todays technology can also be easily done on a smartphone while you away from your computer. Tradingview has a good mobile app that lets you check your charts while on the go.
THE ADVANCE PULLBACK ENTRY
With the advance pullback entry, we wait for price to impulsively move into our favour on the 1 hour chart. After a steep impulse (up or down) - in this example an impulse down - we wait for price to retrace back to the 1 hour - 12 EMA.
Once price has reached the hourly 12 EMA we take a manual entry (market order) short, and place our stop loss exactly at the 1 hour - 50 EMA.
After the daily closed with momentum to the downside - as we see in the previous chart above - this is what the hourly chart looks like at day close:
As you can see price has impulsed down and is clear from the previous 1 hour lows. At his time we are already in our normal swing reversal trade and the trade is going nicely. Lets forward a few hours until price has retraced back to the 1 hour - 12 EMA.
After the daily closed, price fell even more, but decelerated and eventually came back to test the 12 EMA. Often times it will test the 12 EMA and fall instantly, therefore you should be at the charts when this happens.
Since you would have been eyeballing this possible entry for days, we would have set an alarm in Tradingview, that would be triggered when price tests the the 1 hour 12 EMA. In Tradingview such an alarm can easily be set. It enables you to go about your day without having to check the charts every x-minutes. But once the bell rings, you have to be quick.
Ok now lets remove the swing reversal RR tool for a second, and just focus on the advance pullback entry. This is what it looks like when the bell of Tradingview rings and price has come up to test the 1hour 12 EMA:
As you have been anticipating this entry, you would have drawn in the RR tool for this advance pullback entry to the best of your ability hours in advance. When the entry actually happens, you only have to place the entry from the RR tool at point where price meets the 12 EMA, and set your stop-loss at the 1 hour 50 EMA. Therefore you know the amount of pips you are risking and you are able to calculate your position size.
Last thing to check before taking the live entry is the ADX indicator. The values of this indicator only add confluence to your setup and are not set in stone. In time you will see that you can spot the ADX values just by looking at raw price-action. But as a guiding tool, certainly in the beginning stages of your trading, the ADX can really help you out.
Before we take an entry these ADX values must be met on the hourly chart:
ADX (back line) is above 30
Difference between -DI and +DI is equal to or greater than 12 (preferably > 15)
In a downtrend the +DI is below the -DI and in an uptrend the +DI is above the -DI. Basically the
+DI tells you which way the market is going. +DI is below in a downtrend and above in an uptrend.
In this case both parameters are above threshold: ADX = 62 and -DI minus +DI = (35-12) = 17
Therefore the setup is valid and we enter the trade.
Let see what happens next:
A few days later we get to our predetermined profit target and bank a nice 3,62% in profit. Additional profit, if we also took the regular swing reversal entry, banking 7,92% profit in total.
In this case the swing entry took more % from the market than the advance pullback entry.
However, in most situations this will not be the case. Since the advance pullback often has a very tight stop-loss, it can milk two or three times more profit out of the market than a normal swing reversal entry. And.. in many cases you can take both whilst only risking 1% of your account balance.
In the next chapter will explain in details the various types of 1 hour 12 EMA pullbacks there are and which can add confluence to our trade setup, and which should be avoided.