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.
When is it time to change direction
Our first strategy is called 'Swing Reversal'. It is a strategy where we enter the markets after a daily retracement to ride the extension, or to find areas of value to pin-point a reversal in price. We use pattern recognition to identify strong psychological turning points, where we get in at the very top or bottom when price is reversing.
The Swing Reversal strategy can be traded in most market conditions. We trade it with the trend after a pull-back to support or resistance, as a reversal at the very top or bottom of a trend, or in a rang-bound market were we buy and sell at the extremes of the range. The only market where we do not use this strategy in, is in a choppy market. We keep clear from choppy market conditions, none of our strategies can be traded in such an environment.
Our other three strategies are all day-trading strategies that will require you to be at charts in some shape or form, when the entry you've identified earlier gets triggered. This can be behind a laptop or even from your smart phone. The "Swing Reversal" strategy does not require you to be at the charts during the day. Charts are analysed when the daily candle has closed (21hr GMT) and orders are placed accordingly. Either the trade gets triggered during the next day or it doesn't. Open positions are managed at market close (21hr GMT) as well, and either our stop-loss gets hit for a 1% loss, or our position gets closed for profit.
This makes it an ideal strategy for use on the go, during a vacation or when you don't have the ability to be at the charts during the day. It is the most stand alone, versatile and time efficient strategy that we teach. It won't generate as many trades as our day trading strategies but it is extremely effective and highly profitable.
TIME TO TRADE
The Swing Reversal strategy is traded at (or close after) market close of the day. At 21hr GMT the daily candles completes and the new day begins. We do our chart analyses at this time and either our setup criteria for a swing reversal entry are met, or they are not. If they are met, we place an entry- and a stop-loss order. Our profit target-order is not set at this time. If we get triggered into the trade during the next day, we will move our stop-loss in the direction of our trade, hence locking in profit with every move in our favor (we will explain this in more detail in the paragraph "profit target" in this chapter).
Swing Reversals entries are found on the daily chart. As with all our trades; we do a top-down analyses with regards to the trade opportunity. If we find a nice daily price pattern that fits the strategy, we find confluence for our trading bias on the quarterly, monthly, weekly and 4 hour chart. It could also be that we found a very nice setup on the daily time frame, but as we do our top-down analyses we find that the higher time frames are actually against our trade bias, and therefore we do not take the trade. As you know: higher time frames trump the lower. We want to ride the next wave in an existing trend after a pull-back, or be at the beginning of new series of waves from a reversal. Therefore we want the higher time frames to align. If they do not, we do not take the trade.
The most important confluence factors when building a case of evidence for a swing reversal setup are: support & resistance, candle shapes and chart patterns i.e. raw price action. However we use three indicators (on all time frames) to provide even more confluence when we find a setup that meets our entry criteria. These are:
It doesn't seem like much but these are the only extra layers of confluence that we need to push the odds of the trade working out in our favour. They are easy to use and very effective.
Price is oscillating in a trend or in a range.
Clear support and resistance levels have been established (horizontal, trend-line, dynamic).
Price is decelerating whilst approaching these SR levels.
Price is rejecting these levels with a high-test (in an up-trend), low-test (in a down-trend) or tweezer setup candles.
The more entry criteria that are being met, the more valid the trade. For instance if price decelerates on the daily chart whilst approaching a solid SR level, and it forms a high test candle rejecting this SR level, the trade will have more confluence if it is in the direction of the weekly trend and price has formed a high-test candle on the weekly chart as well.
This happens for instance if price is in a downtrend and has pulled back to broken support, whilst decelerating (see example below). If a high test candle forms on the daily and on the weekly chart, this is a great trade opportunity. If it has formed a H&S pattern on the 4 hour chart with MACD divergence as well, this is even greater. Lastly if the daily high test candle not only rejects the broken support level, but also the daily 50 EMA this trade has a 95% chance of working out. You see the bigger the "case of evidence" gets the more likely it is that the trade is going to work out.
As mentioned above, swing reversals can be traded with the trend, countertrend and in ranges. For each market conditions there are slight differences in entry criteria and the management of our open position.
Let look al some examples for all three market conditions.
Condition: With the trend
Take a look at this chart this daily chart of AUDUSD. Would you say it is trending?
It is, right? Price is consistency making lower lows and lower highs. Now let's zoom into recent price action. What do you see?
As you know, broken support turns into resistance. Price resisted the level of 0.68808 two times in the recent past and then broke through it impulsively. After the impulse down, price chopped around for about two weeks and then comes back to our previous support level, which now is turned into resistance. When it approaches the SR level it decelerates very nicely with a doji candle and two high test candles. Textbook perfect.
So what do we do next? We check the higher time frames and see that they are also in a downtrend. After confirmation, we decide to put in an "entry order" to go short, as we expect price to reverse from this daily resistance level and continue the trend. The entry is to be set a few pips below the most recent high-test candle and the stop-loss a few pips above. Varying on the currency pair, 2-3 pips below and 2-3 pips above is enough.
Since price will come back to recent swing highs/lows in a trending market in 90% of the time, we set our Profit Target (PT) at the most recent swing low. This is what is looks like with the Risk/Reward (RR) tool from Tradingview drawn onto our chart:
When we select the RR tool, we can see that our RR is 1 : 3,84 which means that we risk 1% to make 3,84%.
Now that we have placed our order, we can leave the trade alone and go about our day. We either get tagged into the trade or we don't. You can of course check your position throughout the day but is it advisable not to do so.
This could mess with your psychology when price initially does not do what you expect it to do, and you close the trade prematurely only for it to hit your PT a few days later.
Once you have done your analyses and the trade fits your strategy and trading plan, you set the order and "forget about it". You check the charts the next day when the daily candle has just closed, just like any other day.
Let's see what happens next:
It took three days after we've placed the entry order, before we are tagged into the trade. The candle after our high test (entry) candle was an inside bar, which is a reversal candle as well, and is great extra confluence. We are now three days from when we placed the entry and price has printed a low test candle and tagged us in. As you know a low test candle after an uptrend is called a 'hanging man' candle and is a reversal candle.
Just to refresh your memory: a low test or high test candle that is in nowhere land and is not at a key SR level, has no significance and can be ignored. The only time we should pay attention to candle shapes is if they are at a key SR level. In this case the hanging man is after an uptrend and at our SR level, so this offers even more confluence to our trade bias.
Let see what has happened so far on the 4 hour chart:
We can see what the low test (hanging man) candle shape is caused by. Price has tagged us into the trade and has retraced intra-day, creating the daily low test candle. Perfectly normal. As a daily candle consists out of six, 4 hour candles (24/4), we can see that the last 6 candles have formed the hanging man candle on the daily chart.
As you watch the markets move and gain experience in trading you will begin see that price likes to make symmetrical movements. On the left side of the entry on the 4 hour chart, you can see that price is decelerating and creating a bit of an arc. This comes from the fact that the bulls are more and more unable to make higher highs. When price eventually stalls and turns around most of the time a similar pattern will arise after price reverses (right side of the entry).
Let's see what happens next on the daily chart:
Voila, profit target (PT) hit in 13 trading days after the entry. Total trade duration almost 3 weeks.
This might seem like a long time, and compared to our day-trading setups it is. However it is completely care free and highly profitable. Let's take a look at the 4 hour chart now that our PT is hit:
As you can see price gradually made lower lows and lower highs after we got tagged into the trade, creating a similar pattern to price before (but mirrored horizontally). Price will very rarely come straight down without any retracements.
You just have to be patient and trust your strategy. Of course - as we could expect - the fall was quicker and more impulsively compared to the (corrective) move up. This comes from the fact that the sell-off is with the trend and the pullback to our broken support was corrective (against the trend).
In our swing trading example the market is trending nicely and a PT to the recent swing low was obvious. However sometimes the market is not that trending. In such cases, in stead of setting a fixed profit-target, we "trail" our stops behind the daily candle close once we are at least 1% in profit.
This is what it would look like on our trade from above:
Once we get tagged into the trade, each day after the day has closed and we come to the charts, we check if price has taken off in our direction and is running at at least 1% in profit. If price has tagged us in, but is just around break-even or anything worse than +1%, we do not move our stops!
In this example it would have worked out out to move our stop after we were tagged into the trade, but most of the time price will come back with just one final spike to get traders out of their positions, just before going in the predicted direction.
This can really mess with your head, since in this case you would be at the side lines with a lost trade, and price is going in the direction you anticipated without you in it. You would have to fight the urge not to jump in it again. This is FOMO and the most dangerous emotion of all. If you find yourself feeling bad because you feel you missed out on a trade, shut down you computer and walk away immediately!
Ok, so we agree on only moving our stop once the trade is at +1% in profit. Let's see what this would look like each day at a time. After we get tagged into the trade and the daily candle has closed, we do not move our stop-loss order since the trade is not at +1%. The first day that we move our stop-loss is after the 4th day. Price is running at 1% profit and we can now put our stop-loss order a few pips above the nice bearish candle that has just closed.
Our risk on this trade is now just 0,5%. Although it is tempting, do not move your stop-loss to break-even. Price could come back the the previous daily high before falling again, tagging you out of the trade for break-even.
Ok let's see what happens after one more day:
Price has dropped again and we trail our stop a few pips above the 2nd bearish candle, now locking in about 0,5% profit if price would decide to reverse and tag us out.
Same story, we move our stop-loss again, locking in about 1,2% profit.
Price is decelerating and created a inside bar doji (which is a reversal pattern). Since it is not at a key SR level, this does not mean anything so we ignore it. We move our stop-loss once more a few pips above the doji candle, now locking in a nice 1,8%.
Price has come back up and tagged us out. Total profit banked is 1,8%. Not bad for just a few minutes worth of time. As your trading account will probably not be large in the beginning of your trading career, 1,8% might only equate to $90 or so (if you have a $5.000 account).
But don't let the dollar amount fool you. Once you get the hang of this and are consistently profitable you will a) grow your account incredibly fast because of the compounding effect and b) will attract a lot of investors. I've seen a lot of traders go from trading a small trading account and being consistently profitable, to trading a multi-million dollar account for themselves or investors within a few years.
Let's say a few years from now your trading portfolio is 2M (million) USD and you took this trade for 1,8%. This trade would have banked you $36.000 - 36 thousand dollars. 36K for just a few minutes work, not bad but totally realistic.
Placing an order where the anticipated direction of the trade is against the daily trend is considered a counter trend swing reversal. The entry criteria are the same as with a swing reversal with the trend, except the higher time frames will no longer align with our trade direction.
The difference is in the management. As you know resistance turns into support and support will turn into resistance. This means that when we enter a countertrend trade where the overall trend is bearish and we place a trade to the long side, it will most likely retest the support it just broke. Hence we place our profit target just a pips below this support area.
If we take the trade to the downside in a market where the overall trend is bullish, this is a countertrend trade as well. We now expect the broken resistance to act as support. Hence we place our profit target just a few pips above this broken resistance area.
In a ranging market, price is contained in between a support and resistance level. If price is decelerating whilst approaching on of these SR levels and forms a low- or high test candle, we can take the trade as with any other swing reversal entry. Out profit target lays just a few pips above or below the next SR level it will most likely reverse to.