Trench Trading

[TraderDesk]

Hi everyone, I will tell you about a trading style that I use with great success. It is trading manually using the minute chart as the battleground while using the 5 minute time-frame to give you the intraday picture.

The Setup:

1 TF chart:

• Heiken Ashi candles
  EMA period 5 Shift 2 Applied:HLC/3
  EMA period 5 Shift 0 Applied:Close
  Cycle Lines

5 TF chart:

• Heiken Ashi candles
  SMA period 50 Shift 0 Levels: +15 and -15 pips from 50 SMA

What I do is look for the heartbeat on the minute chart during the time I will be trading. There is a cycle of peaks or troughs that occur on the 1TF that you can plot using the Cycle Lines tool which once you identified will give you the heartbeat. Using the Heiken Ashi candles will give you a good visual cue what part of the cycle you are on. Price action against the EMA's will show the strength of the move as well as exit strategies.

Using the 5 minute chart will show you whether your ranging or trending. I look at price action to be "outside" the 15 pip lines to show me a trending action. Very often when price action breaks out of this 15 pip line it will continue so by using a minute chart you can place your entries and exits quite accurately.

Practicing this style of trading takes time as you must get to know the currency pair intimately. After looking at price action day after day on the minute chart you get a good feel where price action is heading. You will even start to understand without lines where supply and demand levels are.

Now there is a very critical component called R/R... You should look to get your stops to be as close as you can without getting stopped out on supply/demand price action within a individual candle. In my case I will average out at 6 pips stop vs 18 pips limit so my risk vs reward averages out to 1 vs 3. My average win rate is averaging around 75% and my time in the market is around 3 minutes.

One of the neat benefits of this strategy is your potential drawdown is very low, as well as your exposure to risk on the battleground. Time in this market as well as very tight stops allow you to leverage yourself with much less risk then other strategies. Even at high leverages your exposure to risk should be less then .25% per trade so your ability to survive drawdowns will be excellent as no human or Algo has a perfect day every day.

Now comes the human side to this trading style. You must accept losses and do not become shy to re-enter the market. You must fight for each pip and each loss should make you want to fight harder for the next win. Also do not start doubling your entries to make up for the loss of the preceding trade. That can get you into larger drawdowns which is not necessary. Remember, your risk is 1 vs reward which is 3 so all you need to do is win 1 time to break even on 3 losses. Let the law of averages be your ally for your going to need her...

Another critical component is your trading platform and execution. Almost any demo platform from any broker will look like they will work with this strategy. That is FALSE. Demo platforms do not reflect the real world of trading as a broker will throw several obstacles in your trading decisions. That will start from spreads to slippage to outright thievery. Since we are talking about "Spot" forex and not futures we need to use a broker that will NOT be a counter-party to our trades. You need to find a company that allows you to have DMA into the interbank market. Now if you are a retail trader it becomes difficult but you can find brokers that do have DMA access and will accept retail traders. Look for established, regulated STP & ECN brokers that connect to Currenex or FXAll or to some other pool like Dukascopy. Spot forex is a market where transparency is very difficult to find. Futures FX market is transparent as it goes through a central exchange where the exchange itself is regulated to be transparent. In spot forex that is not possible so you must pick your broker carefully. A good broker will give you the best execution speed, broadest liquidity pool, lowest spread based on volatility, etc...

That was a long paragraph but I wanted to stress that this style of trading needs the best possible broker to make it work long term...

Different traders have different styles. Me I have several but I like this way of trading as it is trading in the "trenches" so to speak. It is brutal and involves looking at price action for many hours every day but at the end of the month you have the satisfaction of seeing your bank statement in a new high watermark...

TraderDesk

*To learn about Futures FX go to http://www.cmegroup.com/trading/fx/fxfutures/index.html where CME is the exchange.

[jtpada]

Do you happen to have a pic of a trade entry that you could post for a better visual?

Thanks!

[bozden]

Hello ,
Can you add some chart?
Thanks
Bozden

[ha-pattern]

Hi, great post and a good model for organizing a trading method. Thx.

"5 minute chart ... ranging or trending. I look at price action to be "outside" the 15 pip lines to show me a trending action."

"the 1TF[:]"
"cycle of peaks or troughs ... Heiken Ashi candles ...what part on"
Price action against the EMA's... will show the strength of..."
["Price action against the EMA's... will show,"]"as well[,]... exit strategies.

...stopped out on supply/demand price action within a individual candle.


...6 pips stop
vs 18 pips limit
...win rate is averaging around 75%
and my time in the market is around 3 minutes.
...Time in this market ...[and] very tight stops ...allow you to leverage ... less then .25% per trade


...You must accept losses and do not become shy to re-enter the market. You must fight for each pip and each loss should make you want to fight harder for the next win."

[TraderDesk]

Thanks for the comments...

I have uploaded two examples, a one minute chart and a five minute chart. These are are charts I just took a snapshot while writing this post so they are nothing special just a typical moment in a trader's day.

On the five minute chart you will see price action in and outside the 15 pip silver lines. When PA goes outside those lines it has a strong tendency to continue and you can definitively use it a trend adviser to help guide you to placing your trades on the one minute chart in the correct direction.

So basically the five minute chart comprises of Heiken Ashi candles and SMA period 50 Shift 0 Levels: +15 and -15 pips from 50 SMA. Also I like to show major levels like 1.3500 - 1.3550 - 1.3600 etc... as these levels or close to these levels are supply and demand limit orders...

Now on the 1 minute chart you will see price action at a macro level. Here is where you get into the trenches. I know many people like to say this is noise floor and it is very hard to see anything of value but I find that it is totally the opposite. By looking not only at price action but time cycles you get a lot of info through the "noise floor" that will allow you to make positive trades.

In the one minute chart you will see that I have drawn Cycle Lines on the chart. You can do this on the low or the high or a combination of both of the price action within a specific time frame. Now I do this because price action is cyclical and has a statistical habit of repeating itself within the same time-frame. This is important because it allows you to theorize probabilities to whether price action will change.Now on the one minute chart that I attached to this post you will see price action changes at the broken yellow cycle line. I usually will see cycle lines matching up from 3 to 8 times before I need to recalculate. Now when it gets to this line I know that the probability of the PA being at a low is better then 2:1 so I can now plan my entry point prior to the next cycle line. This gives me a statistic advantage so I apply it to my trading strategy. Also by knowing what is happening on the five minute chart I further hedge myself to be on the trending wave that is pushing PA on my one minute chart.

The Heiken Ashi bars help me to visualize past and current PA quickly. This will give me another part to help me know when to enter the market. I like to look for the second bar to be the sign that a new trend has potentially started. Again this is a probability factor that needs to be calculate. Depending on the time of day, trending wave of the five minute chart and volatility in the PA I could see a 70% chance of it being correct on showing a new trend in the PA.

Just those two factors (Cycle Lines * Heiken Ashi bars) / 100 will allow me to start placing better calculate trades. Of course there are other factors as well that comes with experience but that is going to be much harder to code then the above equation. I will try to give further examples in the future to show what I am talking about but I hope this helps a little.

TraderDesk

[bozden]

Hello
Thank you for charts.
Regards.
Bozden

[TraderDesk]

Today I have two more charts to show, the five-minute chart and the 1 min. chart. On both these charts I have shown "Cycle Lines" to give you an idea on how probability in a specific trade increases using them.

For example looking here on the five-minute chart you can see how accurate the tops and the bottoms are in specific time frames. They are so accurate that from one timeframe to another that is almost to the individual bar. Of course they're not always going to work but in most cases they do and you can start to calculate probabilities based on this.

5 minute scalp chart 11-24.gif

Now on the 5 min. chart if you're coming up to a cycle line and it looks like a top you can now go down to the 1 min. chart and place a trade that is going to minimize your risk. As you have a cycle line on the 1 min. chart you know the probability of a top forming in that general time slot will also be quite high. Now you can place a market short was a very small stop loss and a larger take profit with a good probability of having a positive trade within a very short time.

1 minute scalp chart 11-24.gif

I don't know if this type of trading strategy can be coded to work as a robot but manually it works quite well and if you're very careful with your risk/reward and have the proper trading psychology you can easily make half percent per day trading. This is by keeping your risk per trade less then .25% and your win/loss percentage greater than 50%. In actuality, you should be around 70 to 80% win rate when you become familiar with the currency pair and how to trade from the trenches.

Traderdesk

[AnotherBrian]

Here's an EA that might help you manage these types of set-ups.

The EA helps you place your manual entries, exits, targets and so forth, here is one that I just posted. All you have to do is load the EA and it draws lines for you, just move them around and start the EA. See the post for a full description.

http://www.stevehopwoodforex.com/phpBB3 ... f=21&t=192