I See Great Opportunity Here
Here are the rules for trading I am going to use to trade GBPAUD [and by extension for those who wish to trade EURAUD, GBPJPY, and EURJPY].
1) I place a colored [your choice of color from platform selection] horizontal line at the Monday open [00:00]. [Note: Sunday afternoon action goes into the prior weeks candlestick chart.]
2) This weekly open line is our demarcation line for being long/short. 30 pips + or – from this open marks the price for initiating long/short positions. From there I follow the yellow/plum line signals.
3) At any time during the week if the market is in this “no mans land” of + or – 30 pips from the open, I ignore all signals until it moves one way or the other out of this box.
4) The current Risk Model [RM] for GBPAUD is RM = 2; since I am more conservative, I choose to use the aqua exhaustion line for liquidation should price hit it or go beyond it.
5) I don’t know for absolute certainty which market hours I will trade this pair. Since AUD is the denominator pair, and the Asian session includes Australia as well as China news, we are going to see some nice price moves, especially in the later Asian session when China usually releases economic news. Initially I am going to try and catch the later half of Asia, all of Europe, and see what is happening at the start of US trading before I call it a day. I don’t know if I can keep this schedule, but I’m going to give it a shot.
6) My goal is 100+ pips per week on multiple lots.
There are 3 areas I want to cover in more detail to show you what to do when the algorithm presents you with these circumstances; 1) exhaustion line exit and then re-entry, 2) placing of stops and/or liquidation based on the yellow/plum signals, and 3) one special rule after large moves.
In a strong [up or down] moving market, often times the market will move to the exhaustion line, back off, and then start again with a vengeance in the original direction without ever presenting us with a “new” signal. How do we handle this so we can get back in after some minor correction?
[Click Too Enlarge To Full Screen]
The candlestick chart directly above is from Friday’s action; the first yellow arrow is our long position entry; the boxed yellow arrow is our exit because the aqua exhaustion line has been hit. So what do we do now to get back in?
You wait for the plum and yellow lines to get very close to each other after the exhaustion move; you re-enter the market in the blue boxed area with a tight stop [the white horizontal line]. This stop is a) just below previous current support, and b) if hit the plum line would be below the yellow line signaling you wouldn’t want to be long anyway. Just looking at the chart, your risk here is about 10-15 pips [bid price].
When the market slows down, you have to be more judicious in a) following the plum/yellow line signals, and then by default b) setting your stops.
[Click Too Enlarge To Full Screen]
The candlestick chart directly above is from Thursday’s price action, the blue box highlights an area where price is starting to congest and get choppy; we don’t know how long this will last, but the last thing we want to do is get in, then get out, get back in, get out again, etc., all the while suffering the dreaded chop-chop 10 pip losses numerous times.
When you start to see this, you have to recognize it, and then place an appropriate stop level where, if hit, the chop will have ended. Here, in this example, the 2 horizontal lines would be appropriate stop levels for a long position. The first one [in white] is obviously tighter than the second one [in green], and which one you choose depends on your risk tolerance. They both are good choices. This is how you handle the chop.
There is a special rule for trading; anytime a week is up or down more than 500 pips from the previous week [and closes the week at or near the high/low], the lower threshold for getting short is changed from -30 from the open to -150 pips from the open if the market was higher, and the higher threshold for getting long is changed from +30 pips from the open to +150 pips from the open if the market was lower.
In addition, if the market was up that 500 + pips, all long signals can be taken to the -150 pips from the open and if the market was down that 500 + pips, all short signals can be taken to the +150 pips from the open.
This special rule IS ONLY FOR WEEKS FOLLOWING 500 + PIP MOVES IN THE MARKET, WHERE THE CLOSE IS AT OR NEAR THE HIGH/LOW. IT IS NOT FOR OTHER WEEKS. This allows us to take advantage of carry over momentum from week to week when the market is trending strongly IN ONE DIRECTION.
So, since last week saw GBPAUD up about 530 pips on the week and closed very near the high of the week, the special rule is in effect for this upcoming week. Therefore, from the open on Monday, -150 pips from the open we follow the long signals, and if the market goes -150 from the open we would then follow only the short signals.
[Note: for EURAUD and GBPJPY it is a 400 pip week, and for EURJPY it is a 300 pip week. The threshold level for EURAUD and GBPJPY is also 150 pips, and for EURJPY it is 100 pips.]
For those of you who either don’t know what the algorithm looks like on the chart or don’t have a Forex-Metal MT4 demo [or live] account, the following 3 charts are for the entire day of Friday. I am including them here so you can see with your own eyes the power of the algorithm.
Friday November 22, 2013, 5 minutes at a time from the Forex-Metal server 00:00 [Thursday night] to the Friday close at 21:50 are reproduced below in three consecutive charts.
00:00 to 08:00 – Grid Box Is 11.5 Pips
08:00 to 16:00 – Grid Box Is 9.0 Pips
16:00 to 22:00 Close – Grid Box Is 11.5 Pips
When you look at this day, you should intuitively understand why I want to trade this FX pair. Overlayed onto the 5M candlestick chart is the “long term –vegas Big Bang Algorithm” in RM = 2 mode. Since the week is “up” [i.e. green on the weekly candlestick] we are only interested in being long the pair. Therefore, we want to get long on the plum line crossover of the yellow line.
The power of the algorithm has at its heart the yellow/plum line crossover. The margin of error on this visual representation is about 5.2% from the pure math; close enough for us to be right there when momentum changes via the Fibonacci ratios and the most important of the Gann angles.
As Bert once told me, “kid, your analysis doesn’t have to be perfect to make a million bucks in this business; you do, though, have to be perfectly disciplined”.
I want to remind everyone again, I have Patrick Mikula’s 209 page [PDF] “The Definitive Guide To Forecasting Using W.D. Gann’s Square of Nine” publication from 2003. Over the years, I have read and reread this hundreds of times; it is a great source of inspiration, thought, and ideas. Every time I revisit this work I see something different and get a bunch of ideas I want to think through and then check out. Of course, most often times my “out-of-the-box” ideas bear no fruit, but it adds to my education and market perspective. After all, I’m just a student of the market.
If you would like this publication for your electronic library, simply email me at firstname.lastname@example.org and I will send ASAP.
Have a great day everyone.