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Below is the system I use to read the underlying psychology of the markets and base my trading decisions on. I will use this system for deciding to buy, sell or stand aside depending on what the markets are doing.
Top traders seem to agree that you don’t have to know everything, but you must know what works for you and stick to it. And to prove it to yourself it works and understand it thoroughly. This is what I have been working on and is explained below. I am not a guru and don’t aim to be! This is no holy grail system but I believe it to bring long term positive equity. I would also add that finding a system to truly work that you can personally verify through experience (and long term testing in my mechanical approach) is the number 1 rule for true profitable trading. Its harder to find than you first think. But it is possible. My argument being if it wasn’t possible books like Market Wizards wouldn’t exist. Books like this clearly show there are traders out there achieving long term positive equity.
My personal take on trading from what I have gathered is its all about learning how mass psychology behaves for a particular market and responding to certain patterns the mass psychology of that market creates on the price and volume. I personally watch for what I call a bull/bear ratio eg if there are more bull candles to bear candles the market is bullish and vice versa for bearish. With help of all signals below I anticipate whether the market is bullish or bearish. This thinking applies especially to mostly to the Daily chart and slightly less to the 30m and 5m charts.
The goal of this method is to watch the market at by doing a Pre Market Check where I look at Daily and 30m charts the night before and to watch the markets at specific key times where action is likely to this market and place either pending orders or direct trades which are then managed later in day. For the markets im focusing on the times are 8am – 9am just when the London sessions begin and influence the market and 12pm – 1pm just when the US trading sessions are about to influence the market. The goal is to get in early and check back later in day to manage our position usually this means locking in 50% or holding the trade over a few days if our Overview tells us. The key goal is to risk only a 20 pips per trade with the high probability of making 100’s per trade. I see it as a part day trading part swing trading system.
Below I have prepared 2 sections a Pre Market Check explaining what I look for and an Entry & Exit Rules section saying exactly what how I enter on the trading day. Before we go into this i want to show you all the signals i look for when looking at Pre Market Check and going over my Entry Exit method.
Bull Hammer
Criteria :
Market in downtrend
Upper shadow x2 length of body
Signal = Reversal and Reveals Support areas
Bear Shooting Star
Criteria :
Market in uptrend upper shadow x2 length of body
Signal = Reversal and Reveals Resistance areas
Bull Engulfing
Criteria :
Market in Downtrend
Bear Candle body completely covers previous Bull Candle body
Signal = Reversal to upside and shows Lowest Low
Bear Engulfing
Criteria :
Market in Uptrend
Bull Candle body completely covers previous Bear Candle body
Signal = Reversal to downside and shows Highest High
Bull Piercing
Criteria :
Market in downtrend
Bull Candle Closes less than 50% into the previous candles body
Signal = Reversal to upside and shows Lowest Low
Bear Piercing
Criteria :
Market in uptrend
Bear Candle Closes down greater than 50% into the previous candles body
Signal = Reversal to downside and shows Highest High
As explained in the MACD Histogram formation there are peaks formed on price charts. There are lower peaks and upper peaks that together form numerous recognisable shapes and patterns. Its these shapes and patterns that I use to gauge what the market sentiment is feeling. Price always fluctuates up and down, up and down while creating an average value which is why some might rely on various oscillator and moving average indicators to help predict a future move but my personal preference is to look at the price alone I don’t think these indicators are needed. Looking at price does a much better job and is more reliable in my opinion.
Usually as price ebbs higher there will be higher highs with rising lower lows just underneath and at times they form either channels or single support or resistance lines. And vice versa as price gets lower
My most favourite patterns I use as signals are either support or resistance price levels either a single support or single resistance line or if price forms both upper and lower then we have either a channel, triangle or wedge formation. There are many more patterns that peaks will form but these are my most favourite and are what I will briefly explain below. And then demonstrate on markets that have recently made these patterns.
Firstly let me point out how I like to decide whether a pattern has formed. Whether the line is at a angle or not all we do is look for 2 or more fractals and draw a line that projects ahead in time so we can then watch price and as it gets closer for more reactions at this level where it will either breakthrough or rebound that price level.
Triangles & Wedges
When peaks and valleys begin to both converge towards each other then the market is pressurised which means a good move is likely. I often place 2 opposite pending orders on the lines of these triangles. I will explain later exactly how I position my orders. Or I might sit and watch the price and volume to see if volume is rising on breakout further confirming a good move ahead. Remember rising volume often predicts volatility.
On the EURJPY 30m chart, 26th January 2018 price at around 2pm breaks through the lower line of a triangle to the downside making a great sell trade.
On the EURJPY 5m chart on the 12th Febuary 2018 at around 7:30am price breaks through a lower line of a triangle to the downside here price continues to sell of all day.
Sideways Channel
I see different types, some small some big. It might also depend what time of day it is as to how I might trade this. A pre market open such as just before 8am for the London open there might be a tight ranging market its here at this time I would prepare for a breakout to either up or downside.
But if I see a larger sideways channel and price is somewhere in the middle or approaching a price line then I might anticipate price will rebound from the resistance or support of these channels. Or might breakout. Which is why if price has reached these levels I usually dig a little deeper and look to smaller 5m chart to see if there are any other interesting signals appearing which might confirm a rebound or breakout.
If these sideways channels are rising slightly not sharply as explained above I usually treat them in the same way. Expecting price to either rebound or breakout.
I watch the volume also. Remembering a breakout on rising volume means the move is likely to continue where as if volume is declining then the breakout is more likely to be a false breakout.
On the 30m FTSE 100 chart on the 6th of December 2017 price at 8am is at a previous price level forming a possible support. Here I would anticipate possible bullish move. Then the following day at 9am I would anticipate price will rebound from previous resistance levels (especially as there have been 3 hits forming the resistance line) and sell off so would be looking for sell signals.
On the 30m EURJPY chart on the 7th Febuary 2018 at around 12pm I notice price has rebounded and looks like it should head upwards but doesnt we watch price decline then breakout of the lower support line. On 8th of Febuary at 7:30am there is a good opportunity to catch the pullback to this price line before price sells of to the downside.
The MACD indicator is made up of 3 exponential moving averages combined to create 2 lines. One is a Signal line the other a MACD line. The MACD line is made of 2 EMA’s so it will respond to price changes quickly. The Signal line is made of the MACD line plus another EMA so that it will respond more slowly. Typical use is when these line cross above it means market is bullish and when they cross below it means the market is bearish. But I prefer to use the MACD Histogram which gives a more deeper insight into market condition. This is created by measuring the difference between MACD line and Signal line. It plots this difference as a Histogram. Now when the MACD line is above the Signal line the Histogram will be above 0 and when MACD line is below the Signal line the Histogram will be below. When the 2 lines are close together or touching the Histogram is near 0.
What I look for when trading are the peaks in the histogram. Typically as price ebs higher it will form peaks as well as the MACD Histogram will also ebb higher and with this will also for peaks within the histogram. We can use this to read the market sentiment and tell if its bullish or bearish. But I see a signal to be more powerful when the price and Histogram peaks mismatch to form either Divergence or Convergence patterns. We look at the current and previous peaks to find a mismatch.
Bull Divergence :
Price = When the current price peak is lower than the previous peak.
Histogram = When the current price peak is higher than the previous peak.
Bear Divergence :
Price = When the current price peak is higher than the previous peak.
Histogram = When the current price peak is lower than the previous peak.
Bull Convergence :
Price = When the current price peak is higher than the previous price peak.
Histogram = When the current price peak is lower than the previous price peak.
Bear Convergence :
Price = When the current price peak is lower than the previous price peak.
Histogram = When the current price peak is higher than the previous price peak.
Bullish MACD Divergence.
This is when the current high and low is within the high and low of the 3rd bar back. Often the next few bars just after this pattern will see some good moves. Again similar to triangles in market psychology as in it is a pressure point where price peaks and valleys converge.
I use it only on the daily chart so when it appears im prepared for some good moves in the next up and coming days. Meaning if I get in on a trade im more likely to hold onto that trade for longer in anticipation price will continue in anticipated direction.
Here on the 13th Febuary at 11pm on my Pre Market Check i notice a 3 Bar Break so I prepare the following day some volatile action.
On the GBPUSD The day starts out with a a nice downward tight channel so i place a sellstop below previous low and place my stop at previous high. I check back later at 12pm only to see as yet nothing volatile has happened. I decide to break even. But, its not until 1:30 pm with the US sessions influencing the market that the price starts the volatile moves as predicted by 3 Bar Break. It then breaks out to the upside for a good 200+ pip over over the next 3 days.
Chart Set Ups
The bigger charts give good overview of what is happening and are to be used collectively alongside the smaller charts to give a good overview of what the markets are doing. As explained below i like to do a Pre Market Check at night to help my trading decisions the following day. I will explain more in detail as to what i look for on this chart but the basic set up is shown below where i have the following placed onto the chart. These examples are real trading examples and are showing what has happened on the GBPUSD Market over January and Febuary 2018 :
Daily Chart :
Candlesticks
3 Bar Break
Force Index
MACD Divergence Convergence
Volume
Draw Trendline Tool
One Click Trading
30m Chart :
Candlesticks
MACD Divergence Convergence
Volume
Draw Trendline Tool
One Click Trading
5m Chart :
Candlesticks
Pivots Daily
Volume
Parabolic SAR
Draw Trendline Tool
One Click Trading
How I Trade These Charts
STEP 1 Pre Market Check
This is me preparing for what might happen in the next trading day. I usually do this check at around 10pm – 11pm each night before the market action. I don’t expect this to be right all the time its simply a way to prepare for what could happen the following day and manage my trades to what I see here. EG if I see market is bullish with strong volume I will be more inclined to hold a buy trade over a few days rather that take profit.
I will take notes and add to my Pre Market Check file so I can mentally be prepared for the following day.
The following day I watch the markets in preparation to actually trade just before 8am – 9am for the London Sessions to start to move the price and also 12pm – 1pm in preparation for the US sessions to start and move the price.
Pre Market Check Daily :
I now look through the following taking notes of what I see and adding it to my Pre Market Check file so I can have this on screen while I trade the following day :
SR Price Levels, Channels, Triangles or MACD Divergence/Convergence
– I look for Support Resistance Price Levels, Triangles and Channels usually marked by 2 or more fractals to anticipate price rebound or breakout of next hit. Usually on 30m & 5m charts.
– MACD Divergence/Convergence ideally accompanied by a SR Price Levels or a MACD Divergence/Convergence along with an RSH end of trend to predict a pause or reversal of a trend.
Candlestick Market Message Relating To Above System
– The overall ratio of bull/bear candles. EG if there are more bull body candles the market is bullish.
– My favourite candlesticks at the end of trends usually at a good RSH count this means pause or reversal.
– Are favourite candle signals appearing at the above projected price levels.
3 Bar Breaks , Rising Volume or Force Index
– Daily 3 Bar Breaks similar to Rising Volume or Force Index predict possible good moves the following day.
– Daily rising volume or force index signals (Which apply to all markets.) which means there have been good moves and there are more likely to be good moves coming. What this means in my trading is if im in a trade okay then hang on to it longer as the trend is more likely a good trend.
Pre Market Check 30m :
This is the most important observation and where I take trades based upon. I look to the 30m chart for the following :
Support Resistance Price Levels, Channels, Triangles or MACD Divergence/Convergence
The most important signal to watch for are Support Resistance Price Levels, Triangles and Channels that might stretch back over days or could be within the previous few hours.
Mainly the 30m charts is the best for finding these patterns but also patterns can appear well on 5m.
NOTE : Sharp price rallies followed by a Bear Divergence can be good signal as price often falls back to original price level.
On the 30m I look for MACD Divergence/Convergence but ideally accompanied by Support Resistance Price Levels, Channels or Triangles.
Candlestick Market Message Relating To Above System
– Are candle signals appearing at the above projected price levels. This adds to the probability of a good signal.
Volume
– Rising volume confirms continuing trend. I notice often price is volatile on rising volume.
– Declining volume means there’s less power in trend so reversal likely.
– Sharp volume spikes means a change in price direction is likely. (This is a similar take on a maxed out TICK I later learned tick is a reflection of volume)
Here we analyse the GBPUSD Daily and 30m Chart the night before. Usually at around 10pm.
Daily bull or bear zone :
Patterns (Support Resistance Levels, Channels, Triangles or MACD Divergences) :
GBPUSD = Sharp rising channel has been forming since thr 15th january 3 weeks ago. Price has also formed a new resistance level.
Candles with overall Candle Market Message :
GBPUSD = A classic Bear Engulfing signal along with a Bear Hammer has formed at the end of a Record Session High markeing possible end of trend.
3 Bar Break, Volume & Force Index :
GBPUSD = Volume is rising showing more sellers are coming in.
30m Chart Key Price Levels :
Support Resistance Levels, Channels, Triangles, 3 Bar Break or MACD Divergences :
GBPUSD = There has been a breakout of a smaller rising channel at 1pm showing bears are in power.
Overall Conclusion & Trading Action :
I see overall with the above analysis bears are now gaining power, so I will be looking for mainly sell signals tomorrow.
STEP 2 Entry & Exit Rules
With my Pre Market Check in hand or in my head I then go through my entry exit procedure below. Watching mainly the 30m and 5m charts.
Entry :
I run through 30m and 5m charts looking for either of the below signals to enter on. The first 3 below are the main signals I look for. Most of the time if they aren’t there I wont trade. The others are to compliment these first 3 signals.
1) Triangles/Wedges/Tight Ranges to place straddles on.
2) Sharp upward channels anticipating fallback by placing sell order at Price Level.
3) 30m DIV on or around SR Price Level. Place order at or around price level with stop reversal.
4) Watch the 5m volume is it rising, declining or has there been a spike?
5) Watch for how peaks/fractals of both price and MACD Histogram tell sentiment of market.
Is price forming triangles or rising channels? Breaking out of previous levels? Are MACD Histogram and Price peaks/fractals Diverging or Converging?
6) Watch Price and SR Price Level Reactions. If I see any other type of price level only enter if I can watch the price react for either rebound or breakout. Remember rising volume on breakout or spikes are things to watch.
7) Watch the 30m MACD Histogram match the 30m bull/bear ratio if it agrees enter in direction.
Especially if I see some good SR levels but price is in between enter in direction of 30m MACD Histogram making upper/lower SR the target. Although usually use Stop Reversal as this approach can get it wrong 50% of the time I estimate from quick glance.
8) What is the 30m Candle Market Message?
9) Watch for pullbacks if I think ive missed a breakout.
Entry Stop Placement Rule :
10) Place stop at recent highest/lowest peak. Remember always try and draw channels so we can look at price line in relation to time axis. Either this or Parabolic Sar level these can be useful if I cant see decent ideal stop.
As time progresses, price is less likely to exceed this line so play along with this if ive missed entry and risk reward ratio is too big.
Exit :
So after ive placed a trade i will come back a little later and manage the trade. It’s the market overview that influences how I decide to manage the trade whether I should take profit or hold it over the coming days. It all depends on what’s happening . It takes a multi approach :
1) If price doesn’t move in my favour right away and volume isn’t supporting my anticipation get out while I can with a small loss/profit.
2) Use Price Levels as targets along with Pivots.
3) I might take 50% at midday and check back later at night in hope that price has made more profit. Or even hold the trade over the coming days.
4) I might take profit and decide there’s a reversal and re enter.
5) I might move stop to break even and hold the trade over a few days.
What usually happens to the price on the following day and how to trade it.
At around 8am i look at the 30m and 5m charts. Here on the 5m chart I see price is hovering around a projected support level as formed from the rising resistance price levels that have been forming overnight. At 8am on rising volume there is a massive bull candle marking the start of a rally. Which goes against my overall analysis of pre market check.
I could take this trade but i decide to hold and stand aside only to come back a little later at 9am. At 9am I now see price is hovering at the resistance level i also see volume has been declinning but now starts to rise and see price shoot up. As im looking for sell trades i ignore. And keep watching. By 9:30 am price has recoiled creating a short spike pattern which to me says bulls have given up. If we look to 30m chart a nice Bear Shooting Star has formed and volume is declining.
Now i would sell with a stop placed just above the peak formed by our price spike. I then leave and check back later at 12pm. I see at 12pm that we are now in profit by 80 pips fantastic! But wait, do i take my great profit now or wait. Think! We look back to our Pre Market Check and see the market message is saying. Its looking like were in a good position to hold this trade over a few days so i decide to hold this trade.
Market is selling of so because of this i hold the trade over the coming days were price continues to sell of maxing at round 250pips.
I simply move stop to break even level at 12pm (see mark 1) and tighten stop to nearest previous peak as the price moves in our favour over the coming days. Watching for
the market message by looking at our market sentiment being made by our peaks. The following day i would then move stop to just above the previous peak (see mark 2)
formed at 9:30am. Then the following day i would either mov estop to previous peak (see mark 3) or I might take profit as i see a daily bull Hammer has marked possible rejection of lower levels.
This trade would make an approximate 200 pips profit for a small 15 pip risk!
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