The Trading Method, step by step
Important: if you skip even *1* line of the following text, you will lose money.
1) Open a monthly chart. If the currency looks “static”, or “horizontal”, or has many dojis (long shadow and tail candles, small body) then discard that currency for now.
2) Look at the daily chart. If the candles are like the above or their size is just 30-40 pips a day then discard the market for now. If the broker spread is larger than 5 pips, might want to discard as well.
3) Ok, now you have a good currency graph open, i.e. EURUSD, AUDUSD etc. Remove every and all of the grids, indicators and so on. Yes I know that your moving average is cute, but it will clutter your eyesight and will fool your most potent indicator: the one between your ears.
The zoom should be reasonable enough to give a picture of the market, no need for mammoth candles. I use a black background as I find it more eye-relaxing.
4) Forget about patterns for now. You WANT to UNDERSTAND the market. You are reading something like a music score on a pentagram, you don’t care about the individual musical notes (candle bars) but about the “feeling”, the “sound” of the piece as a whole.
The monthly and (usually) the weekly charts are what you look at, to understand what the price is doing (WPD).
The daily (much rarely the weekly) chart is where you look at after the above, to find out if your understandment is confirmed or not and eventually to start a trade.
5) Go to the monthly time frame. Draw horizontal lines at Big Round Numbers (BRNs). I.e. at 1.000, 2.000 and at important Round Numbers (1.3, 1.4…). The key is to only draw those lines where a swing touches them, else you just clutter the graph for nothing. I draw those in yellow.
6) Draw horizontal lines at the top and bottom of each swing close to today’s price (no need to draw the whole chart). If you see a lot of close / random swings like in a range market (RM) you may just draw a line above and below it and eventually some more lines inside the RM only where such lines are touched by several candle bars open / close.
The basic version of this method requires you to draw lines always touching the candles open / close (not the minimum and maximum). I draw the monthly lines in bright purple / violet.
7) Look at the trend. It might be nicely trending in one direction or ranging or forming a triangle, whatever.
Analyzing a market is like finding clues in an investigation. You form a picture of what’s going on, assembling many small elements and clues until the puzzle is complete.
You HAVE to understand what the price is doing (WPD).
In every time frame, every time you cannot underestand WPD or every time the market just won’t want to tell you, you MUST STAY OUT.
You have to get trained into recognizing obvious and less obvious patterns, swings and range markets.
Examples about patterns, swings etc. are available in other chapters of this course.
At this point you might have recognized some cool pattern or nothing at all.
With practice you will begin to “see” many, many more things but it’s fully possible for a market to be doing “nothing special”, i.e. just trending up or ranging. In this case you can still take up many clues: just the fact it’s trending up is a clue. Finding a price action pattern like a BUOB in an uptrend is another clue. Finding that the BUOB sits on top a Big Round Number (BRN) is another clue and so on.
8) Once you formed a picture about what’s going on on the monthly chart, you switch to the weekly bars chart. You will just change time frame from month to week, you won’t open a separate weekly chart.
9) Repeat points 6) and 7) but this time you draw the lines on the weekly chart. I draw them in cyan. You might want to right click (MT4) on the first weekly line (before you draw others), go in its properties => visualization and then uncheck “show all time frames” and only make it visible on the weekly and daily time frames. It helps keeping the monthly chart uncluttered for future analysis.
Look at the chart. You’ll notice a different scenario, different patterns and so on compared to the monthly view.
If you did not find any formation like i.e. a channel, triangle etc on the monthly chart, chances are that you will find it on the weekly one.
Once again, you have to understand what’s going on (WPD). As Strat (see my signature) would say, the monthly chart is the big boss, the weekly is the boss and the daily is the worker. Therefore the weekly chart is still important compared to the daily, you cannot ignore it.
You will find two scenarios: the monthly and weekly charts “agree”: they trend in the same direction, or the monthly has a big bullish channel and the weekly shows a bullish trend inside this channel and so on.
Or they may disagree: the monthly is in an upswing while the weekly is in a downtrend and so on.
If they do not agree, STOP right here. With more advanced tecniques of this method is possible to deal with this scenario but NOT now. Stick to the simple case of monthly agreeing with weekly agreeing with daily until you are MUCH more confident on your trading.
If the monthly and weekly agree, even if you found no clear pattern neither on the monthly nor the weekly charts, it’s still fine.
Even if it’s not required, something you might want to see before switching to daily is a price action (PA) pattern on the weekly chart. Notice how in this method the candles MUST HAVE CLOSED before you can declare that you found a pattern.
– if you see a monthly BEOB on 24th of January, then it’s not a BEOB yet. It will only be a confirmed BEOB on February 1st when market opens.
– if you see a BEOB on the weekly chart and it’s Thursday, then it’s not a BEOB yet. It will be confirmed the next Monday when market opens.
– if you see a BEOB on the daily chart and it’s 8pm, then it’s not a BEOB yet. It will only be a confirmed BEOB when market opens tomorrow (the market opening hour varies depending on your broker).
Now review this weekly chart. Does it make sense? If it does not, then switch to another currency for now.
Does the price tell it’s smart to trade in this week? If it says it is not, then switch to another currency for now.
How do you know that price is telling it’s smart to trade?
Once again, you have to understand the bigger picture.
If the monthly chart indicates we previously were in a bullish trend, now we are inside and close to the top of a monthly range market, it’s NOT smart to seek for buying opportunities, you’ll probably just smack against the strong RM upper resistance with a low probability to see any profit.
On the contrary, if we are at the support of a monthly bullish channel and the weekly chart shows a BUOB then it looks very, very good.
WPD ALWAYS STANDS ABOVE ANY CANDLE PATTERN
As a veteran trader would tell, location, location, location!
If you see a nice BUOB but it closes inside and below the resistance of a range market, then that BUOB is probably just an exhaustion candle and you cannot rely on it!
A pin bar (PB) sitting above the confluence (i.e. multiple converging factors) of a BRN, monthly support line and Fibonacci line, will have a completely other meaning and strength than a small pin bar in the middle of nowhere!
10) Now, let’s imagine you found concordant monthly and weekly price and you really got WPD. Switch to the daily time frame and repeat points 6) and 7) again. I draw daily lines in orange. You might want to setup the daily lines to only see them on the daily chart, in order to keep weekly and monthly charts uncluttered.
You won’t need to draw more than 2-3 daily lines and later on you might even stop drawing them at all.
11) You’ll notice how, once again, a whole different scenario of patterns, channels and whatsnot is before your eyes.
If price is going against the weekly or monthly charts, switch to another currency. In few days you may come back and see if it looks better.
The best trades happen when monthly, weekly and daily are all concordant.
Furthermore, price should be doing something useful to you, i.e. be at the bottom of a RM / channel during a monthly and weekly uptrend. It’s always dangerous to just enter the market hoping price will break thru resistance the next day.
12) It’s finally time to find WPG (where price is going). If location is good, then check if price is weekly line retracing (RET W) against something solid and forming a candle(s) price action pattern. If it is, then this is a confirmed potential trade. Weekly line retracing means that price hit a weekly / monthly line / BRN / trend line, that is a powerful line. Daily lines RET won’t do!
Monthly and weekly uptrend. Price is in daily chart RM where P hit the same monthly support (S) 2 times. Today it hits S again and forms a BUOB. This would be a class A trade.
Monthly and weekly uptrend. Price hit a top 1 week ago and today hit a second and formed a bearish PB. This is NOT a safe trade, the double top pattern should be confirmed first (broken + RET).
But the same trade would be a class B trade if this was the second top with a weekly chart showing price going up to that price level 5 times in the prior month and always halting there. Location!
Monthly and weekly uptrend. Price broke a D RM resistance upwards, then fell down on top of the RM resistance and closed above it and formed a BUOB that closes above the RM highest candle shadow. That’s a class A+ trade *if* that RM resistance was also a weekly line.
But the same trade is garbage, if the monthly chart shows a BRN sitting 20 pips above that BUOB. Location, context and understanding WPD!
13) Once we found this class A setup, the PA candle pattern gives the signal to trade. If there’s no PA pattern it’s best to skip the trade (until you learned and practiced a lot more about this method).
14) Now it’s time to plan the trade (PTT). You’ll decide in advance where to make money management (trail the stop loss) and / or take partial / full profit. There are many ways to do this, most are in the public domain, others will be explained later on this course. Generally you’ll move the stop loss 1 swing away from where price is swinging at the moment and take profits when price is about to hit weekly / monthly / trend / (B)RN lines.
You place a buy stop order above the PA pattern + spread. If there are nearby levels (even daily) or nearby candles maximums (minimums for bear patterns) go some pips above (below) said PA pattern, then the stop order has to be moved a bit till it’s above (below) those candles.
Don’t risk more than 2% of the account per trade. In the beginning only open one trade at a time, it will be hard enough as is.
You probably want to save your analysis in a journal for later review about what went right and what went wrong.
Spread is 2 pips. There’s a bullish PB closing at 1.3111 and the previous candle maximum is at 1.3113. You put the buy stop order at 1.3313 + spread = 1.3315. This helps against stop loss hunting or just being taken in the trade because the sellers wanted to take liquidity where they did already 1 day ago.
The buy / sell stop orders are those orders that trigger when P goes to the level you specified, even without you being at the computer.
The stop loss has to be placed below (above for sell orders) the pattern. This includes putting a SL all the way below (above) PB tails. If there are nearby candles whose minimum (maximum for sell orders) go slightly below (above) the PA pattern, the SL has to be moved below (above) them.
If there is an important liquidity level nearby (a bunch of previous candle minimums / maximums go down to a similar level) the SL has to be put below (above) them.
15) Now that you planned the trade (PTT) you go to bed and let the market trade the plan (TTP) by itself.
Only some platforms allow for unattended partial take profits / SL moving, so you might have to go to the computer every day at market open and manually move the SL and partially (or fully) close the position.
16) Update your journal. The trade is over.
Important points to remember
– Practice for 3+ months before taking the first non simulated trade. If you are not profitable in those 3 months, don’t even try trading real money. Get profitable FIRST, risk money AFTER. It takes YEARS to become a practiced trader, it’s a real profession and like a profession you won’t learn all its secrets in few days.
– You must be ready for the market but the market has also to be ready for you. If the market is doing “nothing special” or is just a random mess, do NOT trade at all, switch to another market, there are thousands!
– Don’t rush taking every possible trade. Overtrading is THE newbie trader killer.
– When unsure, don’t trade.
– Don’t move the stop loss. EVER. You WILL get burned otherwise.
– Don’t check a running trade during the day. You WILL feel sick and will suffer a severe nervous break down.
– Don’t trade every candle PA pattern. First you must understand the its context, its location and WPD.
– The market is never wrong. Even if it was, it can stay wrong for much longer than your account you can afford to be right.
– If you skipped even one line of this article, then you are about to lose money.
Go to Index | Prev: Market, price, and trading basics | Next: The trading log