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FollowPriceActionTrendsByLaurentiuDamir
Copyright©2012LaurentiuDamirAllrightsreserved.Nopartofthisbookmaybereproducedortransmittedinanyformorbyanymeans,electronicormechanical,includingphotocopying,recording,oranyinformationstorageandretrievalsystem,withoutpriorwrittenpermissionoftheAuthor.Yoursupportofauthor’srightsisappreciated.
TableofcontentsIntroductionTrendCorrectionsConfirmationTheDegreeTrendchangeTradesetupTradingsystemstepbystepTradeexamples
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IntroductionThisisaforexsystembasedsolelyonreadingthepriceaction.Itisatrendfollowingsystemthatfocusesonpointsinthemarketwherethetrendisabouttochangeitsdirection,entersthemarkettryingtoridethenewlyformedtrendallthewaytoitsfinishline.Bydoingthisinthecorrectway,thissystemhasthepotentialtodeliverthousandsofpipsinthelongrunbecauseshortlyafteratrendends,usuallyanotheroneemergesprecededbyasmallperiodofconsolidation.Itsoundssimple,butthekeycomponentofthispriceactionsystemistocorrectlyidentifythecurrenttrend,knowwhenachangeindirectionofthetrendisabouttotakeplaceandthenmanagethenewdevelopingtrendinawaythatallowsyoutorideituntilitends.Allofthisisdonebycarefullyreadingthepriceactionwithouttheuseofanytechnicalindicators,magicalformulasandothernonsenselikethat.Thisisnotaveryeasythingtodoasyoumustpaygreatattentiontoeverysingledetailofthepriceaction,butonceyougetthehangofittradingthiswaywillmakeyouveryprofitableinthelongrun.Thisbookexplainswithverygreatdetailalloftheaboveandgivesyouthecompletetradingsystemwithclearentry,stoplossandexitrules,rulesthatifrespectedtotheletter,canbringyouhundredsofpipsforeverytradeyoumake.Letusmoveonnowtothecorepartofthisforexsystemwhichisthetrend.
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TrendYou’veprobablyheardamilliontimesbynowthesaying“thetrendisyourfriend”.Well,you’vehearditbecauseitistrue,ifyouwanttobeprofitableintradingyoumustalwaysknowwhatthetrendisbecausethetrendsignifiesstrongconvictionfromthevastmajorityofmarketparticipantsthatthefairprice,fairvalueofaspecificcurrencypairshouldbeaboveorbelowthecurrentlevelatthattimesotheyalljoinforcesandpushthepriceupordowncreatingatrendthisway.Butletusseewhatatrendactuallyisfromatechnicalpointofview.Atrendisaseriesofimpulsivestrongmovesinonedirection,eachofthemfollowedbysmallcorrectionsorretracements.Let’svisualizeatextbooktrend:
Wehaveintheabovepicturesanidealuptrendandadowntrend.Asyoucanseetheyconsistofstrongdirectionalmovesfollowedbysmallermovesintheoppositedirectionwhichareinfactformedbytraderstakingsomeprofitfrom
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theirpositions.Thisalternationofimpulsivemoveswithcorrectionalonesgivesbirthtowhatareknownasthehighsandlowsofatrend.Foranuptrendthehighisformedwhenthecorrectionalmovestartsandthelowiswherethesamemoveendsandpriceresumesthetrend.Foradowntrendthingsworktheotherwayaroundmeaningthatalowisformedatthebeginningofacorrectionandahightakesformattheendofthesamecorrectionandpriceresumesthedowntrend.Intheexamplesaboveyoucanseethatthesehighsandlowscaneasilybeconnectedwithatrendline.So,toconcludethis,wehaveanuptrendwhenthepricestartstomakehigherhighs(HH)andhigherlows(HL)andwehaveadowntrendwhenpriceismakinglowerhighs(LH)andlowerlows(LL)justlikeinthepicturesabove.Unfortunately,trendssosimpleandclearlikethoseaboveareveryrareinrealmarketconditions.Let’sseesomerealtrends:
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Wehaveaboveoneuptrendandonedowntrend.Thisisjustabouttheclosestthatrealmarkettrendscangettoresemblethoseidealtextbooktrends.Itdoesn’tgetanyeasierthanthisinrealmarketconditions.However,trendslikethesetwoabovearerareespeciallyintheforexmarketwhichisknowntobeaveryvolatilemarket.Eveninthesecleartrendsyoucanseethattherearesomevariations,therearesomesmallertrendscontainedinthebiggertrend.Let’sseenowhowamorecommontrendfortheforexmarketcanlooklike:
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Thisisadowntrendbutyoucantellitismorecomplicatedthanthepreviousonesjustbylookingatit.TherearesomeimportantrulesIdesignedtohelpyoucorrectlyidentifyandmarkthecomponentsofatrend.Hereisthefirstone.
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CorrectionsCorrectionsorretracementscanalsoexistintheformofatradingrangethathasanupperandalowerboundarywherepricestallsforaperiodoftimeandtakesabreathbeforeresumingthetrend.
Asyoulearnedbefore,acorrectionmovehappenswhentradersstarttotakesomeprofitoutfromthemarketand,asaconsequenceofthat,pricegoesforashortperiodoftimeintheoppositedirectiononlytoresumethetrendlateron.Inthisparticularexamplewehaveadowntrendandthepeoplethatareshortarestartingtotakeprofits.Whenthesesellersstarttodothis,thepeoplethatareconvincedthatthispairwillgoupwardsfromheredecidethatthisisagoodlevelforthemtobuythispair.So,ingeneral,acorrectionmovebeginsbecausesometradersdecidetomarksomeprofitsandatthesametimeothertradersenterthemarketintheoppositedirection.Inthecaseabove,thereweren’tmanypeoplebuyingthispairatthelevelwherethecorrectionstartedtounfoldandsopricedidnotmakeaclassiccorrection.Whenacorrectionlookslikeaconsolidationrangeitmeansthatthecurrenttrendinverystronganditisvery
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likelythatitwillcontinuefurther.
Intheaboveexampleyoucanseethatinthesametrendfurtherdownwehaveadifferentformofcorrectionthatbasicallyhasitsownhighsandlows.Ithasafirstimpulsivemoveoppositetothetrenddirectionandatthatpointyoucouldverywellsaythatthisisaclassiccorrectionbut,asyoucanseeitmakesasmallcorrectionandthenanotherimpulsivemoveupwards.Becausethiscorrectionhasitsownhighsandlowsyoucouldmakethemistaketoconsideritasatrendchange.However,itstaysverywellconfinedintotheterritoryofthelastimpulsivemovedownofourtrend.Itstayswellbelowthelastlowerhighofourtrendsoitisstillacorrectionevenifitdevelopsahigherhigh.Butyouwilllearnmoreaboutthiswegettothechangeoftrendsection.Correctionscantakealotofforms,thesearejustthemostcommonones,theimportantthingtorememberisthatforacorrectionmovetobevaliditmustnotbebiggerthanitsimpulsivemove,itmustnotsurpassthebeginningoftheimpulsivemove.Let’sseesomeexamples:
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Youcanseeonthischartthatthecorrectionmovehastoalwaysbesmallerthanthelastimpulsivemove.Atthebottomofthechartyouseeanimpulsivemovebutitisfollowedbyalargermoveintheoppositedirectionsothatcannotbeconsideredacorrection.Thisishowatrendusuallychangesdirectionbutwewilllearnmoreaboutthislateron.Okay,Ithinkitisprettyclearwhatacorrectionisbynowitisnothardatalltoseeit.Nowletusgotothesecondimportantruleofatrendandthathastodowithcorrectlyidentifyinghighsandlows.
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ConfirmationTheruleisthatanyhighorlowmustbeconfirmedbythesubsequentpriceaction.Weknowfromtheabovepagesthathighsandlowsareformedatthebeginningandfinishofacorrectionmovebut,forthosehighsandlowstobevalidpricehastomakeanotherstrongimpulsivemoveinthedirectionofthetrend.BystrongimpulsivemoveImeanpricehastogowellbeyondthebeginningofthecorrectionalmovethatmadethesepotentialhighsandlows.Onlyafterthisstrongimpulsivemovehappenswecanlabelthosepotentialhighsandlowsasnewvalid,confirmedhighsandlowsinourtrend.Ifthisimpulsivemovedoesnothappenoritisnotstrongthenourpotentialhighsandlowsarenotconfirmed,theyarenotvalid.Validhighsandlowsremainthepreviousonesthathavebeenconfirmedbysubsequentpriceaction.Let’sseeachartsoyoucanbetterunderstandthis:
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Youcanseeinthischartabovethatwhatwehavetodotocorrectlyidentifythehighsandlowsofourtrend.Asthetrendunfoldsinrealtimewemarkeverylevelwheretherehasbeenachangeindirectionasapotentialhighsorlowandthenwewaitforthenextimpulsivemovedown,inthiscase,totellusifourpotentialhigh/lowhasbeenconfirmedanditisvalid.Ifthenextmovedowndoesn’tgowellpastthestartofthecorrectionthenwedisregardtheselevelsthatwemarkedaspotentialhigh/lowandwewaitforpriceactiontomakeitsnextmoveandshowuswherethenewandconfirmedhighandlowwillbe.Letusseeanotherexample:
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Herewehaveanuptrend,pricemakestwoHHandtwoHLandthenwhenitlookslikeitispreparingtomakethethirdpairofHH-HLthepairstartsaseriesofquickupanddownmovesalmostequalinlength.NoneofthesecanbeconsideredasanewHH-HLbecausepricedoesn’tgoupatall,itjuststaysthereandconsolidatesandsowedonothaveanewpairofHH-HLhere.Afterthisyoucanseethatpricedoesgoupwithaprettystrongmovepastthepointwherecorrectionbeganbutdoesn’tgofarandretracesbackdown.Westilldon’thaveaconfirmedpairofnewHH-HL.Intheend,finallypricegoesverystronglyupwardswithamassiveimpulsivemove,thusconfirmingourtrend’snewHLandHH.Thingslikethisareprettytrickytomanageinrealtimebutwiththehelpofthisbookandwithpracticeitwillbecomeeasyintime.Let’sseesomeotherexamples:
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Inthechartabovewehavethesamesituationasinthepreviouschart.Okay,nowlet’sseeamorecomplicatedone:
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InthedowntrendaboveyoucanseethatwehaveastrangetrendthathasthefirstandthelasttwopairsofLH-LLveryclosetoeachother.Yousawintheearlierexamplesthatwedisregardourpotentialhighsandlowsifthenextimpulsivemovedoesnotgopastthestartingpointofthecorrectionmoveoritgoespastjustslightly.Insituationslikeinthechartabovewherethingsaresomewhereinagrayarea,meaningthattheimpulsivemovegoespastalittlebitmorethanslightlybutstillnotenoughtoconfirmthepairofLH-LL,wedonotdisregardthispairofLH-LL,wetakenoteofitandafterthepricemakesanotherpairofpotentialLH-LLanditisfinallyconfirmedbyastrongimpulsivemove,welabelthefirstpairaswellasLH-LL.SowehavetwopairsofLH-LLclosetoeachotherinsituationslikethesetwointhechartabove.Letmeexplainbettersoyoucanunderstandwhentodisregardapairandwhennotto.FrommyexperienceIhavecometotheconclusionthattheimpulsivemovethatcomesafteracorrectiontocontinuethetrendhastohavethelength,sizeofapproximatelytwotimesthatofthecorrectionmoveformetoconsideritasastrongimpulsivemovethatconfirmsandvalidatesanypotentialhighorlow.Remember:strongimpulsivemoveisamovewiththelengthofapproximately2timesthatofthecorrectionormore.Moderateimpulsivemovesarethosetwointhelastexample
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wherewehadtolable2pairsofLH-LLclosetoeachother.Let’sgotothatchartagainandseewhatwasthesizeofthesemoveswithrespecttotheirprecedingcorrections:
Thisisthethesamechartwiththesametrendbutitiszoomedinsoyoucanbetterseewhatisgoingonwiththosefirst2pairsofLH-LLwetalkedabout.Youcanseethecorrectionmovehasaspanofapproximately260pipsandmoderatemovedownasIcallitis380pipsinlength.Thismeansitsurpassesthestartofthecorrectionbyalmosthaveofthecorrectionmovelength.Iftheamplitudeofthemovedownwouldhavebeen500pipsorsothenthiswould’vebeenastrongcorrectionmoveandwewouldhavelabeledthefirstpairofLH-LLrightafterthemove,wewouldn’thavetowaitforthathugemovedownafterthesecondpair.Let’sseeonthesametrendthelasttwopairsofLH-LLwhichhaveidenticaldynamicsasthesefirsttwo:
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Heretheimpulsivemoveisnotthatbigcomparedtothecorrectionmovelikeinthepreviousexamplebutitisstill30%biggerinlengthsothisisalsoamoderateimpulsivemove.
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Hereisanothermoderateimpulsivemove.
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Andanotherone:
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Andyetanother.YoucanseeherethatthesebsequentstrongmovedownnevercamesoourpotentialpairofLL-LHwasneverconfirmed.
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Thisisastrongimpulsivemovedown,itisalmosttwotimesbiggerthanthecorrectioninlength.
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Thisisaverysmallimpulsivemovethatpassesthestartofthecorrectionbyonlyafewpips.WedefinitelydonothaveapairofLH-LLhere.
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Wedon’thaveapairhereeither.WedisconsiderthosepotentialLHandLL.YoucanseethiswasaverygoogthingtodoaspricelaterrosebackupandpassedourpotentialLHbyafewpips.Wewillseelaterwhenwegettothestoplossplacementwhythisisimportant.Theexactsamethinghappenedinthepreviousexample.
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ThisexampleisoneofthebestasyoucanseeaseriesofpotentialpairsofHL-HHthatwereneverconfirmedandhadtobedisregardedasthemoveupwardsrightaftereachoneofthemwasnotstrongatallandnotevenmoderate.Okay,Ithinkyouhaveaclearideanowonhowtocorrectlylabelthehighsandlowsofatrend.Afterreadingallthis,youshouldpullupachartandstarttopracticeonpastpriceaction.Letusgonowtothethirdimportantruleofatrendwhichisthedegree.Thisisperhapsthemostimportantpartwhentryingtocorrectlyidentifythehighsandlowsofatrend.
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TheDegreeYou’velearnedbynowthatatrendiscomposedofimpulsivemovesandtheircorrespondingcorrectivemoves.Let’sputtogethertheimpulsivemovewithitscorrespondingcorrectionmoveandcallitawave,likeinthechartsbelow:
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Whentryingtoidentifythecorrecthighsandlowsofthetrendthatarebasicallyformedbythesewavesyouhavetomakesurefirstthatthewavesyouwanttomarkasapairofhigh-lowareofapproximatelythesamedegree,measure,extent,amplitude,sizeliketheseintheabovecharts.Lookatthefollowingchart:
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Wehavetwobigwavesfollowedbyaverysmallwavecomparedtothefirsttwo.Thisisnotofthesamedegreeorsizeasthefirsttwo.DonotconsiderthispairthenewHHandHL.YouwaitforawaveofaboutthesameamplitudetolabelasnewHHandHL.Ifitdoesnotcomelikeithappenedwiththetrendinthischart,thelastpairofHH-HLremainsthatofthelastbigwave.
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Anotherexampleliketheoneabove:
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Andanotherone:
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Yetanotherone.Asyoucanseeintheseexamplesthisisnotexactscience,butwithpracticeyouwilleasilyknowwhattolabelandwhatnot.Okayknowyouhaveaverygoodideaofhowtoidentifythetrend,howtoidentifyitscorrectionsandimpulsivemoves,howtocorrectlylabelthehighsandlowstakingintoaccountthesubsequentpriceactionmovementandthedegreeofthewavesthatformthetrend.
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TrendchangeInshort,atrendchangesdirectionwhenpriceactionmakesawaveintheoppositedirectionofthetrendnearthezoneofthelastlowerhighofadowntrendorthelasthigherlowofanuptrend.Thetrendisconsideredtohavereverseditsdirectionwhen,afterthewaveinoppositedirection,priceactionpenetratesthatlastlowerhighinadowntrendorthelasthigherlowinanuptrend.Letusseeanexample:
Wehaveadowntrendhere.Theredhorizontallineiswherethelastlowerhighofthedowntrendisplaced.PricemakesanimpulsivemoveupwardsthatpenetratesthelastLHandthenasmallcorrection.TheimpulsiveandcorrectivemoveputtogetherarethewavenearthelastlowerhighItalkedaboutjustearlier.Whenthissmallcorrectionfinishesandpricecomesbackuppassingthestartofthecorrectioniswhenthetrendchangesfromdowntrendtouptrend.Thisistheexactplacewherewewillenterourtrades.Let’sseemoreexamplesoftrendchanges:
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Thesamethinghappenshere.LastLHgetspenetratedandpricecontinuesupwardsafterasmallcorrection.Youcanseefromthischartwherewewillenterourtradeandalsowheredowesetourinitialstoploss.Asarule,theinitialstoplosswillalwaysbeplacedlikeinthechartabove,atthelevelwherecorrectionends,precedingthepricemovepastthebreachoflastLH/HLlevel.Theentrylevelhasvariationsbutinthisexampleweenterabuystoporderatthelevelshowninthechart,afterweseethatpricestartstomakeacorrectionatthatlevel.
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Inthisexamplewehaveadifferentsituation.Thewaveintheoppositedirectiondoesnotbreachthelastlowerhighbutitisinthezoneofit.Inthiscaseweenterthebuystoporderrightafterpricecomesupafterthecorrectionandpassesthelevelofthelastlowerhigh.Remember,inthissituationwedon’tenterthetradeatthestartofthecorrectionbecausethatlevelisstillbelowthelastLH,itdidnotbreachtheLHlikeintheexamplesabove.Thesearetheonlytwosituationswherewehavetomanageourentrypoint.IfthewavebreachesthelastLH/HLweenteratthestartofthecorrectionbecausethatlevelalreadypenetratedtheLH/HL.IfthewavedoesnotbreachthelastLH/HLlikeintheexampleabove,weenterthetradeasexplainedaboveandshowninthechart.
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Anotherexample:
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Uptrendchangesintoadowntrend.
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Youhavehereanotherexampleofatrendchange.Nowlet’sseehowwemanageourstoplosslevelsowecangetasmanypipsaswecanoutofeverytradewemake.ThestoplosswillbetrailedmanuallyundereveryvalidHLifwearebuyingandaboveeveryvalidLHifweareselling.
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TradesetupWewillentertradesbasedonthetrendofthe1hourchartzoomedouttothemaximum.Thisisthemostsuitabletimeframeforthisstrategybecausethetrendherechangesdirectionfrequently,thereforeyouwillbeinthemarket80-90%ofthetimeusingthistimeframeandyouwillnothavetoholdatradeopenforweeksasyouwoulddoifyoutradedwiththismethodonthe4hchartorthedailyone.Iamnotsayingnottotradeonahighertimeframewiththissystem,infactthatwillbemoreproductiveinthelongterm,Iamsayingstickwiththe1hchartifyoudonothaveitinyoutoholdatradeopenforweeksatatime.Now,thereisaveryimportantrulehere:whenthetrendchangeslikeintheexamplesabove,beforeweenteratradeinanydirection,wealwaysmakesurethatthetrendonthe4hourstimeframeisinthesamedirectionthatwewillenterourtradeinonthehourchart.Alwaysrememberthisrule.Letmeshowyouwhathappensifyoudonotrespectthisrule:
Trendchangesfromdowntoup,weenter,setthestoploss,pricegoesjust
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slightlyinourfavorandthenretracesquicklyandhitsourstoploss.Why?Lookasthis:
Thisisthebiggertimeframechart.Youcanseethatherethetrendisclearlydown.Alwayslookatthe4hcharttoconfirmthatthetrendthereisinthedirectionofthetradeyouareabouttoenteronthe1hchart.
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TradingsystemstepbystepGotothe1hcompletelyzoomedoutchartandfindthetrendusingwhatyoulearnedhere.Don’tbeshallowwiththispartofchartanalysis.Beverymeticulous,thisstepisthemostimportant.Waitforthistrendtochangelikediscussedinthetrendchangesection.Whenthetradesetuphappensgotothe4hchartandmakesurethatthetrendonthattimeframehasthesamedirectionasthetradeyouareabouttoenteronthe1hchart.Ifthisisnotthecase,donotenterthetrade.Ifthe4htimeframetrendconfirmsyourtradedirectionenterthetradeonthe1hchartandsetyourinitialstoplosslevellikediscussedabove.TrailyourstoplossmanuallybeloweveryvalidHLthatthenewuptrendmakesoraboveeveryLHthatthenewdowntrendmakes.Youcanalsousethissystemtotradethechangesintrendonthe4hchartwithconfirmationoftrenddirectionfromthedailychartandyoucanuseitonthedailychartwithconfirmationoftrenddirectionfromtheweeklychart.Thehigherthetimeframe,thebiggertheprofitswillbe.
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Tradeexamples
Weenterthetradehereonthechangeofthetrend.Let’sseewhathappensnext:
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YoutrailthestoplossonlyatvalidHL’s.ThetradeendsattheSL3level.
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Anothertradejustafewhoursafterweexitedthefirst,SL2isthelevelweexitthisone.
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WeexitedonSL2butthetrenddidnotchangethere,itgoesdownalittlebitmore.Thereisnothingwecandobutwaitforthetrendtochange.Withthehelpofthatsquareyoucanseehowlongwehavetowaitbeforethenextchangeoftrendoccurs.Ofcourse,keepinmindthatyoualwayshavetocheckthe4htrendbeforeyouenteranytrade.
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YouexitatSL4level.
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Inthisexampleyousetyoursellstoporderattheentrylevelbutthepricefailstoconfirmthetrendchangeandcontinuestheuptrendforawhile.Thereisnothingyoucandohere.
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Thisisit.IntheendIwouldliketoapologizeifIsoundalittletorigidinmyexplanationsandifthereareanymisspellings.Englishisnotmyfirstlanguage.IamdoingthebestIcan.Thankyouandhappytrading.If you find that this adds value to your trading please considerwriting areviewofthebookonAmazon.Itdoesnothavetobelong,justafewwordsto state your opinion about the trading systempresented in order tohelpotherpeoplemakemoreinformeddecisions.Please email me afterwards at [email protected] and you willreceive thePDFversionof this e-bookso thatyoucanread itmoreeasilyandprintthecontentsonpaperifyouwant.Ifyouwanttocombinethisstrategywithotherpowerfulforextradingsystemsthatwillgiveyoutradesetupsinperiodslikeinthesquareabovewherethereisnotrendchangeyoucantakealookatthefollowingtradingsystems:
TradethePriceActionTradetheMomentum
DayTradingForexwithPricePatternsDayTradingForexwithS&RZones
ForexRangeTradingwithPriceAction50PipsaDayForexStrategy
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