Pimpmyea.com-Forex Diver Users Manual

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Forex Diver Users Manual

Forex Diver Trading System

Forex Diver is a complete trading system based on three indicators: Fx Diver, TendenzaFX, andStochasticBars. Of course the most important indicator of this set is Fx Diver which displays 4 “Diver Bars” onthe right of the chart: they provide multiple information extrapolated (mainly) from Bollinger Bands on multipletimeframes. This Trading System can be used on any financial instrument available on the MT4 platform. Wesuggest to use it with default settings (1M/5M/15M/1H) on a 1 minute chart, or on 5 minute chart withsettings 5M/15M/1H/4H.

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REGISTRATION

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First Use of Template Files

The first time you use a template (.tpl) file please press CTRL+i on the keyboard and put your authentication email(the email address you used during the transaction for buying the indicator) in the settings. At this point thetemplate will start to work properly. From now on the template will always work properly without any need of settingthe authentication email again (even if you close and restart the MT4).

Installation (MT4 Build 600 and higher)

The installation process:

1. Open your MT4 Data Folder via the “File > Open Data Folder” menu.

2. Copy the “.ex4″ files into the “MQL4\Indicators” folder of your MT4 Data Folder

3. Copy the “.tpl” files into the “templates” folder of your MT4 Data Folder

4. Restart the MetaTrader 4 platform.

Forex Diver Overview

I think of indicators as a way to look at information that is already reflected in the price. So indicators should helpyou in making decisions by “talking” to you. The most difficult part is to have indicators speak an easy languagethat everyone can understand. That’s what Forex Diver is born to do. There’s no secret formula in it other than areally new way to display the same information that otherwise would take a lot of charts, space and time to read.You’ll discover a new way to read charts and you’ll learn just how powerful the Forex Diver is.

The Forex Diver is meant to be very visual. Despite giving you a lot of information it can take only a few secondsto read and interpret. It means that you can quickly and easily:

Determine if it is time to trade or not: Most of the losses of a trader come from trying to make pips out of anon trending market. The Forex Diver will give you a precise idea of the volatility of the market therebygiving you an easy way to catch moves with the right momentum.

If so, understand in which direction to trade (either long or short): the Forex Diver will also tell you whereprice will probably go and help you filter out false entries.

Have an idea of the most probable target levels for your trade: before entering a trade, it is important tohave an idea of the possible target levels that the move can reach.

That’s what makes it a perfect indicator for “scalping” the shorter time frames (particularly the 1 minute and 5minute), but it can also be used on longer time frame charts with subsequent larger targets and trade duration.

The following sections will give you an in depth explanation of how it works and how to use it best. We’ll alsoexplain 3 methods based on 3 “patterns” that will help you to be more consistently profitable with it. You can even“specialize” in one pattern only and wait for it to appear on a currency pair or a set of currency pairs.

Forex Diver Anatomy 101

The Forex Diver indicator is something that’s really new and works in a way that no other indicator has workedbefore on the Metatrader4 trading platform. This section will explain all the information and signals that it will giveyou. Forex Diver is basically a “visual” indicator and it will produce many signals. The main objective of itsdevelopment was to give the trader a way to quickly have an exact view of the overall market situation and allowhim/her to choose:

1. if it is time to trade.

2. if so, what is the trend direction.

While all other indicators are usually displayed horizontally, Forex Diver is displayed vertically alongside the price.This will let you have more time for the currency price and more space to add other indicators (in the charttemplates you will also find 3 more panes with the multi-timeframe stochastic, read on for more details).

The indicator is made of four vertical bars (will be referred to as “ Diver Bars” from now on). Each Diver Bar showsthe Bollinger Bands range for a specific timeframe.

But before we go on…

What are the Bollinger Bands?

Bollinger Bands are a technical trading tool created by John Bollinger in the early 1980’s. They arose from theneed for adaptive trading bands and the observation that volatility was dynamic, not static as was widely believedat the time.

The purpose of Bollinger Bands is to provide a relative definition of high and low. By definition prices are high atthe upper band and low at the lower band. This definition can aid in pattern recognition and is useful in comparingprice action to the action of indicators to arrive at trading decisions. Price can, and does, walk up to the upperBollinger Band and walk down to the lower Bollinger Band.

Bollinger Bands consist of a set of three curves drawn in relation to prices. The middle band is a measure of theintermediate-term trend, usually a simple moving average, that serves as the base for the upper band and lowerband. The interval between the upper and lower bands and the middle band is determined by volatility, typicallythe standard deviation of the same data that were used for the average. The default parameters are 20 periodsand two standard deviations.

Closes outside the Bollinger Bands can be continuation signals, not reversal signals. Trading bands answer thequestion whether prices are high or low on a relative basis. The matter actually centers on the phrase “a relativebasis”. Trading bands do not give absolute buy and sell signals simply by having been touched; rather, theyprovide a framework within which price may be related to other indicators.

The Diver Bars

We said that each Diver bar shows the Bollinger Band range (and so the volatility). Let’s go into further detail.Looking at one Diver Bar, the top of the bar is the exact level of the upper Bollinger Band, the bottom of the bar isexact level of the lower Bollinger Band. The white line in the middle of the Diver Bar is the exact the level of themiddle Bollinger Band or the 20 SMA (simple moving average). These are both the same. So the Diver Bar showsthe Bollinger Bands range and so the volatility on the related time frame.

This applies to each of the 4 Diver Bars. Each one shows the information mentioned in the previous paragraph(and much more) for each of different time frames they are referred to. You can see the time frame associated toeach one of the Diver Bars at top of the bars themselves.

By default the first Diver Bar (from the left) is set to show information on the 1 minute timeframe, the second DiverBar is set to show information on the 5 minute timeframe, the third Diver Bar is set to show information on the 15minute timeframe and the 4th (and last) Diver Bar is set to show information on the 1 hour timeframe. So in a verylimited space you have information and signals displayed from 4 different timeframes, and most importantly, all inone chart.

The timeframe value of each Diver bar is customizable and it all depends on the time frame you decide to trade.Here are a few settings that we use:

Let’s see what other information is displayed by each Diver Bar (i.e. information other than the Bollinger Bandslevels).

The Forex Diver and the Bollinger Bands

As we explained earlier, the appearance of the Forex Diver bars is based on the Bollinger Bands indicator.Specifically, the top and the bottom of each Diver bar is at the same level of the upper/lower Bollinger Bands foreach of the related time frames.

But let’s explain the concept a little better. Here’s are a few screenshots comparing the Bollinger Bands on the 4default time frames with the Forex Diver related Diver bar.

Here are the Bollinger Bands levels and the relative Diver bar for the 1 minute time frame:

As you can see the upper Bollinger Band corresponds with the top of the 1st Diver bar (the one related to the 1Mchart). The lower Bollinger Band corresponds with the bottom of the 1st Diver bar.

That is true for all the Diver bars and the related time frames. As another example here are the Bollinger Bandslevels for the 15 minutes timeframe and the corresponding top/bottom of the 15M Diver bar:

The Forex Diver and the “trend indicator”

The first piece of additional information you can gather from the Diver Bars is the trend. The Diver bars can be oneof two colors: green and red. This color is based on a “trend indicator” that can be chosen from a set of sixdifferent indicators. The default indicator is the RSI (Relative Strength Index), but the user can choose from a listof 6 “trend indicators”.

The RSI is an oscillator that goes from 0 to 100. The value of the RSI is shown by a yellow line on each Diver Bar.The “50 line” of the RSI is the white line. So when the yellow line (RSI) is above the 50 level (white line) we are ina bullish trend, when below the 50 level we are in a bearish trend. The 0 level of the RSI is the bottom of the Diverbar and the 100 level is the top of the Diver bar.

Here’s a screenshot that compares a multiple time frame RSI (the 4 panels below theprice panel) with the Diver bars color. There you can see that when the RSI is above the50 line than the Diver bar is green indicating a bullish trend, when the RSI is below the50 level then the RSI is red indicating a bearish trend.

The Forex Diver and the Bollinger Bands %B

There are two numbers below each Diver bar. The first is a percentage. It’s the Bollinger Bands %B or, in otherwords, it is where the price is in the range from the upper and lower Bollinger Bands represented as a percentage.For example: if the Bollinger Band %B is 70% then it means that the currency pair is actually at the 70% of therange between the top and the bottom of the Diver Bar.

The Forex Diver and the Bollinger Bands Bandwidth and direction

The second number below the Diver bar is the range (or Bollinger Bands bandwidth) displayed in pips. So it isbasically the number of pips between the upper and lower Bollinger bands. It’s a simple way to evaluate thevolatility of the specific timeframe. This can be helpful to understand if we’re in a consolidation phase. We’ll seehow to use this information to our advantage with the “volatility breakout” technique.

Also, the color of the pips range tells you the direction of the middle Bollinger band (20 period SMA) and so thedirection of the Bollinger Bands themselves. When the pips range is green it means that the Bollinger Bandsdirection is upward, when it is red it means it is downward. The upward or downward direction of the middle bandand so of the whole Bollinger band set is based comparing the actual position respect of the previous ones.

Trend Indicator options

As a trend indicator you can choose between 6 indicators commonly used for that:

0 – RSI (Relative Strength Index)

A technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt todetermine overbought and oversold conditions of an asset. It is calculated using the following formula:

RSI = 100 – 100/(1 + RS)

(RS = Average of x days’ up closes / Average of x days’ down closes)

The RSI ranges from 0 to 100. An asset is deemed to be overbought once the RSI approaches the 70 level,meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches30, it is an indication that the asset may be getting oversold and therefore likely to become undervalued.

1 – CCI (Commodity Channel Index)

An oscillator used in technical analysis to help determine when an investment vehicle has been overbought andoversold. The Commodity Channel Index, first developed by Donald Lambert, quantifies the relationship betweenthe asset’s price, a moving average (MA) of the asset’s price, and normal deviations (D) from that average. It iscomputed with the following formula:

The CCI has seen substantial growth in popularity among technical investors; today’straders often use the indicator to determine cyclical trends in not only commodities, butalso equities and currencies.

The CCI, when used in conjunction with other oscillators, can be a valuable tool toidentify potential peaks and valleys in the asset’s price, and thus provides investorswith reasonable evidence to estimate changes in the direction of price movement of the asset.

2 – Parabolic SAR

A technical analysis strategy that uses a trailing stop and reverse method called “SAR,” or stop-and-reversal, todetermine good exit and entry points.

This method was developed by J. Wells Wilder. Basically, if the stock is trading below the parabolic SAR (PSAR)you should sell. If the stock price is above the SAR then you should buy (or stay long).

3 – ADX (Average Directional Index)

An indicator used in technical analysis as an objective value for the strength of trend. ADX is non-directional so itwill quantify a trend’s strength regardless of whether it is up or down. ADX is usually plotted in a chart windowalong with two lines known as the DMI (Directional Movement Indicators). ADX is derived from the relationship ofthe DMI lines.

Analysis of ADX is a method of evaluating trend and can help traders to choose the strongest trends and also how

to let profits run when the trend is strong.

4 – Bollinger Bands %B

The indicator %b tells us where we are within the bands. Unlike other indicator like the RSI, which are boundedby 0 and 100, %b can assume negative values and values above 100 when prices are outside of the bands. If theclose price is equal to the upper Bollinger Band, %b will be 100 (percent). If the close price is equal to the lowerBollinger Band, %b will be 0.0. A %b value of 50 means the close price is equal to the middle Bollinger Band.

Furthermore, readings above 100 and below 0 indicate that the close price is outside of the Bollinger Bands by acorresponding percentage or the Bollinger Bandwidth. A %b value of 125 means that the close price is above theupper Bollinger Band by 25% of the Bandwidth. A %b value of -25 means that the close price is below the lowerBollinger Band by 25% of the Bandwidth.

The Bollinger Percent B equation can be constructed as:

Percent B =((Close – Bollinger Lower Band) /(Bollinger Upper Band – Bollinger Lower Band))* 100

5 – Hull MA

The Hull Moving Average solves the age old dilemma of making a moving average more responsive to currentprice activity whilst maintaining curve smoothness. In fact the HMA almost eliminates lag altogether and managesto improve smoothing at the same time.

The HMA manages to keep up with rapid changes in price activity whilst having superior smoothing over an SMAof the same period. The HMA employs weighted moving averages and dampens the smoothing effect (andresulting lag) by using the square root of the period instead of the actual period itself.

So, which do you think it’s faster and easier to read… this?

… or this?

… so if you want, now you can work like this!

Like a professional trader, you’ll be able to easily monitor more than one currency pair even with just one screen.Watching more that one currency pair at a time will give you more opportunities to catch pips. You won’t have towait hours for the right setup tp show. Trading multiple currency pairs will also let you take advantage of thecorrelations between them and make much more pips with the same “trend”.

Chart Templates and “Fix One to One”

The Forex Diver templates comes in two “flavors”: with or without the StochasticBars. They also come in 3timeframes: 1 minute (1M), 5 minutes (5M), 15 minutes (15M).

Each template has:

FX Diver indicator (with the time frame’s values all properly setup)

[optional] StochasticBars: multiple MTF Stochastic oscillator panes (with the time frame’s values allproperly setup)

TendenzaFX: Automatic Trendlines indicator

Here is how the M1 template with StochasticBars looks like:

We suggest to modify the properties of the chart a Forex Diver template is associated to . Just press F8 on yourkeyboard and select the “Common” tab of the Properties window that pop ups. Then check the flag of “Scale fixOne to One” and click OK. The “One to One” chart property makes every pixel of your chart to correspond to 1 pip.Please keep in mind that when “One to One” is enabled you can drag&drop the entire price (or candle) line onyour chart, so you can center the Diver Bars on your chart and get a beautiful view of the entire price action.

TendenzaFX – Automatic Trendline Indicator

TendenzaFX indicator automatically draws trendlines based on the fractal points. Before we go on let’s see how“fractal points” are calculated.

A Bearish fractal is a series of five consecutive bars where the highest high is preceded by two lower highs and isfollowed by two lower highs. The opposite configuration would be a Bullish fractal. Both fractals (Bearish andBullish) may share bars.

If you want the “fractals” to be shown on your charts you can addthem by going to the menu “Insert > Indicators > Bill Williams >Fractals”.

Bearish fractals are used to draw resistance trendlines, whileBullish fractals are used to draw support trendlines.

Unlike the common “Fractals” indicator, TendenzaFX also lets you choose the cardinality of the two fractals usedfor drawing the trendlines. This feature allows to select just the most significative fractals on chart, so that theirbreakout most of the times is a good indication that price is indeed goin to run.

StochasticBars – Multi Time Frame Stochastic indicator

When you apply the templates you will see 4 panels of bars at the bottom of the chart. Each panel is an instance ofthe StochastiBarsindicator applied to a different timeframe. The 4 panels together form a Multi Time FrameStochastic indicator (referred to as the MTF Stochastic from this point on). The stochastic indicator is a commonlyused to identify overbought/oversold conditions.

The stochastic oscillator is a technical momentum indicator that compares a security’s closing price to its pricerange over a given time period. The theory behind this indicator is that in an upward-trending market, prices tendto close near their high, and during a downward-trending market, prices tend to close near their low.

We’ll use the MTF Stochastic indicator as a confirmation for both long and short entries.

The MTF Stochastic is shown by default as a set of bars. They are displayed in two different colors: green andred. The bars are displayed in two different “weights”: thin and bold.

The color and weight of each bar is based on the following set of rules:

When Stochastic is above 80 then the bar is bold green (overbought area).

When Stochastic is between 50 and 79 then the bar is thin green (bulls area).

When Stochastic is between 21 and 50 then the bar is thin red (bears area).

When Stochastic is below 20 then the bar is bold red (oversold area).

We will often make reference to a stochastic bar “loop” and this is basically what we are referring to:

… > thin green > bold green > thin red > bold red > …

Being a “loop” after the end it starts over again from the beginning. This is the “regular” loop but there areexceptions to it.

Trading Warm-Up

There are quite a few key areas where you can improve your trading profitability well before we start to look at atrading method.

Win-Lose Ratio

Nobody wins all of the time. The win-lose ratio is usually expressed as a percentage. For example, if you win 90trades out of every 100 then you will have a win percentage of 90% and a losing percentage of 10%. Thisexpressed as ratio is 90/10 = 9:1. It is quite possible to make profit even if you have a more losing trades thanwinning trades. Anything less than 1:1 or 50% win percentage and you have more losers than winners.

Personally I would have a problem trading a system with a low percentage of winning trades, even though it winson the long run – psychologically I would find a long run of losers very difficult to cope with.

Risk- Reward Ratio

Calculating reward is simple, it’s just the average number of points won per trade, so if you have 37 trades, ofwhich 21 won and a total of 252 points, your average win (reward) is 252/21 = 12 points.

Risk is just the average number of points lost. Over the same 37 trades you must have had 16 losers and if had atotal loss of 128 points, your average loss (risk) per trade is 128/16= 8 points.

The risk/reward ratio is simply 8:12 or 1:1.5.

Combining win-lose ratio and risk-reward ratio together, we can calculate how much we can expect to make forevery trade on average over the long term. If you end up with a plus figure you will be winning and making profits,should you end up with a minus figure you will be losing.

Stop loss and Risk

When asked about making money in the stock market Warren Buffet the world most successful investor replied:

“There are only two rules to making money in the stock market:

Rule n.1: Don’t lose money

Rule n.2: Follow rule n.1″

Although this quote may make you smile, it is in fact a very important factor in being successful and makingmoney in the markets. If you can eliminate your losing trades all that you will be left with are winners.

The best we can do is to manage our losses, first by trading a system with a high percentage of winners andsecondly by using a stop loss to limit the number of points lost.

There’s always a trade-off on where to position a stop loss: too close to the entry price of the trade and the stopwill be hit more often the result of which will be less winning trades and a lower win/lose ratio. Too far from theentry price and the risk/reward ratio is altered, again resulting in lower profits.

A stop loss is a limit order and it’s the maximum amount you will lose should that trade go wrong. It is also themaximum amount of risk per trade.

Compounding

Why do banks, credit card company and mortgage lenders charge compound interest? Quite simply because itmakes them a lot of money.

So why not emulate how the banking institutions make money and harness the power of compounding byincorporating it into your plan. By compounding your profits you can increase them three-fold or more.

By compounding you are making the same daily number of pips but you are bringing more money on the table,this by just reinvesting your profits and making more profits.

Type of TradesIn this section we’ll describe three methods of using Forex Diver. They illustrate three different approaches youcan use to trade the markets. We would like to stress the fact that once you are familiar with these approaches youcan start using the Forex Diver as a tool and integrate it in your own existing systems or develop new systemsaround it.

The methods we will describe are:

Volatility Breakout

Trend Following

Trend Reversals

For each method we will discuss four steps:

1. How to recognize the method “pattern”.

2. The entry rules.

3. Suggested entry/take profit levels/strategies.

4. Suggested stop loss levels/strategies.

These techniques can be applied to any time frame. So short-term traders (scalpers) may deploy them on one/fiveminute bar charts, swing traders may focus on fifteen minute/one hour charts.

The greatest myth about Bollinger Bands is that you are supposed to sell at the upper band and buy at the lowerband; it can work that way, but it doesn’t have to. In the “Volatility Breakout” we’ll actually buy when the upper bandis broken to the upside and sell when the lower band is broken to the downside. In “Trend Following” we will buyon strength as we approach the upper band only with a trendline break and an MTF Stochastic indicatorconfirmation and sell on weakness as the lower band is approached, again only with a break of the trendline and ifconfirmed by our stochastic indicator. In “Trend Reversal” we’ll buy near the lower bands, using a W pattern,resistance trendline break and stochastic indicator to clarify the setup. We will sell near the upper bands, using aM pattern, support trendline break and stochastic indicator to clarify the setup.

So let’s go into further detail with each of these methods.

Rules for Trading Volatility Breakout

Step 1 – Recognize The Pattern

The most direct application of the Forex Diver is a volatility breakout system. Breakouts occur after a period ofconsolidation. Other indicators such as trendlines break and the “trend indicator” can prove beneficial whendeciding whether or not to buy or sell in the direction of the breakout as sometimes there are fake ones. Theeasiest strategy is to wait until a “squeeze” occurs, then look for the first move away from the trading range. Sojust wait for a squeeze and go with the first breakout.

How to recognize the “squeeze”

A squeeze can be defined as a “compression” of the range (the size) of the Divers bars. Usually the first 3 timeframes (default 1M, 5M and 15M timeframes) are the ones affected by the “compression”. The larger time framerelated to the 4th Diver bar (default 1H) is less sensitive and usually gives the direction of the most probable sideof the breakout of the squeeze. It’s is not possible to say below how many pips of range is a squeeze, as itdepends on the average daily range of each currency pair. But for example, a range below 30 pips for EURUSDcan be considered a congestion period.

Below, there’s an example pattern for a probable short breakout on a 1M EURUSD chart:

and that’s what happened a few minutes later when the “trend indicator” (default and in this example is the RSI)on the first two time frames (1M and 5M) turned bearish:

the 1M and the 5M Diver bars become red indicating that a reversal is starting. This is the first sign of a possiblesqueeze breakout. The second is the break of the (support in this case) trendnline.

Below there’s another example pattern for a possible long breakout on a 1M USDCHF chart:

as you can see the consolidation period has been quite long so that all the first 3 time frames (1M / 5M / 1H) showa “compression” of the Diver bars.

Step 2 – Entries

Short entry

The first signal comes from the lower support trendline break.

To confirm the break wait for the stochastic indicator bar to pass from the thin/bold green to thin/bold red. For a

stronger confirmation wait for a signal to come from the stochastic 15M (2nd stochastic line).

A better signals comes from a close with a BB%B value below 0 for at least the first Diver bar (1M).

Long entry

The first signal comes from the upper resistance trendline break. To confirm the break wait for the stochasticindicator bar to pass from the thin/bold red to thin/bold green.

For a stronger confirmation wait for a signal to come from the stochastic 15M (2nd stochastic line).

A better signals comes from a close with a BB%B value above 100 for at least the first Diver bar (1M).

Type of orders

When trading the Forex Diver system on a 1M chart, I use “market orders” as profit can be only a few pips and sowhat I particularly need is speed of execution (both opening and closing orders) more than the “perfect” entry. Butif you decide to use the Forex Diver on longer time frame charts you’ll have the time to use buy stop/sell limitorders so you can decide on which type of orders you prefer to use.

Step 3 – Exits/Take Profit Levels

Once the order has been placed and price goes in the direction we are trading, either long or short, we are facedwith the problem of choosing “when” to exit. I usually use two different exit levels (described below) but you arefree to use the strategy you prefer. Here’s a list of 3 strategies that can be used.

Single level exit

Sometimes the target is only a few pips but in most situations the pip target is a very interesting one. Rememberyou only need a few pips to be consistent on a daily basis.

Two level exits

If you want to try to catch most of “the move”, and so collect more pips per trade you can close half of the lot sizeof your orders (for example if you opened a 1 lot order, you close only 0.5 lots at the first target level) and let theother half run until the trend reverses or retraces. For example, in a long trade, until the price breaks a supporttrendline. At this point you can move your stop loss for the remaining half lot to breakeven level so you know thatyou won’t lose any money and you’re surely in profit with the trade. If you prefer to “set and forget” you can use a“trailing stop” on the remaining half lot.

Other target levels

Depending on the situation you may decide to have targets that are based on specific levels, like “round numbers”(they are key levels, very important due to the fact that they are “special” numbers for “human” traders). Part ofthis group of important levels are Fibonacci Levels, Pivot Point levels, etc. It’s out of the scope of this document toexplain how they work and how they are calculated, but it can be important to be aware of them.

In a ranging market you can target the opposite Bollinger Band on a higher timeframe. For example, if youentered long on a trend reversal after the price touched the lower Bollinger Band in all the timeframes, you mayhave to decided to use the middle or upper Bollinger band of the 1H “Diver bar” as a target. Remember that theselevels are not static and they will surely change by the time price touches them.

Step 4 – Stop Loss Levels

As I mentioned earlier when trading the 1M chart I place market orders as I need speed in execution. For thesame reason when scalping I don’t manually put my stop loss in when I open the order but I set a “mental” stoploss at the break of the opposite trendline of the one used for the entry. So, if the price reverses and breaks theopposite trendline I then close the trade.

When the trade goes into profit, as soon as I have gained a sufficient number of pips, I set the trailing stop.

But on the longer time frames, or if you want to set a stop loss for every trade, I suggest the use of the previouslower low in case of a long trade, or the previous higher high in case of a short trade. You can easily see theselevels as they are the points that TendenzaFX uses to draw the lines.

Let’s say TendenzaFX uses bars A and B on chart for drawing the resistance line. You can set your stop loss for ashort trade at a few pips above the high value of any of them. The choice between the A and B bar depends onyour risk level. For long trades instead, you can set the stop loss a few pips below the low value of bar C or D (thetwo bars used by TendenzaFX for drawing the support trendline), always depending your risk level.

How the pattern evolves

A squeeze breakout is a pattern with a great potential. That means that probably the Forex Diver will “evolve”showing different patterns. For example it’s easy that from a “volatility breakout” pattern it becomes a typical“trend following” (see next chapter) pattern to arrive to a possible “trend reversal” (third methods we’ll explain). Soit can be useful to take a look at some examples of real moves showing how the Forex Diver morphed during thewhole move showing the different phases the currency pair is in.

Here’s an image showing you the “evolution” of a squeeze breakout. It’s been made putting together 4screenshots taken in different moments on a 1M chart on EURUSD:

The first Forex Diver setup (from the left) of the image shows all green Diver bars. It also shows compression ofthe first 3 time frames. Notice that the 1H Diver bar gives you already a good prediction of where there’s “room” forthe expansion.

Here’s another example in the opposite direction on a 1M chart on GBPUSD:

Rules for Trading Trend Following

Step 1 – Recognize The Pattern

The second Forex Diver method relies upon the idea that strong price action accompanied by strong indicatoraction is a good thing. It is a confirmation approach that waits for these two conditions to be met before giving anentry signal. Of course, the opposite, weakness confirmed by weak indicators, generates a sell signal.

The idea is that both Bollinger Band %b for price and RSI must rise above a threshold value. The basic rule is: IfBollinger Band %b is greater than 0.8 and RSI is greater than 70-75, then buy. If Bollinger Band %b is smaller than0.2 and RSI is smaller than 25-30, then sell.

Recall that Bollinger Band %b shows us where we are within the bands; at 100% we are at the upper band and at0% we are at the lower band. So, at 80% Bollinger Band %b is telling us that we are 80% of the way up from thelower band to the upper band. Another way of looking at that is that we are in the top 20% of the area between thebands. RSI is a bounded indicator running between 0 and 100. 70-75 is a very strong reading representing theupper trigger level. 25-30 is a very weak reading representing the lower trigger level.

So, the Trend Following combines price strength with indicator strength to forecast higher prices, or priceweakness with indicator weakness to forecast lower prices.

The main trap to avoid is late entry, since much of the potential may have been used up. A problem with “trendfollowing” is that the risk/reward characteristics are harder to quantify, as the move may have been underway for abit before the signal is issued. One approach to avoiding this trap is to wait for a pullback after the signal and thenbuy the first up day. This will miss some setups, but those remaining will have better risk/reward ratios.

How to identify RSI level on Diver Bar

You can easily see the level of the RSI indicator simply looking at the yellowline in each Diver bar. Assuming that the bottom of each Diver bar is 0 and thetop is 100 you have another 3 middle levels forming 4 quarters. The middlewhite line is the 50 level. Each half of the Diver bars is also divided into twoequal halves.

You can easily spot the 4 total halves by looking and the 4 different shadow ofgreen/red. From bottom to top: the 0 level (bottom), 25, 50 (white middle line),75 and 100 (top).

Step 2 – Entries

Short entry

Wait for the Bollinger Bands %B to be below 20% and the RSI to be below the30 level.

Enter at the lower support trendline break.

To confirm the break wait for the stochastic indicator bar to pass from thethin/bold green to thin/bold red. For a stronger confirmation wait for a signal tocome from the stochastic 15M (2nd stochastic line).

Long entry

Wait for the Bollinger Bands %B to be above 80% and the RSI to be above the 70 level.

Enter at the upper resistance trendline break.

To confirm the break wait for the stochastic indicator bar to pass from the thin/bold red to the thin/bold green. For astronger confirmation wait for a signal to come from the stochastic 15M (2nd stochastic line).

Step 3 and Step 4

Please refer to the Volatility Breakout section above

Rules for Trading Trend Reversals

Step 1 – Recognize The Pattern

Short reversal pattern

After an upward trend, price can reach the top and touches the upper Bollinger Band in all 4 time frames. The fourDiver Bars are aligned at the top. They are all green and usually the 1H Diver Bar (longer time frame) “contains”the lower time frame Diver Bars. When this occurs the top of all four Diver Bars are almost in a straight horizontalline.

At this point the price starts to come down and the 1M Diver Bar (shortertime frame) starts “blinking” from green to red and vice versa, meaning thatthe “trend indicator” is changing direction. The “pip range” also becomesred meaning that the Bollinger Band (in particular the 20 SMA that’s themiddle Bollinger Band) is changing direction from long to short. The 1MDiver Bar (the first “Diver bar” from the left) is the first to give us a “signal”as it is the most “sensitive” to changes in price. Sometimes the secondDiver Bar will follow soon after.

In any case be prepared for a break to the downside of the supporttrendline.

Long reversal pattern

In this case the pattern is the same but at the opposite side, i.e. all fourDiver Bars are almost in a straight horizontal line at the bottom. It happensafter a downward trend and the price can reach the bottom and touch thelower BB in all the 4 time frames. The four Diver bars are aligned at thebottom, they are all red and usually the 1H Diver bar “contains” the lowertime frame Diver Bars.

At this point the price starts to move up and the 1M Diver Bar (shorter timeframe) starts “blinking” from red to green and vice versa, meaning that the“trend indicator” is changing direction. The “pip range” also becomes greenmeaning that the Bollinger Band (in particular the middle Bollinger BandSMA) is changing direction from short to long. The 1M Diver Bar is the firstto give us a “signal” as it is the most “sensitive” to changes in price.Sometimes the second Diver Bar will follow soon after.

In any case be prepared for a break to the upside of the resistance trendline.

Double top / Double bottom price pattern

Many times this pattern comes after a double top/double bottom price pattern. The double top and doublebottom are well-known chart patterns. These two reversal patterns illustrate an attempt to continue an existingtrend. Upon several attempts to move higher, the trend is reversed and a new trend begins. These chart patternswill often resemble what looks like a “W” (for a double bottom) or an “M” (double top).

The double top pattern is found at the peaks of an upward trend and is a clear signal that the preceding upwardtrend is weakening and that buyers are losing interest. Upon completion of this pattern, the trend is considered tobe reversed and the security is expected to move lower. The first stage of this pattern is the creation of a new highduring the upward trend, which, after peaking, faces resistance and sells off to a level of support. The next stageof this pattern will see the price start to move back towards the level of resistance found in the previous run-up,which again sells off back to the support level. It’s important to note that the price does not need to touch the levelof resistance but should be close to the prior peak.

The double bottom pattern is the opposite chart pattern of the double top as it signals a reversal of thedowntrend into an uptrend. This pattern will closely resemble the shape of a “W”. The double bottom is formedwhen a downtrend sets a new low in the price movement. This downward move will find support, which preventsthe security from moving lower. Upon finding support, the security will rally to a new high, which forms thesecurity’s resistance point. The next stage of this pattern is another sell-off that takes the security down to the

previous low. These two support tests form the two bottoms in the chart pattern. But again, the security findssupport and heads back up.

Step 2 – Entries

Short entry

The first signal comes from the lower support trendline break. To confirmthe break wait for the stochastic indicator bar to pass from the thin/boldgreen to thin/bold red.

For a stronger confirmation wait for a signal to come from the stochastic15M (2nd stochastic line).

The pattern is stronger if it comes after a double top price pattern.

Long entry

The first signal comes from the upper resistance trendline break. Toconfirm the break wait for the stochastic indicator bar to pass from the thin/bold red to thin/bold green.

For a stronger confirmation wait for a signal to come from the stochastic15M (2nd stochastic line).

The pattern is stronger if it comes after a double bottom price pattern.

Type of orders

When trading the Forex Diver system on a 1M chart, I use “marketorders” as profit can be only a few pips and so what I particularly need isspeed of execution (both opening and closing orders) more than the“perfect” entry. But if you decide to use the Forex Diver on longer timeframe charts you’ll have the time to use buy stop/sell limit orders so you can decide on which type of orders youprefer to use.

Step 3 and Step 4

Please refer to the Volatility Breakout section above

Forex Diver Cheat Sheet

Here’s the checklist to follow before entering a trade:

Identify areas of Support and Resistance by drawing trendlines or use the Mouteki Trendline Indicator

Identify areas of Support and Resistance by drawing Support and Resistance lines.

Identify one of the following Diver Bar patterns and look for the criteria associated with each to enter atrade:

1. Volatility Breakout

2. Trend Following

3. Trend Reversals

Volatility Breakout Cheat Sheet

Short Trades

1. Wait for a breakout of the lower support trendline.

2. Confirm the break with the MTF stochastic indicator. Wait for the current bar on the upper most MTFStochastic row to pass from thin/bold green to thin/bold red (1st stochastic line).

3. For stronger confirmation wait for the current bar on the middle MTF Stochastic row to pass from thin/boldgreen to thin/bold red (2nd stochastic line).

4. Wait for the BB%B value below to turn Red and go below 0 on the first Diver bar (1M on the 1 Minute ChartTemplate).

5. Open Sell Market/Pending Order.

6. Determine and/or Set Exit/Take Profit Levels.

7. Determine and/or Set Stop Loss Levels.

Long Trades

1. Wait for a breakout of the upper resistance trendline.

2. Confirm the break with the MTF stochastic indicator. Wait for the current bar on the upper most MTFStochastic row to pass from thin/bold red to thin/bold green (1st stochastic line).

3. For stronger confirmation wait for the current bar on the middle MTF Stochastic row to pass from thin/boldred to thin/bold green (2nd stochastic line).

4. Wait for the BB%B value below to turn Green and go above 100 on the first Diver bar from the left (1M onthe 1 Minute Chart Template).

5. Open Buy Market/Pending Order.

6. Determine and/or Set Exit/Take Profit Levels.

7. Determine and/or Set Stop Loss Levels.

Trend Following Cheat Sheet

Short Trades

1. BB %B must be below 20% (turns red).

2. RSI must be below the 30 level.

3. Enter at the lower support trendline break.

4. Confirm the break with the MTF stochastic indicator. Wait for the current bar on the upper most MTFStochastic row to pass from thin/bold green to thin/bold red (1st stochastic line).

5. For stronger confirmation wait for the current bar on the middle MTF Stochastic row to pass from thin/boldgreen to thin/bold red (2nd stochastic line).

6. Open Sell Market/Pending Order.

7. Determine and/or Set Exit/Take Profit Levels.

8. Determine and/or Set Stop Loss Levels.

Long Trades

1. BB %B must be above 80% (turns green).

2. RSI must be above the 70 level.

3. Enter at the upper resistance trendline break.

4. Confirm the break with the MTF stochastic indicator. Wait for the current bar on the upper most MTFStochastic row to pass from thin/bold red to thin/bold green (1st stochastic line).

5. For stronger confirmation wait for the current bar on the middle MTF Stochastic row to pass from thin/boldred to thin/bold green (2nd stochastic line).

6. Open Buy Market/Pending Order.

7. Determine and/or Set Exit/Take Profit Levels.

8. Determine and/or Set Stop Loss Levels.

Trend Reversals Cheat Sheet

Short Trades

1. BB %B must be below 20% (turns red).

2. RSI must be below the 30 level.

3. Wait for a lower support trendline break.

4. Confirm the break with the MTF stochastic indicator. Wait for the current bar on the upper most MTFStochastic row to pass from thin/bold green to thin/bold red (1st stochastic line).

5. For stronger confirmation wait for the current bar on the middle MTF Stochastic row to pass from thin/boldgreen to thin/bold red (2nd stochastic line).

6. Open Sell Market/Pending Order.

7. Determine and/or Set Exit/Take Profit Levels.

8. Determine and/or Set Stop Loss Levels.

9. The pattern is stronger if it comes after a double top price pattern.

Long Trades

1. BB %B must be above 80% (turns green).

2. RSI must be above the 70 level.

3. Wait for an upper resistance trendline break.

4. Confirm the break with the MTF stochastic indicator. Wait for the current bar on the upper most MTFStochastic row to pass from thin/bold red to thin/bold green (1st stochastic line).

5. For stronger confirmation wait for the current bar on the middle MTF Stochastic row to pass from thin/boldred to thin/bold green (2nd stochastic line).

6. Open Buy Market/Pending Order.

7. Determine and/or Set Exit/Take Profit Levels.

8. Determine and/or Set Stop Loss Levels.

9. The pattern is stronger if it comes after a double top price pattern.