Overview
Markets Traded – Forex, GBPUSD only
Charts – 4 hour, 1 Hour, 30 Minute, 15 Minute, 5 Minute, 1 Minute
Charting Software – Any
Indicators
Pivot Points
Bollinger Bands (20, 2)
5 Period Exponential Moving Average
10 Period Exponential Moving Average
RSI (14)
ADX (14)
Lot Size – 0.2 (It is recommended that you use these lot size but you are
welcome to increase the lot size as your balance increases)
Pivot Points
Pivot points have become a very well known and widely used technical analysis tool. To understand Pivot Points you need to understand Support and Resistance. In order to calculate your Pivot Points simply enter the High, Low and Close prices for the previous day and then press the Calculate button. The Pivot, Support and Resistance levels will be calculated for you and all you then need to do is add these lines to your chart as horizontal lines. We will use some of these levels as possible targets.
Bollinger Bands
The purpose of Bollinger Bands is to provide a relative definition of high and low. By definition, prices are high at the upper band and low at the lower band. One of the first things that you will notice is that the price always moves from one extreme to the other. In other words, once price action has run its course at the lower band, it will eventually make its way to the upper band – and vice versa. Have a look at the following chart:
Figure Bollinger Bands Contracting and Expanding
The indicator is made up of 3 bands, the Upper Band, the Middle Band and the Lower Band. We are looking for the bands to contract, which shows low volatility. We are then looking for the bands to expand, demonstrating high volatility. We only want to trade during times of high volatility. At Point A the bands contracted and we would have paid close attention to the market at this point waiting for it to breakout of the range and start expanding. At Point B you will notice the bands have expanded. Once we notice the bands starting to expand we would have switched down to our lower time frames and looked to enter the market on the short side.
Exponential Moving Averages
This is a type of moving average that is similar to a simple moving average except that more weight is given to the latest data. When a shorter and longer moving average cross each other, a bullish or bearish signal is generated, depending on the direction of the crossover. A bullish signal is generated when the shorter moving average crosses above the longer moving average. A bearish signal is generated when the shorter moving average crosses below the longer moving average. Have a look at the chart below:
Figure 2 Exponential Moving Average Cross Over
Look at the following chart. The RED line represents the 5 Period Exponential Moving Average (5 EMA) which is the shorter moving average. The BLUE line represents the 10 Period Exponential Moving Average (10 EMA) which is the longer moving average. At Point A the 5 EMA crosses below the 10 EMA signaling that the trend is down. From this point on we would be looking to SELL. At Point B the 5 EMA crosses above the 10 EMA signaling that the trend is up. From this point on we would be looking to BUY.
Relative Strength Index
RSI measures the internal strength of a currency (or any other security) by comparing the current price against the average price. When price rises above 70 it is considered to be overbought, when price drops below 30 it is considered oversold. Markets can remain in the overbought or
oversold areas for extended periods of time so this may not be the best time to trade.
The 50 RSI level is the level we are most interested in when trading this particular system. When price rises above the 50 line it is considered bullish and when price crosses below the 50 line it is considered bearish. Have a look at the following chart:
Figure 3 The Relative Strength Index Indicator
The blue line represents the RSI line and the dashed black line represents the 50 level. At Point A RSI had crossed below the 50 line and at this point we would have only been looking to enter short trades. At Point B the RSI Line crossed over the 50 line and at this point we would only be looking to enter long trades. At Point C the RSI Line had crossed below the 50 line once more and again we would have only been looking to enter short trades. ADX – Average Directional Movement Index Average Directional Index (ADX) is used to evaluate the strength of a current
trend, be it up or down. The ADX oscillator fluctuates between 0 and 100 but readings above 60 are relatively rare. Low readings, below 20, indicate a weak trend and high readings, above 40, indicate a strong trend. The ADX indicator does not tell you whether the trend is bullish or bearish but it assesses the strength of the current trend. For example, a reading above 40 can
indicate a strong downtrend as well as a strong uptrend. Have a look at the following chart:
Figure 4 The ADX Indicator
The blue line represents the ADX line which signifies the strength of the current trend. The dashed green and red lines are the +DI and –DI respectively. +DI measures the force of the upward moves and -DI measures the force of the downward moves over a set period (in our example we are using the default ADX period which is 14). At Point A the -DI line is above the +DI line and the ADX crosses 25 and heads towards 40 and above, this is a high sell and we would only be looking for opportunities to SELL at this point.
At Point B the +DI line is above the -DI line and the ADX crosses 25 and heads towards 40 and above, this is a high buy and we would only be looking for opportunities to BUY at this point.
Setting Up Your Charts
This system uses 6 time frames, a 4 hour chart, a 1 hour chart, a 30 minute chart, a 15 minute chart, a 5 minute chart and a 1 minute chart. Most of your trades will be made on the 1 minute chart but we will still look for setups on the other time frames as well. Add the following indicators with the settings shown below to both charts and they should look similar to the charts shown below.
Pivot Points
Bollinger Bands (20, 2)
5 Period Exponential Moving Average
10 Period Exponential Moving Average
RSI (14)
ADX (14)
Add the same indicators to all the other time frames listed above as well.
Figure 5 Setting Up Your Charts
Rules Bollinger Bands Pivot Points and Momentum
1. Calculate the daily pivot using the highest, lowest and closing prices of the previous day's trade and add these to your charts. You can also use the Pivot Point indicator if your trading platform has this or the Pivot levels you obtain from your brokerage, if any.
2. Check the 4 Hour chart to determine the overall trend. When the 5 EMA is above the 10 EMA, the RSI is above 50 and the +DI line is above the -DI line with the ADX above 25, the trend is UP. When the 5 EMA is below the 10 EMA, the RSI is below 50 and the +DI line is below the -DI line with the ADX above 25, the trend is DOWN.
3. After determining the trend on the 4 hour chart, go to the 1 minute chart and wait for an expansion of the Bollinger Bands and a break out in the direction of the trend as determined on the 4 hour chart.
4. Wait for all EMA's, RSI and ADX to give you a signal before you follow the Bollinger Band breakout and enter any trades.
5. If you are going long wait for the Bollinger Bands to expand and then look for a candle to form a high or close above the upper band, then place your entry order
2 pips above the high of this candle once it closes. If you are going short, wait for the Bollinger Bands to expand and then look for a candle to form a low or close below the lower band, then place your entry order 2 pips below the low of this candle once it closes.
6. Place your target limit 20 pips away from your entry level.
7. This system does NOT use a stop loss so you are not required to place a stop loss.
8. If the 5 minute chart also has a Bollinger Band break out in the same direction as the trend, you can either modify the order by setting the target profit to 30 pips or enter a new position using the 5 minute chart. If the 15 minute chart has a breakout in the same direction as the trend, you can either modify the order by setting the target profit to 40 pips or enter a new position using the 15 minute chart. If the 30 minute chart has a Bollinger Band breakout in the same direction as the trend, you can either modify the order by setting the profit target to 50 pips or enter a new position using the 30 minute chart. If the 1 hour chart has a Bollinger Band breakout in the same direction as the trend, you can eithermodify the order by setting the target profit to the nearest pivot point level or open a new position using the 1 hour chart.
Long Trade Example:
Have a look at the following chart. This is a 4 hour chart of the GBPUSD pair. At
Point A you can see I have added my Pivot levels.
Figure 6 Determining the Trend on the 4 Hour Chart
At Point B the 5 EMA has just crossed over the 10 EMA which gives us a signal
to buy. At Point C the RSI line has moved above the 50 line which is another indication
that we should be looking to buy. At Point D the +DI line has just moved above the -DI line with the ADX above 25 which tells us that the trend is UP so we will now be switching to our one minute chart where we will be looking for opportunities to BUY. Have a look at the
following chart:
Figure 7 Entry Positions on the 1 Minute Chart
The chart above is our 1 minute chart. At Point A the market was in consolidation. As you can see the upper and lower Bollinger Bands had contracted so we would have been looking for the bands to start expanding from this point onwards. At Point B the Bollinger Bands had started to expand and we did have a breakout, but to the short side. We determined that the trend on the 4 hour chart was up so even though we had a valid breakout to the short side on the 1 minute
chart we did not enter a trade. We will continue to wait until the Bollinger Bands expand again and we have a breakout to the long side. At Point C the bands were expanding and we had a close above the upper Bollinger Band so we placed an entry order 2 pips above
the high of this candle. We then placed a target limit 20 pips above this candle. As you can see it was a while before our order was opened but once it was opened it did not take long for
our target to be reached. At Point D our target had just been taken and we had another breakout of the upper Bollinger Band which was a signal to enter the market so we placed an
entry order 2 pips above this candle with a target limit of 20 pips. The order was filled and the target achieved not long after placing the order and we had another breakout and entry signal at Point E. We placed an entry order 2 pips above the high of the candle with a target limit of 20 pips and within a few minutes the order was opened. Shortly after that the target limit was reached. So we placed 3 orders and made 20 pips on each but there was more to come,
have a look at the following chart:
Figure 8 More entry positions on the 1 Minute Chart
After our last order closed for a profit the market consolidated for a bit so we stayed out, but at Point G we had another entry signal and we placed an entry order 2 pips above this bar with a target at 20 pips, which we eventually achieved.
Later on at Point H we had another breakout of the upper Bollinger Band so we placed another entry order 2 pips above the high of this bar with a 20 pip target which was reached in no time. While we entered these positions on the 1 minute chart we kept an eye on the 5 minute, 15 minute, 30 minute and 1 hour charts as well as looking for possible entries. During the uptrend we had a few entry signals on these time frames as well. Have a look at the following chart:
Figure 9 Another entry position on the 5 Minute Chart
At point A on the 5 minute chart above, there was a breakout of the upper Bollinger Band as the bands were starting to expand, so we placed an entry order 2 pips above the high of this candle with a target of 30 pips. The order was opened on the next candle and the target was easily achieved by the time the next candle had closed. So while you’re trading the 1 minute chart it is a good idea to keep an eye on what’s going on with the other time frames because signals will appear on these time frames as well.
Short Trade Example:
Have a look at the following chart. This is a 4 hour chart of the GBPUSD pair. At Point A you can see I have added my Pivot levels.
At Point B the market turned bearish. The 5 EMA crosses below the 10 EMA at Point C. The RSI is below the 50 line at Point D. At Point E the -DI line has just moved above the +DI line with the ADX above 25 which tells us that the trend is DOWN so we will be now be switching to our one minute chart where we will be looking for opportunities to SELL.
Figure 10 Determining the Trend on the 4 Hour chart
Have a look at the 1 Minute chart below. Point A is the area at which the trend had turned bearish on our 4 hour chart. As you can see at Point B, the Bollinger Bands had started to contract, so we would have been looking for expansion of the bands and a breakout from that point onwards. At Point C the Bollinger Bands had already started to expand and we had our
first breakout of the lower band so we placed a Sell entry order with a 20 pip profit target 2 pips below the low of this candle. The order was opened and the target achieved within a few bars before the market started to retrace. At Point D we got another entry signal. The Bollinger Bands were still expanding and we had a breakout of the lower band at this point so we placed a Sell entry order with a 20 pip profit target 2 pips below the low of this candle. Again the order was opened and the target achieved easily before we received another entry signal at point E. The Bollinger Bands continued expanding and we had a breakout of the lower band at this point so we placed a Sell entry order with a 20 pip profit target 2 pips below the low of this candle.
The order was opened and the target was easily achieved within a few bars. At this point setup signals were yet to form on the other time frames we were monitoring and while we did not make any trades on these time frames in this example, we still monitored these charts from time to time looking for a valid setup and an opportunity to go short.
Figure 11 Entry positions on the 1 Minute chart
Remember that this system does not use a stop loss and there will be times when the market goes against you. When trading this system there were occasions when the market went against us as much as 200 pips, but it did eventually come back in our direction and our targets were achieved.
If you find the market has gone in the opposite direction it is best to exit the trade for a small loss as opposed to letting the market go further against you. Each trader has a different level of risk that they are comfortable with so it’s best that you decide before hand how far you will let the market go against you before deciding to close the order. If you decide that 100 pips is acceptable for you then you could set a stop loss or trailing stop every time you place a trade or monitor the trade and close the position manually when it goes 100 pips against you. We highly recommend that you use some kind of risk management. Whatever you decide to set your stop loss at will be entirely up to you.
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