Forex Wealth is a
system that uses price action for entries into the market with the
trend. There is a secret to trading forex, well it's not really a
secret because everyone knows of it but few use it, it’s the key to
trading forex successfully. You can either use candlestick or bar
chart for this system, I will be using bar charts as a bar chart
tends to make it easier to spot the setup we are looking for. Once
you have a daily chart open for your desired pair all we need to do
is add a 21 simple moving average in red. Your chart should now look
like the one below, clean and simple.
The Trend
Currency markets are
renowned for their trending characteristics which believe it or not
make it far easier for us to make profitable trades (more on this
later). Below in fig 1 is an example of a chart of the EUR/USD. As
you can clearly see on the chart below this market is trending up and
any smart investor would belooking to take long positions or wait for
the market to clearly start trending down before taking any short
positions.
Identifying the trend
The only thing on the
chart should be the red coloured line of the 21SMA, this will change
slope and direction depending on the direction of the trend.
I use moving averages to
ensure I am on the right side of the trend when I take a trade. If
the trend is weakening I make a note but the trend is still in place
until the moving average changes direction from up to down or down to
up. On the chart above I have marked the trend direction with black
arrows, you can clearly see the trend direction change when the SMA
indicator changes from up to down and down to up. The direction of
the trend is the direction all trades must be taken during that
period. For example, while the trend is pointing up on the 21 SMA we
only take long trades (buy trades) in that direction. While the 21
SMA is pointing down we will only be taking short positions (sell
trades). As the trend weakens the SMA will become flat and this
indicates one of two things, either the trend is changing or it’s a
small consolidation while the trend regains some strength. Be very
cautious about taking trades when the 21 SMA becomes flat I
personally avoid trades totally until the 21 SMA is clearly pointing
up or down once again. Spend a little time on your chart and try to
spot the trend and when the SMA average becomes flat, this does not
have to be an exact science as our entry technique will often prevent
us from entering the market against the trend. Once you feel
comfortable with the 21 SMA, move onto the next section and we will
discuss the entry technique for entering the market.
Entries
We
will only be using a daily chart with this system and we will be
checking the chart every evening as the daily bar closes which
requires only a few minutes of your time. Our entry relies on an
inside bar candle formation. We can not make a trade until one is
present. An inside bar is simply a daily bar which is completely
engulfed by the previous bar. (see example to the left) Once we have
an inside bar present we will place a pending position, 5 pips above
the high of the inside bar + spread if the trend is up on the 21 SMA
indicator and 5 pips below the inside bar + spread if the trend is
down on the 21 SMA indicator. Let's look at some examples of entry
setups.
Above
is a daily chart of the EUR/USD, the inside bars are marked in
yellow, as you can see the 21 SMA indicator is clearly indicating an
up trend so we are looking to go long or buy this currency pair 5
pips above the inside bar + spread. The green lines are our entries
where we would open our positions. Some trading platforms like mine,
plot Sunday bars, these are always very small and are of no use to us
for calculating entries and stops. If your platform uses these then
simply ignore them and use the next available bar for your trade
calculations. Each Sunday bar is marked in red on the above example.
Ok
so you have located the inside bar, it meets the requirements and you
are ready to place a pending order above or below the inside bar by 5
pips depending on the trend direction. The stop for this position
will be a set pip value, each currency pair has a different stop
value depending on how volatile it is. Below are the 8 main currency
pairs I trade along with the required stop value for each pair. You
should only risk 2% of your trading account on each trade.
Pair
Stop
EURUSD
50
USDCHF
50
AUDUSD
50
GBPUSD
60
USDJPY
50
USDCAD
60
EURJPY
90
GBPJPY
100
Take Profits
Once
you have placed your pending position 5 pips + spread above/below the
inside bar with a stop of the required value as stated above
then it is time to set the take profit level for the trade. The take
profit for any trade on any currency pair with this system is always
double the value of the stop. This means your reward is twice as big
as your risk. Fore example lets say we have an inside bar on the
GBP/JPY the trend is up and we have placed our buy orders 5 pips
above the top of the inside bar. The stop value for the GBP/JPY
is 100 pips, which means the take profit should be set at
200
pips. I use fixed take profit levels for several reasons. First it
eliminates emotion from trading which is so common with new traders
trading with real money on the line. Second I know from rigorous
testing and trading, not only are these levels hit the most often but
using this method of taking profit means as long as we achieve more
than 33% winning trades we are making money.
Once
you have placed your order with your broker and placed all the
required stops and take profit levels, all that is left to do is go
about your every day life and check back tomorrow evening to see how
the trade developed. The majority of the time you will come back to
your trading platform the next evening to discover your trade has
already closed with a healthy profit.
System Rules
Before
we move onto full trade examples let's run over the system rules to
be
sure
you understand how everything works.
Long entry signal
•
open a daily chart and check for signals at the close of each daily
bar on the evenings.
•
21 Simple moving average going in trending upward and not flat.
•
Chek if there is a inside bar pattern.
•
Place a pending buy order 5 pips +spread above the high of the
inside bar pattern .
•
Place also a stop loss (see previous stop values)
•
Place a take profit of ratio 2:1 of the stop.
•
Do not exit trade until either the entry is triggered or the 21
Simple Moving Average changes to a downward direction.
Short entry signal
•
open a daily chart and check for signals at the close of each daily
bar on the evenings.
•
21 Simple moving average going in trending downward and not flat.
•
Chek if there is a inside bar pattern.
•
Place a pending buy order 5 pips +spread above the low of the inside
bar pattern .
•
Place also a stop loss (see previous stop values)
•
Place a take profit of ratio 2:1 of the stop.
•
Do not exit trade until either the entry is triggered or the 21
Simple Moving Average changes to a upward direction.
Trade Examples
Above
in example 1 we have two trade setups on the GBP/JPY, the 21 SMA is
in a clear down trend with no signs of turning flat. On the Friday an
inside bar formed and we placed our entry 5 pips below the bar with a
100 pip stop and a 200 pip profit target. 4 days passed with no
market movement before our entry was finally triggered taking us into
profit almost immediately. Our take profit was hit two days later
with a profit of 200 pips. The second trade was far more exciting
triggering our order into the market the very next day and hitting
our profit target the following Monday with another 200 pips profit.
Above
in example #2 we have another 2 good examples of this system in
action on the EUR/USD, both inside bars formed with the 21 SMA
sloping up indicating we can only take buy trades. The first trade
was looking a little grim as it retraced against us after the entry
day but it eventually hit our profit target of 100 pips 5 days later.
The second trade shot into profit straight away and hit our profit
target the very next day. Remember all this was done with about 10-
15 minutes on the evenings, nothing more.
In
this last example we have a very strong up trend on the EUR/USD as
indicated by the 21 SMA sloping up. An inside bar formed and our
entry was placed 5 pips above the bar as soon as it closed. The very
next day the order was triggered and two days later the profit target
was hit for 100 pips profit. Please keep in mind that you are not
going to win every trade with these systems, nor any other system for
that matter. Losses are part of doing business in the forex market
but because the risk/reward ratios of these systems are reasonably
high we can afford to have a few losses in our trading and still
easily achieve profits on a regular basis. I advise you to
concentrate on 1 or 2 pairs at first until you are confident, the
problem with adding too many pairs is it can increase your chances of
having several bad trades in a row. If you do decide to watch 6-8
pairs for setups I highly recommend you lower your risk per trade to
at least 2% of your trading capital.
Questions &
Answers about this system
Q.
If the inside bar closes higher than the open in a down trend or
lower than the open in a up trend can I still take a trade?
A.
Yes, it does not matter where the inside bar closes as long as it is
an inside bar.
Q.
What do I do if an inside bar forms within the current inside bar?
A.
You simple change your orders to the current inside bar and ignore
the previous one.
Q.
Does price have to be above the 21sma to be in a up trend and blow
the 21sma to be in a down trend?
A.
No it is not important where price is in relation to the 21sma all
you are concerned with is the slope of the 21sma.
Q.
If the 21sma has been flat and only just turned up/down is it ok to
take a trade?
A.
Yes it is ok BUT I personally prefer to wait for the 21sma to trend
for a longer period of time before making any trades.
Q.
If a inside bar forms on the Monday against the Friday bar is it ok
to take it?
A.
Yes it is fine, treat it as you would any other trade.
Q.
If I miss an entry is it a good idea to get in at a later date?
A.
No, do not chase the market, wait for the next trade.
Q.
Why am I seeing a lower win % than you in my trades?
A.
As you gain experience you will begin to recognise the good
opportunities
from
the bad ones. Although you can trade this system mechanically and be
profitable
it is far more profitable to use some discretion in your trading.
Q.
Can you give me some tips to improve my win %?
A.
Yes, don’t take trades if the 21sma is not got a good slope. Watch
for strong
support
and resistance levels and don’t take trades into them.
Q.
How do I determine the correct time to check the charts in my time
zone?
A. I
can not work this out for you, this depends on when your broker
closes the daily bar. A simple way to find out is to go to a 1 hour
chart and look along the time line at the bottom of the chart to see
what time they closed day and open the next. Then see how far
behind/ahead of you your brokers time is, from this you can easily
work out what time the daily bar will close in your time zone.
Q. I
don’t want to get up for 10 minutes in the night to check the
charts, is there another solution?
A.
The only solution would be to use a broker that uses midnight EST
instead of GMT this would give you a change in time and not affect
your trades overall. Please note that you don’t have to check your
charts the minute the daily bar closes, you are normally fine to
check them a few hours later as there is very little movement in the
markets at that time.
Below
links for download of Inside Bar pattern MT4 and the template MT4 of
Forex Wealth
Inside
bar pattern indicator MT4:
Forex
Wealth template MT4:
https://drive.google.com/file/d/0Bwjv2Pbf48itYWFIS21SSXdTQUE/view?usp=sharing
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