INGOT'S RAINBOW ... A Position Trading Strategy

[andyk]

Good stuff Droesparky - thanks for the MTF stoch addition - saves me some effort.

I like the candles as long as you are zoomed in enough. Panning back to view a larger timespan seems best without them. Good tweak.

Ingot

I can see the 'fishnet' pattern on stochs warning us to stay away. How do you trade them other than this. Red on top and tightly packed for a BUY yes ? But would you want to enter when everything is coming above 23.6 or might you enter when the stochs are much higher up. It seem spudfyre reckons the biggest price move (upwards) occurs when the stoch crosses above 80, not when it crosses above 20 so we wouldn't be too late to enter a long trade if the red and blue lines had tightened up and were already quite high. Is this correct ?

[droesparky]

Yes those Weekly charts clearly show the long term trend, and also looks like according to the stochastics that it is at a place where it could either head back up. Not sure yet but would be willing to take long trade set ups from here.

I have a bollinger squeeze indicator that looks like its close to the zero line, the place where its common to get a bounce. There is alway the chance that it could drop below that point.

NFP gave no real direction today so it will be up to things next week.

[droesparky]

Also notice on the daily chart yesterdays candle made a nice little hammer. A possible reversal candle. ITs a ratther small one but its there take note of it, with stoch at the low its possible since we are in a long term uptrend for the long term trend to take over again.

Make note also that we have just broken some long term trend lines on the 4 hr chart and are at a long term daily trendline. maybe we will get some direction next week out of this.

[tonymand]

This is an interesting picture, also add my thanks to all those that have put in the hard work to create this

[Ingot54]

OK people ... time to stop theorising around and let's see some real action with these charts.

I hope you log in frequently from now on because my approach will be to examine some good setups from the past and discuss them (takes two for a discussion, so you are welcome to submit a critique please).

The we will look at some live setups and establish entry and later, exit.

Now - I know I said earlier that I use only TWO indicators ... and this is true, but we still have our training wheels on and (some of us) need all the help we can get as we pick up the strategy (I did at the start).

So I would like to introduce the Reversal Candle as a temporary "tool" we will use until we become skilled enough to select reversals using the Rainbow pattern with the MTF Stochastics alone.

If we do not learn to discard the candles crutch, we will never learn this strategy as a stand-alone trading approach, and we might just as well stick with conventional strategies.

Remember, it is well worth the effort - this will get us off our butts and away from the computer to participate in LIFE once again - the purpose of our involvement in trading in the first place - n'est ce pas?

Reversal candles - the ones I want to use - have LONG upper/or lower tails/shadows. (Let's stick with "tails")

In order to qualify as a "reversal" candle the body of the candle must be equal to or less than one third of the total candle length. So it follows that the LONGER the tail - the stronger the reversal signal. This candle is like other candles - NOT INFALLIBLE - but it does rate as a HIGH PROBABILITY of success, and that is why we are looking at it in particular.

The "Hammer" and/or the "Dragonfly Doji" are excellent Bottom Reversal patterns, and the "Shooting Star" and/or "Gravestone Doji" for Top Reversal patterns.

Google for "Reversal Candlestick Patterns" or go to leavittbrothers.com/education/candlestick_patterns/ or similar site and you can find some sense on candles there.

OK - enough digressing ...

A quick scan (and I mean a quick visual scan) on this hot Australian Sunday afternoon/evening found the USDCAD has been a very profitable candidate recently. Below you can see the WEEKLY chart of this pair with some annotation. I have included the candles in the second view.

You can now see the value of confirmation using candles.

[Ingot54]

The previous charts posted showed the bottom reversal of the USDCAD.

But could we have gotten into this trade at a better entry ... that is ... an earlier time?

Of course - although we are basing the strategy on WEEKLY charts - we are not one-eyed about this - we are here to make money, and we MUST use ALL the tools at our disposal.

So it makes sense to look at adjacent (the next) TF on each side and for entry/exit even lower.

In the case of the USDCAD we could and should look at the DAILY TF as well as the 4H and even the 1H providing they each trend in the same direction that we intend to trade. But I do not go this far - simply because by the time an entry becomes apparent, it is too late to utilise the earlier TF.

Remember we are not sitting down staring at the screen, but checking in once a day (no rule about this - but if you trade this method, might as well have a life as well!) It is no use using hind-sight to say: "There is our entry" - the bird has flown.

Because we are trading WEEKLY charts (generally) we can just look for a dip and jump in, or just do it without the dip! The trend should carry you - even if we mess up on the entry. (There are better ways than this of course, but I just want to make the point that missing the "best" entry by 40 pips is not a disaster, when the end of the trade is +800 pips away!)

So - enough rambling ... here are the DAILY charts of the same period of the USDCAD. What a beautiful setup it proved to be (looking backwards, remember).

[Ingot54]

Ok - We have seen WEEKLY and DAILY charts with MMA's/MTF Stochastics and with/without candles.

Please give your FIRST impression. I am not interested in ego-stroking please.

It is important for you to register whether this is something you can trade ... or there is still something (visually) missing.

We will get to the nuts-and-bolts of the entry/exit in due course. What we need to know right now is this: Do you see a setup or not?

Would it be easier if the view of the chart was a little more encompassing? ie a longer view of recent action. Personally I can view the entire chart, but the 600 x 600 size limitation actually chops off a lot of what I see and what YOU see as it is posted.

I will post a few charts now which are another step back, to check their appeal and appearance.

[Ingot54]

This has little to do with the discussion at this point (although it will be interesting later as we discuss stops).

Take a look at the chart below. It is the EURCHF of last Thursday at 2200 hrs.

The intriguing thing is that giant doji candle with the disproportionnate range.

The body of the candle is just 3 pips.

But the range is 64 pips.

Nothing unusual really about a doji ... but the entire candle was completed on a ONE MINUTE chart, with just 33 contracts traded.

Now I don't subscribe to the stop-hunting theories - that's another debate!

But that one candle represents an inordinate amount of pain!

Consider what happened there. As the action rallied, it would have hit the stops of the covering shorts. At the same time, it would have triggered contingent orders for entries. As the trade corrected, it would have hit contingent stops placed as the orders were opened on the way up.

It's only half the story ...

On the way past the strating position, and further, it collects the stops from those who just went long, or who had long positions open already. Further on, as it travelled southwards, it took out the stops of the longs, and established contingent short positions, as well as placed contingent stops for them.

Suddenly, the trade reverses again ... and finally comes to rest just 3 pips lower than its opening. As it does so, it forces shorts to cover once more, and may even have triggered a few more longs on the way.

Any trader with contingent buy/sell/SL/TP orders within 30 pips of the open price would have their orders executed. In short, this candle would have filled the coffers of the brokers, and most traders would have just seen their trades blink on/off the board in less than 60 seconds.

Voila - How to make a few hundred thousand dollars ... without really trying (for brokers).

Conversely ... how to lose a few thousand ... ! (for traders).

By the way - I have not looked, but did this same candle appear on other platforms besides IBFX? Larger ... ? Smaller ... ?

We'll be taking a very close look at stop loss placement and usage a little bit later.

Stay tuned ... you've only just tasted the entree!

[Ingot54]

Just a foot note before I retire for the evening ...

I DO use stops myself. So please do not think we are going to toss out all of your hard work deciding the best place to put your insurance stops.

Just remember we are using LONG TERM charts, so there is no need to have stops 20 or even 80 pips away from the entry, or even the current action.

It may take strong nerves to even consider this, if you have been a scalping-type trader in the past.

But believe me, you have to allow for a bit of breathing space if you ever want to know what it is like to reap those 800 pips per month.

And you can do it without screen gazing. While you take your kids fishing, skating, frisbee-ing, cycling, to the swings in the park, or go out for a lunch or coffee with your long-suffering spouse, the trade will be working FOR you.

In fact there are times when you really MUST NOT go near your computer, and just TRUST your strategy.

With best wishes

Ingot

[tonymand]

Gee you have put a lot of work into this today Ingot and certainly given me something to think about. In addition you have indeed challenged a couple of my own biases regarding timeframes and stops. Could I trade this - not sure. On the CAD I would be looking to join the downtrend but thats just me used to the shorter TF that I use. Look forward to continuing to follow the story