Building my Trading Strategy............from the bottom up!

Beginner Questions
1

Hi All,

I’m coming back to trading after a break away to refresh and focus. I’m a beginner and have fallen into many typical beginner traps including buying a dreaded signal system but am now taking a different approach. I’m not ready to trade yet, but have spent alot more time reading and learning about different indicators and what they do. In the past I’ve tried a signal system as mentioned, splashing lots of indicators onto a chart and hoping to see something, and also pure price action but nothing has felt quite right!!

So I’m starting again, from the bottom up, and feel that I’m getting quite close to something I’d like to paper trade. I’d be interested to hear peoples thoughts on what I have come up with. The basis of my strategy design is now much more analytical, instead of throwing indicators at a chart I am creating ‘Problem statements’ and then going to test hypothesis against the problems to allow me to redesign components of my system where my hypothesis fails. Make sense?

[B]Here are my markets that I’m using for my test: -[/B]

GBPUSD
EURGBP
XAUUSD
GER30
UK100
US30

This is only a starting point, depending on how they trade on paper will lead me to cutting and replacing markets if I feel they are not a good mate for the strategy.

I’m going to be trading predominately off the Daily timeframe. I think going down to the lower timeframes may be something I consider later on once I feel I can be consistent at this level. I have also decided that I will be trading in line with the trend to give myself a greater chance of success.

[B]Problem:[/B] Need to identify direction of the trend to give a greater chance of success
[B]Hypothesis:[/B] 200 SMA will correctly identify Trend direction
I’ve seen several ways of identifying trends and it seems a bit subjective to me (one man’s trend is another man’s retracement) so my first indicator is going to be the 200 SMA. My rule here is if we are trading above the 200 SMA on the entry and timeframe above then the trend is Bullish and vica-versa. There also needs to be no breach of the series of Higher Highs and Higher Lows.

[B]Problem:[/B] How can i identify turning points in the price?
[B]Hypothesis: [/B]Fibonacci Level 50% will correctly identify turning point
[B]Hypothesis:[/B] Fibonacci Level 61.8% will correctly identify turning point
My second indicator and the centrepiece of my strategy is the Fibonacci retracement tool. I am looking to get in on a retracement, with the current trend resuming to give myself a favourable RR ratio. The levels I am looking at entering are 50% (yes I know, it’s not actually a fib level) or the 61.8. I’m not interested in the 38.2% as the RR ratio is greatly reduced and gives a bigger risk IMO. If I can’t establish which High and Low to use for my calculations, I’ll go to a higher timeframe to help identify the trend. I will also be using Fibonacci to define profit targets but I can elaborate on that later, at the moment I’m trying to finish defining entry points.
[B]
Problem: [/B]How to improve the effectiveness of primary indicator
[B]Hypothesis:[/B] RSI 5 period will improve the effectiveness of primary indicator
[B]Hypothesis:[/B] Pivot points will improve the effectiveness of primary indicator
To confirm that there is a high probability of the retracement finishing and the main trend resuming I am using a 5 period RSI (looking for oversold status in an uptrend) or confluence with support and resistance pivot points.

[B]Problem:[/B] What is the final definition of the exact point to enter the trade?
[B]Hypothesis:[/B] Price action formation completion and continuation will correctly identify that the correct entry point.
The final piece in my entry point is at the moment undefined. I have seen people quote that they are a 50% fib trader so will enter when price touches the line or the same for a 61.8% fib trader. TBH I’m not comfortable with this and would like to find some way of identifying that price has begun to turn. I’m considering using PA candle formations here (PB, BUEB, 2BR etc) but would happily take feedback on this from anyone who has a view. My price action strategy would be to look for the PA formation to complete and then price to take out the top of the formation in a long trade to enter.

Welcome all feedback on the general approach or different point so the system. Please be gentle, I am still fairly new at this but I do feel this more structured approach to strategy design will help me better understand where my system can be improved. Once I have completed the initial design phase I will start to measure the effectiveness of various points of the system through a paper trade measurement phase, before analysing the results and looking at where improvements can be made.

2

Here is an example of what I am looking for in a setupfrom todays XAU/USD chart: -

xau.jpg700×334 41.8 KB

  • Trend is down as below the 200 SMA (although the retracement has taken it above)
  • Price has retraced to the 61.8% fib
  • RSI is overbought
  • 61.8% fib is in line with previous Support and Resistance level

If we could get a PA signal to go short this could be a potential trade.

What do you think?

3

I don’t think such a fast indi will help in daily chart.
If only for identifying ovesold/overbought conditions, RSI14 is recommended but still not safe as it can get stuck above 70/below 30 for weeks.
Have found more useful the Stoch (14,3,3) as a stand-alone/off chart indi.

Yet, since you are planning trading the daily charts, S & R lines together with PA are just what is needed. Plus wise money management always.

4

personal estimation:
the trend is strongly bullish in all timeframes up to the “weekly” one.
For such cases a pullback to 38.2% of the current bullish move would do fine for reinstating LONG positions (around 1280), that is if there is a pullback around 1350.

cheers

5

Hi Matt. Sounds like you have a plan. Have you thought of using historical data? From what I read, you’re gathering data from live trades. This isn’t bad, but it’ll take a long time to compile enough data to make a judgement. However, I like that you are testing very clear and explicit ideas.

6

At least you have a plan.Make it simple. Way to go mate. Good luck

7

Hi Etfak,

Thanks for your comments. i understand what you’re saying on the RSI. I had thought about it, and at the moment, where I see extra value coming from it is that it stops me getting into too small a trend. I’m not sure that’s technically correct but it’s a theory for me to work to at the moment. The Stoch is an option, thanks for that. I’ll have a play first but maybe I don’t need either, just follow the PA as you say.

8

I can absolutely see what you’re saying here and wrestled with this for a while especially given the placing of the 200 SMA. My doubts on this are that you could argue that there is a HH on 27/1 and a HL on 30/1 with the Price crossing the 200sma on the 14/2 confirms the end of the bear run. I’m not sure those HH’s or HL’s are significant enough or the cross over of of price / sma is valid until it retraces to it and holds. Anyway, will be interesting to see how it plays out and all part of the learning.

9

Thanks Kevin, would this be just going back through the charts and doing it manually, or could a software solution help here. I think I need to take a day out from the day job to give it a go!!

10

If you have never seen these to vid’s, watch them, if you have watch them again. I watched them at least once a week and every time I do I get an aha moment. The first one is a solid strategy on how to use Fibonacci in your trading. Second one is an expansion from the first one, as well uses the same principles but a little different advanced approach. How to Trade with Fibonacci Levels - YouTube Andrei Knight - Fibonacci… Easy as ABCD - YouTube

I use the first vid’s strategy for forex and trying it in a demo with options. A couple of things that I have found using this strategy. Very easy to set and forget. it works on any time frame and it’s a great strategy for counter trend trading as well. If you set your entry at 60% level, your stop loss at the 70% level and your 1st take profit to 0% it’s around 4:1 risk. You would set your next take profit at 38% extension and 3rd one at the 50 extension You can use this strategy on any time frame. It works best on trend but I also use it on ranging anything 50 pip spread and up. I take a reading on the hourly time frame, compare it on 30 minute then set my trade. This also works on any currency pair. The more you use this the better you get at it. Like I said your plan is a good one watch the video’s and you will get better at executing it. One last thing both these presenters have additional add ons for money. Although I did buy Patel’s book, cause I like his style, I’m not vouching for the paid stuff. And as a matter of fact I don’t know what they could sell you that would have more worth than the freebies. Anyhow Great Plan and Good Luck
Gp

11

I personally do my backtesting manually. I use Forex Tester 2, which does a pretty good job. You can try backtesting manually on MT4 if to you want, but I found Forex Tester 2 to be more friendly for backtesting (it also comes with data from 2001 onwards).

You can try coding if your system is completely mechanical. It’ll save you alot of time, but you need to learn how to code. I hate coding with a passion so I do everything manually. It makes backtesting alot slower, but you expose your eyes to the charts more longer, helping you to develop market intuition. At least, that is my way of thinking.

12

Actually GP thats the exact video that got me to start to understand Fib’s!! I think much like you I really liked the guys style and his abruptness!! The ‘you think about it’ approach rather than spoonfeeding some of his attendees. Thanks for the second, I’ll watch that tonight. What was the book like?

Are you using Fib’s as a single indicator as per the video? TBH that scared me a bit. I’m not keen on the way he dives in on touch of the level rather than waiting for a sign that price is revering. I think there’s enough meat in the target price to surrender some to confirm the change of direction, although, clearly these guys know much more than me. if you don’t mind me asking, how long have you been trading with it on Forex? Have you found it to be consistently profitable?

Thanks for the info

13

Thanks Kevin, I’ll have a look at the software.

I’ve tried to refrain from calling what I am trying to do a system, preferring to call it a strategy. Probably a mental block I have that I don’t believe in systems and EA’s etc. I believe this strategy needs a bit of interpretation, which is a good thing really. I have some very basic level coding skills, but not enough to mechanise the stratgey, and I’m with you on the chart time thing. I think I need it. I learnt to drive a manual car, although I drive an automatic now. If I need to I can get out and drive a manual, but only because I took those skills on first!!

14

Guys, thanks for the great value you’ve given me on this today. It’s all really helpful, and I will explore every piece of it as part of building my strategy. It really is much appreciated.

15

The book was good. More about the cloud. I watched his I Cloud vid’s. but it’s not for me. When I first started I used the Retracement and extension tools. Now I only use the one. I didn’t do it before I was real, real comfortable using the Retracement tool.

Don’t worry about surrendering a couple of pips. That’s what Andre Knight (2nd video) is more about. He says don’t try to pick tops or bottoms; be in the business of making profit. He is the 2nd trader who told me that. The first one is a friend and I watched him surrender a couple to make sure he’s in profit. He draws a box between the 62 and 50 levels and only enters if price is in the box. On the other hand he places his stop loss 10 pips from the 61 level.

Just keep at it and the more you practice and learn, the better you get. When I started live trading, I used 2 sma cross, trend signal, stochastic, support and resistance indicator, cycle identifier and quite a few more custom indicator. I still use a sma cross, custom macd, support and resistance, to confirm fib readings, as well as following a very strict set of trading rules and money management. I’ ve been doing it for 5 months and there is not question it’s consistently profitable. I would think it would be hard not to be consistent as long as you follow the rules along with your analysis. The max risk if you enter where the he says, place your stop loss and take profit targets as well, your risk is max 4 to 1.

16

[QUOTE=“gp00053;607497”] The book was good. More about the cloud. I watched his I Cloud vid’s. but it’s not for me. [/QUOTE]

I was fascinated by the piece in the video that said there’s a progression from fibs to EW to Cloud as I was starting to think about EW when I was drawing my fib levels. What I need to do now is forget all that until I can develop a fib strategy that works for me.

[QUOTE=“gp00053;607497”] When I started live trading, I used 2 sma cross, trend signal, stochastic, support and resistance indicator, cycle identifier and quite a few more custom indicator. I still use a sma cross, custom macd, support and resistance, to confirm fib readings, [/QUOTE]

I’ve been filling my head too much with indicators which is why I’ve started from the bottom up to rebuild a strategy. I watched the Andre knight video which showed a great way to follow up after completion of a fib trade but I’ll try to master stage 1 first. I watched his video on entry points as well which showed a more complex strategy but actually the principles of it made a lot of sense. 3-5 reasons to trade, 1 from a higher timeframe 1or 2 from the Price Action and 1or 2 from the indicators below to confirm the PA. The challenge is breaking it into smaller parts that I can use that make sense to me instead of throwing it all in and confusing the life out of me!!

[QUOTE=“gp00053;607497”] as well as following a very strict set of trading rules and money management. I’ ve been doing it for 5 months and there is not question it’s consistently profitable. I would think it would be hard not to be consistent as long as you follow the rules along with your analysis. [/QUOTE]

I’m happy with my money management for now, just need to check it all works once I’ve got my trading rules documented. My biggest issue I think is the confidence that the strategy will work, but that I hope will come from the testing. If it doesn’t hopefully my analysis will point to why not. Thanks for the pointers and the videos, it’s been a big help.

18

Hey Matt

Usdjpy today is a great example of the fib Retracement strategy. It’s just before 9am EST. If you take a reading on the 1 hour, you see price it’s at the 50% retrace, No events coming out for an hour. You could enter short ong now place your stop loss at the 60% level, 1st take profit at the 0 your risking 5 to 1 roughly. Or you can wait and watch and see if it goes to 60% level, in which case your 1st profit target is the same but your stop loss would be at the 70% level giving you even a much better. Or you could place your short order at the 50 make your stop loss at 60 with a long order if your stop loss gets triggered.
Gp

19

Hi GP - I see the area you mean and I also see that it provided support for price between 27/31 Jan. Interesting that it now looks like providing resistance now.

I had a fib marked on the Daily chart which this works within. I’ve spent alot of the day confusing myself about fibs within fibs etc but I think I’m starting to realise that I’m trying to take them over much to big a period of time. For example, the image below of the same Pair on a daily chart. If I was to trade this I could be in it for months before I get a result!!

USDJPY.jpg700×294 31.4 KB

Where as this on the same pair on the 240 would have given me a much shorter trade length

usdjpy_2.png694×189 2.02 KB

More thought required I think!!

20

Fibs work on all time frames. The problem that I see a lot of times is, not only with fibs, but most indicators, is that traders apply short term analysis to long term trades and vice, versa. Your chart is a good example. Or how many times have you heard. When I place my stop loss at a 2:1 risk I’m always getting stopped out. But then when I place it further down I still get stopped out . How is that possible? I think trading is rigged. Well it’s not rigged, but you do have to use relevant analysis for your current trading. Take today. The US data releases will not have the same affect for Swing traders or position traders as it will have for day and scalpers.

The big difference I’ve found between time frames is the shorter the time frame the more accurate your execution has to be. But that also applies to profits, loses, trends, momentum everything. I use to trade 1 pair, only during Monday to Thursday between the NY open and London close. Now I look at all pairs Monday through Friday. But any thing I’m considering has to agree with my current analysis. One of the great things about this fib strategy is that it allows you to see and analyze at a lot of pairs quickly. Something else you’ll see the more times you do this is you don’t have to bring your fib tool up to look quickly at a currency pair. For example your trend analysis says market is going down, you see what would be the swing high and swing low; for whatever time frame you’re trading. Drag your mouse from the high to low look to see how many pips there are between high and low, divide that by 2 and there you have your 50% retrace level. When you get a chance watch the first video again and pay particular notice a few minutes into the video when he starts saying you see where traders are buying buying buying and then they take some profit, and start buying buying. This is where you want to buy.

21

Sorry GP, I’m not sure of the point you’re making here about short term analysis on long term trades in the context of the example. Could you possibly elaborate for me? Is there a difference with how I should be using fibs on longer TF vs shorter ones?

That was my assumption - the analysis remains the same, but the execution has to be better, which is why I’m not playing that low until I can master the higher TF.

Thanks, I’ll do that again this morning. Nice USD/JPY trade BTW