Daily close trading strategy

Roberto_Dinero · July 18, 2009, 3:04pm

Hi, I’d like to share with you my trading strategy.

I will say from the start that if you are looking for 400 pips a day you should move on right now. If you’re still looking for the holy grail then you should probably move on too.

What I have to offer you is the benefit of my experience of a few years trading forex. Also don’t expect it all on one post. I have a lot of things to say that will take time to get across. Yes, I can teach you my strategy in a day. To fully understand and implement it will take you a month or more depending on your current level. I’m not patronising anyone here, once you’ve seen the kind of trades you can achieve with this strategy you will want to know more.

I will be posting charts as I go along but don’t expect too many too soon. Trading succesfully in the long term is less about what’s on any chart and more about what’s inside you. I want to talk about pyschology, discipline, money management and everything related to trading too but it’s going to take time.

I’m going to split this down into a few posts here. At the moment feel free to read but please save responses for a post or too until I get down the structure of where we’re going, ok? Thanks RD

Roberto_Dinero · July 18, 2009, 3:26pm

Ok, first off let me get across a few thoughts…

Day trading is not for me. There it is, I said it.

I lost more money trying to trade short time frames than anything else. I’m not saying that it’s impossible to trade intraday and make money as that sort of statement would be absurd but I’m just pointing out it’s not for me.

Look at it this way, guys go to work for companies all over the world who invest time and effort training them to day trade and even with the back up of an employer, the best mentors in the company and enough time, patience and money to see them through to being profitable there are still a huge percentage of them that fail. Why would I, as a retail investor, trying to educate myself from books, forums and trial and error stand a chance of making any money day trading if the people best placed and with the best education still fail? I’ll agree that the right person in the right company will be outstandingly succesful and that the same person could well have been succesful if they learnt it the hard way like I did but for the rest of us there’s another way. This brings me onto my next point.

This should be no surprise…the forex market trends. And how. It trends on all time frames including the 1 min through to the monthly. My point is, if your chosen pair is trending on the monthly and you can get a good entry there and leave it for a 1000 or so pip gain, why bother trading it in the 1 min and taking all of the micro trends involved? For me it’s a no brainer, place a trade, turn the pc off and go do something else. I have no desire to watch a computer monitor 8 or 12 hours a day waiting for the perfect entry for a 20 pip gain when I can just ride the trends on the higher time frames. It’s less stress for bigger gains. Ok, you have bigger losses but with proper risk/reward you’ll be up every month which is my sole purpose in trading. If I can make a gain of between 1 and 10% of my account every month I am happy, why stress it day in day out for a huge gain which isn’t guaranteed anyway? Put it this way, if you’ve read this far you’re probably not making consistent money anyway otherwise why bother with some guys system?

What makes trading interesting for me is not a 5 or 10% gain per day but a nice slow, steady climb in my equity. I take less risks for more gain and the biggest word to remember is COMPOUNDING. Get a spreadsheet and set it up to work out how much a $1000 account would be in 10 years time if you just increased your account by 1% a month. Not bad huh? Now try 2% a month, or 10%! It gets better month on month. My average at the moment is a littl over 5% a month and that’s fine with me. My win rate? Nearly 80% but I’m real careful about what trades I take. My risk/reward? 2 or 3 to 1.

Want to read more? Ok, come on.

Roberto_Dinero · July 18, 2009, 3:44pm

Lets start with a BIG surprise… almost everything you read in those books on trading was RIGHT!

Ok, maybe some of it was junk but the main points had a lot of truth in them. The funniest thing is that you probably know all of this stuff already but have never really applied it or known just exactly what it meant.

The trend is your friend.
Let your winners run and cut your losses short.
Buy support and sell resistance.
Never a lender nor a borrower be.

Ok, that last one isn’t trading! My point is that I am probably not going to actually teach many of you anything at all about trading. What I am going to do is show you how to put together what you probably already know to make it work for you.

THE BASICS…

Before you start make sure you have a working knowledge of the following…

Support and resistance in all it’s forms, by which I mean horizontal, trendlines, channels, fibonacci (yes, that is dynamic s/r), moving averages, round numbers and pivot points.

Candlestick (or bar if you prefer) patterns (reversals).

THE PAIRS…

I use this on the major pairs and the eur crosses with the majors such as eurgbp, eurjpy, eurcad and euraud. Why? Liquidity. The higher the liquidity the more price will respect support and resistance levels.

Next post is the good stuff, I promise…

Roberto_Dinero · July 18, 2009, 4:10pm

We can break the setup down into a few simple steps…

Get a weekly chart and pull it out to it’s fullest extent. The farther you can go back into history the better.
Draw lines at levels of historic support and resistance, the more obvious the better. Try and round this off to the nearest round number even if that makes it a few pips out. 50 levels as well as 00 are valid but I prefer rounding to 00 if possible.
Draw any relevant trendlines.
Move to the daily chart and tidy up the trendlines if necessary (I find they can move about a bit on metatrader). Draw any relevant trendlines on the daily chart of different from the weekly tl.
Draw any relevant channel lines, fibonacci levels or triangles.
Draw monthly pivot points.

Set up is complete. The only thing to do now is to sit and wait.

THE ENTRY…

Monitor the charts at the close of the daily candle. This obviously depends on your broker.

For a valid signal to enter a trade you must wait for the following to occur…

Price must approach one of the horizontal s/r levels away from the trend. A valid candlestick or bar reversal pattern must occur. Enter in the direction of the main trend with a 100 to 200 pip stop loss as appropriate.

The touch or nearing of horizontal s/r is enough to take a trade HOWEVER, the signal is stronger with the CONFLUENCE of a number of s/r features such as a trendline, horizontal AND fibonacci.

If you are taking a signal from the horizontal s/r alone it MUST be very clear price action. For trades with clear confluence of s/r you can be less critical in your selection of price action but it still should be a fairly clear pattern.

THE EXIT…

After you have entered you have a number of options of how to exit the trade…

It would be perfectly acceptable to exit the trade once a certain target is hit, say 2:1 r/r. Usually the next s/r level is comfortably 400 pips away so a 400 pip tp for a 200 pip sl would be fine.

Another method is to place a 3 period simple moving average of the typical price (the daily pivot point) on the chart. Close the trade when price CLOSES above or below that MA (dependant on the direction).

My prefered method is to trail the stop loss up manually on a daily basis after the close of the daily candle. The best way to do this is to watch the ebb and flow on the 4h chart and look for areas of consolidation on that chart. Put your stop loss the other side of those areas. If the daily chart is trending up quite smoothly it makes sense that the 4h chart is moving in an elliot wave type pattern with higher highs and higher lows or vice versa. Use those swings high and low to trail your stop behind. Using this method it is quite possible to achieve over 1000 pips on a trade. You will obviously be stopped out at break even on a number of occasions too but on balance you will achieve more good wins than break evens with your average trade being somewhere near 400 or 500 pips.

Chart next I promise… RD

Roberto_Dinero · July 18, 2009, 4:28pm

Here are weekly charts of two of the major pairs with the major s/r levels drawn. Notice gbpusd follows a pattern, every 500 pips at the major round numbers.

Roberto_Dinero · July 18, 2009, 4:41pm

This next chart is the gbpusd on the daily and closer up.

There are 2 areas marked. The green arrow represents a very good trade. Although it doesn’t form the bottom of the candle exactly at the s/r line it is obvious by the close that there is a high probability of the uptrend continuing. A take profit or trailed stop would have got you out at about 400 pips up, not bad. This trade was based solely on the horizontal s/r line. The trendline is a little lower and no other valid trendline could be drawn. No fibonacci could really be used. All we had was a candlestick reversal pattern at a SIGNIFICANT level.

The other area marked with the red down thumb is a good example of unclear price action. On first look and with the benefit of hindsight you can see that the price has reversed and gone back in the direction of the main trend BUT there was no CLEAR price action giving you an idea that it was MORE THAN LIKELY going to go up. This is a good trade to leave well alone.

If you stick to the VERY CLEAR AND OBVIOUS price action at VERY CLEAR AND OBVIOUS areas then you will increase your win rate and maintain good risk reward. It’s that simple.

Roberto_Dinero · July 18, 2009, 4:55pm

Next is the usdcad chart on the daily.

There is one trade marked that offered a good opportunity and is a good example of how the price action can be very slightly unclear but still offer a good trade if backed up with confluence.

Notice the trendline wouldn’t have been in place when this trade occured as the top hadn’t been formed but we have the 68% fib level being rejected, notice how price fails to close above the 50% level on 3 consecutive days. Also you have the SIGNIFICANT level of s/r clearly rejecting price.

Trailing the stop down again produced a nice profit with a good r/r.

Notice that although the next swing high would have been a valid trade the price action around the s/r level was a little less clear.

Roberto_Dinero · July 18, 2009, 5:19pm

Now you have most of the strategy together in a nutshell. There is plenty to add but I’m hoping this will evolve over time to become a useful thread for anybody looking for a consistent income from their trading.

Please feel free to ask questions now.

A few points that come to mind is money management. I only risk 1% or thereabouts per trade and I try not to have more than 2 or 3 trades open at one time. Remember your strike rate should be nicely over 50% and r/r over 1:1 so a profit is certain over time.

The other point is patience. Once you have set the charts up it can take a few days or even a week to find a good trade. Remember the power of compounding, one good trade per week will give you somewhere around 4 good trades a month with maybe 1 loss. Better to wait for the very best setups than to just take anything that comes along.

Another point I can think of is that the charts posted so far show what I call hindsight trades. This means that they are easy to spot after the event. I will be posting charts of POTENTIAL setups in the future but I’m not going to give you trades on a day to day or week to week basis, finding the trades is up to you.

That’s enough from me for now, hope I have sparked some interest and I look forward to your replies. RD.

Roberto_Dinero · July 19, 2009, 2:36pm

Hi all, just a quick update for Sunday night. No open trades at the moment, a bit quiet last week. That’s the way it goes, some weeks no trades, some weeks 3 or 4. It’s worth remembering that you don’t get a prize for opening the most trades but you do get rewarded for opening the best trades!

The xxx/usd pairs are consolidating at the moment so no setups there at least for a few days.

A few interesting charts to mention. First is usdjpy, there is some minor resistance at monthly S1 which corresponds with the 13 sma of the close (I find this acts as s/r sometimes). It is trending down but the price action isn’t really clear enough for me to trade tonight on the open so I will watch and see. I expect this could well drop in the next few days but still it’s a no trade for me. It’s worth mentioning the fibonacci looks good from the last move down too.

Next is eurgbp. It is definitely trending down but for me, again, there is too much noise in the move up to this level to take a trade with confidence.

Last is eurjpy. An interesting spinning top at a significant level but monthly S1 is just below and I see a triangle forming on this pair at the moment. Another leave but an interesting chart to look at.

No other pairs are looking obvious for a trade this week so far but I’m hoping to get at least one trade this week so I can show you the strategy in action.

Until then. RD.

benji533 · July 19, 2009, 3:37pm

Double post…sorry.

benji533 · July 19, 2009, 3:39pm

Hi RD!

Thank you for all this great stuff.
I am now using the combination of R+S lines, candlestick patterns and price action exactly like you are using in your method.
The only problem for me is identifying the right S+R Horizontal lines. I will be glad to receive a bit help here if you can please.
First, when you are looking for historical S+R lines, at which time frame you are looking? I have done it with the 4H hours and after I have zoomed out to the daily and weekly charts I got too much crowded lines and no space…
I saw you have only 6 lines in one of your weekly charts…how can you see them in the daily chart? I think it won’t be such effective there.
I will try to get a space of at least 400 pips between each couple of lines and make them be at the 50 and 00 levels as you have suggested.
All the best to you RD with your trading, and please keep updating, it is very useful

Take care,

Ben

Roberto_Dinero · July 20, 2009, 1:10am

Hi Ben, I always draw s/r lines on the weekly chart pulled out to it’s furthest extent, so with the most history available.

The lines I look for are the round numbers that have acted as significant support AND resistance in the past. So, I look for swing highs, lows and reversal points that usually correspond to round numbers.

These round numbers that acted as significant s/r in the past offer you the most probable points at which price will react in the future and so a very obvious candle reversal pattern at a very obvious s/r line will give you a high probability trade in the direction of the main trend.

I’ve attached another chart for a different pair, this time eurgbp. Notice how the s/r lines are only 200 pips apart but look at how price has been reacting to them (take a look on the daily chart above) . These weren’t necessarily good signals for trades but sooner or later you will get a clear signal to enter that will yield you a nice 200-400 pip trade. Note, I could draw more lines lower down but I’ve just marked this up with the s/r lines near the price.

benji533 · July 20, 2009, 5:48am

Hi RD, thanks for the reply. I have also got some help from phil, so now I am covered up, thank you

Ben

Roberto_Dinero · July 20, 2009, 1:19pm

No worries, if you need anything else just let me know. It takes a while to get the hang of trading this way but in the long run it’s worth it.

The biggest thing is having the patience to wait for the best trades. That’s what almost all traders have to learn from scratch when they start.

RD

Roberto_Dinero · July 20, 2009, 4:42pm

UsdJpy looking very interesting. It’s not VERY clear price action but it’s ok. I might wait one more day and see how it develops but I’m interested in a short.

The yen has weakened in the last few days due to oil rising but I think oil may have met a level where it may consolidate for a while before a big push up so I’d be happy to short usdjpy provided the right PA was there.

erikdahlstrand · July 21, 2009, 5:14am

Great thread, thanks!

I have a few questions, mabye you can help me?

How to draw the monthly pivot points?
I find it hard to draw the S/R lines. Can you have a look at attached screenshots and tell me if it looks somewhat alright? Must every line be both support and resistance? How many lines to draw? There are plenty of “sub-swing” high/lows.
What time period are you looking at on daily to identify the main trend? In some cases there is one trend when looking at the last three months and another “opposite” trend when looking at the last six months.

Thanks in advance!

Roberto_Dinero · July 21, 2009, 6:33am

Hi Erdah,

Answers to your questions…

I use a custom indicator called auto pivot indicator which you should find easily if you google it. It’s not my indicator to post so I am wary of posting it here but you will find it. The one I use draws daily, weekly and/or monthly pivot levels automatically and I use just the monthly as on the daily chart the daily and weekly are of no use.
I tried to look at your attached screenshots but they appear very small so I couldn’t tell for sure but looking at audusd you are on the right track. The important thing is to make sure they are at round numbers. Don’t get too hung up on finding exactly the right lines as these act more as areas than exact points. Look at the gbpusd trade I posted in my introduction, it doesn’t react exactly to the line but it closes above the significant area.

In fact, look first at gbpusd. I have lines at every 500 pips all the way from 1.35 to 2.1. These aren’t exact lines and there may be other lines you could use but with that particular pair it just works that way, probably due to the huge liquidity in gbpusd.

If it helps, my audusd levels are… 84,82, 80, 77 and 74.

You can use just support or just resistance but it helps if the level acted as both. You are looking for the most significant areas. If a line acted as support in a trend on one occasion and then nothing then it means less than if it acted as a trend reversal point a couple of times and a swing high or low point.

Draw as many lines as you see significant s/r for. Some pairs will have s/r lines 100 or 200 pips apart in some places which will make trading it a bit harder, you would need a good trend through that area to be able to trade with confidence. Some pairs will have 600 or 700 pips between lines in places. Don’t be afraid to draw the line if it looks significant to you, the more information you have the better you can trade it, if it looks too congested, don’t enter a trade.

There are lots of smaller swing high/low points but only some of them have repeatedly acted as s/r and stand out. The more obvious the area is, the more traders will see it and the more the s/r line will be respected by price.

In general I draw trendlines on the weekly chart and refine them on the daily, meaning I add any extra trendlines I think are relevant or tidy up the weekly to the nearest swing point. I find that when you zoom in on metatrader the line can be a little bit away from the actual point you wanted on the higher chart.

As well I zoom the daily chart right in and then pull out 2 clicks. This is the chart I trade from, I find it gives me enough bars of information to work with.

If there is no trend on that chart then I work with either the weekly trendline or don’t use one at all.

Determining the trend is a tricky subject. In general the higher the time frame the trend, the more dominant that will be but there are trends within trends. For instance, often an uptrend on the daily chart will be a retracement on the weekly chart. I tend to watch the trend on the weekly chart to see if it is reaching a critical point in that trend and if not then I trade the daily trend. Obviously the best scenario is to be trading a daily chart that is trending in the same direction as the weekly chart. I wouldn’t trade against the trend in the daily timeframe but I’m a little more relaxed about trading against the weekly trend if the daily trend is opposite but well established. It’s a matter of how much risk you are willing to take. Some traders will only trade in the direction of the weekly trend but take a lot fewer trades, I’m prepared to trade against the weekly as long as the daily trend is strong.

I hope all this helps, if you need anything else just get in touch. RD.

Roberto_Dinero · July 21, 2009, 8:03am

I used to check my charts all the time. Even when I moved to trading just the daily close, if I had a day off work I would sit and watch what was going on. All this lead me to do was to meddle with things, if I thought my trade was going wrong I’d close it out or add more if it was going well. Needless to say it happened so many times that I closed out a bad looking position intraday only for it to close in my direction at the end of the day.

These days I check my charts ONCE per day and that is as near as possible to 11 o clock, the end of my brokers day. Since i started doing this I have found that my trading has benefited immensely.

Think about it, the whole point of trading the daily candles is so you don’t have to sit and watch the chart all day. In fact, sitting and watching the charts made me a worse trader.

If you can’t place a trade, switch off the computer and walk away it means just one thing, you’re trading too big a position. I feel completely comfortable with leaving the charts all day and not wondering what’s happening with my trades. That’s what stop losses are there for, so you don’t need to be.

Roberto_Dinero · July 21, 2009, 10:45am

I’ll be posting posts like the above every now and then as I go along just covering areas of trading I feel are important as and when they arise.

If there is anything you would want to see me cover now then please just ask and I will put together a post covering that topic.

I’m guessing most questions at the moment will be about how to draw the lines and what candlestick patterns to use, etc. I know this because that’s what I struggled with first too. Once we’re past that stage and any questions I can answer about that have been covered then we can move on to other things.

I hope eventually to put all of these posts together in one place, maybe a PDF posted on the first post for new people on the thread.

I would welcome some feedback too about the thread and the strategy. I’m guessing there’ll be a little more interest once a couple of decent trades come along, don’t worry, it won’t be long.

erikdahlstrand · July 21, 2009, 11:19am

Thanks for answering my questions. You are very kind and helpful.

My AUDUSD levels are the same so hopefully I’m not completly wrong on the other pairs. I have uploaded larger screenshots here cuzone.pictiger.com/albums/64185.

I downloaded the indicator from here forexfactory.com/showpost.php?p=1899982&postcount . I guess linking is alright. On some charts the indicator lines aligns nicely with my s/r lines. On some charts they do not (see screenshot). Can you explain how to interpret charts with many lines. Are the indicator lines and my s/r lines equally “strong” candidates for trend reversal.

What do you think about USDJPY tonight?