Man! I love this stuff!
And yes - it is nice to be catching up with family over Easter. I thought I would be kicking back and enjoying a bit of computing … but Mrs Ingot has other ideas and I’m certain it has been the same for many of you … at least I hope you have been as fortunate as I have been, having family to meet with and enjoy.
Back to the task at hand.
What we are looking for now is something that we can mentally grasp that utterly convinces us that the LONGER time frames are the way to approach currency trading.
The analogy of the movement of the surface of viscous oil might do that for us (referring now to my previous post).
Well - some of the corks in the story were near the centre of the oil pool, and some were nearer the edge. The movement of the oil is much more rapid and violent near the middle, and this is where most of the action occurs. Not only does this area move more violently, if I may use that term, but it moves more often that the edge area of the pool.
So if we can, imagine the centre of the pool as being SHORT term TF and the edge of the pool as being LONG term TF.
In the centre, we see the little corks bobbing up and down rapidly, affected by every wave that comes along - almost unpredictable - and in fact, the short term moves are nothing but moves-within-moves, and may bear little relation to the overall movement of a currency pair - just choppy chaos.
Yes, eventually a short-term move WILL be the beginning of a move that actually turns out to be THE pivotal point of change of long-term trend, but there will only be ONE of these, because the LT trend will only change ONCE in every “Long term” by definition - else it is NOT a “long term” at all.
So what can be said for the “corks” out near the edge?
The facts are that once we are able to establish exactly WHAT that trend is, then it will maintain its trend until prevailed upon by some deep and fundamental influence, that will cause the turnaround relative to its peers. Everything else is just a short-term “wave” causing the bobbing of “corks” which are just short-term moves. Corks near the edge move more slowly and bob up-and-down less often.
Hope that is fairly clear.
Taking this a bit further - how can we trade something like this?
OK - forget about oil and corks now - we have called in a crane, removed the vat, drained the oil and recovered the pulley … and whatever else happened to fall into that oil over the years!
We have all understood from looking at the weekly and monthly Rainbow charts exactly what the LONG term trend is.
And by looking closely at such a Rainbow chart we see that the short-term moving averages that make up the red/yellow side, are much more rugged and “noisy” that the other side of the Rainbow.
Now it doesn’t take a lot to see that if we can buy in to the background trend (LT trend) at a strategic point, then we may have a little (or a big) windfall.
Hands up those who can accurately pick the top or bottom of a move?
No one … ? Good! Thanks for being candid guys!
So … if we can NOT pick a turning point, how CAN we benefit?
OK - here is where the Multi-TF Stochastics can assist. Knowing that the background trend WILL eventually assert itself, we watch the MTFS. When the stochs look like they are setting up for a move that will cause a GENERAL swing of price movement back into tune with the underlying long-term trend, we have action.
This is going to be a little riskier that before, and will require a smarter strategy that before. Remember those WIDE stops we discussed way back in the beginning of the thread? Well we are now going to need them.
We are going to back our judgement with a touch of courage. And I want you to feel the fear now, because if you do, and if you can pass this ONE test, you will have learned to trade, and you will have discovered something indefinable (for now) deep within, that no one can EVER take away from you.
Here’s how to do it.
We get our signal from the hook or peak forming on the stocks that someone is entering the trade with decent money. In fact it is likely the only clue we will get that this has happened. But we also see that the stochs are moving, in the Long term charts - monthly, weekly and yes, daily - to point to a bigger move.
At this point we may still see the daily and perhaps the 4H and 1H charts moving counter to the underlying longer trend, or they may not. In fact they can be doing anything - their action is irrelevant at this imminent point of change. Eventually they WILL fall in line.
So with this in mind, we begin to support the LONG TERM trend - even though initially it may mean carrying a loss.
We enter one position. And we have a 250 or even 300 pip SL.
“WOW!” … (I heard you say that!)
But remember we are not randomly playing the fool here - we are trading with an edge - in earnest seriousness. We enter one position and wait. The trade may swing in our favour, or it may not.
After the trade moves against us by 75 pips (an arbitrary figure - only experience with a specific currency pair will nominate a more precise figure for you - we could make this 50 or 100 pips) we enter another position … and wait … same story.
Another 75 pips and enter a third position. At all three entries, the SL should be placed at the SAME level - the first at say 250 pips from entry; the second at 175 pips from entry and the third 100 pips from entry.
Why are we doing this?
Because the stochastics, the trend and everything we have been watching is signalling to us that the trend is resuming. We have the luxury of having instruments that we can depend upon. (Remember the criteria for entry?)
If we did not have the signals - this strategy would not only be premature - it could be very costly. If we have followed our setup and read the signals, by this time the trend should be visibly in our favour, and the positions should now rapidly improve.
Once we have the trend in our favour of course it’s a picnic - you can scale in or pyramid or whatever you usually do in these situations.
Keep in mind you will now be riding this for a long and easy ride back to the “core” trend. And given that the trade may have gone against you initially, it is likely that you will have a much faster ride.
It would make sense to me now, knowing what the stochastics and the Rainbow are looking like, to really milk this for the 200 or 500 or 800 or more pips that it potentially will deliver.
You can see on your chart how far this has to move to remain faithful to its core direction. It’s OK to feel elated at this point. I would be for sure.
But what I hope to do now, is to uncover some trades where this may have gone wrong. While it is nice to spread this nicely on paper for you, we MUST learn to manage trades that do not fulfil their “duty” to the strategy.
And there may be a few of these. It is inevitable that one day we all will be involved in a trade where it seems like a return to core direction is occurring, but in fact it goes on to become a trend reversal - every trader’s horror.
We want to avoid this - or at least learn to manage it with minimal risk.
I do not have any examples readily at hand (prepared) so would appreciate now if I could hand the thread back to you for full participation. If you have seen such a flipper trade - please share it.
And if you have had the wonderful experience of having one of these trades come along for you - feel free to share that too.
In the meantime I will search for an example of “rogue” trades and try to discover what the signals were to avoid them … if any.
Sorry we didn’t get to revel in the victory of having that winning trade fill us with confidence - but it is vital that we also consider alternative outcomes if we hope for longevity in trading. And before we go too much further, I will try to come up with an example of what we have discussed in this post.
Get this right now, and you will have dozens of these each year to enjoy.
With very best wishes