-Phoenix Foundation- July 2011 version

First, sorry about the huge post…

I’ve been around on this forum for several years now. During these years I have spent on average several hours every evening in front of the computer reading, testing and thinking about forex trading. I’ve made the usual journey complete with system jumping, revenge trading, bringing my account to its knees on my first live attempt, going down dead ends, looking at EAs, arguing with forum trolls, etc. You get the idea.

Thankfully, since I’m only slightly more than half stupid, I’ve actually managed to learn a thing or two along the way. I’ve seen many people start threads here and elsewhere to teach or develop their systems. I’ve read many of them, some are good but most face the Darwinian extinction sooner rather than later.

I’ve had my own little thread going for some time, a thread which has become more and more like the geological layers paleontologists and archaeologists love to excavate.

This will be my attempt at contributing something useful to the community here at Babypips. I’ve been thinking about starting a thread like this for a while, so when the good people here came up with the Trading System of the Month concept, I had no more excuses.

Let’s start off with a brief segment about how I view the forces that drive the markets and thus control how our charts look.

What is a market? The answer according to me is that a market is a place where the price of something is set through a continuous auctioning procedure. Think of your local auction - a man stands on the scene holding up a vase and says: the starting price for this beautiful vase is 5$, does anyone bid 5$?
A group of five people in the audience all want the vase and they start trying to out bid each other until one of them places a bid that the others decide is so high that if they match and raise it they will be paying more for the vase than they consider it to be worth. Thus the group has decided what the price of the vase should be given the circumstances at that time.
Now imagine what would happen if the next item is a box containing ten more vases exactly like the one they just fought over. The supply suddenly increases in such a way that there are more vases than there are people interested in buying one. Suddenly there’s no competition for the vases and the auctioneer may now even have to lower his opening price to get them sold.

This was a short description of how supply and demand work when the price of something is decided. This is also how the forex market works.

In other words, the basic principle that controls price is supply and demand, make no mistake about it. The collective emotions of the people taking part in the auction is also a determining factor for how the supply and demand will turn out. Imagine for instance what the result would have been if the five people interested in the vase had all wanted to build as large a collection of such vases as possible. Likely, all eleven vases would then have been auctioned off at the very highest prices that the five people could afford.

So, supply/demand + human psychology = current price

Above is my extreme simplification of how I view the markets. Those of you wondering why I left out words such as technical/fundamental, here’s the answer: these do impact the price, but they do so only by affecting the human psychology or the supply/demand components of the equation, not by themselves.

The lesson to be learned by this is that the only indicators of any real use would be those that indicate to us what the current supply/demand situation is and those who track the market’s collective psychology.

Spot forex is different from other markets in that there is no reliable information on trading volume to be had since there’s no central exchange that keeps track of everything. This leaves us only the price chart itself to try to glean the supply/demand situation from. For more information on how to do this I suggest looking up Sam Seiden’s videos. (I know, you can look at futures volume or tick volume etc, but that’s a discussion for some other thread)

As for how to gauge the market’s sentiment, there are many ways but the most widely used (and perhaps simplest) is without doubt the moving average. The theory is simple - if price is above the moving average then the market sentiment is obviously bullish and vice versa.

In my system I will try to gauge the supply/demand situation using the simplest approach possible. I will be looking for common bar formations, mostly two bar formations but also multiple bar formations.
To gauge market sentiment I will be using a moving average. I could have used a simple moving average, the results would not differ much. But I decided to use a moving pivot point average instead. It’s mostly a matter of personal taste, but I chose it because I believe it slightly better tracks market sentiment.
The finesse of this pivot moving average is that it takes the (highest high + lowest low) of a period of x number of bars + the most recent close and then divides by three. This makes it possible, for instance on the 4H charts, to calculate your moving average based on the highest high + the lowest low of the last five trading days + the most recent bar close. If you want, you can instead take the highest high and lowest low of just the last 24 hours, or can use the last month - your choice.

Bar formations and the pivot MA are the only things I will use. The reason I try to keep things as absolutely simple as possible is that when I’m at work I don’t have the time to sit and draw horizontal lines etc. This approach takes care of almost everything, only the discretionary parts of deciding whether to take a setup or not and how to manage it is left to us.
I find it attractive not having to spend hours every night drawing and reviewing lines/zones on all the pairs I watch.

What do we really need to know in order to be able to trade profitably? The answer is as simple as it is obvious - we only really need to know if price is more likely to go up or down. Sounds ridiculous doesn’t it? But it’s true if you think about it. We don’t need to know anything about fundamentals or indicators or wedges, head and shoulders or anything else.

My way of deciding which direction price is more likely to go is by using the Pivot MA which will from now on be called the moving pivot. If price is below the moving pivot I will only be looking for short trades and vice versa. In other words, the moving pivot decides my bias.
Once we have a bias we then look for good trade setups by looking for bar formations.
Trades may only be taken if both moving pivots give the same directional bias. No need to fret over trading against the higher time frame anymore, ever… Very simple and definitely always with the trend.

For those unfamiliar with bar formations, What is a Japanese Candlestick? | Japanese Candlesticks | Learn Forex Trading or Japanese Candlestick Charting Explained or Candlesticker by Americanbulls.com - Candlesticks or any other site in the vast Google universe will bring you up to speed.

Since the moving pivot tells us the bias, logic also suggests that the higher above the moving pivot or the farther below, that price goes, the bigger the risk becomes that price is reaching an extreme and may retrace or even reverse.
For this reason I will be careful taking setups that form when price has already moved far above or below the moving pivot.

Next I’ll discuss briefly setting up the trade itself.
There are four things that must be known in advance before any trade can be set up:

  1. entry price
  2. placement of stop loss
  3. position size aka account risk percent
  4. placement of take profit and/or where to move stop loss to break even

1-2. Generally I will enter on the break of the bar setup but there may be situations where I’ll choose to enter on the break of one of the bars in the formation instead of on the break of the high/low of the whole formation.
Likewise the stop loss will generally be placed a few pips beyond the high/low of the formation, but in some situations I may choose to use the high/low of one of the bars in the formation instead of the high/low of the whole formation. These choices will be discretionary and when I make such exemptions from my general principle it will always be to reduce an otherwise to large stop loss.

  1. I’ve been interested in the mathematical formula known by traders and gamblers as the Kelly criterion for some time.
    The Kelly criterion is a mathematical way of determining the optimal percentage of your account to risk on a trade. There are two drawbacks. One, it requires that we have reliable win rate and risk/reward statistics and two, it’s based on the assumption that these stats will hold up. A prolonged losing streak could have a profound effect on an account traded with the Kelly criterion. Likewise the positive effect of a winning streak can be huge and over enough time these two balance each other out. The key is being able to keep trading during a losing streak and stomach the equity swings.
    There’s also the possibility of trading a partial Kelly criterion. For instance, if the Kelly formula suggests risking 40% of your account, using a partial strategy you would divide this percentage by a number of your choosing.

From start until I reach 40 closed trades I will be risking 2% per trade. There will only be one open trade at a time. Once I reach 40 trades I will start using a partial Kelly criterion for determining risk percentage, this will have to be adjusted continuously as statistics change.
I’m going to divide the Kelly risk percentage by five to make it mentally easier to stomach it. This may indeed still result in very high account risk percentages, but then that is the whole idea of the Kelly formula.
If you want to learn more about this subject, have a look at these links: Kelly criterion - Wikipedia, the free encyclopedia
Money Management Using the Kelly Criterion
This post is by someone who knows what he’s doing and his experience is well worth taking note of: http://forums.babypips.com/forextown/31062-dead-pips.html#post267753

  1. Where to take profit is often the hardest part to decide and it is often the part that decides whether a trading system is profitable or not.
    Let’s begin with the easy part. I will be looking to move my stop loss to break even on all trades when they have reached around 1R.
    The hard part is to decide where to take final profit. In general I will be looking for trades where I can expect to get at least 2R from the setup. My standard take profit will be in some location around the 2R level which also agrees with the supply/demand in the chart.
    On occasion I will try to let trades run if I see potential for them to do so.

As you see I have general principles that I adhere to and some hard rules that will never be set aside, such as the use of stop losses. But there are other areas where I will make judgment calls from trade to trade as I find that it is difficult to create one size fits all rules for these areas. I’m sure many people will disagree with me on this, but this is what seems to work for me.

Due to my full time day job I’m mostly unable to trade the shorter time frames. I will be focusing on the 4H time frame.
Included in the template are moving pivots on all time frames except the monthly. The periods are set like this:

TimeFrame; Color; Moving Pivot Period
1min LIMEGREEN 240 bars = 4 hours, 1/2 money center trading session
1min CRIMSON 480 bars = 8 hours, one money center trading day

5min LIMEGREEN 48 bars = 4 hours, 1/2 money center trading session
5min CRIMSON 96 bars = 8 hours, one money center trading day

15min GOLD 288 bars = represents three 24H trading days
15min SLATEBLUE 1536 bars = represents 16 24H trading days, roughly three weeks

30min GOLD 144 bars = represents three 24H trading days
30min SLATEBLUE 768 bars = represents 16 24H trading days, roughly three weeks

1H GOLD 72 bars = represents three 24H trading days
1H SLATEBLUE 384 bars = represents 16 24H trading days, roughly three weeks

4H GOLD 18 bars = represents three 24H trading days
4H SLATEBLUE 96 bars = represents 16 24H trading days, roughly three weeks

Daily GOLD 3 bars = represents three 24H trading days
Daily SLATEBLUE 16 bars = represents 16 24H trading days, roughly three weeks

Weekly SLATEBLUE 52 bars ~ roughly 1 year

SLATEBLUE - always represents 16 24H trading days, roughly three weeks, except on Weekly where it corresponds to one year
GOLD - always represents 3 24H trading days
LIMEGREEN - always represents 4 hours (1/2 money center trading session)
CRIMSON - always represents 8 hours (one money center trading session)

These settings are correct for my broker’s opening hours, if you use a different broker you may have to adjust the periods to make them correspond correctly.

Last, but not least some cherry picked chart examples to get an idea of what we’ll be looking for:

Bullish outside bar to the left and bullish pin bar with the trend following a bearish pin bar.

Evening star to the left and inside bar to the right.

Three inside up formation

Finally I’d like to say a big thanks to DodgeV83 who kindly helped me with the FoxPivot indicator which was not doing what it ought to in the beginning, but which now works perfectly thanks to him.

-phoenixfoundation-.zip (2.73 KB)

Dear o990l6mh

Thank you for an oscar winning post and the time and effort you have put into this. Really valuable, insightful info.

Status - open

EURGBP short from 0.8785 SL 0.8850 Preliminary TP 0.8655

I can’t see the highlight in my chart? Did you highlight the entry trade part yourself or is something the problem.
And I didn’t understand the part about the entering the trade.

I posted at work so there was no chart with highlighting of the entry.

This is the bar formation I entered on the break of:


The red lines are SL and TP, the green line is the entry. Click on the link below the image for a higher resolution version.

But since I am still not too much experienced in forex. I would like to request for 1 minute chart and H4 chart at the time of your entry for both buy and sell entry if you can. I want to look at the RSI chart when you took the trade mainly.
Thanks in advance.

I will post the 4H chart of the trades but I can’t promise that I’ll be able to do it at the time I take the trade. Most likely I’ll be posting the charts in the evening when I’m at home.

1min charts with the RSI will be rare, I’ll only post those when I actually enter a trade using the 1min charts, and as I’ve said that won’t be very often.

This post will keep track of account performance.
Clicking the image will bring you to the myfxbook page where open trades and open orders can be seen.

Thanks Matt!

Let’s start with how much difference there is between the FoxPivotModified and a regular SMA or EMA of the same period.

Here are some charts from today, just minutes ago:

EURGBP 4H with FoxPivotModified 32 periods, no shift in yellow and SMA 32 periods, no shift in white:


EURGBP 4H with FoxPivotModified 32 periods, no shift, in yellow and EMA 32 periods, no shift, in white:


I was going to post more charts to show the relation between the FoxPivotModified and ordinary MAs, but these two charts are very representative. As we can see the SMA does a good job, but the EMA does a really good job.
The only situation where there’s a small advantage for the custom indicator is in very choppy situations, but the advantage is so small it’s unlikely to be of any real importance.
In conclusion the EMA and the custom indicator I use are more or less interchangeable. This is true not only for the 4H time frame but for all time frames.
In spite of my liking for the KISS principle I use the custom indicator because I like the math it’s based on slightly better than the ordinary MAs, but it’s really just a matter of taste.

Now for the second part.
If I had the time available to place and review s/d lines/zones I certainly would. Adding that into the method would most likely improve performance. But - I could only do that once a day, in the evening which for me happens around NY wind down/Asia open.

As a result I’ve decided that the bar setups will have to be my proxy for this. Put simply, I will assume that good bar formations tend to occur where supply/demand zones lie on the chart.

It’s a compromise I’m making for the sake of simplicity.

Other possible variations could be such as only taking short 4H setups if the Daily chart is trading below its Moving Pivot and only taking short 1H setups if the 4H chart is below the moving pivot and so on.

This is by no means a finished system. Through this thread perhaps sharp minds like yours can work together to create something better than I could on my own. Everybody is welcome to take this basic system and make it their own. (Just as long as this thread remains on whatever track I want.)

SL moved to BE + 1 this morning as we had passed 1R. Currently price has reversed and is close to kicking us out at BE.

Trade #1 stopped out at BE.

This sort of thing is just part of the job. Let’s move on to the next setup straight away since one has actually occurred.

All right, as it happens trade no 2 appeared just as no 1 stopped out. Let’s see if we get a winner, BE or a loser.

USDCAD short from 0.9589 SL 0.9624 Preliminary TP 0.9524

Here it is:


Well, the good looking ones :wink:

No, seriously, I try to pick the ones that retrace against the trend and then print a clear bar setup. I look for the basic ones, OB, IB, pin bars, morn/eve stars, several small bars in a range, etc

I don’t have a list of exact criteria for how I pick or why I will pass a setup by. I try to pick the best looking one out of the pairs I watch.

I may trade other situations than retracements as well, but it’s fair to say that retracements are what I primarily look for. I suppose that makes me a trend follower.

Moved SL to BE + 1, ie 0.9588

TP hit at 0.9524

And we’re flat again, looking for the next trade. Although I’m on vacation there’s a lot of stuff I have to do so I can’t promise I’ll be able to focus entierly on the charts every 4H. I’ll do my best.

I will not normally be trading this frequently, but there’s another good quality setup for me, so I’m taking it.

USDCHF short from 0.8174 SL 0.8235 Preliminary TP 0.8048


Wow, well that was one quick 4H trade.

SL hit just a minute ago.

edit: I should add that I actually made a mistake on this trade, had i waited for the bar formation to break there would never have been any trade. Well, I’ll try not to make that mistake again.

Well, I think I warned you that this is work in progress, as always.

I’ve decided on a small change to try to further both improve and simplify the system.

I’ve added the Moving Pivots from both the daily and the weekly charts onto the 4H - 15min. I’ve also changed the color scheme to make it consistent. Moving pivots that are displayed on several time frames now have the same color on all those time frames

Indigo - always represents 1 year
Seagreen - always represents 1 month
Gold - always represents 1 week
Lime Green - always represents 8 hours (one money center trading session)

The change in the system is that trades may from now on only be taken if the yearly, monthly and weekly all give the same directional bias. No need to fret over trading against the higher time frame anymore, ever… Very simple and definitely always with the trend.
For instance, with these rules we would only have been looking for longs on AUDUSD and XAUUSD since July 2009. In other words, this will improve our ability to follow the big trends.

I’m adding the new template file to this post and I’m also updating the first post.

-phoenixfoundation-.zip (1.9 KB)

I’ve been otherwise occupied last couple of days which turns out to have been rather unfortunate when I looked through the charts and saw what I had missed out on.

Now, hindsight makes it easy to be right, always bear that in mind. These charts are hindsight indeed, but I would most likely have taken the gbpusd setup(s). Since I’m only allowed to have one trade at risk at a time I would not have been able to take more than one of them since they occurred more or less simultaneously. (I don’t think I would have managed to get USDJPY to BE before the other setups triggered.)






[I]I had to cut this section out from the first post since the forum complained the post contained too many characters after my update to it… Besides, the 1min section probably fits better into a small post of its own anyway.[/I]

The 1min chart looks a little bit different than the others. I’ve added a standard RSI and then placed standard Bollinger Bands on the RSI. This is a little trick that can be used when there’s a setup on the 4H chart and you want to enter with a tiny stop loss and try to ride the 4H setup.

How to use it? Let’s imagine there’s a long setup on the 4H that we want to get a tight entry into. What we do is simply switch to the 1min chart and wait for RSI to either hit the lower Bollinger Band and/or drop to the 30 RSI line. when this happens we wait for the RSI curve to turn up and when that happens we simply enter on the open of the next 1min bars with the lowest low of the previous bar(s) as the stop loss.
Other than that the trade management is the same except we of course want much more than 2R and we have to be prepared to be stopped out for a loss or at break even a few times before the trade takes off. A few successful trades of this type can grow an account rapidly. Unfortunately I will rarely be able to take them since I work during London and first half of NY.
One thing worth mentioning for the 1min charts is of course that the spread becomes very important. This type of trading is only suited for brokers and pairs with tight spreads.
Just to repeat, the 1min system is [B]NOT [/B]a standalone system. It is only to be used in conjunction with a good setup on a higher time frame, such as the 4H.