The Most Profitable Trading Pattern You Will Ever Encounter

Trading Systems Free Forex Trading Systems
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Before getting into the actual strategy (and I want to do that before the weekend ends, so you guys are familiar with it). I just wanted to talk about day trading’s characteristics that make it different from the swing/longterm approach we would use on the 4 hr.

Because of course there will be a difference between a trade you hold for a few hours, and trades that you hold from anywhere from a week to three months. So let’s write these differences so we are clear on them.

  1. When trading the strategy on the 4 hr, we approx. get two to three trading opportunities per pair in one month.
    But when we start day trading, the opportunities are much more (about 2 to 3 a week using the 1hr or 2 to 3 a day using the 5 minute.) [B]Naturally, the opportunities on the 4-hr are of a higher probability than those on the 1 hr or 5 minute[/B]. Because as we said, on the 4hr we are capturing trends but in day trading we are looking for a bursting movement.

  2. [B]The stops when day trading are much tighter than when trading on the 4-hr.[/B] It is normal that, when day trading, you will have a stop loss between 5-11 pips. Compared to the 300-700 stop loss on the 4 hr.

  3. [B]As a result, you are likely to be stopped out much more while daytrading than trading the original strategy, but by the end of the month your profit/loss should not be that different.[/B] In other words, you could enter 30 trades in a week of day trading. 10 of those could have been stopped out for 3 pips (a total of -30 pips), 13 stopped for 10 pips (so now the total is -160 pips), but the seven you made have made a profit of 65 pips on average (ending the week +295 pips).

  4. [B]Combining 2 and 3, we get that day trading is much more hectic and stressful than the swing/longterm trading. As a result a day trader will only have to focus on two pairs (three at most) compared to the 4-hr chart where he could watch the entire market with ease.[/B]

  5. Since we are also trading much more, [B]The 1% rule per trade becomes too much! You should risk 0.1%-0.25% per trade only[/B]. Why? In the previous example we said we can make 30 trades a week. If we were to risk 1% on each trade, that means we risked 30% of our equity in just one week!. Imagine of those 10 losses of 3 pips would have been equivalent to 1%. In an instant you would have been down 10% of your equity! But if it was 0.1%, you would have lost just 1%. You would have gotten 0.65% on your winners. So by the end of the week you would be up 2.95%, so approximately +11.8% a month which is more than good.

As a general guideline, the appropriate risk is one that would allow your reward to double your equity in a year’s time.

So for example let’s say I day trade AUDUSD, GBPUSD and USDJPY on the 1 hour. I know I will get an average of about 9 trades in a week. I will assume my risk to reward will at least be 1:2 (the system will give more reward). So I need to risk a total of 50% a year to double my money in a year. That means risking 1% a week. So those 9 trades combined should be worth 1%. If I think that’s too little, I follow only two pairs so that 6 trades are worth 1%.

Point 5 is the most important aspect of day trading you need to understand. Its why most beginners lose money while trading in the first place.

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So what if you want to day-trade AND follow the entire market? Surely there must be a way to do that?
Yes there is, it involves you treating office trading like a job and being organized.

The trading day is divided into three zones: 1) The Asia timezone. 2) European/London timezone. 3) US timezone. Each one is about eight hours.

Dedicate eight hours to day trading. When trading on the 5-minute chart, you are likely to get at least one burst per time zone. So if you are trading the Asia timezone, where is the most likely bursting move coming from? [B]Australia, New Zealand and Yen![/B]. If in Europe? [B]Pound and Euro![/B]. If in the US, obviously the US and Canadian Dollars.

So its important to know which timezone you are trading. Then keep your eyes on the pairs that correspond to the timezone.

I’ll discuss the system next. Its not easy to day trade so keep focused!

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So what if you want to day-trade AND follow the entire market? Surely there must be a way to do that?
Yes there is, it involves you treating office trading like a job and being organized

True, but sitting in front of charts all day is mentally taxing. You would need to take regular breaks and make sure you don’t fry your brain trying to keep up with 5 min charts all day.

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So have a look at the chart. This is the EURUSD’s action over the course of last week. It seems like very volatile movement, but switching to the daily chart would show what an insignificant moves these are.

Now in the center is EMA 24. Think of it as the average price of the last 24 hours. So price should be moving in cycles around that average. Sometimes overshooting and others undershooting, but looking to touch that average in someway.

So as we see in the chart. The week starts below the average. Then shoots up above it (the area of that pinkish trend line I drew.) All of a sudden price reverses and shoots below the 24 EMA and consolidate near it (red trendline area). Suddenly, price shoots up above the average very sharply (orange trendline). EURUSD then consolidates near its average before breaking lower (Yellow trendline).

Now all these moves seemed impulse. There was no way to know when they started and when they reversed. But in the next post I will show you how we can add a few rules that help us day trade that.

Remember, we are looking to pocket these sure bursts of movements that occur in the forex market on a daily basis.

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Now the second step helps us achieve the entry. We need to plot a 4 EMA. What this does is tell us the position of the average close of the last four candles.

Before we continue, I need to clear this up about my use of moving averages. Of course there are many others who use it in the same way.

Think of the EMA as a measure of the strength of a move. If you plot a 1 EMA, you will see that it follows the close of every new candle. The 2 EMA is the average close of the last two candles. A close above the 2 EMA by the third candle tells us that the buying strength of the third candle was higher than in the previous two. Now for future candles to remain higher than the 2 EMA line, the close has to be higher than the average close of the previous two candles. Needless to say the longer it stays above the 2 EMA, the harder it gets to remain above it. And eventually price will break down below it. Try it for yourselves as an experiment.

I’m choosing four in reference to the four hour time frame. In my opinion the explosive move occurs in two circumstances (when the 4 hour 20 EMA is about to cross the 50 EMA and upon the completion of our trading signals.)

There are two conditions that would qualify an impending “explosive move”

  1. Candle closes above both the 24 EMA and 4 EMA for a buy.
  2. After condition 1 is met, the 4 EMA has to be already higher than the 24 EMA if we are buying. Or at least that last candle was so strong it pulled the 4 EMA to become at least level with 24 EMA, but never below it.

Now let’s revisit the same chart but with the 4 EMA and our entry rules intact. Now since this is day trading, the stop loss will be a close below the 24 EMA if we are buying. Or a close above the 24 EMA if we are selling.

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So last week, EURUSD crossed beyond the 24 EMA a total of 11 times. Now if we applied our two conditions than number would go down to 5. Three of the five lost. They were stopped out for 6, 9 and 22 pips respectively. A total of -37 pips.

In the next post we will get to find out how much we would have made on the two winners.

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There are two kinds of exits: 1) the simple method. 2) the advanced method.

The Simple Method

You keep using a close below the 24 EMA as your exit until the value of the 24 EMA becomes equivalent to your entry level.

After that, you plot the 12 EMA. A close below is the end of your buy.

So let’s look at one of the two winning signals we got in EURUSD last week.

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The intersection of the blue horizontal line and the black vertical line is where we start to rely on a close below the 12 EMA.

It closed for a profit of 108 pips. The second winning signal closed for a profit of 12 pips. So 120-37= 83 pips using the simple exit strategy.

Advanced

Now the advanced signal is a way for us to spot my original trading pattern on the hourly chart. Once your entry conditions are met. Look for a swing that occurred before your entry in the same direction.

What is a swing?
In a buy signal, the previous swing would be a move that took price above the 24 EMA, then below it before giving you the entry signal. The swing consists of point A, B and C.

If you do find that swing, Draw the Fibonacci extension and open up two positions. You’ll stop will be a close below point C. The targets are 127.2 and 161.8 extension. When Candle closes above 100 level move stops to break even. When it touches 127.2 move the second stop to 100 level.

Here is the chart with the swing exit.

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Now you would have entered only twice the entire week if you were using the advanced exit signals. You would have taken two positions on the first entry, making 279 pips.

The second trade would have been the winning short, but rather than winning 12 pips…You would have risked at least 96 pips on the two positions while winning a total of 49.9.

Of course notice you risk more with the advanced method. So if you don’t know how to spot swings don’t worry about it.

This concludes the 1 hr day trading strategy. Note that the 5 minute strategy is different.

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Great system I can’t wait to try it next week. One question though, what about the spread that is charged to trade. For some pairs it can get to 5 to 8 pips. The 5min charts are quick pick ups, 10 to 20 pips per burst. What do you recommend doing after it has signaled? i.e. Quick Market buy/sell, buy only when the ASK is above the 24EMA and the 4EMA (for a buy sign)??

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Trading the 5 minute is humbling experience, especially for the technical trader. For us to succeed we will have to accept will get it wrong more times than not. The consolation is we don’t lose a lot of pips (remember, risk 0.1% only when day trading).

It is also a high pressure because you have five minutes to find the entry, calculate your lot size then actually sending your order. What I learned is its much better to day trade the majors and avoid crosses. Majors have smoother movements.

Credit has to go to Robert C. Miner (my hero) for this. My strategy is based on one part of the strategy he presented in “High Probability Trading Strategies.”

We will need the RSI (14). But it has the 9 SMA. I prefer if you guys add me on trading view so I can send you the RSI I created.
We will also need to plot the 45 EMA and that’s it.

First you look at the 1 hour and ask yourself two questions: 1) Is the RSI above or below its 9 SMA? 2) Is RSI either OB/OS (that’s 66.6-80, 33.3-20)?

If RSI is above 9 SMA and NOT OB then buy on the 5 minute. If RSI is above the 9 SMA but OB, then sell on the 5 minute. The opposite applies when the RSI is below the 9 SMA.

Now once you answered the two questions on the 1 hour you move to the 5 minute. If you’re conclusion was to buy. You wait for the RSI (on the 5 minute time frame) crosses above its 9 SMA, on condition that the 45 EMA be below the price.

A close below the 45 EMA , An RSI cross in the opposite direction on the 1 hour TF or a 2ATR on the 1 hr timeframe constitute an exit. Which ever comes first.

I’ll share a chart or two next.

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Thanks Philip and sorry about the multiple posts, I didn’t realize I have to wait for admin to aprove it

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Philip, show us the path… and we will follow…

Thanks again for sharing.

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two queries:

  1. regarding hourly strategy u said that "You would have taken two positions on the first entry"
    what does two positions mean.

  2. regarding 5min strategy and customized RSI: what is your name on trading view and how can we get your RSI by following u on tview?

thanks for the systems though… would you term them also as “most profitable patterns” in their respective categories???/

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Finally read trough the whole thread! Looking at the charts i can’t find any valid signals, maybe there will be a signal soon on
aud/usd; eur/aud; aud/cad but they seem to be in the range. Philip can you share what pairs are you expecting to show some valid signals.
Thanks Radev

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At the moment AUDJPY short, EURGBP short. GBPUSD long, GBPCAD long and Gold long. All on the four hours.
You are using a different timeframe for your watchlist? I’m not finding any signals on the 4 hr for your mentioned pairs.

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Let me start with question 3 first. Day trading is never the most profitable. Yet for some reason people prefer trading them for some reason. For the two systems I shared to be profitable you probably need to trade only one pair, trade every signal and not care about losing a lot, because you will lose a lot. Its just that one winner will make up for a bunch of losers. If you are ok with trading on the 4 hours I would stick to that.

  1. Let’s say according to your money management rules your next lot size will be 1 standard lot. Now if you trade the simple exit just trade one standard lot and that’s it. Now if you can trade the advanced exit, open two trades each at 0.5 lots. I hope this clears it up.

  2. My name on tradingview is motcha1. You guys can either add me or just send me a private message and I will send the indicator on the PM as I don’t want to publish it publicly.

I’m sorry I didn’t share pictures of examples of the 5 minute strategy, I’ll try to do so in the coming hours.

Also expect the rules to be improved as we move along. Its something I’m always keen on.

PS: I tried sending you a message through the “visitor message” have a look at it when you get the time.

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This is actually a great question. My response would be stick to majors like EURUSD because the spreads are usually narrow.
On the other hand its very tough to day-trade gold for instance because of the spread.

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Ok so here are pictures of AUDJPY, EURGBP and GBPUSD on the 4H i don’t see any valid signals.

AUDJPYH4.jpg700×260 33.5 KB


EURGBPH4.jpg700×260 32.5 KB


GBPUSDH4.jpg700×260 32.2 KB

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Can you explain why you are monitoring the AUDJPY ?
Isn’t this pair in a range ? EMA’s crossing all the time.
Or are you expecting a break out ? If so based on what ?

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I didn’t say valid signals. You said watchlist? GBPCAD hass just crossed up, so has EURGBP. So I watch until they give a valid signal.

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I treat every crossover as a potential pattern.

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OK, I understand. But then you can put every pair on your watch list since there will be always a crossover. Why did you put that pair in the watch list? Trying to understand your logic/thinking…,