HE IHFHIEH HUE

A blow by blow description of how to profit

from trading forex

on the one minute chart.
by
Derek Evans
13/08/12
Copyright Notice
All rights reserved. No part oI this publication may be reproduced or transmitted in any Iorm or by
any means, electronic or mechanical, including photocopying, recording, or any inIormation storage
and retrieval system, without permission in writing Irom the author.
Risk Warnings
High Risk Investments
Trading Ioreign exchange on margin carries a high level oI risk, and may not be suitable Ior all
investors. The high degree oI leverage can work against you as well as Ior you. CareIully
consider your investment objectives, level oI experience, and risk appetite. The possibility exists
that you could sustain a loss oI some or all oI your initial investment and thereIore you should not
invest money that you cannot aIIord to lose. You should be aware oI all the risks associated with
Ioreign exchange trading, and seek advice Irom an independent Iinancial advisor iI you have any
doubts.
Internet Trading Risks
There are risks associated with utilising an internet-based deal execution trading system
including, but not limited to, the Iailure oI hardware, soItware, and internet connection. These
Iailures are beyond the control oI the author so he cannot be responsible Ior communication
Iailures, distortions or delays when trading via the internet. Discuss with your broker emergency
telephone trading options Ior when you are subjected to an emergency.
Accuracy of Information
The content oI this book is subject to change at any time without notice, and is provided Ior the
sole purpose oI assisting traders to make independent investment decisions. The author has taken
reasonable measures to ensure the accuracy oI the inIormation in the manual, however, does not
guarantee its accuracy, and so cannot accept liability Ior any loss or damage which may arise
because oI your interpretation oI the content.
- 2 -
Preface - If it's so good, why are you seIIing it?
I have traded the markets Ior seventeen years. Over the last ten, it has been mostly Iorex. The
reasons are simple: it's cheap; it's accessible. There are no price gaps, except on weekends, but who
trades Iirst thing Monday morning anyway? I've made good money Irom trading and know that it's
possible to do it proIitably. But there is no doubt in my mind that trading now is a much tougher
game than it was 20 years ago. In the 90's I made good money using mechanical systems, now
cutely called robots. You'd laugh iI I told you how simple they were. Now they no longer work. It's
a lot tougher.
All mechanical methods eventually Iail, this is well documented. To survive, you need to inject
some creative human perspicacity and do something a machine can't. This in itselI gives you a real
edge, providing your emotions don't ruin it.
For me, it's almost time to hang up the mouse. The method described in this book is simple and
eIIective, and has served me well. There are no secrets here, and there are none in the market,
despite what some system vendors would have you believe when they claim to share their magic
methods. These vendors would have you believe that by selling you a trading Ferrari they can make
you a good driver. Believe it iI you will.
This method is not revolutionary, nor even evolutionary. It is a time proven trading system using a
combination oI a number oI simple and recognised market tools. It's Iun to trade once you get the
hang oI it because you don't need to hold on to trades Ior a long time to make a proIit. And iI you're
wrong, the pain is over quickly. It's very nice trading some days and being Iinished Ior the day an
hour or two aIter you started.
Over the years, and especially lately, I've been involved with teaching people about the markets.
UnIortunately, in my assessment many will never make proIits Irom trading. II you have been
chasing proIits unsuccessIully Ior a long time you should consider careIully whether you are one oI
those people. Some have wasted years trying, but ultimately Iail. Just because you're good at
something else doesn't make you a good trader. Don't Ieel badly about it. You're probably not a
concert pianist either. There are numerous reasons why not everyone can succeed, but that's not in
the scope oI this book.
The scope here is to give you a workable short-term method and provide you a good chance oI
proIits given suIIicient practice and application. II you don't apply yourselI, you won't make money.
It's pretty straightIorward. There is no shortcut.
I have seen hundreds oI trading methods and read many, many books. Once you develop a sense Ior
the market something only time and practice can give you you will realise that most so-called
trading methods use creative but silly tools that provide crutches Ior people who can't walk through
the markets without them.
I hope you Iind this method elegant in its simplicity. II you are a systems jumper (you know who
you are) please don't write this one oII as something rehashed that you've seen beIore. You see, it
works. II you do write it oII, do so Ior the right reasons. I don't mind iI it's because it doesn't suit
your personality, your eyes are Iailing, you hate computers or because oI some other reason that's
important to you. Please don't use your own Iailure as a reason.
- 3 -
Introduction
As the title suggests, this book is written Ior the reader who is an Impatient Trader. OK, others with
more patience are allowed too
1
.
Let's be quite clear Irom the beginning the trader who is impatient is usually a loser. But he's
convinced it doesn't have to be that way. Our impatient trader has spoken to other traders, has read
internet Iorums, discussed the markets with a broker or two and read quite a Iew books. All these
sources express the same opinion: there's no way to make consistent proIits on very short term
charts. That's because:
1. The spread is too big as a percentage oI your average trade and
2. There's too much 'noise in the charts.
The Impatient Trader doesn't want to believe this. Surely there must be a way to make money and
pack up beIore dinner too?
Consensus has it that traditional technical analysis is simpler on longer term charts., and true, you
certainly have a lot more time to analyse the situation. Many say that something like a channel
break on a Iib at long term support is a better trading signal on an hourly chart than a one minute
chart. By the end oI this book, you may not agree.
BeIore we start, let's get something straight. It is not easy to survive Iinancially Irom Iorex trading
alone. Perhaps you've tried, and (go on) admit it, trading Iorex is much harder than you thought. It
looked easy at Iirst. When it's going up, buy, When it's going down, sell. How hard can that be?
Well, iI you've had any sort oI practice, I'm sure you know exactly how hard it can be. I Iirst tried it
years ago, well beIore retail Iorex allowed trading such tiny amount as now. I cut my teeth (and my
wallet) on Dax Iutures. Try doing that as a novice. There was no 10c a pip in those days. Worse, I
had to make a phone call to place a trade. The Dax trades at t12.50 a tick but oIten moves several
ticks at a time. Back in the old Deutsche Mark days the tick size was double that. It's not Ior the
weak.
II you truly are an impatient trader, you will Iind this method useIul. As you develop with the
strategy, I hope you build your patience and your selI control. Trading short timeIrames is not about
being in the market all the time any more than it is on longer timeIrame charts. It's still about
patience, patience, patience. Wait Ior the right setup and strike. It's nice that on the one minute, you
don't have to wait Ior so long. So there. The Impatient Trader needs some patience.
I don't discuss the basics oI trading in this book you can learn that elsewhere. I also don't discuss
brokers or where you should open your account. You can do that research yourselI. I would rather
give you a shorter book more to the point than endless repetition oI what you've already heard
elsewhere. So let's get started.
1 And will probably do better!
- 4 -
Quick start
Here's the nuts and bolts oI the method so you get an idea oI where we're going.
I can't completely describe all the nuts and bolts in a couple oI sentences, even though it's quite
simple. But here it is anyway. You'll need to read more, later in the book. This describes buying the
market. II you're selling, stand on your head.
1. Use an indicator to decide when to look Ior buy trades.
2. Wait Ior a discernible support area to appear.
3. Look Ior a good resistance line, usually diagonal.
4. Make sure the trade has space to move in the direction oI the trend.
5. Enter at market (or stop) when the resistance line is broken.
6. Target old highs, pivot levels, channels or some other expected resistance where the reward
is at least as much as the stop loss.
7. Minimise the stop loss when appropriate.
That's it. So it's the old trend/pullback/resume (TPR) method. In the opinion oI many successIul
traders, the saIest and best method oI trading.
The exact implementation oI this old method diIIers, oI course, Irom one system to the next. Using
this one, you're going to catch some great moves but you're also going to miss a lot. Winning at
trading is not about getting on to every trend. It's about your account moving steadily Iorward over
time. Once you can do that consistently, you are Iinancially a Iree man. Or woman.
This method is one implementation oI TPR. Read on to see why it works so well.
- 5 -
What it takes to be a short term trader
To be a short term trader takes almost exactly the same personality attributes that it takes to be a
longer term trader. It's a sad Iact that most losing traders progressively reduce their chart timeIrame
as they hope to improve their results. Making the timeIrame shorter gives the illusion oI being
closer to the markets and making stop loss sizes smaller but decisions Iaster.
UnIortunately, this approach rarely works and in Iact usually has the reverse eIIect: more trades and
more Irequent losses. This will accelerate the psychological damage to the poor trader's brain and
cause more Irustration and anger. Have you Ielt that way at all yet?
As with all styles oI trading, you must be patient and wait Ior the right setup. So much Ior our
impatient trader - there's that P word again. Sorry, it seems that The Impatient Trader was just a
catchy title.
Yes you need patience, but on the one minute chart you must strike very quickly when the
opportunity presents itselI. There is no time Ior doubt.
Hallucination
A major beginner's problem is hallucination. Hallucinating in this context means identiIying
opportunities that are simply not there. Waiting can do that to you. It's better to let a setup go iI
you're not sure, there are quite a Iew each week that will knock you over. You're not in this to
gamble. Once you practice Ior a while, the good setups will start jumping out at you.
Some days, I see no setups at all. My wiIe used to ask me each day "How did you go today?" and
sometimes I replied that I hadn't taken any trades at all. She thought I was crazy sitting there
looking at a computer screen so long, doing nothing. But you have to. I was trading a system. I was
sticking to the rules.
With reIerence to the rules, there's no point taking trade setups that you haven't researched, although
every trader I've ever met has done so. I've done it many times, thinking I was smart, and had my
smartness handed back to me in a big way. Absurdly, I've even thought "I'm not taking that setup,
it's too obvious, the smart money will Iade it" only to see the trade be a spectacular success - two
hours later its up 80 pips. The next day its up 200. Oh, brother. No wonder robots are popular.
Better to lose your money without the emotion.
Fundamentals
To be a short term trader you don't need to have the slightest interest in economic Iundamentals.
One nice thing about the one minute chart is that Iundamentals play a very small part. The longer
the timeIrame, the more economic Iundamentals are evident. Many major market turning points on
long term charts can be attributed to Iundamental events such as interest rate changes. The
Impatient method on the other hand is purely technical, so it's perIect Ior traders who don't want to
be concerned with the economics. It is good to understand, however, that the bias is down on the
AUDUSD when, Ior example, commodities demand is Ialling. The Iundamentals can encourage
you to hold a trade a little longer than you might otherwise. That's about it.
- 6 -
The trader quiz
II you really want to test your aptitude Ior this, you may like to take the quiz that was devised by
Bill Whisenant. Bill is doctor in clinical psychology and a trader, trading coach, and instructor.
It's best iI you can honest with yourselI about the answers!
1. Do you worry a lot?
2. Do you remain calm and relaxed in tense situations?
3. Are you a trusting individual?
4. Do you drive at or below the speed limit most oI the time?
5. Are you a perIectionist?
6. Do you work on a project Irom start to end beIore beginning another one?
7. Do you like to complete projects?
8. Did you do well at school, that is, do you possess above average intelligence?
9. Do you like maths or are a good problem solver?
10. When driving and the stop light turns green, do you accelerate Iaster than the car next to
you?
Go to the Appendix 1 to see how you Iared.
- 7 -
Trading pIan
There's enough already written on this subject to compete in volume with War and Peace, so I'm not
going to add much to it.
Above all, you must:
Make a plan and stick to it.
II you spend time building a plan, then revising a plan, then adjusting the plan, you owe it to
yourselI to use it the way you designed and built it. It is sheer Ioolishness to change your plan in the
middle oI a trading session. Trading sessions are Ior trading, not Ior planning. II you decide you
hate your plan aIter you have a couple oI losses, stop trading Ior the day. Revise the plan later, not
when you should be trading.
I want you to read the next line careIully.
You don't need to make a huge tally of pips to make a living out of this game.
With this strategy, stop losses are usually between 10 and 20 pips and typical proIits 15 to 50. On an
average week, set yourselI a reasonable goal oI, say, 50 pips. II you like weekly goals, that is.
You might think that's laughably small. Read on.
To be even more conservative, I'd recommend trading just one Iull size lot ($US10/pip) Ior each
$20,000 in your account.
This may not sound much, but consider this scenario. The numbers are simpliIied and rounded
down Ior convenience.
Starting account size: $20,000
ProIit: 200 pips a month
The Iirst month's return trading one lot is $2,000, or 10 return, assuming you keep to one lot all
month.
II you don't draw anything out oI your account, by the 12
th
month, with compounding and still
trading one lot Ior each $20,000 in your account, you will make $5,700 Ior the month.
That's not bad Ior a part time job.
OI course once you are more proIicient you can increase your trading size. Work out how much you
would make in your 12
th
month trading one lot Ior every $15,000 and averaging 75 pips proIit a
week. AIter 12 months you're talking big numbers
2
. It's deIinitely worth practising Ior.
2 OK, it's scary. It's $29,720, part-time.
- 8 -
Charting tooIs used in this book
Charts in this book are marked consistently to make them easier to interpret. We use only a small
number oI tools, so virtually any charting program will do. Occasionally you need to Ilip to the
higher timeIrames, so use a program that makes this easy.
The small number oI tools used keeps the decision-making process simple. Here they are.
Horizontal support and resistance
One oI the most important components oI this trading system is support and resistance. These terms
are widely used and understood iI you need a reIresher, here are a couple oI links where you can
get that:
http://www.babypips.com/school/support-and-resistance.html
http://www.investopedia.com/articles/technical/061801.asp#axzz1bIRlPzvl
These price areas are marked using a grey shadow. We look at higher timeIrame charts as well as
the one minute chart. It is usually easy to tell when you Ilip back to the one minute when a price
area has been previously marked on a higher timeIrame as the shaded area is usually much taller
than the areas that have been marked on the one minute chart. These areas are sometimes labelled
R1, R2 and S1, S2 etc to make it easy to reIer to them in the text.
The chart below shows examples oI support and resistance with typical labelling.
- 9 -
Diagonal trendlines
Trendlines represent diagonal support and resistance areas and represent less important turning
points than the horizontal areas.
Trendlines are almost always used Ior our trade entry trigger. (Except in the case oI a horizontal
breakout, which is much rarer).
You need to be aware that trendlines can be quite unreliable, particularly when trying to Iorecast
trend changes. The main problem with trendlines is that each trader can draw diIIerently what
should be the same trendline. Taking that into consideration, we try to avoid those that are simply
too ambiguous. They don't always look as clear as the one in the chart below.
These lines are marked in orchid, which is a light purple colour.
- 10 -
Pivot lines
The daily pivot point is a price level based on the average oI yesterday's high, low and closing
prices. Additional levels oI support and resistance are also calculated. These are shown as horizontal
lines on the chart. The prices change each day, as the day changes the pivot points are recalculated.
Because Iorex has no daily close, there is some disagreement as to what constitutes the 'end oI
day. The three most common claims are:
4pm New York time;
5pm New York time;
Midnight GMT.
We use the 5pm New York time. II you're interested in the calculation oI the pivot points, visit this
link http://en.wikipedia.org/wiki/Pivotpoint. We use the most common method oI calculation.
Conventions:
Daily pivot is blue, and labelled "D PP"
Daily support levels are green and labelled "D S1", "D S2" and "D S3".
Daily resistance levels are red, and labelled "D R1", "D R2" and "D R3"
Pivot points sometimes act as good support and resistance levels, as in the chart above. The most
popular use is as targets Ior a winning trade, or as a level to place a stop loss behind. A bounce oII a
pivot level may help convince us that a particular trade setup has more validity, as below.
- 11 -
In this example, you may have Ielt comIortable selling this pair aIter watching the price action in
the blue ellipse having diIIiculty breaking above the D S1 line.
You would have been right: the price dropped 50 pips in the next hour.
- 12 -
False breaks
The Ialse break is one oI the best leading indicators in the wonderIul world oI Iorex. It sometimes
precedes an absolutely cracking good trade.
In the chart below, many a breakout trader would be convinced that the breakout oI the circled
support level was an opportunity to sell. And on many other charts, they would be right. But not
here. This little shake-out probably triggered many stop losses Irom traders holding long positions
as well as new entries into short positions. We can see in hindsight that the real volume at this price
level was buying, not selling.
Sometimes using the Impatient trade setups you will get stopped out aIter a Ialse break. Other,
cheerier, times you will see a Ialse break away Irom your trading direction, and aIter its Iailure it
will make you psychologically stronger when (iI) you get a trading signal in the opposite direction.
Occasionally when we trade a break and get stopped out, the reverse trade setup is valid. II you're
nimble and have the Iortitude, you will oIten get your loss back and then some.
- 13 -
Other considerations and risk management
To keep things consistent throughout this book I use the 1 risk model. Every trade is deemed to
risk 1 oI the account balance.
You don't need to Iollow this personally oI course, and I don't myselI, but it's ideal Ior
demonstrating risk/reward. For example, iI a particular trade has a stop loss oI 15 pips and the proIit
made was 30 pips, then I call this a 2 winner.
II the same trade was a loss oI the Iull 15 pips then it is a -1 trade, or 1 loser.
Once you are practised, it is reasonable to expect about 5 per week with this method, without
working too hard. Work more hours and you could expect more. I have seen many days when it was
possible to make 5 on the day.
Counting pips the way that many systems vendors do has little signiIicance. Pips are not a
normalised measure oI trading perIormance. I saw a trading system vendor recently advertising a
method that made 2000 pips last month. What was not mentioned in the headline was the size oI the
stop losses used: oIten up to 500 pips. Is there any diIIerence between making 2000 pips using a
500 pip stop loss and making 200 pips with a 50 pip stop loss?
With this method you can expect to make 200 pips per month with usually less than 20 pip stop
losses. Which looks better to you?
- 14 -
Demonstration accounts
I'm not a Ian oI so-called Demo accounts. So many new traders make money on demo accounts but
Iail to transIer their success to live trading. As one oI my associates likes to say, "You'll never learn
until you get some skin in the game". He's right, oI course.
Use the demo account until you are comIortable with the technology and placing trades without
error. Then get a small live account. Many brokers today allow you to place trades with very small
risk. In advance, determine that you are willing to lose a speciIic amount oI money in your trading
practice and try to stick to it. II you can aIIord to lose $500 at $1 a pip in learning to trade this
method, it will probably be well spent. Once you are good at it you will Iind it hard to lose that
much.
- 15 -
The markets we trade and why
Trading the one minute chart takes concentration. Most very short timeIrame traders concentrate on
one market only, but because the Impatient setups are quite well deIined, you may Iind it
comIortable to monitor two markets.
We need to consider:
Spread When trading short timeIrames, the spread is oI utmost importance.
Volume Generally speaking, the greater the liquidity, or volume oI trades, the smaller the
spread.
Volatility Some currency pairs are very liquid but have small trading ranges. This is oI no use
to the Impatient Trader.
News The impact oI news is diIIerent on diIIerent pairs. News spikes are very unpleasant
on one minute charts.
To assist in the choice, there are two charts and a table to consider.
This Iirst chart shows that by Iar the busiest Iorex centre is the United Kingdom, Iollowed by the
USA. All other trading centres are much smaller, although Others is quite large, but we can only
guess where that might be.
Market activity is typically highest at the open and close oI trading sessions, so we can inIer that the
best times oI day to trade are at the UK open and close. As the UK is also trading during the US
morning, the highest volume oI trading activity is during the Iirst hour or two oI the US session.
On many days however, the biggest moves come during the London open. II you are a resident oI
Australia, this is quite convenient, as it is in the late aIternoon.
- 16 -
We want to trade the most liquid market and at the busiest time oI day. It makes sense, then, to see
what the British like to trade. The Iollowing chart shows typical volume traded in the UK by
currency pair.

The table below lists in pips the rounded 100 day average range oI each oI the most liquid markets
in the chart above, as oI the time oI writing.
Currency Pair Avg Daily Range
EURUSD 180
GBPUSD 145
USDJPY 65
AUDUSD 155
USDCHF 145
EURGBP 80
USDCAD 110
EURJPY 155
EURCHF 185
Going Iurther down the liquidity list leads to unacceptable spreads.
- 17 -
From the three above illustrations, we choose the EURUSD as it is the most liquid market by Iar
and is close to the most volatile during the times we should trade.
This market also stacks up very well with our Iourth criterion, the news. During the London open
the UK news has a much more proIound eIIect on GBP pairs than the European news has on the
EUR pairs. This is one oI the blessings oI so many countries using a common currency. Most Euro
news can be ignored, with the exception oI German news.
This EURUSD, then, is the market oI choice. Fortunately (or consequently?) the EURUSD is also
generally considered the most trending oI the currency pairs. This suits our purpose nicely as the
Impatient technique is a trend Iollowing one.
II you choose to trade only the EURUSD then you have made a good choice. With this method
there is no need to trade more, although adding a second market may better maintain your interest.
Choosing a second market to trade is not so easy.
Using the second chart, we should choose Irom:
GBPUSD This one is something oI a renegade during the London hours. It can be extremely
choppy and move against conventional wisdom. It's daily range used to be greater
than it now is.
USDJPY This market can be rejected immediately as too boring. There simply isn't enough
movement on a minute by minute basis to warrant trading it.
AUDUSD Also a trending market, the Aussie can have periods oI extreme boredom but also
times when it is very volatile. It tends to move less erratically than Cable.
USDCAD The bulk oI trading in this pair is done during the US session. It can be diIIicult to
trade on very short timeIrames and is not usually volatile enough.
EURJPY This pair shows good volatility but is oIten too closely correlated to EURUSD to be
considered as a second choice.
USDCHF Recent volatility is not typical oI this pair and it has traditionally been a mirror image
oI the EURUSD. This must be rejected Ior the same reasons as EURCHF below.
EURGBP This could be an interesting pair to trade were the daily range better. But it isn't, so
we reject it.
EURCHF The current volatility oI this pair is not backed by history. The EURCHF in early
2010 had an average daily range oI just 45 pips, now it's 185. The variation in this
pair's average daily range makes it a diIIicult choice.
The choice, then, is between GBPUSD and AUDUSD. Spend Iive minutes looking back at one
minute charts oI each pair and I expect you will come to the same conclusion I did: the AUDUSD
wins Ior trending. Likewise, during the London open the AUD pairs are not oIten heavily aIIected
by news releases.
Caveat: The pairs we trade are not Iixed Iorever. Each month you should check the volatility oI
each pair and look at some one minute charts. Things change. Look Ior smooth trends and good
ranges. We choose markets with a minimum oI choppy days. It is quite conceivable you could trade
more than two pairs using this method so long as you have the computer real estate Ior it.
- 18 -
CorreIation
II we are to trade two markets then we need to be aware oI the correlation between those markets so
we don't inadvertently increase our risk by trading both at the same time.
Correlation reIers to how closely two currencies stay together or diverge. II currency A and B are
observed to move up and down in value together compared to others, then we can say they are
correlated. Correlation between currencies changes over time. For example, the Euro and Swiss
Franc used to move in harmony much oI the time, and then they diverged Ior a while until the Swiss
National Bank intervened to put a lid on the price oI the Franc against the Euro. Correlation is
constantly changing and can be measured statistically, Ior example, at this website.
The correlation between two currency pairs is measured by the movement oI the cross pair between
the two. In the EURUSD and AUDUSD pairs, the Euro and Australian dollar are both being priced
against the US dollar. Remove the common USD Irom both and we are leIt with the currency pair
EURAUD.
Checking the EURAUD chart shows (at the time oI writing) an average daily range oI about 100
pips. The greater the daily range, in general the lower the correlation between AUDUSD and
EURUSD. This range is perhaps not as much as we would like, and it indicates that sometimes the
two charts we are watching will be moving similarly.
II that is the case, be cautious about trading both markets together. You may be eIIectively doubling
your risk iI you do. Sometimes the two charts look very similar, other times, not at all.
On the other hand...
Correlation can be quite helpIul. Even though both markets are moving together, one will oIten
present a trade setup more clearly than the other. The clearer the trade setup, the greater the chance
oI success. You will see this happening almost every day.
- 19 -
The tooIs of the trade
You don't see too many carpenters using $2-shop hammers. A cheI is passionate about the knives he
uses. II you want to be a proIessional, you must have good tools. But don't go overboard, you don't
need to have NASA-rated computer horsepower. The soItware used in trading places very little
strain on a computer. On the other hand, trading the one minute chart Irom a small laptop screen is
doing a disservice to yourselI and your eyes.
To trade short timeIrame markets you will make your liIe a lot easier, not to say improve your
results, iI you have a minimum oI two computer screens. You need at least one monitor dedicated to
the charts and another Ior everything else. Evervthing else can be market news and other research,
or anything you are working on while waiting Ior trade setups. Watch movies, play sudoku, but you
really don't want to be switching back and Iorth between screens while you are waiting. It's a
guaranteed way to miss trades.
II you are trading more than one market you should consider a third screen. I personally like to use
the whole screen Ior a single chart but you may not Ieel the need to.
- 20 -
Setting up the price chart
For clarity in the book, the charts are shown in simple black and white. Colours are reserved Ior
marking up the charts.
These are the conventions.
Chart background White.
Up candle Black outline with white body.
Down candle Black outline with black body.
Trendline Orchid (light purple), thickness second Irom skinniest.
Buy marker A short green horizontal line. A buy is also an exit Irom a short trade.
Sell marker A short red horizontal line. A sell is also an exit Irom a long trade.
Stop loss A horizontal black line.
Text Is written in brown.
Highlights Are marked with a blue ellipse.
Here's an example chart using all the annotations:
- 21 -
Indicators
The only wiggly line indicator required is a 200 period Exponential Moving Average (EMA). This
is charted in blue, Ior no special reason.
A wise old trader once told me that iI you were going to use indicators, you only ever needed two.
One to tell you which direction to trade, and the other to tell you when to do it. He said iI you
couldn't trade with two, you still wouldn't be able to with ten. This is debatable, as sometimes
indicators can be used Ior other reasons, such as to show daily range or a longer term trend.
Regardless oI that debate, this method uses the 200 EMA as the direction indicator. The price
usually moves better in the direction oI the prevailing trend than against it.
This is a trend Iollowing technique.
The 200 EMA has been chosen through trial and error, by empirical chart use, simple observation. It
is a commonly used EMA on longer term charts but lends itselI well to this timeIrame too. The one
minute chart is prone to sharp movements, so a shorter period EMA is too jittery. A longer period is
too unresponsive. II you are brave, experiment with other periods such as 100, 150, 250 or 300. It's
what you get used to. Whatever you do, don't change the EMA period when you have had a couple
oI losing trades. Then you're on a slippery slope down. Make your research much more bullet-prooI
than that.
A word on Contrarian Trading
Contrarian traders say their trades are inevitable there will always be a retracement. That's true,
but picking exactly when can be a real challenge. You must be prepared to be wrong, and oIten. The
most compelling reasons and chart setups Ior counter-trend trades can be overwhelmed by even a
moderate trend. Counter trend trading is best done at strong support and resistance areas when the
market is seriously overbought or oversold, and that is not a subject discussed here.
- 22 -
The price on the above chart crosses above the 200 EMA early on, so look only Ior long trades as
the trend is clearly up. Buy entries should not be taken below the blue line, nor sell entries above
the blue line. Sometimes the market is oscillating around the line. In this case extra caution is
needed because oI the lack oI momentum, but trades can be taken in either direction iI the setup
pattern is good.
- 23 -
ScaIe the chart
I had been trading a while beIore I learnt this trick.
Most charting programs by deIault automatically scale the chart to Iill the screen, no matter what
the trading range. So on a big trending day the chart might look like this:
And on a choppy, narrow range day the chart looks this way:
- 24 -
The problem is that the Iirst chart shows a move oI 200 pips, and the second, which seems to show
a massive sell oII and recovery, has a total range oI less than 40 pips.
Another chart problem that used to mess with my head was this type oI chart.
The problem here is that the right hand side seems to show the price is as low as it can go there's
no room on the chart Ior it to go lower. This makes me want to buy this market, even when there is
no chart logic to support that thought process. This pair, Ior example, moved down 100 pips in the
next hour.
This problem can be solved iI we consider the average daily movement oI the currency pair.
- 25 -
Average daiIy range
Although every day is diIIerent, each market has it's own average range and this varies over time
depending on current market volatility. I keep an eye on this as should you. Not every day, but
perhaps once or twice a month. The average movement a pair makes in a day helps me resize the
charts when I'm trading.
I am much more inclined to sell the market when the chart looks like this.
...even though this is exactly the same chart as on the previous page. It is simply re-scaled to show
the average daily range oI the pair between the top and bottom oI the screen.
It's now easy to see that this pair is nowhere near its daily range and has plenty oI room to move
either up or down on the chart.
NOTE: For the sake oI clarity, the example charts in this book are not usually scaled. This is simply
to make the chart patterns easier to see.
- 26 -
The trade entry
The 200 EMA determines the direction to trade.
A breakout Irom a chart pattern is the trigger to enter.
We look to buy only when the breakout occurs above the EMA.
We look to sell only when the breakout occurs below the EMA.
Breakouts on longer term charts take a while to come along, but on one minute charts most days
you'll Iind several good entries.
Use any recognisable and well known chart pattern, such as:
Trendline
Channel
Wedge
Flag
II you don't know what these patterns are, don't worry, there are plenty oI examples on the
Iollowing pages. The names are not important anyway.
The more structured or obvious the chart pattern, the higher the probability that the trade will
succeed. Don't try to be clever and draw trendlines several ways. II the trade setup is ambiguous,
you might want to pass on it, even iI later it turns out a winner.
Remember that bad setups and even totally random trades can provide big rewards. You can't say a
particular type oI setup is good until it has proven that it works over a whole series oI trades. Don't
be Iooled by one or two good trades, or even several wins Irom poor setups.
With practice you will improve at recognising good setups, but as the examples at the end oI this
book show, some setups just scream to be taken. This doesn`t mean they are guaranteed wins that
can never be. But they will improve your hit rate.
Getting value
When you buy anything, you want to pay a Iair price or even get a discount. You don't usually want
to pay top dollar.
We never need to pay top dollar on the one minute chart. Entering close to the EMA is where the
value is. Entering when the price has already moved away Irom it means you're not getting as good
a price as you could. You want to be able to sell your position out at a higher price (iI you've
bought) so there must be others willing to buy Irom you. II you can't see the price has room to move
up, don't buy it.
You want to be like a retailer. Buy at wholesale price and sell at retail.
- 27 -
Entry step 1: The baseline
Let's talk about a buy trade, understanding that the logic is reversed Ior a sell.
The market is more likely to go up iI it has tried to go down and has Iailed. Combine that with the
discernible edge oI trading in the direction oI momentum and you have a Iormula Ior proIitability.
The Iailure to go down can be deIined in a number oI ways, but some pattern is necessary so the
opportunity becomes apparent. Not just apparent to you, but to other breakout traders as well.
This lower line is called the baseline. II this is present and obvious, traders are more likely to Iavour
a trade in the opposite direction.
The baseline also helps to answer that other dilemma: When is the retracement over?
II there is no recognisable base Ior the trade, we can't tell when the trend is likely to resume. A
baseline helps deIine the limit oI the retracement. UnIortunately it doesn't happen on every
retracement, and on some it is clearer than others. But luckily, trading every trend and every
retracement is not required and you can still proIit handsomely with just a Iew occasional good
setups.
I use the term baseline Ior both buy and sell trades, even though the strict meaning oI the word is
usually taken as something below, not above. It saves having two diIIerent terms.
This is the part that most people get the wrong way round. There has to be more than just a breakout
to enter the trade. What we're looking Ior Iirst is a solid place to place the stop loss. We want the
market to declare its local support or resistance Iirst, beIore we take a trade.
When the market is above the blue line, we look Ior a price base to be Iormed near or even just
below the blue line.
You may see what appears to be an absolutely perIect breakout buying opportunity, but unless the
market has declared a support base Ior the trade the chances oI a reversal are increased. In the chart
below, the market has shown at a number oI places that the price is supported at the grey shaded
area it has deIined the baseline.
- 28 -
The subsequent price break upwards is Iollowing the trend and bouncing oII a strong base, so it is
more inclined to attract trend traders.
Until you see a good base, you should exercise care. This is not to say no trades are successIul
without a good base, but your odds oI success are simply improved iI it is present.
The baseline is drawn as a grey shaded area iI it is horizontal. II diagonal, it is drawn as a trendline.
In general, the horizontal is preIerred, but a good diagonal in the right place can provide an
excellent trade.
- 29 -
Entry step 2: The breakout line
Once a baseline is in place, we need a sensible place to take the trade, it can't be arbitrary. It must be
located where other traders recognise the potential move ahead.
The simplest breakout comes Irom a trendline. This is what traders like to see and can recognise.
That's the trigger. The break oI a trendline.
The trendline does not have to be perIect. What's important is this:
For a buy trade, there needs to be two lower or equal highs in the retracement.
For a sell trade, there needs to be two higher or equal lows in the retracement.
A line has two ends, so you can draw a line though any two points on any chart. This can't have any
validity. To be valid, diagonal lines need three price touches, or two lower highs Ior a buy trade.
This way, other traders can identiIy the pattern and watch Ior the breakouts too, and when they also
buy the market it helps the price move quickly away Irom the chart pattern.
The breakout line is nearly always denoted by a trendline.
For a buy entry, the breakout line must be horizontal or sloping downwards towards the right
hand side of the chart.
For a sell entry, the breakout line must be horizontal or sloping upwards towards towards the
right hand side of the chart.
- 30 -
In the example below, the breakout line and the baseline had to develop together as the pattern was
much smaller. It took a while to get going, but eventually there was nice proIit.
Notice how the size oI the base and the breakout lines are in proportion. It's doesn't make sense to
have a baseline that takes two hours to develop and then use a ten minute breakout line. It simply
doesn't look right on the chart. The patterns have to be recognisable to others, not just you.
- 31 -
Entering the market - the order
II you are Iocused and have your wits about you, you can enter with a market order. Providing you
are not prone to hesitation.
Personally I Iind this places undue stress at the time oI entry. I have made my decision to enter on
the break and I don't want to be vacillating when it happens, and I deIinitely don't want to be
looking the other way.
Because oI this I preIer a stop entry order. II your charting package allows it:
When you are looking to buy the market, plot the Ask price.
When you are looking to sell, plot the Bid price.
Doing this will make it easier to decide the price oI your entry. As you are usually entering on a
diagonal line, as the pattern develops your entry price will get closer. Every Iew minutes you will
need to adjust it, and more regularly iI the breakout line is steep.
Each entry is a little diIIerent, but you need to be sure the breakout has deIinitely happened beIore
you enter. I used to be caught oIten jumping the gun through impatience, only to see the pattern
hold and turn the other way. Give the market a couple oI pips Irom the breakout line beIore you
enter.
It's better to enter a little late than too early. OIten when the breakout occurs the price moves very
quickly because oI stop orders being Iilled. II you are waiting to pull the trigger manually and
you're not snappy enough you may curse because you Ieel you've missed out. Don't despair, many
times the price will brieIly retrace or pause to give you a second chance at entry.
The best entries
SatisIy all these conditions and you're in with a good chance oI success.
A well-deIined baseline develops near the blue EMA.
A well deIined breakout line Iorms with the anticipated breakout position still quite close to
the EMA.
The EMA is noticeably sloping in the direction oI the pending trade.
The time is within the London session.
There are no imminent scheduled news releases to aIIect the price movement.
The market has not already been trending Ior hours.
- 32 -
Entry example 1
First, let's look at a rather extreme example to demonstrate this concept.
In the chart below, aIter rising strongly at the Iar leIt, the price has settled into a sideways pattern.
The 200 EMA is running through the centre. There are two things oI note.
1. The price has tried several times to go down below the daily pivot (horizontal blue line) but
each time has quickly recovered. The grey shaded area highlights this.
2. The price is Iorming a diagonal trendline along the top, the range is narrowing, meaning
trend traders are getting bored and range traders are having Iun.
The price has Iailed to go down and also Iailed to go up Ior about Iour hours. It had Iormed a
triangular Ilag shape. At the start oI the Ilag, the price range is about 30 pips.
Like I said, this is an extreme example. You usually don't have to wait this long Ior a trade and most
patterns are much shorter.
As the price entered into this consolidation phase Irom the bottom leIt oI the chart, this is
considered a bullish chart pattern.
The next chart shows what happened over the next Iew hours.
- 33 -
The entry to this trade is taken as soon as the price breaks out oI the Ilag. There is no need to wait
Ior breakout/pullback/conIirmation. You will miss some good trades iI you do that. OIten these
breaks on the one minute chart happen quickly and sharply.
AIter breaking out oI the Ilag, the price continued the upwards Ior over 60 pips, or approximately
double the height oI the widest part oI the Ilag. It eventually stopped the uptrend just one pip below
the D R1 pivot level. The stop loss (discussed later) would have been 20 pips, so the trade could
have netted three times the stop loss, or 3 return.
- 34 -
Entry example 2
Here's an example with both an upper and lower diagonal.
The price touches the upper line three or more times and does the same on the lower line (blue
ellipses). This pattern also took quite a long time to develop, about an hour and a halI. But by that
time it was so easy to see and the breakout was very powerIul. The trade would have returned 2
very quickly, and by holding on longer through some retracements, 3.
UnIortunately Iabulous patterns like this don't happen every day, but they certainly occur every
week. How many per week do you really need iI you can make 2, 3 or more return on each?
II you look again at this chart, you may be able to see another trade opportunity at the leIt hand side
oI the chart. The next chart may make it easier to see. It is the same chart but scrolled to the leIt and
hour or so. Try to identiIy the trade entry on the chart below beIore proceeding.
- 35 -
Can you see the trade setup in the centre oI the chart?
The answer is shown on the next page.
- 36 -
The breakout line here is horizontal, and the baseline is showing the direction oI the trend, and
almost parallel to the EMA.
In both oI the trades on this chart, the price pattern ignored recent high price extremes at the price
peaks labelled '1' and '2' in the chart above. Evidence suggests this is clearly all right. It's not really
important what the market did beIore the pattern Iormed.
- 37 -
Entry example 3
Entry chart patterns do not always take as long to develop as as those in examples 1 and 2. The
Impatient Trader could be excused Ior not wanting to wait that long. Example 3 is a tiny pattern that
developed in less than 30 minutes.
Small patterns such as this one come along quite regularly. This particular example is worth
examining more closely by zooming in.
- 38 -
When we zoom, two points are highlighted:
1. The channel is not absolutely perIect. It rarely will be. Top to bottom is less than 10 pips, so
all the market participants would have to be placing their trades very accurately indeed Ior
the channel to be perIect. II you are waiting Ior a perIect setup, you probably can't see the
wood Ior the trees. Zoom out and it looks just Iine.
2. Secondly, the entry is marked just above the high price oI the last touch oI the upper channel
line, labelled 'p1'. The horizontal black line marks this level. II your calculated entry price is
very close to p1, consider putting it just a little above ('a little' varies with the scale oI the
chart) to avoid a potential double top. II doing this saves you just once every ten trades
you'll be glad. In many trades the diagonal breakout line is steeper than in this example and
the question does not arise.
- 39 -
Entry example 4 - Extending the breakout line too far
Time Ior a short (sell) trade example. This chart shows the loss oI momentum when the breakout
pattern is extended too Iar. Ideally, the price touches on the breakout line should be reasonably
evenly spaced, and the breakout should Iollow shortly aIter.
The breakout at point 4 is not in proportion to the spacing between 1, 2 and 3. The blue circle shows
the preIerred place Ior the breakout.
Conversely, sometimes the breakout comes very quickly aIter point 3, and this is acceptable so long
as there are three distinct touches on the breakout line and the base is readily identiIiable.
The spacing aIter point 3 is more critical than the spacing betweens points 1, 2, and 3. Sometimes
points 1 and 2 are made quite close to each other, and point 3 does not Iollow till sometime later. So
long as the breakout line is not extended a proportionately long time aIter point 3 the breakout is
valid.
The chart under Entry step 2: The Breakout line (Page 31) is an example oI point 3 being spaced
a comparatively long time aIter 1 and 2.
- 40 -
Entry example 5 - Going nowhere
Choppy sideways days come along regularly. This trade is an example oI just that. Even though it
was taken during the London session, the market was having one oI those lacklustre days.
Although the trade did eventually get into some proIit, it soon retraced. This trade is discussed again
later under Exits.
- 41 -
Entry example 6 - Pivot in the way
Pivot line ahead is a speciIic situation oI support or resistance being in the way that comes along
quite regularly.
Experience shows that a pivot line alone is not a good enough reason not to take the trade. A pivot
line with other support or resistance, however, is. The distance Irom the blue line is more important.
II the price is close, the presence oI a pivot line should not matter. II the blue line is Iurther away
then consider that other traders may be looking Ior a proIit-taking area, and the pivot line may be
used Ior that which could cause a reversal in the market.
In this chart the presence oI the red pivot line at the entry point didn't aIIect the trade outcome. Note
that the blue line was quite close and has a good upwards bias.
- 42 -
Entry example 7 - Unavoidable loss
This trade setup look reasonable but it just didn't go anywhere.
The breakout line was a little weak, but there's no denying the baseline both as a horizontal and a
diagonal. This trade was during a non-trending Asian session. Sometimes you just have to cop it on
the chin.
- 43 -
Entry 8a - poor breakout line but a good baseline
PerIection is hard to Iind. Sometimes you'll be tempted by less than perIection. As with any rule
based system it's important to know when taking a punt is a good idea, and this comes with practice.
II you are not conIident about bending the rules, then don't. There's no real need, but iI you are a
really impatient trader then I'm sure you'll be tempted by setups like the one below.
The problem with this setup is that the breakout line is arbitrary it really has only two points oI
contact. But the baseline is excellent, a diagonal with Iour discrete points oI contact. The price has
changed sides oI the EMA Irom top to bottom and the EMA is starting to turn.
Taking these trades is higher risk, so you may like to take a smaller than usual position size. You'll
see that the entry marked on the chart is just below the recent low point.
- 44 -
Entry 8b - poor breakout line but a good baseline
Here's another example oI a poor breakout line. The point being reinIorced here is that not
everything has to be perIect. This trade didn't go Iar, the time oI day was probably wrong (late
Asian) and the strange nature oI the breakout line with those long candlewicks may have scared you
oII. But there were two or three lower highs beIore the breakout, so technically the setup is valid.
Notice how the breakout line does not include the high price to the leIt oI the line. Draw the
breakout line as best you can through available price highs. II you don't like it, leave it.
- 45 -
Entry 9 - What's wrong with this?
II you go back to entry example 2 (page 36) you may notice that there was an entry setup prior to
the Iirst one discussed. Here's the same chart, showing the earlier entry.
There is little wrong with this setup. Both the baseline and the breakout line are well deIined. The
probability oI a successIul trade increases iI the blue line is sloping in the direction oI the trade and
when the breakout is close to it. The time oI day plays a part too, this trade setup came along a
couple oI hours beIore the FrankIurt open, a notoriously slow time oI day.
In this instance, the slope was good but maybe the breakout was a little too Iar away Irom the EMA.
Nevertheless this is a trade setup I would have taken, had it happened during the London session.
As a consolation, the stop loss was only about 8 pips, a symptom oI the time oI day.
- 46 -
Entry 10 - Oops, too soon
This one comes along quite regularly when the retracement hasn't Iinished, but there's still a good
baseline. I've expanded the candle spacing on this chart so it's easier to see.
The trade setup has a good solid baseline and an easily recognisable, although steep, breakout line.
Just beIore the entry the price makes a nice little Iake downwards at point 1, which is an
encouraging sign to take the trade when the price breaks upwards.
But the retracement downwards was not yet over, and iI you had placed your stop loss just below
point 1 then you would have been stopped out at point 2.
Then the market thumbs its nose at you by moving upwards.
II you think the pattern is still valid you can enter again aIter point 2 at the second green mark, but
don't underestimate the psychological strength it takes to do this. New traders will probably miss it.
See how point 2 is supported by the extension oI the breakout line. II you had seen that as
conIirmation you should be much more likely to re-enter the trade.
- 47 -
Entry 11 - And what's wrong with this?
You need to exercise some common sense when looking at entries. This chart shows an entry that
just didn't work out.
This is a poor entry because:
The price was a long way (comparatively) Irom the EMA.
The market had had a long run down and needed to retrace more. The retracement is caused by
sellers taking proIit Irom earlier sell trades, and by speculators gambling oI the market bouncing up
aIter the big Iall. This entry is just too soon aIter the market moved so Iar. Ask yourselI: "Who's
going to be selling it here?" Is this price a good deal? Is it value?
Now see iI you can spot a much better entry on this chart. Here's a hint: it's a sell near the blue pivot
line.
- 48 -
Non entries - setups that never produce an entry
Example 1
II you trade this method even Ior a couple oI days you will see that there are many good setups that
simply do not produce a trade opportunity. The chart below is an example oI this.
The shaded area shows a good baseline Ior a short trade, and the trendline is a good breakout line.
At circled area 1, the price moves up and Iails, beIore bouncing oII the breakout line again. We
could be excused Ior getting excited that a great selling opportunity was imminent.
In this example, you should have had your trade entry order in place about a pip below the last
touch oI the breakout line. As it was not hit, the order would have to be cancelled once the price
started moving upwards and the pattern invalidated.
- 49 -
Example 2
Here's another example oI a trade that never happened. This setup took two hours with no outcome.
On the above chart, at one point the price breaks above the breakout line but Iails. Could this have
been considered an entry opportunity? Below is that setup, with the right hand side removed.
- 50 -
What is your impression oI this opportunity? Is the baseline strong enough? Are the touches on the
breakout line convincing? Does the chart pattern stand out? The answer to each oI the questions is
probably no. This is not a good trade setup.
Later on the same chart a second entry opportunity arose, as below.
Here, the situation is more ambiguous. The touches 1,2 and 3 are quite evenly spaced. The baseline
is good. The triangle pattern is easy to see.
This would have been a losing trade had it been taken. What could have alerted you that this trade
may not work?
The easiest answer is at the entry price, which should have been set just above point 3. The price
never made it there, so the trade would not have been taken. Setting the entry price very
aggressively to get in at a better price can sometime backIire on you.
Because this chart is not scaled, the breakout looks more convincing than it really was. The same
chart is shown below, but rescaled the way you should do when you are trading.
- 51 -
Now it's quite easy to see that it would be sensible to wait Ior the breakout above point 3 beIore
entering the market. The breakout line has a very shallow angle and very little oI the trade is being
given away by waiting.
- 52 -
Protecting your capitaI - the stop Ioss
The most important rule is this:
Never place a trade without placing a stop loss at the same time.
It seems like common sense, but it is violated so oIten. There is no reason not to do it, so do it. You
can see these trades coming many minutes in advance so you always have plenty oI time.
Stop loss placement
The placement oI the stop loss is usually quite easy. The market has already demonstrated that the
baseline is an area oI support or resistance, so logically the stop loss should be placed behind that
line.
This is sensible Ior many trade entries, and especially those where the baseline is horizontal or the
breakout line and the base line are converging, as in this example.
Always place the stop loss behind a recent high or low point. In the above example, a double top
(shaded) is used, and the stop loss is placed a Iew pips above that.
- 53 -
OIten the EMA will be in the vicinity oI the stop loss placement. In most cases it can be ignored, it
doesn't really have much support or resistance value.
In this chart, the stop loss is again placed a Iew pips below the support area. Because the support
(grey shading) is a little less exact in this example, the stop loss line is a Iew extra pips away.
Many trades, aIter the entry, never challenge the stop loss so its positioning is oIten not as critical as
you might think.
The use of the stop loss
A trade that works usually works soon aIter entry. It may not go Iar initially, but iI it is going to
work it will not go near the stop loss.
II a trade makes a weak start then retraces against you, you should be on the alert to exit the trade
beIore the stop loss is reached. The stop loss is a worst case scenario, a place used to measure your
trade reward/risk perIormance. Losses do not always have to be 1.
Let's repeat that Ior clarity:
Most losing trades can be exited before the stop loss is hit.
There.
Stop loss in channels
Sometimes a channel is too wide or angled the wrong way to allow placement oI the stop loss way
on the other side oI the baseline.
In this case a little common sense is needed. Look Ior some other local support (or resistance Ior a
sell) that can be used. Is there a pivot line handy? Any other diagonals? Even the blue EMA? There
is usually something that can be used. II there isn't you have to consider passing on the trade.
- 54 -
This channel is very wide and steep. It's probably not a great trade setup, but it serves the purpose
here. Placing the stop loss above the top channel line is impossible, but there is a convenient triple
top within the channel (blue ellipse). It's a logical place to use. The stop loss is beyond that triple
top.
- 55 -
Exits
Profit taking
The age old question is this: set a proIit target or trail a stop loss?
I am a Ian oI setting a target according to how the trade develops. II the price moves very slowly
aIter entry and a new session is not starting, and there is nothing to make you suspect the price
action could get more volatile, then take a close target.
II, on the other hand, the market has been volatile and the trade takes oII nicely aIter you enter, hold
on Ior better proIits.
The nice thing about taking proIits is that it's a good decision to have to make. Either way you
should come out in Iront.
The first pull back
This is important.
Some traders dislike breakout trading because very oIten almost immediately aIter entry the trade
gets only brieIly into positive territory beIore moving back negative. To the novice, this can cause a
panic and a premature exit with a loss.
By examining charts and breakouts, you should be prepared well in advance Ior this. I've put the
next line in bold because it's verv important.
Be prepared to sit out the first pullback.
II you can't stand watching your trade turn negative, go Ior a walk around the house Ior a Iew
minutes. You have a stop loss in place, and that deIines the worse possible result unless you're
trading at a major news release, when you could get a big whack oI slippage.
Amazingly (Ior the worriers) most trades make a pullback and then go positive again. This Iirst
pullback can give you vital inIormation about how traders are viewing the breakout you took and
can help you Iormulate a plan Ior exit.
Moving the stop loss
II you survive that Iirst pullback and the trade gets back into proIit, consider moving your stop loss
a little closer. Not too close, but iI the baseline is diagonal you can use that. II the baseline is
horizontal you may need to wait a little longer Ior an obvious support or resistance level to Iorm,
but that Iirst pullback will oIten give you that. I don't usually bother moving my stop loss at all, I'm
watching the trade all the time anyway. But iI I have to leave the screen Ior any reason, I will
deIinitely move my stop loss.
Targets
Always look on the current timeIrame and the higher timeIrames Ior recent price congestion or
signiIicant highs and lows. These are the places the price will most likely stall again.
This is what to look Ior when you're choosing a proIit target.
Make it more than the stop loss. You can decide this even beIore you enter. II you see
serious roadblocks (i.e. Heavy resistance right above your buy trade) it may not be worth
taking the trade at all.
- 56 -
Look Ior old support (iI selling) and resistance (iI buying) on the 1m, 5m 15m and hourly
charts. Beyond those timeIrames it shouldn't matter.
Use the pivot lines. The price will likely bounce oII these lines aIter a good run. Don't exit
every time at these lines though, iI the trend looks good and steady the chances are that the
price will bounce but then press on later. Especially don't use the Iirst pivot iI it is close to
your entry price.
Boundary lines oI channels on the one minute chart or higher timeIrames can make Ior
excellent exit points.
II you really must, you can use Fibonacci targets. This can be a good option when you can't
see anything else. Fibs are notoriously diIIicult in advance, but oIten trivially simple in
hindsight.
Profit target worry
This term reIers to the process oI calculating a sensible proIit target, but becoming progressively
more and more worried about the market reaching it as the trade progresses. There is some logic to
this Iear, because as the price nears the target you have more to lose should the market reverse. This
leads to the practice oI premature capitulation taking the trade out early with a smaller proIit.
Almost inevitably (in my experience) the market continues on to the proIit target and oIten, to be
cruel, just keeps going. An hour oI two later you look at the trade in hindsight and wonder what on
earth you were thinking.
II this is a regular occurrence Ior you, it's not too hard to solve with discipline. Simply set your
targets a little closer. Move your stop loss near break even as the price approaches you target and go
and have a chocolate biscuit. Come back to Iind your target hit (usually).When these trades start
getting hit quickly and the market keeps going, you'll have the encouragement to ask Ior more next
time and you can get by without the chocolate. When next time comes, set your target slightly
Iurther away and closer to the logical target area. Gradually you will get used to holding your
trades.
This next sentence needs to be in bold. And it is.
It's very important to hold on for your profits.
You'll notice many oI the winning examples in this book are between 2 and 3 times the stop loss. II
you don't hold on Ior that, you'll end up a break even trader.
- 57 -
The predictive power of channels
Channels work very well on the one minute chart. For example, the trade entry below is one you
may have Iancied because oI the nice wedge shape developing; the rising EMA; and the price
moving above the pivot point.
Once in the trade and looking Ior a target, you can draw the parallel oI the lower trendline as shown
below. You have to exercise judgement here, but sometimes it's quite obvious. The breakout
trendline is removed Ior clarity.
- 58 -
II the channel is too steep, you may be asking too much oI the price to reach the top again. Exercise
your own judgement.
Shortly aIter, the chart looked like this.
Naturally, this clean bounce oII the projected channel line doesn't always happen. Sometimes the
price breaks right through the top channel line, especially iI the channel is almost horizontal. And
sometimes the price doesn't reach the upper channel, especially iI the channel is very steep. This
example is neither Ilat nor steep, and has a good trendline base, so is a good candidate Ior this type
oI behaviour.
The exit shown returned about 1.3 times the risk, not a huge gain, but a calculated proIit based on
the high risk oI a bounce oII the channel top.
OK, that trade's out oI the way, but keep your wits about you. The next consideration is that the
upper and lower channel lines can Iorm a breakout line and a baseline. On the chart above, the
breakout to the downside at the Iar right hand side (circled) is below the EMA and breaking through
the daily pivot. Is it a valid sell signal?
Yes, it is, but there are two immediate concerns. Firstly, with a diagonal baseline we would
normally require three touches, but in a channel this is voided because it is parallel to the breakout
line and two touches are thereIore enough. There can be little dispute that the second touch oI the
baseline where the price reversed was a point oI resistance, and that's exactly what the baseline is
Ior, to identiIy support or resistance. The second concern is that the EMA is only just Ilattening and
starting to head down at the time oI the short trade entry. You have to weigh that consideration
against the rest oI the indications that the setup is valid.
II it is not too steep, the lower trendline can be used to approximate a trailing stop level so long as it
is clearly a valid trendline with at least 3 touches.
- 59 -
Tough call
Here's a trade with almost no way to calculate the appropriate proIit level.
The red line (it's D R2) is too close Ior good reward. There was no convenient resistance above that,
even on the one hour chart.
A simple way to take proIit is to mark the chart at a proIit oI two times the risk and use that as an
initial target. As the trade develops you can decide whether that is achievable. In this case, the price
moved up and down very quickly (and even approached the stop loss) beIore moving quickly
upwards. A reward oI twice the risk seemed reasonable and the chart is marked where that
happened.
Contrast that with the Fibonacci target on the Iollowing page.
II you're going to use a Iib target, you need to draw it as best you can. In the chart above there is
nowhere to draw a good retracement or extension. It needs to start at the bottom oI the trend and
measure a good recognisable retracement. So the answer may be on the next timeIrame up, the Iive
minute chart.
The chart below shows a recommended place to draw a Fibonacci Ior this trade on that Iive minute
chart.
- 60 -
The entry and stop loss are shown as on the previous one minute chart. The Iib retracement is drawn
Irom the bottom to the signiIicant high price beIore entry. The next Iib extension is at 1.38, where
the red marker shows the exit.
This is an amazing exit and one you'd Ieel very pleased with. But in practice, could you do it? How
would you know to take 1.38? Fibs can be tricky.
- 61 -
What if it doesn't take off?
This chart was discussed earlier (Entry example 5) as an example oI a trade that went nowhere.
These trades are sent to disappoint. There is considerable time invested into this trade.
At the ellipse area marked 1, the market spent over an hour going sideways but only moved into
negative territory about 8 pips. The high point in the centre oI the ellipse deIined the top trendline
and allowed that line to be drawn. This was the trigger Ior the price to move lower to point 2. Even
there, the trade is only 10 pips in proIit.
On such a slow day, the decisions you make are not much going to aIIect your overall proIitability.
You could:
Extend the top trendline and exit the trade with a small loss when that was broken at point 3,
causing only about 5 pips loss or less than 0.5;
Place a break even stop when the trade got into some proIit near point 2;
Exit through boredom. Many traders like their trades to move soon aIter entry and become
impatient Ior a result. The one minute chart can consolidate sideways Ior an hour aIter the
breakout beIore moving Iavourably, so it's worth waiting this long. The angle oI the blue
line is a hint. In this trade, the blue line slopes gradually downwards during the sideways
phase 1, but not by a very steep angle.
- 62 -
Trading against the trend
I've put this in because I know you will try it. II you don't, you're not normal. We all like to stretch
and change the rules. Sometimes you can make Iabulous proIits doing the wrong thing and breaking
the rules.
As you know, in this method the trend is deIined by the EMA. It gives the method an edge in the
market. Momentum is very important.
II you take a trade with the trend and it works out, pat yourselI on the back.
II you take a trade with the trend and it loses, bad luck. It happens. You stuck to the rules but it
didn't work out this time. Analyse the setup Ior clues as to your loss. There may be none, some
trades just lose. Next time it will probably work. No damage done.
Here's where bad things can happen.
II you take a trade against the trend and it loses, you're going to Ieel badly because you lost money
and you broke the rules. It will give you distress, and that can Iester into more bad trading
behaviour. It's not a nice place to be.
II you take a trade against the trend and it gives you a tidy proIit, your pleasure will be short lived.
You will start to doubt the method. You will want to spend time looking at charts, back testing and
checking to see iI more proIits can be made this new way. All you're doing is reinIorcing bad habits.
You'll end up a loser.
I have some lucid advice about trading against the trend.
Don't do it.
I don't mind iI you change the 200 period EMA to 150, 250, or 83 times the value oI a, but use it Ior
what it's designed, to keep you out oI counter-trend trades. The trend is part oI the edge in this
method, so don't throw it away. Trade any other way and you're not trading the Impatient Trader
rules.
- 63 -
Overtrading
Some days you will really need to hunt Ior trades. And iI you do, the chances are that the trades you
Iind are not going to be spectacular.
Here's a quiet day. The yellow shaded area starts at the FrankIurt open and lasts 4 hours.
By resizing the screen (this one is about 160 pips top to bottom) you can easily tell when the day
has narrow range. A telling Iactor is the blue line see how Ilat it is Ior the whole session. Can you
see any good trade setups on this chart? Perhaps towards the end oI the shaded period the breakout
above the Ilat tops is the best opportunity this day. The EMA was starting to angle up then.
- 64 -
More compIex setups
There is only one example here as I really don't want to Iocus on this, but as you become practised,
you will start to see some interesting variations on the theme. Consider this chart.
The baseline is clear and corresponds with the daily pivot. The breakout line however is not clear at
all until the break has been made and the line retested. Only then is there good conIirmation that the
line was valid.
This setup gave plenty oI opportunity Ior entry, and in this case I've marked the break above the
previous high point.
- 65 -
DaiIy preparation
It doesn't take long to prepare yourselI each day.
Check the higher time frames
Draw horizontal lines at levels where the price has stalled more than once. Also draw horizontal
lines are at the start oI very sudden moves such as news spikes or weekend gaps. The market oIten
comes back to these areas and retests them, so they can act as proIit target areas.
The rectangle tool is excellent Ior horizontal levels as it can be made as narrow or as wide as
required.
Check the Iive minute chart Iirst Ior interesting price levels, then the IiIteen minute chart and the
hourly chart. Rarely will you need to go Iurther than that.
Scale the chart
As discussed earlier, scale the price axis so the market has room to move up and down on your
chart. Normalising the price action like this gives charts a homogeneous look and trains your eyes at
identiIying good trade setups.
Daily and weekly ranges
Be aware oI the movement in the market. II the average daily range has already been exceeded,
exercise caution in your proIit targets and maybe look Ior smaller rewards. II the week has already
exceeded it's usual range, watch out Ior good reversal trades.
Check the news
Don't let the market shock you with a news announcement you were unprepared Ior.
During the Australian morning there are oIten announcements that move AUDUSD but also have an
eIIect on EURUSD.
During the European session there is less Irequent news that causes dramatic moves.
At the start and sometimes later in the US session major US economic announcements cause the
most upset.
Check the holidays
Don't trade major holidays. There are Iew institutional traders at their desks. The markets are thin
and rarely trend.
Skip the AUDUSD during Australian daytime on Australian public and bank holidays.
Skip the EURUSD on major European holidays.
Skip both on major US holidays like Thanksgiving.
Don't trade Easter and Christmas/New Year. Get a liIe.
Work out rough position sizes
Even though throughout this book Ior convenience I use a 1 trading risk rule, in practice I almost
never adhere to this. Rather, I average 1. This is simple expediency. Over a series oI trades I may
risk anywhere Irom 0.5 to 1.5. My average over time will work out to be about 1.
- 66 -
The percentage varies because oI three Iactors.
I don't always have time to calculate exactly what 1 risk means on a trade. Sometimes you
can turn on the screen and see a trade setup almost immediately. I don't have time to work
out the stop loss size, my account size, divide this by that, drop down and change the
position size list and so on. Rather I keep my deIault position size at about 1 risk Ior the
average sized stop loss. This average stop loss size varies depending on how volatile the
markets are at the time, but is generally between 10 and 20 pips. In this way I can turn on
the screen and place a trade within a Iew seconds. Over time it averages out.
Some setups look great, others do not, so I might increase the risk on a great setup and
reduce it on a weaker setup. This way iI I am getting itchy Iingers because there have been
no good setups today, I am not going to lose as much iI I get tempted into a poor setup. I
don't vary the risk by much, around 30 or so, it's not a mathematical calculation. It's a
comIort thing.
I may change my mind about the stop loss aIter I have calculated the position size. Say my
original stop loss size is 20 pips and I calculate 1 risk on a trade. Then I decide I missed
something on the chart, the stop loss is too close and I change it to 25 pips. I have just
increased my risk to 1.25. This could happen just aIter the trade has been Iilled. By the
way, I would never increase the stop loss size simply because the market is threatening to hit
it. That's a big no-no.
- 67 -
Trading summary
1. Decide iI you are buying or selling. II the price is close to the blue line, you could be
looking Ior either. II the price is too Iar away, wait. Patiently.
2. Look Ior your stop loss position. IdentiIy a short term support Ior longs or resistance area
Ior shorts.
3. IdentiIy a sensible breakout away Irom the blue line. This must be easy to see and will
typically break a local trendline or horizontal line that has been touched at least three times.
A lot oI the time you will not get past this step. The trend may move without you beIore any
breakout line is identiIied, or it may reverse. Make sure there is room Ior the trade to move
into proIit beIore it hits roadblocks.
4. Once in the trade, look Ior a target area 2 to 3 times as Iar away as your stop loss. Give
consideration to the price action. Is it choppy? Is it strong?
5. Assuming it doesn't stop you out, ride out the Iirst retracement against you.
6. Reconsider your target given the price action since your entry. Is it still strong, weak,
sideways?
7. II you wish, trail the stop loss behind identiIiable support (iI long) or resistance (iI short)
until you hit the target, get stopped out or decide to exit based on the price patterns
discussed earlier.
8. Go and practice. Keep practising.
- 68 -
A finaI word
That's it. I told you it wasn't complicated.
I have heard that Warren BuIIet once said: 'Wealth is the transIer oI money Irom the impatient to
the patient.
So much Ior the Impatient Traders chances then. But I guess you know now that there's no place
Ior impatience in trading. It's all about waiting patiently Ior your setup. Waiting Ior that setup that
time and repetition has taught you has an edge in the market. The edge that allows you to trade with
conIidence and with the certainty that iI you do it right, then over time your account will grow and
you will make money.
Without the edge and the conIidence it brings, you will re-analyse, hesitate, doubt and stumble
when the time comes to place the trade.
For that reason, practice is absolutely mandatory. Trade with the smallest amounts you can until you
are certain you can do this properly. Once you have that conIidence, you will Iind that gradually
increasing your position size does not give you the nervous jitters. You'll look Iorward to each new
trade instead oI dreading it. You'll be able to grow with conIidence.
You have the tools, now it's over to you.
Good luck.
But with hard work, you won't need it.
Derek Evans
November 2011.
Revised August 2012.
- 69 -
Appendix 1 - Quiz
Score one point Ior each Yes answer except on the Iirst (#1) and last (#10) questions. Those should
be No. The higher the score the more likely it will be that you can become a successIul trader.
Emotion
I've read that that there is no place Ior emotions in the market. You must be like a robot. Nerves oI
steel and all that.
That's a little idealistic, like telling an athlete not to be nervous beIore a race. You will Ieel tense and
nervous. You will get sweaty palms. Your heart will pound. Every time you increase your lot size
you're likely to Ieel it again.
The trick is to know that it is expected Ior you to Ieel that way, and not change your behaviour
because oI it. Keep your trade size small enough so you are not palpitating. II you have trouble even
with the smallest trade size, you may have to resign yourselI to throwing away some small money
until you get used to the Ieeling oI being in a trade. This book is not about helping with that, but I
can assure you that the nervousness wears oII. It turns to anticipation as you improve your skills,
and, believe it or not, boredom some time later.
A successIul trader must be able to remain calm in diIIicult situations. Traders that rank very high
on the emotional stability scale have very low anxiety levels, remain calm, relaxed, and have a low
suspicion level. They tend to be trusting individuals and are not paranoid. You won't hear them
blame anyone Ior their losses, they take responsibility Ior their actions. SuccessIul traders tend to be
well grounded.
Discipline
SuccessIul traders are ones that can Iollow the rules, like driving at the speed limit. They tend to be
perIectionist and take pride in their work. They like to take a project Irom start to Iinish and get joy
Irom completing it successIully. Pilots are trained to Iollow check-lists and tend to make good
traders. An impulsive individual will have diIIiculty achieving the discipline to become a successIul
trader.
The discipline is all about taking proper trade setups. Boredom can make you do crazy things. You
will devise whole new trading strategies based on one so-called setup that you see. You are
hallucinating. An actor does not spend days, weeks or longer rehearsing a part only to do something
else on the night. Neither should you. II you do, you will almost certainly lose, and you will Ieel the
pain.
Intelligence
SuccessIul traders tend to be intelligent. They need not be Einstein but they are above average in
intelligence. They tend to be good problem solvers and good with numbers, such as statistics. They
understand that trading is based on probability, that not every trade will work as planned.
Patience
II you think it doesn't take patience to trade the one minute chart, sorry, you're wrong. It can
actually be worse that watching longer term charts because oI the level oI Iocus needed. It's very
very easy to see patterns in the candles which just aren't up to scratch. I can't impress on you
enough - wait Ior the good one. It can be painIul taking a terrible setup and losing, then looking
back later, thinking "what on earth was I doing?" or stronger words to that eIIect. So, again, the title
- 70 -
oI this book is wrong. You really do have to develop patience and wait Ior the setup according to
your method. Luckily with this method, there are several setups on a typical day.
Tenacity
Please understand this clearly. This method works. It has an advantage because three important
elements are on its side.
1. The trend.
2. Support and resistance.
3. The reward/risk ratio.
Believe it, and stick to it. You will make mistakes. You will repeat mistakes. Trade small until you
get better. But above all, keep trying. The principles are simple. You can learn it in a day. When you
have a bad run look at some oI the examples at the end oI the book. Keep going.
- 71 -
Appendix 2 - Trade exampIes
This appendix is presented so you can learn by example. There are winners and losers, and
hopeIully enough examples so you will be able to recognise most trade setups when you see them.
On each example, take a piece oI paper and cover up the right hand side oI the chart. Place the
covering sheet exactly so you can see the baseline and the breakout line but not the trade itselI. By
doing this with each example, you will train your eyes to see the setups.
Look at the marked exits and the reasons.
Not all these trades were taken live, although many were. Some are plotted in hindsight. They are
not in any particular order.
- 72 -
Example 1
Date: 3/11/11
Pair: AUDUSD
Session: London
Reward: 5
Why not start oII with a real cracker. Everything lined up in this trade. The D S1 pivot matched a
support level Irom yesterday's price action (shaded). The price hesitated there Ior a while and make
an asymmetrical wedge with 3 to 4 candle touches on each side. At the time oI entry, the price is not
only above the blue line, but the blue line is rising strongly. This one screamed to be taken.
The only weakness in the setup is that the blue line could have been a little closer.
When the price moved - you wouldn't want to have leIt the room - it moved quickly and the Iirst
retracement was very small, indicating the trade could go maybe the same distance again. At this
stage the daily pivot (blue line) was a logical proIit objective. This was conIirmed when the price
did not retrace below the support level S1.
This trend was very strong. Later in the day this market moved up even Iurther to D R1.
- 73 -
Example 2
Date: 28/9/11
Session: Asian
Pair: EURUSD
Reward: ~ 2.5
Direction: Short
Here we have a beautiIul breakout Irom large wedge. Notice the blue line is sloping down just
beIore entry so even though a break on either side would be eligible, the short side was Iavoured.
You can't be dozing Ior these trades, but you would have had at least 15 minutes to prepare Ior this
break. A stop entry was the obvious choice here as the breakout line was horizontal, so the order
once placed needed no adjustment.
When the pair moved quickly lower, the clear horizontal support at about 1.3545 (as shown on the
15m chart below) was a logical target with a risk oI about 10 pips.
- 74 -
- 75 -
Example 3
Date: 28/9/11
Session: London
Pair: AUDUSD
Reward: either 1.2 or ~ 2.5
Direction: Long
A nice wedge developed here above the blue line and the daily pivot. The blue line is rising. The
support below the wedge is horizontal and quite obvious.
The Iirst target T1 could have been at the horizontal resistance Irom the recent highs as shown, but
the proIit at that price was small, and the price had not yet had any retracement aIter the entry.
Waiting Ior the Iirst retracement and the next push up presented the larger channel as a logical target
and exit at T2.
- 76 -
Example 4
Date: 30/9/11
Session: Asian
Pair: AUDUSD
Reward: -1 maximum.
Direction: Long
I have presented this chart rescaled, as without it the chart looks very choppy.
I quite liked the look oI this trade I took it live. The price had Iormed a nice wedge, the baseline
was a strong trendline, the momentum was up and the price was above the daily pivot.
When the price broke upwards at the trade entry the break was steep, but the upwards movement
stopped abruptly at the old high price. About 4 candles painted long upper wicks, which was a
concern, and I should have exited the trade immediately. But because the setup looked good I
waited to see what the Iirst retracement did.
The market moved sideways Ior a while then moved down. I have shown the worst case exit,
although I exited well beIore that (the boredom exit) aIter the price Iailed to recover upwards on the
second push.
I really should have ignored this trade as the EURUSD looked weak and I'm always mindIul oI the
correlation see example 5 taken on that pair at virtually the same time.
- 77 -
Example 5
Date: 30/9/11
Session: Asian
Pair: EURUSD
Reward: either 1.5 or 3
Direction: Short
This was a clear break Irom a channel. The price Iell very quickly Irom the upper to the lower
channel line, and had it not paused at the lower line I would not have taken this trade as the
breakout line would not have been conIirmed. The pause conIirmed that the channel was important,
so the break below it was valid. The pause also caused the blue line to curl downwards, showing
momentum that way.
There was support showing on the hourly chart about 10 pips below the entry so I was ready to exit,
but as the blue line headed down and the Iirst retracement didn't threaten the entry price I decided to
let it run. Once the support was broken, even thought the price retraced a little the blue line was not
threatened.
Two exits are marked. The Iirst shows the price retracing above a local resistance area R1 and the
second at a clear support level showing on the 5m chart below.
- 78 -
At it turned out, this trade entry was a key turning point on the hourly chart and the price Iell 450
pips over the next two days. Imagine holding that sort oI run with a 10 pips stop loss. Hindsight is
marvellous indeed.
- 79 -
Example 6
Date: 30/9/11
Session: London
Pair: EURUSD
Reward: 1.5
Direction: Short
This chart pattern is a thing oI great beauty to the Impatient Trader (even though it took a while to
Iorm). There is a clear channel setup and aIter the price made a Ialse break upwards (blue ellipse) it
started looking good Ior a sell trade. The bounce oII the lower channel line just prior to entry
conIirmed the breakout, iI it came, would be worth taking. Without this bounce the price would
have Iallen directly Irom the Ialse break upwards and made an upwards retracement very likely
aIter entry.
The EMA is turning down at the time oI the breakout, and the Iirst retracement aIter the entry stops
perIectly at the broken channel providing a second entry chance.
Exit is at the old low shown at the leIt hand side oI the chart, even though the market did move
lower aIterwards (not shown). This is a good exit style when the market Ialls sharply to a support
level as a bounce becomes high probability.
- 80 -
Example 7
Date: 4/10/11
Session: Late New York
Pair: AUDUSD
Reward: 1.8
Direction: Short
A large wedge appeared in an obvious downtrend. The double top at the high price oI the wedge
provided the resistance. The breakout was just above D-S2, but Iar enough so that there was room
Ior the trade to bounce on its Iirst retracement beIore continuing down. The exit at the previous low
was enough to give over 35 pips reward Ior a stop loss under 20.
This trade is an example oI not needing the stop loss to be behind the baseline. It is placed above a
local resistance area and well above the EMA.
A similar pattern appeared in EURUSD a Iew minutes later.
- 81 -
Example 8
Date: 6/10/11
Session: Late Asian
Pair: AUDUSD
Reward: -0.5
Direction: Short
This is an example oI clutching at straws, looking Ior a trade in a choppy sideways market.
The downwards momentum was deIinitely building on this trade, although the market was in a
small range. The trade was against the prevailing 5m and 15m trend, so perhaps a quick proIit
would have been prudent.
Encouragingly the price appeared to have cleared the shaded horizontal support area.
The exit was taken where local resistance is broken.
- 82 -
Example 9
Date: 6/10/11
Session: Late Asian
Pair: AUDUSD
Reward: ~ 2
Direction: Long
This trade appeared just over an hour aIter the trade in Example 8, which you can see at the leIt
hand side oI the chart.
The baseline here is very strong and the breakout line quite straight. The trade is better than the
previous one as it is in the direction oI the higher timeIrame trend.
The stop loss is placed a Iew pips below the baseline and the EMA.
The target is the old high (not shown) on the 5m chart.
Note that aIter entry this trade went sideways Ior about 45 minutes, but the EMA was still sloping
nicely upwards, predicting a break up.
There is a second buy trade later on this chart. Can you see it? The entry would be aIter that period
oI sideways movement. The breakout line and baseline would again be quite well deIined.
- 83 -
Example 10
Date: 17/11/11
Session: Asian
Pair: AUDUSD
Reward: 2.5
Direction: Short
I took this trade about 9am aIter the market had been sideways since the New York close. The
breakout line was horizontal but not very well deIined, however the baseline was Iantastic and made
up Ior the ambiguous breakout. I waited Ior a Iew minutes aIter the initial breakout as the price
didn't reach my stop entry price, but with such a steep EMA I was Iairly conIident that when this
moved it would be going down again. Volatility oIten accompanies the end oI a trend and this
wasn't evident here. I thought the D S1 may have been too Iar Ior this trade so was relieved when
the price reached that target. You can see how quickly it bounced back up aIterwards.
- 84 -
Example 11
Date: 24/10/11
Session: Asian
Pair: EURUSD
Reward: ?
Direction: Short
I have leIt the exit oII this chart, I hope you can guess why. The Iirst pullback aIter the sell entry
was very large, and would have given many traders a nervous ten minutes. Would you have been
able to hold the trade through that Iirst pullback? HopeIully this chart shows the value oI doing so.
There was a maximum oI 2 return available on this trade. The stop loss was between 20 and 25
pips, and the trade was negative 10 pips at the worst point. That's not too bad is it? The trend was
clearly down and the EMA maintained its downwards attitude during the retracement.
Remember iI you can't see a good place Ior a target, try Ior 2 return based on the stop loss.
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Example 12
Date: 11/10/11
Session: European open
Pair: AUDUSD
Reward: 1
Direction: Short
This trade could have gone either way. When it entered it pushed down very strongly with barely
any retracement. It seemed sensible to wait out the Iirst retracement and target the blue pivot line
below and a 2.5 return. Nothing on the 5m or 15m charts suggested otherwise.
The stop loss was 20 pips.
The Iirst retracement was a disappointment aIter the price had Iallen so sharply. The exit is shown
aIter the price made a couple oI higher tops.
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Appendix 3 - A fuII day's trading opportunities
The examples above are not cherry picked, but are well deIined so you can clearly see the method.
The Iorex market is sometimes erratic and patterns can be less well developed. In this appendix, I
present every trading opportunity on Monday 14
th
November 2011. I have picked this date because
it was yesterday - the day beIore I'm writing this appendix.
I present each trading opportunity on the EURUSD Irom the week's open through the Asian session
and the London morning.
Each trade opportunity is presented over two pages. The Iirst page shows the setup as it appeared at
the time, while the second shows the trade entry, suggested stop loss and exit logic.
We trade each setup indiscriminately so you can see the results even iI your analysis and choice oI
setups is still as a novice.
Trade setups that did not produce an entry have been omitted.
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Trade 1 - The Setup
Session: Asian
While the breakout line and the baseline both look OK in this setup, there are a couple oI other
considerations.
Ellipse 1 shows the closing price Ior the previous week, and the market has gone some way towards
closing that gap.
Ellipse 2 shows a weakening oI the downwards trend corresponding with closing that gap. The
support at the leIt hand side oI the chart may prevent this trade going Iar.
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Trade 1 - The Result
The market Iailed to Iall Iar and the trade was eventually exited at break even using the boredom
exit.
Result: 0
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Trade 2 - The Setup
Session: Asian
As we scroll through this day, you can sometimes see previous trade setups towards the leIt hand
side oI the chart. The setup oI interest is at the hard right hard edge oI the chart.
This setup channel is Ior a buy trade. The channel is not perIect and the EMA is Ilattening. The
overall chart look is uninspiring the wave movements look choppy.
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Trade 2 - The Result
Perhaps as expected, this trade was a Ilop. There was no momentum in the direction oI the trade,
and in the bigger picture the market seems to be moving up and down in a trading range.
The Iirst pullback was quite strong, and when the price Iailed to rally aIter that it was reasonable to
exit the trade when the low point oI the Iirst pullback was broken.
Result: -0.7
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Trade 3 - The Setup
Session: Asian
This setup looks better. A double bottom has been broken (shaded) then the price has risen and
spiked through that level, only to quickly retrace downwards.
The breakout line looks good too. Although there is support at the leIt hand side oI the chart, the sell
order will be Iar enough above it to warrant an entry.
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Trade 3 - The Result
This ran down nicely, and at the bottom oI the chart the shaded area shows the support created near
the close oI last week's trading. That looked like a good target as the next lower pivot line was still
over 30 pips away.
The stop loss is about 10 pips away. The exit is shown aIter a higher low and a strong up candle.
Result: +1.5
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Trade 4 - The Setup
Session: Asian
The breakout line looks quite good although the horizontal baseline is weak. This is compensated
Ior by the presence oI a second baseline the long diagonal trendline across the top. The EMA is
Ilattening and the overall price action is still quite choppy.
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Trade 4 - The Result
The market didn't like our breakout at all. This trade is a great example oI why we place the stop
loss at the time oI entering the trade, and how it can save you Irom a nasty loss.
The market broke strongly up through the longer term trendline. On the 5m chart this still didn't
look like a great buy trade, so perhaps the up move won't last?
Result: -1.0
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Trade 5 - The Setup
Session: European open
This sell trade setup, while still in a choppy market, still has some merit.
The baseline was hit or approached a number oI times beIore a Ialse break upwards that strongly
reversed.
The diagonal breakout line is very strong and easy to see.
The main problem is the EMA pointing upwards, so the price needs to Iall below it to enter the
trade.
The volatility has increased with the start oI the European session.
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Trade 5 - The Result
The entry is market just below the previous local low point.
The stop loss is above the baseline, but not above the Iake-out.
The price Iell very sharply and the Iirst pullback (circled) was merely a sideways pause.
When this (circled) type oI price action appears, the second leg down is oIten similar in size to the
Iirst, and that's exactly what happened here.
The measurement "x" is taken Irom the start oI the drop to the centre oI the small sideways
congestion. The second drop measures to just below the shaded area, which is the same support
level that trade 4 Iailed to reach. The exit is marked when the price dipped below that support area
but bounced back up.
Result: +1.4
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Trade 6 - The Setup
Session: London
The market is now in a deIinite downtrend with the EMA showing good momentum.
The price has retraced to the previous support level to Iorm the baseline.
The breakout line here is a bit dodgy, but the price looks a little overbought in a downtrend.
The price has rebounded a good way oII the daily pivot line.
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Trade 6 - The Result
The position oI the stop loss is quite obvious, just above the baseline.
The Iirst retracement aIter entry came very quickly, and aIterwards the price Iell in an indecisive
way to below the previous low and the pivot line. The exit is marked aIter the price Iailed to make a
lower low.
Result: +1.5
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Trade 7 - The Setup
Session: London
The baseline here corresponds with the daily pivot. The EMA is strongly down-sloping.
The breakout line is short but well deIined. OI concern is that the price has reacted very quickly to
the breakout line all the candles touching it have long wicks.
This trade entry is not very close to the EMA and a Iurther retracement may be required beIore the
trend continues.
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Trade 7 - The Result
Again, the Iirst pullback came very quickly. When the downtrend resumes, the price was soon
moving a long way Irom the EMA so the Iollowing upwards retracement was not unexpected. The
exit is marked when the price broke above Iirst pullback.
Result: -0.5
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Trade 8 - The Setup
Session: London
A very tidy double top above the EMA Iorms the baseline.
The breakout line is a little bizarre, but with that double top just above the EMA it's worth looking
Ior the best entry opportunity. As the breakout line touches two tops and two bottoms it must be
valid. Had this one touched only one top, I would have consider it too contrived.
The EMA is Ilattening but the price has some way to go down just to make the previous low.
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Trade 8 - The Result
This one was a surprise.
The Iirst pullback was strongly upwards, but reversed right on the EMA and Iell sharply
downwards. When the market is Ialling like this, you need think where it might stop. While it is
Ialling and you can't see support, there's no reason to exit the trade.
The old low did not provide enough reward Ior the risk (less than 2) but the lower line oI the down-
sloping channel gave a reward oI exactly 2.
Result: +2.0
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Trade 9 - The Setup
Session: London
The trend is getting tired now. It has run down about 110 pips, but the average daily range is still
some distance away, so there's perhaps time Ior one more setup.
The EMA is still strongly down and the baseline looks terriIic: several touches locally and previous
support at the same level.
The breakout line looks good too, with several touches at its leIt hand end and another at the right
hand end.
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Trade 9 - The Result
Extending the channel provided a logical target Ior this trade. The top and bottom lines are nicely
parallel.
The trade moved a good way beIore its Iirst pullback and looked like it might make it to the lower
channel line quite quickly.
However it did need a breather, and had the sideways action moved above the Iirst pullback the exit
would have been marked there. One last push down made it to the channel where the contrarian
buyers were waiting to push the price up again.
Result: +1.5
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Summary for 14/11/11
Trade No. Result Session
1 0.00 Asian
2 -0.70 Asian
3 1.50 Asian
4 -1.00 Asian
5 1.40 European open
6 1.50 London
7 -0.50 London
8 2.00 London
9 1.50 London
TOTAL 5.70
These results cover a long shiIt oI over 12 hours, which is IanciIul Ior one day's work.
Had you only traded the London morning session on this day, less than 4 hours, your result could
have been around 4.5 (the last Iour trades). This is oIten typical many hours work in the Asian
session produces little overall reward. That reinIorces why, when we discussed the markets and
times to trade, we chose the London session.
II 4.5 Ior the day doesn't sound good enough, then you're hard to please. Go back and check the
AUDUSD on the same day. You should Iind a number oI proIitable trade setups.
ReIlecting on our brieI discussion on trading plans, you may guess that this one day trading the one
market during London morning session IulIils the requirements oI a Iull week's trading. 50 pips, at
1 risk per trade.
Not every day is this good. But many are. I wish you the best.
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