Rules of Engagement:
1.
The range of your last few high/low pointsis more than 20 pips. High/Low points on our charts are indicatedby the red (high) and blue (low) circles. (also called “Mouteki 2 bar high/lowpoints”) These are a high or low point with two bars on each side of them thatdidn’t make a new high or new low. Wedon’t use all red and blue circles when deciding if 20+ pips has been reached,we mainly use the points that have shown very little retracement. The exception to this rule is only if yourpotential trade is in the direction of the overall trend. If so, less than a 20 pip range could stillbe acceptable, provided the other variables match.
2.
Trade the right side of the range. Ifyou are planning to go long, your entry would be in the bottom half of the rangebetween your last few high/low points-closer to the low of the range. When shorting a currency, it would be the topend of the range. If you are in thedirection of the overall trend then this rule is less important.
3.
Beforeplacing a trade, wait for a breakthroughof any decent support or resistance that’s nearby. Ideally, we like to seedouble confirmations. If there is abreak of the trend line, we like to wait for a break of the nearest support orresistance as well. We do this to avoidreversing our position on what is likely a small retracement. On our chart we have two examples ofthis. The first trade breaks the lowprice point, and then the trend line. Thesecond trade breaks the trend line, and then the higher price point. During the upward move, we also haveretracements that break the trend line, but not the support line, therefore wenever reversed our trade.
4.
Draw smooth trend lines-use clean points withno previous breakthrough. Thisis important because we think that once the price passes through it, theintegrity of the trend line has been weakened. Once a price breaks through ourtrend line, we modify our trend line according to the previous break. We take our original point and use the highor low of the violation bar as our next point.We then draw a trend line between the old line and the new line, becausewe would still consider entering that trade on a double confirmation. If the trend line is strong, and the pricepulls away from it, only to come back and pass through it, we don’t need adouble confirmation. We would considerentering the trade without it, if there are no support or resistance points inthe area around the breakthrough.
5.
If our trade is going really well, and thetrend line looks pretty steep, we often change our strategy a little. We would not be looking to stop and reverseas usual, but be more concerned with not giving back all of our profits. If your price targets have been reached oryou feel you are coming up on a strong support or resistance, then feel free toexit the trade. We like to give thetrade a chance, usually waiting for a trend line violation or an oppositesupport or resistance break though.Sometimes there will be no mouteki price points or trend lines in theimmediate area, so we look for technical reversal points to exit our tradeswith still a decent profit while at the same time giving our trade room tobreathe.
6.
Be conservative on choppy days or days whenbars have consistent long shadows. The Forex usually follows somedaily pattern, until, of course, it is broken.Because of that some days will be very easy to trade and profitable, andothers will be difficult. For the mostpart the market will be fairly easy to trade and profit from because of thevery large daily pip range. Thesooner we recognize the type of market we are in the sooner we can adapt ourtrading strategy to it. One way we can “adapt” is by utilizing smaller stopswhen the market is trending tightly, and using better positioned stops when themarket is more volatile. If we see aranging market, then we can look to enter on a single confirmation closer tothe top or bottom the range. It is easyto trade according to rules, however it is more difficult to recognize andadapt to the current market conditions.By using adaptive rules we can better play specific market conditions.
7.
Use technical points for stops. Thereis no need to risk more than 15 pips on a trade when using a 5 minute chart. If you decide the risk is worth the rewardthen virtually any stop can be justified, but be aware of the next majorsupport or resistance, as that will likely be your first target or obstacle. Ideally, our stops will be on the oppositeside of the top/bottom range point nearest to our trade. If this is not possible then we will try andplace our stops just beyond the nearest support or resistance levels that wecan find that are within reason.Remember to add your spread (2 pips) and a buffer zone (1-3 pips) to thesupport or resistance you chose to put your stop behind. The basic idea is that our trades have 3possible scenarios, 2 of them going our way. The trade could move against us and break outpast our technical point; we lose. The trade could move against us, hit our technicalpoint and reverse back, moving our way; we win.The trade could move in our direction; we win.
8.
Managing stops can be the biggestdeterminate between making money and losing money. If we trailour trade tightly, we increase the chance of making a small profit, but reducethe likeliness of making a big profit.Small profits are good, however, if we consistently get stopped out at+5 or so, and are willing to risk 15 pips on the downside, it will be tough tomake decent money. More often than notwe would miss the big runs. With thatsaid, we need to be intelligent about our stops, both in placing them as wellas managing them. Ideally, we just closeour trade and take a position the other way.If we are using a trailing stop loss, we need to keep our distance andalways place stops behind strong support/resistance points. We trail our stops if we think our stop is ina weak position. The stronger we feelour stop is, the less likely we are to move it (unless the trade moves intogood profit.) One strategy that makes stops easier to manage is trading twolots. The first lot we look to exit atthe first likely reversal point, thereby locking in profit, (or at leastoffsetting any potential moves that stop you out.) Trading two positions can free you upmentally by satisfying your need for locked in profits, but also allowing youan opportunity to see your trade run as well.
9.
Trading bigger ranges and trading with theoverall trend will reduce your risk and dramatically increase the probabilityof a successful trade. Like we stated earlier trading two or morepositions also increases your chance of success. Remember that the trend is more likely tocontinue than it is to reverse.
10.
Do not force or create trades. Waitfor the market to dictate when you trade. This rule is the difference betweenfollowing a strategy and “just winging it”.Modifications can be great, but entering early, really late, or placinglarge stop losses are recipes for disaster if not thought through.
These Rules of Engagementare based on the results of one lot trading with a few adaptive variables,(e.g. stops and limits.) We have NOTtested trading only with the trend, or trading only large movements. If you decide to do so, please share yourresults with us.
Additional Information:
Q:When using a 5 minute chart are we not just giving spreads to ourbroker?
A:That depends on the currency pair.For the EUR/USD, our spread is around 1.5-3 pips, which is a fraction ofour allowed stop loss. We want toposition ourselves for the larger moves, but even with smaller moves we canovercome a 2-3 pip spread easily. We don’t enjoy paying a spread, but it is afactor that most intraday trading strategies must deal with and overcome.
Q:Why use such a small chart; wouldn’t the 15 or 30 min be better?
A:The 5 minute chart is both the15 and the 30 minute chart it’s just a matter of how you look at it. Three 5minute bars are a 15 minute bar, and six 5 minute bars are a 30 minutebar. The 15-30-60 minute charts can’ttell you about a 5 minute chart, and a 5 minute chart can tell you what the15/30/60 minute charts tell you. That’s why we use it.
Q:Why don’t you use any technical indicators along with your charts?
A: Wewould be happy to if you know some that would correlate with the strategy thatwe are trading, and that would act as a confirmation of when to enter or exit atrade. We are trying to keep trading relativelysimple; “if this, then that”
Q: Why do you use trend lines along withsupports and resistance points?
A:Trend lines give us a glimpse of the possible future, and supports andresistances open or close certain actions within that possible future. The idea isn’t to use a moving average totell us what we already know; rather the point is to gather information on whatwe don’t currently know and using that information to predict probabledirections of the market.
Final Note:
The point and goal of all of this is tosimply make pips, individually and collectively. How we get to that pointdoesn’t matter, what does is that we make it there. Pleasetest, tweak, develop, and create towards our goal of group success. It is difficult to put onto paper a set ofrules that work, because often the market gives us hints on what’s going tohappen and opportunities that we could seize but our rules don’t allowfor us to do it. It is for that reasonthat we are working on two other strategies to fill the voids that this oneleaves. Our other strategies inprogress are for trading supports & resistances and trading rangebreakouts. You will see that sometimeswe miss big trades because we followed our rules, so utilizing multiple strategiesjust makes sense. We will revise andupdate these strategy rules in the near future, but for now, please look overthis strategy. Test it. Modify it.Do whatever you wish with it! Welook forward to any constructive criticism or suggestions or how to make itbetter. Feel free to stop by our groupsite or shoot us an email. Thank you fortaking the time to read this, have a fantastic Holiday and we wish you the bestof luck in 2007.
Galvestone Forex Group