HOW I TRADE

People tend to have reservations about sharing their trading methods to the general public for a huge variety of reasons. Some of them very legit. I had my share of negative thoughts until it hit me that today I would have been no where had my teachers, my seniors weighed their trading knowledge and wisdom against cash, or anything else.

Following in the footsteps of the angels I met, I hereby disclose impartially and with complete transparency my trading method.

A bit about my style

For quite some time I wouldn't consider myself a true trader if I wasn't looking at my charts 6 hours a day with at least 10-15 trades per day. It was not until a couple of years that I realized I wasn't meant to be a trader on the m5

I trade the daily the 4H and the 1H TF. I don't need 10 hours a day in front of charts anymore. In fact 2-4 hours is all I need. I am no longer fighting the "noise" of news spikes and short term order flow. I am no longer exposing my capital to 10 trades a day. I have on my watch list as many pairs as my broker offers. Around the blog you will find charts ranging from majors to the most exotic pairs. Well price is price and it doesn't change its course of action in exotic markets and for that matter even in the non-FX markets.It is not uncommon for me to be watching 50+ pairs at any given time and yeah I still need a maximum of 4 hours to take/manage trades.

I primarily trade Support and Resistance as taught at the James16 group. However I only use the knowledge in an indirect way in validating and managing trades. My "system" is different to the conventional james16 stuff to a decent extent yet its still a pure modification of the material itself through ideas and research work of the very senior members at the group and at Forex Factory forums in general.

Credits

•  Almighty Allah for his blessings and help that has been nothing short of divine.
•  The James16group for everything that I know today and will ever know about trading You guys at the public thread and the private forum namely James16, Mbqb11, Jarroo, Seeking Light, Bemac, and many others - you guys are martians. I've met my fair share of nice people, but the folks at the James16 group are something else.

• Tom Piccin (username the_wizard at FF). A genius of a trader who runs a thread titled "fail better" at forexfactory forums and has been helping many traders by providing golden nuggets of knowledge and wisdom. He was the guy who introduced me to the concept of a "fake out" and that it can be very informative about future price directions 

THE STRATEGY

The Basics of the method

Foreword

By putting the material contained in this post I have assumed that my audience has had at least some kind of exposure to the James16 group either at the public thread at forex factory or at the private forum. While this system is not about a direct application of the James16 material it is primarily a modification of it with the core still very much intact and in its original form. This method will be best assimilated by someone who has a good idea of how we look at our charts at the James16group.

Identification of swing points

These are defined, in plain and simple terms as points in the market where price took a U turn, either for the longer term (reversal) or for an elongated correction/pull back.

These are not difficult to spot on the chart at all. Here's a chart to get you going...

Simple enough?

Introduction to the fake out

We know there are two types of traders participating in these markets. The novice trader that is under capitalized and is pretty naive when it comes to trading knowledge. And then there are the real big pros, the hedge funds, the banks and other institutions who know their stuff and have really big accounts. These 'cool' traders however suffer from a major problem that stems from the size of their account. The problem of liquidity. The FX markets are amongst the most liquid markets in the world yet there still is a problem when a hedge fund wants to sell 10,000,000 units of EUR/USD at resistance where obviously others are willing to short as well. You see why? How many traders do you think want to long in a market that is heading towards resistance? This poses a serious problem and these guys will then take some measures to get rid of this problem. These are smart people BTW. They break their position sizes into smaller lots and execute it at closely bound price levels instead of clicking a 10,000,000 position size at a single price level.They also artificially create buy side liquidity in the market by targeting the novice traders.

Small positions selling into support and buying into resistance, create the "buzz". Enough manipulation to lure traders into thinking price is headed for a break of support/resistance. The breakout traders start jumping in. At resistance for instance, traders short in the market who most likely will have their stops above resistance or below support (the pros know it all!) start to freak out and their stops start getting hit creating more buy side liquidity (a stop loss on a short order is actually a long). By creating an artificial scenario in the market the pro traders have managed to, like a sheep dog, get the herd where they want them to be.

They can now pull out their long positions and start dumping their huge short orders on traders willing to now buy into a breakout that is going to be a fake one. Now guess what? All those traders that jumped in long will start hitting their stop losses because the big orders are propelling price south and which creates more selling in the market to take price down (long traders will close their trades by selling their positions), but the pros are already in and any selling pressure now is just adding cash to their wallets. Some smart folks and james16 are probably looking at pin bar showing this very information and are short too WITH THE BIG BOYS. DO you now see how the 95% of losing traders are filling up the pockets of the remaining 5%? The naive trader lost when he was short at resistance. He also lost when he thought he could catch a smooth break out.

These pros have nothing against retail traders. Its like a huge ocean where survival for the big fish means consuming smaller fish. Its a zero sum game after all.

So what does a fake out look like on a chart?

At a strong area of support or resistance you'll often see price moving sharply to notify a breakout and either on the same bar or on the next few bars will sharply pull back into the swing point. It will either leave behind a wick or a few dead bars (low range indecision bars) showing a strong move up (like you would see in a break out) followed by a complete reversal back into res/supp.

What I said above is good knowledge for someone really interested in going behind the backdrop to take a sneak peak of "behind the scenes" but its perfectly ok to be comfy in an audience seat ready and tuned in for the action as and when it happens. 

Enough of the details of the chemical composition of bread and butter...let's get down to earning some.

The system explained

How do you convert this market knowledge into a consistent solid trading method:

You simply wait for price to approach a major swing point. A point in the market you know a bunch of traders will have their eyes on. They may be anticipating different things though hence the "market imperfection" and that is what gives you the edge.

For a short setup price must make a move higher than the highest high in that period of resistance (I call it the HHR - short for Highest High of Resistance) and fail to close above resistance, preferably on the same bar i.e leaving behind a "wick".

Similarly for Long I am looking for a move below the LLS (Lowest Low of Support) that fails to sustain itself and closes back above leaving behind a wick.

 ENTRY

Entry would be at the close of the fake out bar. Since it can some times be far away from the source itself (in case of a long spike where price closes further away from the HHR/LLS) a good idea is to wait for a pull back (happens often) to the HHR/LLS via a pending order once the fake out bar forms. Obviously the latter strategy might lead you to missing a few trade setups because while price will often pull back at least once to the HHR/LLS after the fake out bar forms it won't do it all the time. For me, It almost always boils down to the grade of the setup itself and the distance from the source that is in question. If I find its a setup off of a great area I might not wait for a pull back and enter on the close itself, other times I will wait with a pending order at the HHR/LLS. Of course the case where you get a fake out close, close enough the HHR/LLS an entry on the bar close itself is totally justified.

STOP LOSS

A fake out setup, as per this method is NOT over unless you get a close beyond the fake out bar high/low. period.

Enough literature out there and your charts too, if you do your homework, spell out that a fake out is most meritorious up to the point where price fails to respect the order flow that created the fake out. Most often this is illustrated by a strong close beyond the fake out bar high/low. Other times price literally does just this (i.e close beyond the fake out high/low) and totally reverse right back so as to comply with the order flow that created the fake out.

There really is no way to say for sure when exactly is a fake out setup invalidated. Its important to understand that a certain level of ambiguity and grey areas have to be deliberately left out to make the market imperfect enough to allow for the edges to exist. Think about it, if fake outs as a phenomena was exactly repetitive each time "the edge" for the pros that it represents would be gone. Remember a lot of small fish need to be wrong to feed a single large fish. 

Let's return to the statement in bold right at the top of this section:

A fake out setup, as per this method is NOT over unless you get a close beyond the fake out bar high/low.

This is probably a good benchmark to give your method the rules it rests on. It is is usually unlikely for a fake out to work out if price goes against the direction of the fake out and closes strongly. NOT ALWAYS...I said USUALLY.

Interestingly it poses another major problem. Waiting for a bar to actually close beyond the fake out bar high/low is essentially keeping your stop loss totally open until you get a second close. This could be detrimental specially if you are day trading. Furthermore it obviously makes position sizing calculations complex because you are unaware of the exact pips and you can only roughly guesstimate a position size.

When I do place a stop and for the purpose of position sizing calculations what I essentially do is, I calculate a stop twice or so, the size of the wick of the fake out bar and use that distance in pips for my calculations and possibly for an actual stop loss placement. Again there are no hard and fast rules here, I could go a bit tight or a bit loose depending on the situation and also on the size of the wick of the fake out bar. Bear in mind though that I mostly trade the higher time frames. Leaving stops open on intra day TFs could be deadly.

As far stops go you have to go with your gut feel driven by your evaluation of the setup itself and the ongoing market action. This is easier said than done because decisions on stops are usually the ones that involve the most emotions. Where gut feel is involved experience comes in big time, and I can't stress this enough, that you must practice, practice and practice this method till you start to anticipate market action over and above your emotions.

Being an order flow method, how good you do with it depends not on the rules as much as it does on your grasp of price action and order flow dynamics. This is why I feel knowing the James16 stuff is such a HUGE ADVANTAGE! 

EXIT

Another crucial aspect. Depending on the strength of the setup I will either exit at the first MAJOR S/R area in the way or prefer to hold on to see if it can blow through (for stronger setups)

At the James16 group we discuss the concept of "space vs traffic". The idea that a trade that is running into fewer bar highs and lows and HCR/LCS levels has far more potential than a trade in traffic. Traffic here is defined as cramped up space with close by trouble areas specially when you're trading straight into a period of consolidation or into a major PPZ.

Mike (Mbqb11) Another gem from the James16 group did a wonderful video of traffic vs space on the guest section of the private forum. Under the column for Mbqb11 look for the video "traffic vs space - the basics". Download and view it for further clarification of the ideas of space and traffic.

"Decent space" is a crucial requirement for me, and unless the other factors are tipped heavily in my favor (very STRONG swing point, large fake out bar wick) a setup that is heading into traffic is rejected.

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I know reading a lot of text can be daunting and I am absolutely sure that at least some part of what I wrote is still unclear or is ambiguous.

Let's take a look at a lot of fake out setups and see what is good/bad about them so as to apply all the material "in text" on a chart to see how it can translate into a winning method for us.

Some golden short and long setups:

 

 

 

 

If you assimilated at least some of the information I gave in the earlier sections you would clearly understand what the wicks here are telling you and why, at areas of prime importance, these can give you a good idea of the bigger game in the market.

On a side note, for all james16ers who ever wondered why a pin bar works the way it does, it basically follows the same underlying principles of taking out stops in the market. If you can learn to pick only the bigger supp/res zones that really matter and nail them down using your price action bars you are on your way to building a nice equity worm.

You should notice a few things about these charts. For one these are daily charts. I have applied fake outs successfully all the way from the weekly to m1 and ranging from majors to minors and even other markets. However the precision of the phenomena on a higher time frame chart like a daily is unmatched to an intra day counter part. We will take this subject up in more detail a little later...

You will also see that I use a moving average. The EMA I use is the 150 EMA which is part of the base system taught at the james16group. Without getting off on a tangent all I'll say is that I use it for additional confluence for support and resistance. The BASE goes a step ahead and put more weight to a touch of the EMA after some time or the first time after a cross.Now there is obviously more to the base system in the true sense but I only use a particular part of the BASE i.e the 150 EMA that I feel fit and complimentary to my method.

Notice also that out of several swing points I have shown you setups based only on very deep swing points. Since these are daily charts its not often that you see price testing deep major swing points, and for that purpose these golden trades are rare, but when they come by they are simply MONEY IN THE BANK. 

You'll now see how fake outs can be applied to slightly minor swing points too with success using a little more of the available market information.

How about some intra day charts?

When I started off nothing seemed more thrilling than watching charts. Day trading was an obvious attraction. I would vomit at the thought of having to take a trade or less in a week. 10 trades a day was more like it. One of the major reasons why this business takes so long to succeed at is because of the time you need to spend discovering your true "comfort zone" as opposed to your perceived "comfort zone".

It took me a while to realize I wasn't meant to day trade. In spite of this  I have traded this fake out method on the lower time frames for a short while. The nature of this method is aggressive, and as the last chart illustrates it's certainly not for the faint hearted!

I will not shy to state that the confidence I have behind this system has its roots on the higher time frames. I simply didn't do too well on the lower time frames possibly because of my own emotional/psychological constraints.

That said I won't discourage anyone in love with day trading to go ahead and apply it on lower time frames. As you've already seen, and as more homework should reveal, this stuff works across time frames and even across markets. Its an order flow/ price action method. The human race will need to evolve into something totally different to stop order flow and market dynamics to work the way they have been working for hundreds of years.

Conclusion

I have tried my level best to describe my way of trading the best way possible. Was not easy for sure given the huge element of discretion involved in the trading style and hence I am not sure if I did an adequate job. 

Kindly go through the material again and again AND AGAIN. Its amazing how literature seems to sink in, in small chunks each time you go through it - or maybe that's just me...Anyhow, if you have any questions or need more elaborations/clarifications I am always available through e-mail, forex factory, the google group and skype.

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