Submit by Joker 02/01/2012(Written by Forex Soho)
This is a simple trading method and it can work on any pair. However, it must be used on the Daily timeframe only. The best part of this system is that it just need a few minutes from the trader and it is 100% mechanical. You just have to do what the system is telling you to do, there is no time to think. And we are only using a few indicators just to help us with some calculation but not to derive any trading signal from them.
As the name implies, this trading system is a counter trading strategy, that is, we are buying when people would normally be selling and we are selling when people would normally be buying. We will also be using a Risk/Reward ratio of 1:1.. The system is just the basis of what can be a more complex system after you tweak it and add indicators etc to fine tune the strategy. I am going to write on the rules one by one and detailing them as we go on… and you will see at the end that it is indeed a very simple mechanical method.
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Calculate the Average height (pip height) of the last 10 Daily candles.
We first need to calculate the average height of the last 10 daily candles. To calculate the height of 1 candle, we take the High of the Candle and we minus the Low of the same candle and we get the height in pips. Each candle will have a different height or pip height. Here is a screenshot to get a clear understanding
However, what we need to calculate is not the height of 1 candle but the AVERAGE height of the last 10 candles. We can do so by calculating the height of each candle separately, then adding them together before dividing them by 10 to get the average height we are looking for…. Of course, this can be tedious and time consuming… However, there is a trick to achieve this. We just need to add 2 simple moving average to the chart. The first one with a period of 10 on the HIGH and the second one with a period of 10 on the LOW. Now to get the pip range we are looking for, we take the High moving average value and we minus the Low moving average value and we get the average pip height of the last 10 candles. If you want to look the
average pip height of the last 20 or 50 candles, you just change the period of both simple moving averages to these values. Here is a screenshot of what I am talking about. Please take note that we need to use values from the SMA on the current candle which is still open.
However, what we need to calculate is not the height of 1 candle but the AVERAGE height of the last 10 candles. We can do so by calculating the height of each candle separately, then adding them together before dividing them by 10 to get the average height we are looking for…. Of course, this can be tedious and time consuming… However, there is a trick to achieve this. We just need to add 2 simple moving average to the chart. The first one with a period of 10 on the HIGH and the second one with a period of 10 on the LOW. Now to get the pip range we are looking for, we take the High moving average value and we minus the Low moving average value and we get the average pip height of the last 10 candles. If you want to look the average pip height of the last 20 or 50 candles, you just change the period of both simple moving averages to these values. Here is a screenshot of what I am talking about. Please take note that we need to use values from the SMA on the current candle which is still open.
I hope that that illustration above can help you in understanding the logics behind the buy and the sell. A point that should be noted carefully is that… we do not care about any other candles … we only need to work on the current candle and we should just focus on it alone. Do not get distracted by the other candles and follow this system mechanically. Do not under-estimate this method due to its simplicity… it has more inside. The last part of this system is the setting of the stoploss and takeprofit levels and I should be writing on it in the next part. Good luck so far…
5. Where to place the StopLoss
After we have determine a trade signal, it is time to put the Stoploss as it will help in decreasing our risk and improve the consistency of the system.
For a BUY, you place the Stoploss at 1-5 pips below the FIRST LOW WHICH IS LOWER THAN THE CURRENT LOW. If the candle before the current candle you are trading on has a higher LOW, then look at that candle just before this one and keep going like this till you find a LOW which is LOWER than you current LOW.
As for the SELL position, you will place the stoploss a few pips above the HIGH which is HIGHER than the HIGH of the current candle. We are not looking for the HIGHEST HIGH or LOWEST LOW to place the stops but we are only looking at the first candle which HIGH or LOW is HIGHER/LOWER than the current UNCLOSED candle on which you are currently trading.
Set the TakeProfit
Now the last thing that we need to set is the TakeProfit an it is very important as well. The TakeProfit also is not complicated at all to calculate. You just set the TakeProfit at 50% (HALF) of the current candle and it is the same for both the buy and the sell position. For example, it a candle is 100 pips long, and it we have signal to open either buy or sell position on this candle, then we will set the TakeProfit of each of them at 50% of that candle at the time you are opening these positions. So in our example, the TP will be 50 pips above the buy or 50 pips below the sell.
I have come to the end of this explanation and I hope I have covered all the main rules for the strategy. Please take note that I have come up with this trading method all by myself and it has been shared here on fxfisherman exclusively. You should also take note that I do not myself use this method as I just came up with these trading ideas recently and I am still experimenting on it. I am sure many of you will doubt this method due to its simplicity and honestly, you should not be thinking in this way. The simplest are always the best. Take some time and study this system. You are free to experiment and tweak it to your own liking as well. Suggestions and improvement ideas are welcomed. Would like to hear back from you, especially if you are practicing it on a demo. The system is not easy to backtest at all and most of the testing should be done in the real market or through a trading simulator. Good luck and all the best.
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