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Copyright Notice:
forextrendy.com All rights reserved.
Please feel free to share this eoo!" #t please do not modify any content.
C$%C reired disclaimer: %rading foreign exchange on margin carries a high level of ris!" and
may not e s#itale for all investors. %he high degree of leverage can wor! against yo# as well
as for yo#. 'efore deciding to invest in foreign exchange yo# sho#ld caref#lly consider yo#r
investment o(ectives" level of experience" and ris! appetite. %he possiility exists that yo#
co#ld s#stain a loss of some or all of yo#r initial investment and therefore yo# sho#ld not invest
money that yo# cannot afford to lose.
C$%C )*+, -.-1 /ypothetical performance res#lts have many inherent limitations. No
representation is eing made that any acco#nt will or is li!ely to achieve profits or losses similar
to those shown. n fact" there are freently sharp differences etween hypothetical
performance res#lts and the act#al res#lts s#seently achieved y any partic#lar trading
program. ne of the limitations of hypothetical performance res#lts is that they are generally
prepared with the enefit of hindsight. n addition" hypothetical trading does not involve
financial ris!. ariales s#ch as the aility to adhere to a partic#lar trading program in spite of
trading losses as well as maintaining adeate liidity are material points which can adversely
affect act#al real trading res#lts.
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Content
Introduction -
Overview 3
Section 1 Trends
%he 4yth f 4ar!et %rend 5
/ow %o ncrease %he Profitaility f Any 6ystem 7
/ow %o 8etermine %he %rend 10
9hat s A %rend 8rawdown 1
Protecting Against olatility 1-
,xercise 15
%he *ltimate 6ol#tion 17
Section 2 Patterns
/ow %o 8raw %rend +ines 1;
,xamples:
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Introduction
%his report was written to ill#minate the top mis#nderstood $orex areas and
help $orex traders s#cceed and stay profitale. %he information is presented in
a readale way for eginners as well as advanced traders that want to t#ne #p
their trading approach and increase their s#ccess rate. @o# will learn y
stressing the common mista!es and often revealing ovio#s #t #nderestimated
trading technies.
4ost traders start y as!ing the correct estion: =9hats the c#rrent mar!et
trendB>" #t then most of them fail to determine the trend correctly and almost
all traders miss the next important estion: =/ow reliale is the c#rrent
trendB>
f yo# dont ta!e the trend into acco#nt" yo# will often e tric!ed into placing
low winningproaility trades. %rend is yo#r friend. 'y following the trend it
can only e etter. '#t yo# have to disting#ish etween the realtrend and very
tempting price action that wants to play with yo#r emotions.
@o# will also #nderstand the asic principles ehind chart patterns" how to draw
strong trend lines" how to recogni?e the patterns and how to trade them. 9e
always !eep trading simple and therefore we foc#s only on the most reliale
chart patterns. 9ith the following !nowledge" yo# will e ale to spot thepatterns leading to explosive price movements and then trade profitaly with it.
,n(oy
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Overview
9e will cover two different #t close areas that all s#ccessf#l traders have
mastered:
Section 1 Trends
%he =#y and hold> strategy is dead today. 8o mar!et trends existB
%he common approach in all trend following systems
%r#e story: a simple trading system that made a fort#ne for one famo#s
trader and his investors
ne =tric!> that will ma!e the difference etween losing Dor rea!ing
evenE and winning
%he common mista!e: seemingly =strong #ptrend> is followed y a hard
fall
/ow to identify the real trend #sing p#re price action
9hich trend is more reliale and how to comp#te the trend reliaility Another common mista!e: 6top +oss not reflecting the c#rrent mar!et
volatility
9hich mar!ets to avoid and how reliale trends increase s#ccess rate
Section 2 Patterns
%he g#idelines to drawing good trend lines. 'rea!ing thro#gh a strong
trend line res#lts in a massive and profitale move.
6everal examples of good and ad trend lines and the common mista!es
=%ime oms> constr#cted y trend lines
%he definite strategy to enter an order" place yo#r 6top +oss and ta!ing a
profit
*sing the =Pro(ection 4ethod> to determine the =%a!e Profit> Point
ntelligent software that can recogni?e strong trend lines and chartpatterns
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Section 1 Trends
The myth of market trend
%rend following has een the est style of trading for the past 0 years. %here
were times when traders made fort#nes (#st y following the trend or following
a simple system ased on two moving averages crossover. %he =#y and hold>
strategy that was so pop#lar y traders ao#t a decade ago is dead today.
+oo! at the ,*)F*68 chart from Gan#ary 2001 #ntil G#ly 200H. %he #ptrend was
pretty strong most of the time. f yo# p#shed the ='#y> #tton" yo# wo#ld win
most of the time even with a poor trading system. %he consistent rise of the
e#ro over the dollar was giving yo# a clear sense of the overall trend.
6ince G#ly 200H" it loo!s li!e everything has changed. %he trend direction is
#nclear" noody !nows what is going to happen next and people are serio#sly
preparing for the coming collapse of the single ,#ropean c#rrency. 'y the way"
for #s D$orex tradersE it wo#ld e nothing #t another opport#nity to ma!e a
profit" so !eep smiling.
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8oes it all mean that mar!ets are not trending todayB f co#rse they are
trending %rends exist and they can e traded #p and down for profit. %here will
always e shortterm trends in any mar!et" the only estion is when 6o" the
ig estion isI>how do we find the est trending mar!et and not miss the
opport#nity of ta!ing trading signals in the direction of a strong trendB> @o# will
find a definite answer soon.
%he elief that trend following is an o#tdated trading technie is only partially
tr#e. t is tr#e that there is hardly any mar!et with clear overall trend direction.
@o# co#ld follow the temporary trend only if you are able to determine the
trend correctly. %his is the point where so many traders fail. A pair moving #p
on a 0min#te time frame can act exactly contrary on an ho#rly timeframe.
,ven if yo# find a rare coincidence a c#rrency pair moving in the same
direction on all time framesyo# still need to !now =how well the market
is trendinto avoid very shortterm trends. %he sol#tion is smart and simple.
!ow to increase the "rofitability of any system
'efore yo# discover the most simple and effective method to determine the
trend" lets see what itJs good for. All the trend following systems are ased on
one common approach:
='#y the dips in an #ptrend and sell the rallies in a downtrend.>
+ets reveal one simple trading system that act#ally made a fort#ne for one
famo#s trader and his investors. %he system =8onchian 3 K 20> is named after
him. /ere is the set#p.
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n the chart aove" yo# see two indicators L the l#e line and the red line. %he
l#e line is the indicator 64A 3 Dstands for simple moving averagewith period
3E and the red line is 64A 20Dsimple moving averagewith period 20E.
8onchians idea was very simple:
1# $uy when the blue line crosses the red line u"wards
2# Sell when the blue line crosses the red line downwards
,ven a 3year old child co#ld do this Act#ally" there is nothing special ao#t
this system. All trend following systems are li!e this. 6ome systems are more
advanced" with more sophisticated indicators" #t the common approach is to
#y the dips and sell the rallies.
If everyone could do this% then what&s the money makin secret'
%he answer is that 8onchian #sed this system in strong #ll mar!ets. @es"
trendingmar!ets %his important note is the !ey to consistent profits as
ill#strated in the chart elow.
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%he first trade was profitale eca#se it was made in the direction of the strong
trend. %he next trades lead to losses as the mar!et was t#rning #p and down
witho#t a clear direction. Profits made in the first trade wo#ld e ta!en ac! in
a series of losses.
/ow 8onchian dealt with it was smart. /e ignored all trading signals when the
red line was not going #p on at least a -3 degree angle. /e wo#ldnt ta!e any
losing trades after the first trade eca#se the red line is not trending at all. t is
in a so called choppy ?one. 6o why was 8onchian ale to ma!e a fort#ne from
s#ch a simple system while others co#ld notB 'eca#se others wo#ld throw this
system away as not profitale %he only =tric!> was to follow a good trend and
not ta!ing any other trades.
(hat is the lesson from this story'
f yo# !now how to determine the mar!et trend correctly" it co#ld ma!e a
difference etween losing or rea!even and winning. 8onchian #sed a simple
moving average to determine the trend and filter trading signals.
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1. 9hen the mar!et was trending" he t#rned his system on.
2. 9hen the mar!et was in choppy ?one" he t#rned his system off and
ignored any trading signals.
9hat yo#can do is (#st the same with any trading system or root.
8etermining the trend #sing a simple moving average can e replaced with a
more sophisticated" versatile technie that yo# will learn in the next pages.
!ow to determine the trend
6ome people learn from their mista!es" #t smart people learn from other
peoples mista!es. 6o lets start with examples of a wrong #t very common
approach to mar!et trend analysis.
9hat yo# see in this chart is explosive price movement that is #s#ally the res#lt
of a news release. All ro!ers" platforms and vario#s c#rrency tools are
indicating a =strong #ptrend>" tempting people to (#mp in and ma!e a profit.
9hat happens next is" at est" a choppy ?one" or a hard fall.
9hat is act#ally in the chart are a few consec#tive long green candlestic!s. %his
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is not a real trend" #t immediate price action" tempting traders to initiate
trades and experience a costly and painf#l exercise. %o avoid falling into this
trap" yo# need to foc#s on longer trends. %his is what a real trend loo!s li!e:
%he price is consistently rising with no s#dden changes or explosive
movements. @o# can expect that this trend will contin#e and yo# sho#ld ta!e
only #llish signals. vio#sly the trend wont last forever and yo# can even
have ad l#c! y entering the mar!et at the end of the trend" #t the odds
work for you. t simply cannot e etter. %here are 100s of free or proprietary
indicators to identify the trend #t elieve or not" no indicator is etter than the
h#man eye. As Alert ,instein said:
=4a!e things as simple as possile" #t not simpler.>
Now lets reveal the easy #t the most effective method to identify the trend.
1. Moom the chart inFo#t to show ao#t 200 ars. Notice that 200 ars on
daily chart Dor 200 trading daysE correspond to 1 year.
2. Connect the lower left corner with the #pper right corner. f the line
overlaps with the price ars several times Dthe more times" the etterE"
yo# have fo#nd a reliale #ptrend. 6ee the example elow.
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. Connect the #pper left corner with the lower right corner. f the line
overlaps with the price ars" yo# have fo#nd a reliale downtrend.
As yo# see" the mar!et is li!e a sea wave and it !eeps on going #p and down.
6ometimes the dips are too deep to consider it a reliale #ptrend" or the rallies
are too high to consider it a reliale downtrend. nowing the =trend reliaility>
is the !ey to discover the realandreliable trend. 6o" how do we determine if
the trend is reliale" or whether it is etter to stay offB %he est way is to forget
any lagging indicators" #t to #se p#re price action.
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(hat is a trend drawdown
%rend drawdown is comp#ted from p#re price action and so is the est way to
determine the trend reliaility. t simply tells yo# how deep the price went
against the c#rrent trend. @o# will appreciate this method in the next paragraph
=Protecting against volatility>.
Now" ta!e a loo! at the chart elow.
%he l#e line indicates the deepest move against the c#rrent trend. n this
example it is 2 pips. %he whole move in this chart is HH2 pips.
%he trend drawdown is:
2 F HH2 O cca 25
Not ad. Conservative traders wo#ld prefer the trend drawdown to e elow
20 as it is more reliale. %he Qig dogsJ prefer trends with drawdown even
elow 13. 6#ch trends exist almost every day in at least one $orex chart.
%rends with drawdown elow 10 are very rare" #t when they appear" they
are gold mines L yo# can easily achieve a winning percentage aove ;0.
%he lower trend drawdown O the more reliale trend O the greater s#ccess rateO the more consistent profit
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One more im"ortant note)
/ow many ars sho#ld we #se to define the trendB 9e have #sed 200 ars in
the examples aove. t is a compromise L not too m#ch" not too little. f yo#
were to #se only 20 ars" yo# wo#ld ris! entering the shortterm explosive
mar!et movements which are not real trends as we have explained aove. f
yo# were to #se 300 ars" yo# wo#ld hardly find any c#rrency chart with trend
drawdown elow 20. 'efore we show yo# how to systematically pic! the est
trending pairs and time frames every day" lets loo! at how to #se the trend
drawdown in the most important aspect of trading L #sing a 6top +oss
Protectin aainst volatility
+oo! at the chart aove. %he trader who placed the 6top +oss right after
entering the mar!et deserves great appla#se #t the prolem is" the 6top +oss
is too tight
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=when did the price go as deep as my 6top +ossB> f it has happened several
times in the c#rrent chart" why wo#ld yo# thin! yo#r 6top +oss will not e hit
nowB
The ideal Sto" *oss should be reater than the trend drawdown#
+isten to the mar!et" not to the pips. n the example aove" the 6top +oss
sho#ld e at least 2 pips. %oo m#chB 9ell" #se a smaller lot si?e. f yo# trade
1 minilot and R2 is aove yo#r ris! tolerance" then #se microlots. r dont
ta!e the trade. %he worst thing yo# can do is #se a small pip val#e (#st eca#se
yo# want a small ris!. Act#ally" yo# wo#ld ris! more eca#se if yo# dont give
the mar!et eno#gh space to reath" the 6top +oss wo#ld li!ely e hit regardless
of how good yo#r trading system Dor reliale the trendE is.
@o# wo#ld do well if yo# wo#ld #se the trend drawdown S 1 pip as the pip
val#e for the 6top loss D2 S 1 O 2- pips in the exampleE. f yo# want to
increase the s#ccess rate #t on the other side" increase the ris! when
compared to the profit potential" yo#r 6top +oss sho#ld e set at a m#ch safer
1.3 x trend drawdown.
Sto" *oss + 1#, - trend drawdown + 1#, - 2.. "i"s + cca .,/ "i"s
6ome traders wo#ld prefer even 2 x trend drawdown O -55 pips. 6#ch 6top
+oss wo#ld e safe eno#gh from the wild mar!et. ts all ao#t statistics.
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0-ercise
Now its time for a little exercise. /ere are two charts with ovio#s #p anddown trends.
%he maxim#m drawdown indicated y the l#e line starts from the high at7H.55 and ends at the low at 7H.1H. %he trend drawdown in pips is:
#33 #1 + /#4 54 "i"s6
Now lets calc#late the percentage drawdown. %he visile #ptrend starts from
the low at 75.05 and the maxim#m high is at 7;.30.
%he overall move in the c#rrent chart is:
7#,/ 3#/3 + .#44 5.44 "i"s6
%he percentage drawdown is:
4 8 .44 + cca 149
No do#t" the trend with drawdown elow 13 is solid. Place the 6top +oss at
least -; pips elow the initial entry point.
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n the next chart" there is a downtrend.
%he trend drawdown in pips is:
1#./3, 1#27,, + /#/11/ 511/ "i"s6
Now lets calc#late the percentage drawdown. %he visile downtrend starts
from the high at 1.2H and the maxim#m low is at 1.25H2. %he overall movein the c#rrent chart is:
1#.2. 1#232 + /#/3/1 53/1 "i"s6
%he percentage drawdown is:
110 F 501 O cca 1H
%he trend reliaility is moderate. Place the 6top +oss at least 111 pips aove
the entry point.
The ultimate solution
8iscipline and patience are the two !ey points to s#cceed in the $orex mar!et.
6top h#nting the mar!et for every potential trade. Prepare efore trading.
6canning a few c#rrency pairs on all time frames can ta!e yo# ao#t 13
min#tes" #t the conseences are inval#ale. Pic! only the est trending
c#rrency pairs and time frames and ignore all other #npredictale movements.
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%rade less" profit more. A few g#idelines:
1. Trade only if the trend drawdown is below 2/9"
Dpreferaly elow 13E.
2. If the trend drawdown is below 1,9" yo# can e consistently
profitale even with a simple trading system s#ch as =8onchian 3 K 20>
Dpage 5E.
3. If the trend drawdown is below 1/9" yo# have fo#nd a gold mine
@o# can simply enter the mar!et in the trend direction with a ;0
s#ccess rate.
%he :ore- Trendy#ltimate sol#tion scans - $orex pairs on all time frames for
yo# every second. t calc#lates the trend drawdown for each chart and shows
the most reliale trends sorted y reliaility ased on yo#r preferences.
Clic! here to watch a video how it wor!s
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Section 2 Patterns
!ow to draw trend lines
4ost traders thin! that drawing trend lines is all ao#t connecting vario#s highs
and lows. 9itho#t proper !nowledge K experience" yo# wo#ld see them
everywhere" however not all trend lines sho#ld e considered. f yo# follow the
g#idelines to drawing good trend lines" there is a high chance that the price will
respect yo#r trend line and get repelled y it" or it will rea! thro#gh the trend
line res#lting in a massive and profitale move. +ets start with some asics.
1. %he u""er trend lineDl#eE connects at least two lower highs" so it is
sloping down.
2. %he lower trend lineDl#eE connects at least two higher lows" so it is
sloping #p.
3. %he red trend line in the chart is a little controversial when it comes to
disc#ssion. t is ovio#sly an #ppertrend line Dconnecting two highsE"
#t it is sloping #pC6#ch a trend line alone is notvalid #nless we deal
with =9edges> and =$lags> as yo# will see in the next pages.
)ememer: an #pper trend line is sloping down" while a lower trend line is
sloping #p.
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0-am"les) ;ood Trend *ines vs# $ad Trend *ines
9hen the price rea!s thro#gh a strong trend line" it goes f#rther" offering yo#
a great profit potential. @o# can draw many trend lines in one single chart" #t
there are several g#idelines to choose only the strongest trend lines:
1. Prefer trend lines with more than two touchin "oints#
D%rend lines ecome stronger the more times they are testedE.
2# The touchin "oints should not be too close toether#
. *oner trend lines are stroner than shorter trend lines#+onger
trend lines are also seen on the #pper time frames" so more traders are
aware of them.
n the example aove the to#ching points are very close together forming an
#nreliale trend line. %here is no other to#ching point on the rest of the trend
line.
n the next example elow" the two to#ching points are not so close together"
#t the trend lines are too short.< ood trend line should be at least ,/
bars lon. %here exist m#ch etter #pper and lower trend lines in this chart asshown in the previo#s page.
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=ow let&s see some ood trend lines>
%he trend line aove has to#ching points and can e considered as m#ch
stronger than trend lines in the previo#s examples. %he points are evenly
distri#ted and the trend line is long eno#gh. All three g#idelines are met
perfectly.
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Now this trend line is a monster t is long eno#gh with 3 to#ching points. @o#
may notice that there are two gro#ps of two points that are too close together"
#t this is not a prolem as long as the other points meet the g#ideline. Treat
a rou" of close "oints as one ?bi "oint#
?Trianles% :las% (edes###
Now that yo# !now how to draw trend lines" yo# are one step away from
discovering the oldest mar!et phenomenon: chart patterns. @o# are ao#t to
learn incredily reliale price formations that have time and time again provided
#s with consistent profits.
%he #pper and lower trend lines are forming a trianleas seen in the next
chart. As the price is oscillating etween the two o#nding lines" the #yers and
sellers are in t#g of war" and event#ally the price will rea! thro#gh one of the
lines L noody !nows which one n the next pages yo# will learn how to
participate in this explosive move.
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:allin wedeis li!e triangle" #t oth trend lines slope down. )ecall that the
ottom line alone wo#ld not e a valid trend line. @o# egin y drawing the
#pper trend line and then yo# complete the wedge or triangle Dit depends on
which line has more to#ching pointsE.
ne important note:the u""er and bottom trend lines must convere so
that the "rice is bein s@ueeAed#
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%he flag pattern is encompassed y two parallel lines. %he price is not see?ed
y the trend lines" #t it is moving inside the channel formed y the trend lines.
:las are usually seen as the market "auses after a bi move before
continuin its main trend#
All the presented patterns aove are in an #ptrend. %he #ptrend does not need
to e perfect" the price efore the pattern is (#st rising. Chart patterns after a
downtrend are similar. 9e will foc#s only on contin#ation patterns" that is"
#ying in an #ptrend and selling in a downtrend. @o# may hear ao#t reversal
patterns" #t trading against the trend reires a lotof experience. 4any an!s
have crashed and many fort#nes were lost eca#se of st#orn traders trying
to pic! the tops and ottoms. %rend is yo#r friend" so !eep it simple
!ow to trade chart "atterns
Now its time to reveal the definite strategy to enter an order" place yo#r 6top
+oss and ta!e a profit" so yo# dont need to watch the mar!et and yo# dont let
yo#r emotions control yo#r trading.
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The best way to enter the market is by
usin ?Sto" Orders and ?*imit Orders#
9hen the orders are placed" they are located on the ro!ers server" so yo# can
safely leave yo#r trading platform. %his rings yo# freedom from trying to spot
the est entry point.
%he entry r#le is simple:
1. f yo# trade a pattern in an #ptrend" "lace a $uy Sto" Bust above the
u""er trend line#9here exactlyB @o# may want to place it 3 pips
aove the trend line to spot the real rea!o#t. %he advanced approach is
to reflect the mar!et volatility as we will disc#ss it later.
2# Place a Sto" *oss Bust below the lower trend line#
. f yo# trade a pattern in a downtrend" yo# do (#st the opposite L place a
6ell 6top order elow the lower trend line and a 6top +oss aove the
#pper trend line. 4ore in the ,xercise.
%he interesting part is when to %a!e A Profit. 4any traders enter the trade
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lindly witho#t any idea where to exit Notice that the 6top +oss elow the
trend line reflects the c#rrent mar!et volatility. t is not Dand never sho#ld eE a
fixed n#mer of pips. %he same sho#ld hold for the %a!e Profit. @o# cannot (#st
decide that 30 pips is eno#gh and yo# wo#ld exit the position. 30 pips is very
different on min#te time frame and daily time frame.
There are two reat methods to find the Take Profit level)
1. ProBection methodL easy
2. :ibonacci methodL #sing several %a!e Profit levels" a little complex"
#t etter
+ets foc#s on the first oneTThe ProBection ethod.
1. 4eas#re the greatest width of the pattern.
2. %his pip val#e will e #sed for the %a!e Profit.
*se the same method for triangles" wedges" flags or single trend lines. As the
mar!et rea!s from the choppy ?one" it normally travels at least the pro(ected
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distance.
ne note ao#t the flas and wedesD
As the price travels etween the o#ndary lines" it happens that the trend line
is not ro!en and the pattern ecomes deeper" or even no more valid. n s#ch a
case cancel the order and place a new one to reflect the c#rrent sit#ation.
6ometimes the sit#ation is not going as yo# had planned and the price rea!s
thro#gh the other trend line. %hen simply cancel the order and forget the
pattern. )ather not ta!ing the trade than ta!ing a ad trade is the !ey of
s#ccessf#l trading. %here will e plenty of other opport#nities
eep in mind that chart patterns can appear and disappear" or morph into
another patterns. An emerging patternis not confirmed #ntil the relevant trend
line is ro!en.
0-ercise
$irst" lets loo! at the clean chart elow. %here are several significant highs and
lows that can e connected with a trend line. 'efore the choppy ?one we see a
minor #ptrend" so we are going to complete the pattern and place a #y order.
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%here is (#st one way to draw the two trend lines that meet the g#idelines.
%hese trend lines are forming a triangle pattern.
1. Place a $uy Sto" order Bust above the u""er trend line.
2# Place a Sto" *oss Order Bust below the lower trend line#
. %he distance of the highest high and the lowest low of the pattern is ;
pips" so this is the pip val#e for the %a!e Profit.
As the pattern contin#es to grow" yo# can replace the '#y 6top order a it
lower to the trend line" #t its not necessary. $inally" the #pper trend line isro!en" the '#y 6top order is exec#ted and the %a!e Profit is hit
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Now the well!nown technies are made in the opposite direction:
1. 6ell 6top order elow the lower trend line"
2. 6top +oss aove the #pper trend line"
. Pro(ected %a!e Profit.
%he trend line is ro!en" the 6ell 6top order is exec#ted and we ma!e money in
a downtrend #ntil the %a!e Profit is hit. As we #se a single %a!e Profit level" the
downtrend contin#es witho#t #s... let it o>
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EeconiAin chart "atterns
Professional traders #sed to analy?e chart after chart to find reliale patterns on
daily and even intraday time frames. %oday" comp#ting power comes into play.
:ore- Trendyis a software sol#tion ale to recogni?e chart patterns on all
charts every second
.4 :ore- "airs - 7 time frames + ./3 charts>
t has an intelligent algorithm to recogni?e strong trend lines and discover the
most reliale chart patterns at the c#rrent time. @o# will learn more technies
ao#t chart patterns in the memership s#scription:
*sing $ionacci technie for m#ltiple %a!e Profit levels
%rading =p#llac!s> y #sing +imit rders for a etter entry point
/ow mar!et volatility is #sed to filter false rea!o#ts
And more s#pertips
Clic! here to watch a video ao#t a#tomated chart pattern recognition
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