Intraday Trading Strategy (Version 2.1)

Preface

My approach to intraday trading is based largely on technical analysis, which is the study of price action through indicators in order to anticipate future price action. Naturally, I've long accepted that there is no way to be 100% accurate, for trading is (and this is a very important point) a game of probabilities. The successful application of technical analysis is therefore designed to alert the trader to the highest probability move... be it up, down or sideways. It is collective psychology that is the force behind market movements, and the result of this psychology is what we eventually see on the price chart.

Keeping It Simple

Given the multitude of technical indicators out there, it's hardly surprising that traders (especially new ones) often get confused. Unfortunately, it's hardly helpful that there's no 'holy grail' to trading. As they say, "there's more than one way to skin a cat."

Trading is very personal, and for this reason you should use indicators you feel most comfortable with in the hopes of improving your odds for success.

Notwithstanding, I will show you how I use the indicators that I use... and hopefully you will be inspired to develop your own trading strategy.

Speaking of Timeframes

The choice of timeframes is a personal one also, and personally speaking I like trading using the M15 and H1 charts.

Money Management

Sound money management is essential to sustainable and profitable trading. Though I shall not cover in great lengths on the subject, I will share my own money management technique.

On any given trading day, my daily equity at risk is capped at 3%. I further divide this into ten (10) trades, meaning that I risk only 0.3% of my equity on any given trade. Though it has yet to happen *touchwood*... I will be able to sustain 10 consecutive losing trades a day, before walking away for the day and regroup.

The Fundamentals

The foundation for ALL of technical analysis is the concept of support and resistance. Support is an area below the market price where buying overcomes selling. Resistance is an area aboe the market price where selling overcomes buying. It's no surprise then that properly identifying support and resistance is a big part of becoming a successful trader... because good market timing depends on buying close to support and selling close to resistance.

The strategy I employ is modelled on the tried and tested pivot points, originally employed by floor traders on equity and futures exchanges to determine critical support and/or resistance levels.

*Quick history lesson: Pivot Points are based on the mathematical formula originally developed by Henry Wheeler Chase in the 1930s. Chester W. Keltner used part of the formula to develop the Keltner Bands, first published in 1960. Larry Williams "brought sexy back" in his book 'How I Made One Million Dollars... Last Year... Trading Commodities' in 1979. Don Lambert, the creator of the Commodity Channel Indicator (CCI) uses the pivot point formula to make the CCI work.

If you are unfamiliar with pivot points and the various terms, kindly read the following articles for better understanding.

http://www.investopedia.com/articles/forex/05/FXpivots.asp
http://www.investopedia.com/articles/forex/07/pivotpointstrategy.asp
http://www.babypips.com/school/pivot_points.html

Should you already be familiar with pivot points, then by all means read on.

You will realise that I've essentially kept my trading style fairly conservative and without any material changes to the basic principles. As they say, "if it's not broken, why fix it?"

Trading Rules

1. This is an intraday trading strategy adapted for trading using the M15 and H1 charts. The indicators you will need as well as the template I used can be downloaded here:
http://www.ircforex.com/indicators/602-minibahns-indicators

(a) super_signal_v3.mq4 (used for alarm feature and for discretionary TP; NOT to be used for new trade entries!)
(b)i. Pivot _Points_-_Daily_(Shifted).mq4 (my ShiftHrs is "-1" to sync with London) *
(b)ii. Pivots_Daily.mq4 *
(c) Pivots_Weekly.mq4
(d) Pivots_Monthly.mq4 **
(e) b-clock_(h-m-s).mq4
(f) Volatility.Pivot.mq4 (my atr_factor is set to the default "3.0" on H1 and "5.0" on M15)
(g) FFCal.mq4

* My primary MT4 account is now with FXCM UK (
http://www.fxcm.co.uk/metatrader.jsp). As FXCM UK's server time follows London (BST), I now use (b)ii. on my M15 chart. Note that use of (b)ii., (c) & (d) on MT4 platforms with different server times, may result in materially different pivot levels. Whilst it is acceptable to use different pivot levels, i.e. based on GMT, EST, etc. my personal preference is per London since the London market is the largest and most volatile forex trading market in the world.

** I use (d) only on H1.

2. Determine bias by observing the day's opening price relative to the daily pivot point. If price opens ABOVE the daily pivot point, then bias is bullish/long. If price opens BELOW the daily pivot point, then bias is bearish/short.

3. Confirm bias by observing the day's opening price relative to the volatility pivot line. If price opens ABOVE the daily pivot point AND is also ABOVE the volatility pivot line, then the bullish/long bias is strong. If price opens BELOW the daily pivot point AND is also BELOW the volatility pivot line, then the bearish/short bias is strong.

4. The BEST entries for new trades are located within a zone (sweetspot) 20-30 pips wide of any given pivot line (Daily PP, S1, S2, S3, R1, R2 and R3). For longs (buying supports), ideally entries should be made 'at' to 15 pips above any given pivot line. For shorts (selling resistances), ideally entries should be made 'at' to 15 pips below any given pivot line.

Note:
  • If price is at PP, watch for a move back to R1 or S1.
  • If price is at R1, expect a move to R2 or back towards PP (shorts outperform longs approx. 58% to 42%).
  • If price is at S1, expect a move to S2 or back towards PP (longs outperform shorts approx. 56% to 44%).
  • If price is at R2, expect a move to R3 or back towards R1 (shorts outperform longs approx. 83% to 17%).
  • If price is at S2, expect a move to S3 or back towards S1 (longs outperform shorts approx. 83% to 17%).
  • If there is no significant news to influence the market, price will usually move from P to S1 or R1.
  • If there is significant news to influence the market price may go straight through R1 or S1 and reach R2 or S2 and even R3 or S3.
  • R3 and S3 are a good indication for the maximum range for extremely volatile days but can be exceeded occasionally (at R3, shorts outperform longs approx. 97% to 3%; and at S3, longs outperform shorts approx. 97% to 3%).
  • Pivot lines work well in sideways markets as prices will most likely range between the R1 and S1 lines.
  • In a strong trend, price will blow through a pivot line and keep going.
  • Once support or resistance is broken, the level in question becomes its opposite, i.e. former support becomes resistance and former resistance becomes support.
** It is important to understand, however, that these are probabilities and not certainties.

5. Wicks pricking through pivot point levels do not constitute a valid entry. Unless the move past a pivot point level is convincingly rapid, it is advised to enter a new trade only upon the 2nd candle that has its body past the pivot point level. In relatively calm market, when price is in the "sweetspot", I would typically place an OCO order (One-Cancels-The-Other) with the buy stop leg 10-15 pips above the pivot line and the sell stop leg 10-15 pips below the pivot line.

6. Stop-losses (SL) though highly recommended are not an essential part of the trading strategy, for if Trading Rules no. 4 & 5 are strictly observed... any unprofitable trades will be immediately closed when the opposite entry signal is observed. However, should you require a SL... the recommended level is 20-30 pips (and preferably on the opposite side of pivot point level to your entry).

7. Unless you trade one (1) lot at a time, it is advised that you split your entries into at least two separate trades.

8. Pursuant to no. 7, the way of exiting trades shall also be split... i.e. one shall be based on your discretion, and the other shall be decided by the market (via a trailing stop about 20-30 pips away). In general though, the TP level should be the nearest resistance if buying support and the nearest support if selling sesistance. (Note: The volatility surrounding the major USD-crosses have resulted in trades frequently being stopped out, be it for a loss, break-even or prematurely when in profit... far short of its eventual reversal point. I've been tinkering with a few exit strategies and was advised by an institutional trader friend of mine to utilise a volatility 'filter'. Since I do not have access to his multi-million dollar setup, I found the use of the Volatility.Pivot.mq4 to be helpful. From what I understand, despite its name, it is actually based on the ATR. I'm still in search of a more 'concrete' volatility filter. Until then, this is what I'll be using.)

Well, that's it in a nutshell. Please feel free to review the trading logs posted here to further familiarise yourself with the strategy... and remember, practice makes perfect. Should you require further clatification, you'll most probably find me here (
http://www.ircforex.com/chat/) most weekdays.

10 comments:

annatanady said...

good knowledge and strategies in Trading will make a perfect combination.. that's what i think

btw u've posted a great article
thanks a lot buddy!

Great Day!

Anna Tanady

Options University Secret

Sameer said...

Very informative... if not followed 100% .. its still incredibly useful. After all ur performance is based on this strategy ... thanks for sharing..

jdnaddix said...

Hello, This is Naddix,just wanted to say nice blog and thanks for some ideas. I have been a big fan of these pivots. So thanks.

Fr3ed0x said...

Hello im very impressed of your trading system minibahn and i very like it , it's not the right place i shoud ask you but didnt find good place.

Please can you convert your system for VTTrader platform . Thanks in advice

Karl Haines said...

You're awesome minibahn! Thanks for the wisdom...

Trader Blastradius said...

hello minibahn!
could you explain us how you make forex news appear live on metatrader charts? (with countdown to release of the news)

jesuscheung said...

i looked into the calculations of your pivot, resistance and support- its simpler than simple! e.g.
pivot = (last_week_high + last_week_low + last_week_close) / 3

don't you need something more well designed?

jesuscheung said...

and your resistance is probably untrustworthy
Resistance = (2*pivot)-last_week_low
you can do better than that?

Mark said...

@jesuscheung: read some books on pivots plz!! im sure u can see these formulas in any book.

Blogger said...

I would recommend that you pick the best Forex broker.

Post a Comment

Fixed Ratio Money Management

It's been a while since I last blogged about Money Management, what many consider to be the most important yet overlooked subject in trading. As one of the three (3) pillars of trading success (the other two being Mind and Method), I therefore feel that I have an obligation to share more of my thoughts on the matter.

Click HERE for more

Visit my other blog