the Daily Swing System This system requires 10 minutes each evening to trade. This system is all about taking high probability swing trades. Not only have I traded the system for a long period of time I have also manually back tested years upon years of data. I originally tested it over 13 pairs and found that 2 of these pairs did not produce amazing results so I have cut them out and now only trade 11 pairs. The pairs I trade with this system are as follows USDJPY, AUDUSD, GBPUSD, EURJPY, AUDNZD, EURUSD, NZDUSD, CADUSD, EURAUD, GBPJPY and EURCAD. The reason I trade so many pairs is because the setup we are going to be looking at only happens on average 12 times a year per pair (if you only take the very high probability setups). So once we start trading 11 pairs we get more than enough signals, in 2007 there was approximately 120 good setups.
click to join usSupport and Resistance
What is support?
Support is the price level at which demand is thought to be strong enough to prevent the price from declining further. The logic dictates that as the price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell. By the time the price reaches the support level, it is believed that demand will overcome supply and prevent the price from
falling below support.
What is resistance?
Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further. The logic dictates that as the price advances towards resistance, sellers become more inclined to sell and buyers become less inclined to buy. By the time the price reaches the resistance level, it is believed that supply will overcome demand and prevent the price from rising
above resistance.
Below there are two examples of support and resistance in action on a Daily chart of the EUR/USD. The first example is using horizontal support and resistance and the second example is using a trend line. The arrows show points at which the line rejected price. As you may notice from looking at the first example once a strong support level is broken it turns into strong resistance, the same goes for a strong resistance level, when it is broken it becomes support.
click to join usThis system will be using support and resistance extensively so I highly recommend after you have read this section that you spend a decent amount of time trying to identify support and resistance levels for yourself on your trading platform. Throughout my trading career I have always used support and resistance levels to assist my trading decisions and it has proven to be a very valuable asset.
For the entries for this system we will be using price action, we will only be using one candle stick pattern which I call the Pin Bar. Pin bars form on all time frames where price tries to push up or down through a resistance level but fails and falls back to a similar level at which it opened. Once the bar closes in this state, it creates a price bar which looks like a pin see images below.
click to join usThis price bar is very accurate at pointing out reversals on the larger time frames like the 4 hour and daily charts as long as it coincides with a strong support and resistance level. However no pin bar is created equal, every one that develops is slightly different, as you gain experience you will be able to easily spot the good from the bad but for now I will give you a few pointers to help you recognise the right pins to be trading.
• The pin of the bar must be at least twice the length of the head (the part between the open and close).
• The longer the pin the stronger the signal. The close of the pin bar should be close to the open.
• Although it is not crucial, if the pin bar is pointing up and the close of the pin is below the open this shows that the bears are strong and means it is a strong signal. If the pin bar is pointing down and the close of the pin is above the open this shows that the bulls are strong and means it is a strong signal.
Let's look at some pin bars on a chart.
click to join usOn the above example there are 4 bars marked out with numbers, only two of these are pin bars. Pin #4 is a well formed pin bar. Pin #3 has a close which is too high making the pin of the bar not long enough. Pin #2 is not a pin bar but more of a neutral bar mainly because the pin of the bar is equal on ether side indicating uncertainty in the market. Pin #1 is a perfect pin bar, it meets all the
guidelines and would be a perfect setup in my opinion.
Once you have a grasp of the support and resistance and you understand how a pin bar is formed and what it should look like, then it is time to put everything together and start looking at entries.
First you will need a Daily bar chart, for each of the following currency pairs. USDJPY, AUDUSD, GBPUSD, EURJPY, AUDNZD, EURUSD, NZDUSD, CADUSD, EURAUD, GBPJPY, EURCAD.
The first signal we are looking for is a pin bar like we discussed earlier. Each day a new bar is created at midnight GMT or EST depending on your
broker, you only need to flick through all your charts and check if today's bar closed as a pin bar. For example I use a
broker on GMT but I am in EST so every day at 8.00pm ST I flick through all my charts and look at the days price bar to see if it is a pin bar, this should barley take 2 minutes. Sometimes you may not see any for a hile then the next week you may get one each day.
Once we have found a nice pin bar we have to see if the price is also close or touching one of the following.
• Trend line
• Support level
• Resistance level
If you have been keeping an eye on the pairs for more than a week then you will already have marked out all the possible support and resistance levels and have a good idea what's going on long before a entry is formed. Let's look at a couple of charts using support and resistance along with pin bars.
click to join usAbove is a daily chart of the GBP/USD at this time there were two major support and resistance lines in play going back as far as 5 months. I have marked with arrows the pin bars that formed at these levels, using the entry technique we will discuss later just these four trades would have easily yielded over 600 pips and remember all we are doing is spending 10-15 minutes each evening at the charts.
Ok, so you have the major support and resistance lines set out on your charts, you see a nice pin bar form at one of these levels, right now your probably dancing around because you are so sure you know where price is going… but don't jump in the market yet! Although you could jump in the market now and have a good chance of this being a winning trade you would be leaving a lot of money on the table, let me explain my method for entering the market once you have a signal.
This is the real beauty of this system, most people I know that trade off of pin bars will place their buy or sell order a couple of pips above or below the pin bar with their stop the other side. I'm not saying this does not work but I am saying that there is a far better way of trading them. I analyzed hundreds and hundreds of pin bars from all 11 pairs that I trade and I found 1 thing in common. Each time a pin bar is formed I found that more than 90% of the time, price retraced back before heading in the direction the pin bar anticipated. Out of those 90%, 80% retraced to the 50% fib retrace level of the pin bar and the other 10% retraced to the 68% fib level of the pin bar. What this means to us is that if we enter at the 50% retracement of the pin bar then we get a much better risk/reward ratio on the trade which is very important to any trader wishing to make it long term in this business. Don't worry if you are confused, I am about to explain.
Let's take a new example of a pin bar forming at a resistance level. I have enlarged the picture of the pin bar that formed so you can clearly see the entry level.
click to join usAbove you can clearly see the red resistance line that has shown a history of support and resistance further back in time (not on chart) and the nice pin that formed at the level, this means we are looking to make a sell trade. To locate our entry point at the 50% retracement level what I do is use the Fib tool and drag it over the whole body of the pin bar, the 50% fib level will be our entry point for the sell trade located on the picture above where the black arrow is pointing. As you can see the next day price came up to open our sell order at the 50% level, then went in the desired direction. There was almost no drawdown on this trade and everything was known the day in advance! This is not luck if you check back over your charts you will see the same thing repeats itself over and over. Of course there will be times when price will go way over the 50% level but they are minimal. Stops are always placed 5 pips the other side of the pin bar. By using this method of entry we have halved the risk. Here's an example. The average pin bar on the daily chart is about 100 pips in length, if we were to place our buy order 5 pips above to catch the move with the stop 5 pips behind then our risk in pips is 110 pips not inc spread. Using 2% of your account (which is what I recommend) on a $10,000 account would be $300. This means price has to move 110 pips for you to make back your initial
2%. Using my entry method our risk in pips would be 55 pips so price only has to move 55 pips in our direction for us to have a profit of 2%. Considering I have had moves of 500 pips risking 50 pips your account can grow faster than you think! On that particular move it was a profit of 20% of my account risking 2%. Below is a diagram of a pin bar with the entry and stops drawn on for a sell position, it is exactly the same for a buy position except the opposite way around.
click to join usTrade Management
How you manage the trade once it is open will vary depending on your personality, some people like to shoot for the big money while others prefer to take smaller more consistent profits.
If you prefer smaller more consistent profits…
I recommend you split your position into 2 halves, set a take profit level for one half at the same amount of pips that you risked on that trade. For example if you stop is 60 pips then you would set the take profit on the first half of you trade to 60 pips. Set a trailing stop for the second half of your position to trail behind by the same amount of pips you risked. This enables the trade to take care of its self while you are not around, the first position is used to take a quick profit and the second will follow the trade behind by the same amount as the stop value, eventually being stopped out when price turns against it.
If you prefer larger big dollar gains…
I recommend you do not split your trade into two positions as this does reduce your overall dollar gain, instead use one position, and as soon as you check the trade and it is in more profit than you risked, move your stop to break even. From here on it's a free ride and some of these rides are huge! You can target another support and resistance level or set a predefined target like four times
your risk which would give you a huge gain on each winning trade.
I personally use the second method as it makes me the most money but I do get quite a few trades stopped out at break even which can be annoying sometimes. Whichever method of trade management you choose you still should not need to be more than 10 minutes in front of your charts on the evening.
System Rules
• Check each chart when the daily bar closes for a pin bar.
• Make sure it is bouncing off of a major support and resistance level.
• If the pin is pointing up against the resistance level we are looking to sell.
• If the pin is pointing down against the support level we are looking to buy.
• Set the 50% fib level of the pin bar to find your entry.
• Work out your risk for 2%-5% of the account.
• Set your entry order at the 50% level.
• Place your stop 5 pips + spread the other side of the pin bar (pointy side).
• Set your take profit level depending on which exit strategy you wish to use.
• Always bring your stop to break even once you are in profit by the same amount as you risked.
• If you trade is not triggered within that trading week then close the pending trade and look for a new one.
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Best Forex at 3/16/2009 12:59:00 AM
