2ways2wealth - trading systems explained

7/16/2019 2ways2wealth - Trading Systems explained

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2ways2wealth OverboughtOversold

Module: Over Bought Oversold Assist Strategy

ObjectiveThe objective of this module is to become familiar with the Over Bought Oversold Strategy

including placing the selected indicators onto a chart and learning to LGHQWLI\WKH6HW8Sand

Trigger&RQGLWLRQV This trading system provided for2ways2wealthby Wealth F X.

IntroductionThere are generally three major trading approaches.

T rending Systemsand strategies that generate signals when the market is trending orreturning into the major trend direction after a retracement

Breakout Systemswhich focus on getting in as a breakout starts and as close to thebreakout point to maximise the return on the trade.

Volatility SystemsorOver Bought OverSoldtrading strategies are used where themarket is moving into areas of unusual or extreme price conditions or trading a channel

where clear top and bottom prices are identified

The 2ways2wealthOBOS system is focussed on prices moving into extreme areas looking forover extensions of price moves in the short term, while looking to identify opportunities as the

momentum starts to run out, yet the price is still moving in the same direction.

It is a trading system looking to generate signals indicating when to get into the market as pricesmove back towards more normal market conditions.

This strategy is all about identifying the either the point where the move has ended and the prices

are returning back to normal conditions or anticipating the retracement as prices are still moving

strongly.

This is a contrarian trading system which means that the price is moving very strongly in one

direction and we are trying to pick it as it exhausts itself and identify entry points into the

currency in the opposite direction from the current short term market trend as the price returns to

normal areas or pricing.

Loading the system indicators and settingsThere are a number of ways to add indicators from a chart you will need to familiarise yourself

with your charting program to achieve this.

MarketscopeIf you use the FXCM Tradestation, Marketscope charting function the instructions for adding the

specific indicators are below.


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You can either use the Add Indicator function on the (FXCM) Marketscope tool bar or secondly

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keyboard to bring up the Add Indicator Function.

Note: You wil l needtosubscribetotheWealth FX Assist oscillatorto usethissystemeffectively

Once you have the Add Indicator function open you can add the indicators and the settings

required for this trading system.

Indicator 1: Wealth FX Assist (WFXA)Indicator 2: Bollinger Band 4321 (BB)This Indicator will need the settings altered for each one of the four Bollinger Band indicators

you add to this chart.Indicator 3: Relative Strength Index (RSI) there are personalised settings required for thisindicator

Introduction to our indicator settingsThis section will cover in detail the placement and set up of your indicators.

All the parameters of the indicators are set and loaded separately for each of the Bollinger Band

indicators we will overlay on our chart, whereas the Assist will use the default settings and the

RSI will need specific settings also.

Indicator 1: Wealth FX AssistPlace the WFX Assist on to the chart using the Indicator function button.

The Screen should look like the screen shot above.


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This indicator can be found by scrolling down to the indicators under the Wealth FX section.


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Alter the figures and then Click OK.

Repeat this step 4 times using the figures 2, 3 and 4 in the Standard Deviations

2 Standard Deviations



When you click OK the last time the chart will appear with the four Bollinger Bands displayed

and the centre line which is our 20 Period Simple Moving Average.

Your Chart should look like this screen capture below.


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Indicator 3The last of the indicators is the RSI or Relative Strength index which monitors the internal

strength of a currency and plots the results on a separate chart area at the bottom under the Assist

Chart Window.

We are going to make alterations to the look and the settings of this indicator and firstly we need

to select the RSI from the list of indicators in the FXCM Marketscope and click OK

The Indicator settings box will appear and you will need to alter the number of periods from the

default to the number 10.

This screen shot below displays the RSI Properties box with the Period altered to 10 (ten periods

of data).


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Next we need to alter the settings for the Overbought Level and Oversold Level settings from 70

and 30 to the new figures of 80 and 20

The RSI Properties box should look like this screen capture below.

We have altered the colour of the RSI line to black using the colour palate available, we have alsoaltered the colours of the 80 and 20 lines to red by using the same palate function.

To alter the colour of a line or alter its properties you can click on the colour and a small grey box

will appear with 3 black dots across the bottom, click on this and the palate with colour selections

will appear like this palate below.


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Your complete chart should look like this depending on which order you add the Assist and the

RSI.

The first indicator you add will sit at the top of the bottom section and the second will sit below itlike this chart above.

NOTE: If you find the indicator legend is getting in your way as you add the Bollinger Band

indicators, you can un-tick the show legend check box and these will be hidden from view.


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This will leave the chart free of text clutter which will free up vital screen real estate.

You can do the same with both of the other indicators if you are short of screen real estate.

You can always add them back again by reversing this process and checking the boxes again ifyou need to.


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Trading StrategyThe overbought and over sold nature of this trading strategy indicates that there is a condition

happening that is unusual and we are going to take advantage of that unusual market condition.

What the Bollinger band does is to display the prices between a pair of wavy lines which are set

either side of an average. What we have done is add different calculations of the distance thoselines are set from the average. We have added four versions and the chart will look like this close

up shot.

The Dark Blue line is the Simple Moving Average of the price set over 20 periods with sets of

parallel wavy lines set above and below the average.

Bollinger Band construction displaying standard deviations from the price will mean that 90% of

all Price candles will close inside the Bollinger Band 2 parallel lines (BOLL 2).

When the prices move and the candles close outside the Bollinger Band 3 and the Bollinger Band4 lines (BOLL 3, BOLL 4) the condition of the prices is extreme. We use the word extreme in the

fact that the price has moved away from the 20 Period Simple Moving Average (20SMA) fast

and/or a long way.

This over stretched condition is like an elastic band where once the prices move away with thrust,

venom or volatility and when the move away ends as it always does the likely hood of a

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Prices are expected to move back towards the average at some point and our goal is to identify

when the move has finished and the price is starting that retracement.

This predicted move back towards the average is what we as traders are looking for and as we

only elect to trade when a certain amount of volatility is present. I.e. the price has closed outside

the BOLL 3 line which means we can relax until it as happened and this is the first step to our

trading approach.

Below is a screen capture of an example trade placed after a move up outside the BOLL 2 and up

towards the BOLL 3.


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If we look at this screen shot we can see the prices are rather extreme.

The next screen shot (below), we can see that the price move up has stalled and the move back to

more normal pricing has started.

This is a perfect trade and shows the potential and also the key signals we are watching out for.

This trade has rewarded the trader with a 10 pip profit

Trading conditionsTrading Tab with Profit of +10 result and the Stop Loss levelMomentum

FallingRSI Overbought


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Trade Set Up conditionsBollinger Bands and Price Candles: Price has risen or fallen outside the BOLL 3 or BOLL 4during the move.

Wealth FX Assist: Signal Bars are overextended and the last two bars are generating lessmomentum (the Assist bars are falling on a sell trade and rising on a buy trade) so the momentum

is swinging back towards the centre line.

RSI:The RSI levels should be around our overbought/oversold levels of 80 on the high oroverbought side and 20 on the oversold or low side. If this looks to be heading down on a sell

trade and up on a buy trade this is good.

Entry:While market is over stretched we are looking for the prices to stop the move away fromthe average and turn back again.

We can take three types of entry and you will need to practice each one so you are confident ofyour trading system. (The next part of this strategy will cover the three different trading

approaches used to enter an Overbought Oversold Assist trade.

Stop Loss Placement:It is suggested that we wait for a candle to start which has a lower extremebefore entry. I.e. If a Sell trade is selected after a long move up we need to wait for a candle to

form below the highest point. This is a great place for us to hide our Stop Loss above the last high

point and possibly above the next Boll line on the chart above.

Risk on Trade:Stop Loss no more than 20 pips and no less than 10 pips and where ever you areplacing the Stop Loss you should risk no more than 1% of your trading capital as you are going

against the trendNote: Use the Wealth FX Trading Spread sheet to calculate the Stop Loss and Position sizerelationship to control your risk on the trade (See Money Management).

ExitStrategies:There are a couple of exit approaches that are popular and each has its ownadvantages and disadvantages.

F ixedtarget:This is where you can set a specific target based on pips or cash profit and theTrading Station will close out the trade when this level is reached.

An Example is set a 10 pip Stop Loss and a 10 pip Profit/Limit target or set a 10 pip Stop Loss

and set a 20 pip Profit target.

Floatingtargetbased on marketconditions.

Set a fixed Stop Loss and then manage the exitmanually by using the market conditions, movement or current prices combined with market

indicators to determine when to close this trade.

Example 1:We have a Sell trade and we set a 10 pip stop loss and the market moves downas predicted quickly and we are up 18 pips and as the price has just crossed the centre line we exitthe trade there and lock in whatever profit we can.

Example 2:The prices drop as predicted and we enter a Sell trade but when the prices fallaround 50% of the original move up, we determine that the price is unlikely to fall further andclose the trade right there.


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Example 3:We wait until the price starts to rise again in the opposite direction to our tradeand close out on the first strong upwards candle.

In this screen capture here we can see the price has fallen to a point where we are now making

more profit than we are risking and there is an area where we could exit this trade profitably (the

Green Box). Different people will exit the trade at different points based on their experienceconfidence and psychology.

In this example we could have exited the trade at:The Limit/Profit target set at 10 pips.

At the low point of the Profit Zone square giving a result of plus 30.1 pips (highly unlikelywecan picktheexactbottom).

8VHWKHDGGLWLRQDOLQGLFDWRUVWRindicateZKHQWKHGRZQZDUGVSXVh appears set to end, anexample could be if a MACD starts to cross the signal line.

The price crosses the centre line or one of the other BOLL lines which we are using as a

target.

The most important thing about this trading system is taking an exit a point that makes the trade

worth taking in the first place.

You do not want to risk 15 pips on an OBOS trade and then exit the trade at 8 pips.

Taking the trades is easy closing for a reasonable amount of profit is a touch harder.

The Screen shot below displays a great trade which has moved into the profit zone and after

finding a new low has then started to rise again.


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Exiting the trades as different technical conditions occur is the key to trading this system

profitably.

This trade was good but depending where you took the exit the profit potential was different for

each exit.

The three entry conditions in detailAggressive/Anticipatorytrade:The trader enters the trade before the price has started to fall.This type of trader is anticipating the turnaround and is trying to get in at the absolute top or

bottom of the move to give an entry which promises a larger win loss ratio as the actual pip risk

should be small and the gain could be considerable.

This trading style will mean that the move is not yet over so you will get stopped out of trades

quickly as the price continues to stretch. This trading style can deliver 5 or 6 times your risk but

may only win 30% of the time and may need to include multiple trades on the same move as the

price knocks you out you re-enter again at a higher/lower point with the confidence that the price

will fall eventually.

Note:Stakingstrategiescan beusedto givethistypeoftrading a real turbocharge.

Thisentai lsincreasingthepositionsizeofsubsequenttradesso when you dofinal ly win you get a bigtradewith bigger positionsizethantheprevioustradeswith asmall positionsize andsmal lstop loss.Thistypeoftrading will deliver a regular reward ofwinning day by day butwhenthingsgowrong youcan losemany dayswinnings in quicksuccession.


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The trade below indicates the market in an extreme condition and a trade entering at the top and

selling the market.


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The trade below shows a buy trade taking entry at the bottom of the move.

NOTE: The trades above were anticipation trades taking the decision to trade contrarian to the

move under way and trying to pick the top or bottom of each move.

We entered at the very extreme of the market once the highest candle started to fall leaving a tail.

Conserva

tive/Pa

tien

t:(QWHUVWKHWUDGHDIWHUDOORIWKHLQGLFDWRUVKDYHindicatedWKDWWKHUHLVDturn around occurring and is removing the chance of getting knocked out quickly as the volatility

is drying up as the prices drift back to the average.

This is definitely not about trying to pick the top or the bottom but about deciding when the

market has actually run out of steam and the indicators are all showing this clearly.

The market is turning back from the extreme move.

When the market is showing clear signs of a technical reversal we can elect to take a trade in the

opposite direction to the initial move.

In the example above the MACD was starting to fall with the WFX Assist showing lower

momentum and the RSI was showing lower price strength.

As the price made two higher highs and with lower momentum there were a couple of excellent

opportunities to enter in the OBOS trade.

This next approach is focussing on one condition to occur in a specific order.

Set Up: The price must touch the BB3 The price must have moved more than 30 pips from the centre line (20SMA) on the

Bollinger Bands.

The RSI must read over 80 for buy trades and less than 20 for sell trades. Market creates a new High or Low

Trigger : The price must make a new high (or a new low) while the WFX Assist is diverging


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Momentum is running out, and confirms with RSI Check for additional support and resistance at old high/low prices

Exit: Look for areas like BB-1 to enter and BB+1 for the exit.Use the amount you are risking (Stop Loss amount and add 25%): Stop Loss 15 pips target is 18

Pips Stop Loss 20 pips Target is 28 pips.

This screen capture below shows each stage of the trade, Step one and Step two are the Set Up

and the focus is on the size of the move and its extremeness by triggering a BB 3 touch, a RSI

80/20 reading and a specific amount of actual movement from the SMA.

Step 3 and Step 4 are the Trigger and Step 5 is all about exiting the trade with a decent return on

risk.

This is a great trading system for taking 20 to 40 pips out of the market regularly and quickly and

works really well around 4 - 6 pm ESDT in Australia, as it covers the moves that start when

Frankfurt and London open.

AutomationUsing the Price Alerts function you can set alerts around 30 pips above and below the sideways

market and wait till one of them is triggered.

This saves screen watching as most of our currencies we trade use the USD or the JPY as the

quote currencies then we get alerted when todays fastest mover hits the Price Alert.

This automates the process and cuts down on screen time

If you want to see some live OBOS trading videos click on the link below and view the videos

and workshop clips.


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2ways2weal th Overbought Oversold

Additional IndicatorsThere are additional indicators which will help to fine tune your entry and exit points into this

type of trade.

We can look at the Wealth FX training site and specifically lessons 9 and 10.

2ways2wealth - trading systems explained

Documents

indicator function

system indicators

contrarian trading system

bbthis indicator

2ways2wealth trading

major trading approaches

extreme price conditions

normal market conditions