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Rabu, 14 Januari 2009

way to the top

Way to The Top of Pips
May all your trades be successful ones
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If you have been following my journal entries in Forex Factory, you will notice that I
have been making extremely short term trades to capture small pips. This I have been
doing to demonstrate the use of stochastics over multiple time frames. I also wanted to
demonstrate that you can make low gain pip trades and make a consistent income from it.
Now, I will show you what I call the “escalator to pips”. From this time forward this is
the more often method I will be using to trade in my journal. I am providing you samples
of charts to refer to so that you may understand what dictates my decision making for a
trade. In my journal I will be trading live and invite everyone to discuss trades and ask
questions, or provide insight of their own.
Escalator to Pips Methodology
I use this only on GBPJPY however I am sure it can be used on any pair. One pair is
enough for me to concentrate on and earn pips from.
I set up 4 charts at 15 minutes (15M), 30 minutes (30M), one hour (1H) and 4 hours (4H).
I use and only need one single indicator, the stochastic slow set at 5,3,3.
Our trades are always initiated by a simple series of events that happens over multiple
time frame stochastics. If you need an explanation of stochastics you will not find it here,
please look on the Internet.

Entry Rules
1. Ignore the %K, %D cross.
2. Always wait for the 4H chart to lead our entry.
3. Long trades are entered when all 4 time frame stochastics are moving
upwards and the solid lines are all above or at 20.
4. Short trades are entered when all 4 time frame stochastics are moving
downwards and the solid lines are all below or at 80.
These four rules are our foundation for entering a trade. I wish it was this simple for
every trade entry, and most of the time it is. However, there are always some variances
to watch for and these are explained in the following charts.
Exit Rules (choose any of the below)
1. Exit at a pre-determined pip amount
2. Exit when you see a reversal in one or more time frames
3. Exit when the 15M hits the line (80 long; 20 short)
4. Exit when any of the other time frames hits the line (80 long; 20 short)
5. NEVER use the 4H chart 80 or 20 line to exit.
By looking at the exit rules you can see why I call this the escalator to pips. As we enter
a trade we will ride the 15M, then the 30M and finally the 1H stochastic chart to either
the 80 line (long) or 20 line (short).

Stops
I think I could actually write a book on stops. In fact this is one of the hardest sections to
write and keep short. So, I am just going to tell you how I use stops and leave it at that.
Stops are used to either protect my account or my profits. I never use a stop to stop a bad
trade. The stochastics stop my trade, not the stop. That means I am in full control of my
trade and it is based on the same exact method I use to make pips. I give my trade lots of
room…usually 70-100 pips away from price. My stop is going to get hit if there is
something abnormal happening in the world or the market, not because the stochastics are
wrong.
You can never lose taking profitable pips. You only lose when you lose a pip profit.
Always move your stop to protect your profits. Never cry over lost pips if you made at
least 1 pip. You’ll have another trade to make more pips, but how many pip losses can
you survive?
The more margin you have the less risk you’ll be at for any single trade. $500 mini
account traders carry lots of risk every trade…you have to accept this and have your next
$500 ready when something bad happens. If you are trading to protect $500, you are
going to have an extremely tough time making pips in Forex because you’ll simply set
too low a stop trying to protect too low a margin. I’m not saying you need to lose your
$500 on a single trade. What I am saying is don’t set your stops like you only have $500
to trade with…even if that is all you have.
If your in doubt about my stop theory. Sit and watch my trades in my journal and watch
how often I hit my stops or how much I lose from stops. Then look at how much I lose.
Then you will understand what I am writing about and you will have more confidence in
what I suggest.

Charts
All charts are only stochastic indicators from GBPJPY. All times are GMT. All charts
have stochastics from top to bottom of 15M, 30M, 1H and 4H. Vertical dashed line in
each chart identifies a significant time as discussed in each chart. Dashed horizontal lines
at the top and bottom of each chart identify the 80 (top) and 20 (bottom) lines.
I have purposely left the price out of each chart to show you that we do not need the price
chart to know where our trade is (although knowing how stochastics and price move
together is extremely beneficial). We really only need price to know how many pips we
are making, or how close we are to our stop.
Chart 1a – March 14, 2007 at 12:00 Long Entry
Every long trade you enter should resemble this chart. In this
sequence, the 15M is higher than we would like and the 4H has
just cleared the 20 line which is not ideal.
Notice every time frame stochastic for this long trade is above
20.
Notice too, that we did not enter this trade until the 4H crossed
the 20 line. There is a huge misleading idea in trading that long
term charts identify the trend. This is false. Long term charts
tell us only what the short term charts have been doing. There is
no guarantee because a long term chart is just starting an up
trend it will continue to go up. However, we do know if our
short term charts reverses, our long term chart will be affected.
You might think I’m splitting hairs on a definition here, but I
am not. I am trying to dispel a false train of thought that you
probably have. I don’t know how many times people state that
“the 15M is doing such and such but it is too short a time frame
to matter”. All I can say is “open your eyes, the 15M chart is
telling you something”.
Statistically we know that stochastics will behave a certain way.
I know in this situation we have about a 99% chance that we will
see continued up ward movement in price based on all four time
frames. The only thing I do not know is how far up the price
will move. What will dictate the limit of the move will be the
15M, the 30M and the 1H charts. The higher the time frame I
ride on the “escalator” the greater my risk is of a price move in
the opposite direction. However the higher up I go the more pips
I have already gained.
Getting back to my explanation of trends and time frames. Each
movement in a lower time frame will affect the time frames
above. It is the degree that a lower time frame affects a larger
time frame that will indicate what our price will do. Why?
Because lower time frame movements build longer time frame

trends.
You have to remember this to trade stochastics over multiple time frames successfully.
Chart 1b – March 14, 2007 at 16:00 Exit the Trade
All our exits appear at the same time; 16:00 however each
will give us a different exit price:
Entry was at 223.50 Long
Exit on 15M is at 224.14 +64 pips
Exit on 30M is at 224.07 +57 pips
Exit on 1H is at 224.81 +131 pips
The discrepancy here is exiting at highs, lows or closes
during each time frame. However, it does not matter, all
gained pips.
Look at the charts and you can see the 15Mchart going for
a wild ride up. If we pay attention to our other time
frames, especially the 30M as it is closest to the 15M, we
can see things are fairly stable.
Can you see how the 15M builds the 30M, the 30M build
the 1H chart?
I can tell the price is going to continue going up in the
15M chart because the downward moves on the 30M chart
and even the 1H chart are almost non-existent. As wild as
the 15M chart is, it is building an upward trend for the
longer time frame charts
The 4H chart during any trade is merely a reference point
to our direction and what the short terms are building.
I can show you a dozen more long trades and they will all
look like this. Shorts are just the opposite.
So how about something tricky and bad. Let’s go on to the
next charts.
Chart 2a – March 20, 2007 at 16:00 A Bad Trade Short?
As you can see by this chart our 4H has just crossed the
80 on the way down on March 20, 2007 at 16:00.
Here again we would much rather have the 15M and
30M much higher up the stochastic scale than they are
to jump into a trade. In fact you would have to consider
this a pretty risky trade because of where the 15M and
30M are together.
I will tell you that the 4H didn’t go down much further
in this trade when it was entered here. This is about as
bad as the trades go under “normal” conditions.
It is not an ideal trading position so already we are at
risk, There is a possibility that we could have enjoyed a
better trade since we could have entered the trade before
the 4H closed it’s candle. I don’t like to trade that way
unless the movement is clear or it is late in the candle.
However, I went with the trade here so let us see what
happened that turned this into a bad trade.
Chart 2b – March 20, 2007 at 16:00 A Bad Trade Short?
The 15M and 30M both turned up rather quickly.
Here’s what happened to price:
Entered short at 229.95
15M hit 20 at 229.38 +57 pips
30M did not hit 20
1H did not hit 20
Technically if you exited at 15Myou still gained 57
pips and hopefully you protected some of those
pips when you went to 30M.
When the 15M and 30M both turned up you should
be exiting but definitely when the 1H turned up and
closed.
So what would you have lost if this happened and
you waited for the 1H to turn up and close?
You actually would have gained about 4 pips and
lost that to your spread.
Here is a great example how the small time frames
build the 4H trend and why my stops are rarely ever
hit for a loss. During our trade the 4H is still
moving down and the net effect of the upward
movement of the short term charts was small.
Small enough anyways to allow us to gain some
pips.
The short term stochastics told us what was
happening and started to move up. It was time for
us to bail out when two moved against us and one
did not hit the 20 line. When 3 moved against us,
we were in trouble. At worst we would have hit our
profit stop.
The 4H didn’t lead us astray, it was just a weak
down turn and we entered this trade knowing there
was some risk attached. The short term stochastics showed us they were starting to build
an up trend and the 4H was just slow in reacting…which it always is.
Chart 3a – March 6, 2007 at 2:00 The Optimum Long Entry
This chart is a good example of the what
an optimum entry point looks like for a
long trade.
Notice first that the 4H actually led the
entry to the trade and broke the 20 line
first. This is the best possible situation as
we know that the lower time frames are
building a strong up trend.
The rest of the time frames have nice
parallel lines, they are all moving at the
same slope and all have their stochastic
lines about the same distance apart. In
other words the stochastics are almost
identical on each chart.
Just for the record, this trade would have
netted you anywhere from 50-200 pips!
Take this chart and post it on your wall
as a reference.
Chart 3b – March 7, 2007 at 2:30 The Optimum Short Entry
This is a chart of the optimum short entry setup.
This is an example of cheating a little and
entering when the 1H is halfway through the
candle. Trading live is much different than
looking at historic charts. During this time frame
the movement was quite simple to see.
Again the 4H leads the trade entry and the
downward stochastics of the other time frames are
making identical moves.
Another easy trade and the pips gain anywhere
from 90-200 pips.

Trading Forward Live
I left the price out of my charts in this document so that you would concentrate on the
stochastics. As you trade more and more using this stochastics you will learn how price
reacts to the stochastics. This is a valuable tool and becomes second nature to you
without even having to think about it.
Let the stochastics rule your decisions not the price. The price will move to make you
think you are wrong. The price movements are used to manipulate your decisions. The
stochastics tell the naked truth.
Practice with stochastics. Cover the price on your monitor and watch the stochastics
move over multiple time frames and write down what you think the price is doing and
will do. You will be amazed in a short time how well you can interpret what is
happening in the market and how you can “predict” moves long before they happen as
your brain absorbs the patterns.
Your greatest enemy will be human error and that feeling that you might miss a great
trade if you don’t act now. If you are feeling that anxiety, take a step back and think it
out. Am I too early? Too late? Does something not feel right? As you trade stochastics
learn to listen to your gut. It is actually your brain saying “this pattern is not right” or
“this pattern is right”.
Look at the charts I included here. This is about as close to fail-safe trading as you will
find. If you get into a losing slump go back and just trade the optimum setups until you
feel like a winner again.
Always, it is never about how many pips you make, but what the pips are worth that
counts!

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