Price action strategy the STEAMM

TABLE OF CONTENTS PREFACE A SHORT HISTORY ROAD MAPS TRADING BEFORE THE LONDON OPEN False break – 2B STEAMM STRATEGY The trend Exponential moving averages Entry filters The STEAMM set up REAL TRADING EXAMPLES PREFACE “An investment in knowledge pays the best interest.” ~ Benjamin Franklin Trading is a zero sum game If you are winning someone else is losing and vice versa This is the first thing you have to understand about the financial markets If you don't get this you have good chances to join the 95% club of unsuccessful traders The good news is that you can make nice income working from home just a few hours a day because trading is like any other business The other important aspect of the trading is that it is not an art gallery which means that technical analysis is not all you need to know You must learn how markets operate which are the main players and what they exactly Also you have to learn what market conditions you can trade and which financial instruments you should use To tell the long story short trading is a business and you have to treat it like that and if you consider treating it like a hobby you’d better something more relaxing The fact that trading is a zero sum game implies one very important requirement - you must have an edge if you want to be a successful trader This is the reality and you can't change it After the 18 years that I’ve spent on the financial markets as an individual trader, risk manager (during the world financial crisis) and FX dealer (during the EU debt crisis) I‘ve learned one thing - the ULTIMATE trading EDGE you need before you name yourself experienced trader is KNOWLEDGE It is not a holy-grail trading system or secret method for analysis Financial markets are always changing and if you want to make money in the long term you must adapt And you can't adapt to the new market conditions if you don't have sufficient knowledge You have to know how the markets work, what the large participants do, what types of instruments you can use, how the fundamentals affect the prices, etc Remember! Knowledge about the markets will pay the highest interest on your capital Bon voyage! -Svetlin A short history Financial markets are changing often and in order to trade successfully, you need to use a range of a few strategies to trade the different market conditions More important, everyone should have a specific trading style that suits his/her temperament, experience, vision of the financial markets as a whole, risk aversion, etc In this book I will try to explain in more detail what exactly my trading style is and how I trade the FX market For the past 15 years I have seen a lot of strategies that work well and then fail, but it could not be otherwise Technology is developing too fast and it is used by large funds and banks to give them an advantage Also the role and behavior of market makers are changing and that also requires adaptation of some rules of the trading systems There is no way in the presence of super-fast computers and the light-speed Internet and increase of the daily volume from 1.2 to 5.3 trillion USD, to apply the same strategies without any change It should not be forgotten that the methods of the classical technical analysis were developed in quite different conditions and speed of dissemination of information The currency market was not available for many of the current players back then More popular were the stocks and commodities futures The development of various technologies allows almost anyone to trade on the foreign exchange market, as well as contracts for difference (CFD) and any other financial instruments The development of the same technologies, however, created the so-called "high frequency traders" (HFT) Armed with super-fast computers, servers and the Internet connection they have significant advantage over other market participants In the middle of the past decade, the forex market was joined by large sovereign funds (mainly from Asia) They significantly increased the liquidity, but started to have a serious impact on price movements EUR/USD managed to reach 1.60 in 2008 fueled at least partly by sovereigns buying This trend was not confirmed by the fundamentals and as a result, the pair tumbled to 1.23 in just months This event convinced me that it doesn't matter what I think about the forex market or what the classic fundamental and technical analysis are telling me Much more important is what the big market players are intending to They have the resources to move the prices wherever they want, and their only purpose is to make more money from money Everything else is irrelevant for their managers and traders For the above stated reasons, I found that for me it is best to follow the "big money", of course as far as possible It is wishful thinking to imagine that a manager of a large fund or dealer at a major bank in London or New York would call me to tell me exactly when to buy or sell Somehow I have to identify what they are doing and try to follow their actions Initially I started with trading strategies based on technical indicators and chart patterns This is inevitable, since at the beginning there is no way that you have an accurate idea of what exactly are the financial markets and what's working best In fact, these strategies were working very well, because the market was not as crowded as today Also the computers were not the largest group of traders The uptrend in EUR/USD since the beginning of 2002 to the end of 2004 was perfect for trading With the opening of London usually a new leg in the direction of the trend started Pullbacks were pretty clear creating good entry points Around 12:30AM London time a deeper correction after a test of the European session extremum (high/low) used to start, which was providing great trading opportunities The most popular chart patterns worked almost perfectly and breakouts of flags or triangles on 1- hour chart could be traded easily In 2006, however, major sovereign funds joined the forex market They were well capitalized with money (mainly dollars for diversification into other currencies) from exports (China) or the high prices of raw materials (the Middle East, Russia) The market was no longer the same and the old strategies did not work so well Funds had enough resources to buy or sell without any retracement This immediately changed the notions of divergence, overbought and oversold conditions First breakouts of chart patterns were usually false, because the entry and exit points were crowded Then I found out about the price action trading and the other methods of Joe Ross TTE (Trader’s Trick Entry) is an excellent strategy and can be used in any financial market, as long as there is a trend However, I did not like the size of the stop and I had to something to reduce it Trends were not as clear anymore and I had to trade on minute chart Unfortunately, at such small time frame this strategy is not effective Then I decided to add the good old moving averages to my trading toolbox This of course did not happen by accident After long hours of screening time, I noticed that before the next leg of the trend starts, the price retraces to the moving average Of course there is no way it will always be the 20-period EMA, because everyone will learn the set up and trade it Therefore I had to find a filter that can restrict the number of losers, but at the same time not increasing the size of the stop The quote reading was perfect for achieving these goals Moreover, it could help to meet the basic principle of the strategy, which is to follow big money As I wrote, the quotes are the first source of information that can be used by traders to get an idea of what orders are executed Of course entries had to be in the direction of the trend, and the moving averages could be used as dynamic trend lines and support or resistance levels Their location and direction gives us insight on whether a trend is present and whether it is bear or bull Basically, this is the short history of my trading strategy that I named first TTE of TTE (the terminology of Joe Ross) and then someone came up with the name STEAMM (Simple Trick Entry And Make Money) As I said, every trader must have a range of strategies In this book you can read about how I trade at the spot market Every morning, I start by reading the main news affecting the financial markets (not just forex), quick overview of the closing of the previous day (in all major markets) and drawing the so-called road maps Road maps Roadmaps show the technical picture and give me the first entry levels for the day They depict the major support and resistance levels and especially the points of confluence I draw my road maps on 15-minute chart, but everyone can select the time frame suitable for his trading style The road maps show all major price levels from daily to 15-minute chart Most important for me are the levels on the 1-hour chart, as they are often tested throughout the day Longer-term traders can start with weekly or monthly charts and go down to 4or 1-hour time frames In such cases it may not be required to update the road map every day I use the following levels of support and resistance: - Swing highs and lows - Trend lines - Moving averages – 20, 500, 100 and 200 EMA - Pivot points - Fibonacci retracements - Psychological levels (round numbers) - Bollinger bands The is updated every morning before the start of the European session, but when you gain experience, it takes only a few minutes Major levels on a daily time frame change less frequently, while the moving averages and pivot points are drawn automatically by the charting software Only the horizontal support and resistance levels and probably trend lines and Fibonacci levels should be updated Also it makes no sense to trade all financial instruments that are available You have to choose only 2-3 major currency pairs and learn everything about them At some point you can guess, with a good degree of probability, what comes next just by watching the quotes or the candles I trade mostly EUR/USD, GBP/USD and EUR/JPY and sometimes the stock indices DAX and FTSE The whole procedure of drawing of road maps takes less than minutes On charts and you can see road maps for EUR/USD and EUR/JPY The ellipses show the buying zones, while the rectangles show the sell zones The first area where you can look for a long position in EUR/USD is 1.3045/40 This area is based on the confluence of the central pivot point and the 200-period EMA Short position could be open around 1.3100, where we have a round number, swing high and a pivot (R2) Between the two sell zones there are several resistance levels (upper boundary of a consolidation, pivot, and Fibonacci retracement) but none of them is strong enough For EUR/JPY the situation is slightly different The pair has been in an upward trend and therefore it is much safer to open only long positions We can identify to buy zones and as they are within 10 pips, it is advisable to look for a long entry between them, or closer to the second one (129.80) When you plot all support and resistance levels on the chart, it looks like a maze The idea is not to look at all horizontal, vertical and diagonal lines Important for us are only the points where there is a confluence of at least 2-3 support or resistance levels In addition, I have set some priorities For me, most reliable are the swing highs and lows, moving averages and trend lines All other levels are only for confirmation and without one of the main, I would not look for an entry The more types of support and resistance are concentrated at some point, the more likely there is someone else to buy or sell around the same level Road map EUR/USD Chart - Source: MetaQuotes Software Corp STEAMM at round number Chart 33 - Source: Forex Strategy Builder When the market is in consolidation we can look for entries close to its borders Best strategy in such cases is 2B, but sometimes you can use other methods if you have confirmation by the price action On Chart 34 the currency pair EUR/USD attempted an upward price move, but around the 1.4170 resistance have emerged strong offers These orders were confirmed by the sharp return from the level the bear trend candle on 1-minute chart A little later, second attempt for a break above 1.4170 followed, but it also was unsuccessful You can note several combinations of a large white candle followed by a large black candle This is a sign that the bulls cannot take full control of the market and implies that a break above the resistance level is less likely The third attack gives us the opportunity to open a short position We can choose a more conservative approach (2B) or an aggressive sell at the double top Short position was opened at 1.41659 with initial stop at 1.41708 (4.9 pips) Prices go back down sharply, and a triple top appears on the chart The next minute we close the first and second parts of the position respectively for 6.2 pips and pips profit Then we follow the downward price move by moving the stop, which eventually was hit for 19 pips profit Unfortunately, the lower boundary of the range is not tested and another attack on the resistance level follows The average profit is 11.4 pips with 4.9 pips initial stop When trading in a range always use protective stop, because a break against your position may lead to huge losses Triple top short position Chart 34 - Source: MetaQuotes Software Corp The time before the London open is appropriate to look for a false breakout of the Asian range The best option for opening of a position is after a small break of previous extreme (2B) Some experienced traders can also use more aggressive approach One of these methods is the formation of a double bottom or top close to strong support or resistance levels On Chart 35 you can see one of these cases EUR/USD breaks below the Asian range low shortly before 7:00AM (London time) and goes to the 1.4170 support, where are clustered strong bids In general, liquidity before the opening of London is not large and these orders can stop the downward price move So we have a reason to join with the idea that a double bottom will form The stop is very small when we use aggressive approach, so it is worth a try Of course it is good to have confirmation at least from the quote reading When you want to go long (as in Chart 35), upticks must be larger than the downticks Buy on a downtick (at 1.41698), as close to the first low as possible The stop has to be two pips below the first swing low (4.9 pips) Double bottom is formed and upward price move starts The first part is closed for 5.2 pips profit and the second for 10 pips profit As this rally is very fast, the stop is moved immediately at +3 pips Third part of the position is close at the 100-period EMA for 29 pips profit The average profit is 14.7 pips, which provides us with risk/reward ratio of 1:3 Long position at double bottom Chart 35 - Source: MetaQuotes Software Corp Correlations between different financial instruments are some of the best filters for trading the STEAMM and any other strategy Charts 36 and 37 show how correlation can be used in practice EUR/USD tested the 50-period EMA, but EUR/JPY was still above its EMA I waited for EUR/JPY to touch its 50-period EMA and opened a long position in EUR/USD at 1.41978 Both pairs went back up together almost immediately, and this allowed initial stop of pips The first part was closed for 5.4 pips profit and the second for 10.5 pips profit Unfortunately, 200-period exponential moving average stopped the upward price move of EUR/USD The stop of the remainder of the position was hit for pips loss Ultimately, the average profit for the position was pips Unfortunately, correlations not work well recently, but you should know them, as they are a very good tool for any trading strategy STEAMM for EUR/USD with confirmation from EUR/JPY Chart 36 - Source: MetaQuotes Software Corp Chart 37 - Source: MetaQuotes Software Corp There is an interesting modification of the strategy that I call "Early STEAMM entry" In this case, we open the position at the very moment of crossing of the exponential moving averages before they are heading in one direction Mandatory condition is that before the entry the pair should consolidate in a narrow range on 1minute chart Also the quotes must show the presence of larger orders in the direction in which we will open position The advantage of the "Early STEAMM entry" is that we enter at the very beginning of the new trend If you open the position near one of the borders of the consolidation range, you can afford very small stop It is better the market to be trending on a higher time frame and the position that we open to be in its direction On Chart 38 the currency pair EUR/USD has been in tight consolidation just below the 20- and 50period EMA We sell near the upper boundary of the range at 1.39619 with an initial stop of 4.6 pips Shortly after the crossing of the two exponential moving averages a new downward price move started The first two parts of the position are closed respectively for and 10 pips profit Pullback follows and the exponential moving averages are tested but the bears are selling and the next leg down begins Such price moves are often exhausted quickly, and we can close the last part for 31 pips profit In such cases you can only move the stop closer to the current price levels The average profit of the position is 15.3 pips with initial stop of 4.9 pips Early STEAMM entry Chart 38 - Source: MetaQuotes Software Corp STEAMM strategy can be traded on any time frame The difference is that the greater the time interval, the higher the initial stop, but we can also expect bigger profit On the hourly chart of EUR/USD (Chart 39) exponential moving averages indicate a bearish trend The second correction of the downtrend tested the 50-period EMA, which coincides with the level of the swing that was formed by the first correction We have perfect conditions for STEAMM and open a short position at 1.4282 The initial stop this time is 10 pips, because the trade is on a larger time frame The position could be opened at the level of 50-period EMA You can also wait for a little break above the EMA and sell pip below it for 2B entry The third option is to determine the exact entry level on a smaller time frame chart as this could be a double top or breakout of consolidation pattern The test of the 50-period EMA is followed by a sharp selloff We close the position in parts, as the profit targets must be consistent with the size of the initial stop The stop for the third part should be moved above the swing highs on 5- or 15-minute chart In this case, the maximum profit for the third part was about 140 pips STEAMM on hourly chart Chart 39 - Source: MetaQuotes Software Corp Finally, let me show you an example form the last few days This is a very interesting case, because it shows a lot of advantages that we have with the STEAMM strategy The USD was under selling pressure for fundamental reasons and I was looking only for long entries Major currency pairs were trending upwards during the Asian session and the 200-period EMA was supporting GBP/USD Around the London open EUR/USD was bought, while the GBP/USD was still testing the 200-period EMA This is a perfect buy set up: The market has an upside bias; Correlated currency pair (EUR/USD) starts to move in the direction of the trend; Currency pair we trade is testing strong support (200 EMA) In this case GBP/USD tested the 200-period EMA with double bottom and I bought at 1.5985 The initial stop was at 1.5979 (6 pips) First part of the position was closed during the tight consolidation for 5.5 pips profit The upside price move started with good momentum and the second part was closed for 14.5 pips profit Stop was moved to break even Let me turn your attention to the first test of the 20-period EMA When the quotes show that someone is buying with large orders, I add to the position when there is a good STEAMM set up This time a bought 1/3 of the original size at 1.6023 with pips stop The last part of the position was closed when the stop was hit at 1.6073 STEAMM GBP/USD Chart 40 - Source: MetaQuotes Software Corp STEAMM is a strategy for trading in the direction of the current trend, which is determined by the position and the slope of the 20-, 50-, 100- and 200-period exponential moving averages Positions are opened at the end of the pullbacks to the EMAs (mostly 20- and 50-period) The following conditions could improve your trading results: levels of support or resistance - usually swing highs and lows; - quote reading; correlation with other currency pairs and financial instruments The more of these conditions are met at the time of the opening of the position, the more likely it is to be profitable Each position must be actively managed and closed in parts The first part is closed when the profit is equal to or greater than the size of the initial stop The second part is closed when the profit is two times greater than that of the first After the second the second part is closed, move the stop to break even For the remainder of the position follow the price move by moving the stop above the swing highs or below the swing lows Used time stop/limit and close the first part after 5-10 minutes (for 1- minute chart entry) if the price stop or limit are not activated The second part is closed after 15-20 minutes, and the third after 30 minutes Position may be closed if the quotes show the existence of large orders in the opposite direction STEAMM strategy can be traded on any time frame The higher it is, the larger will be the size of the initial stop, but also a large profit can be expected Also, by increasing the time interval of the chart, we reduce the number of the trading signals When trading STEAMM as well as any other system you must strictly apply the rules for money (risk) management Very simple but very effective rule is to risk a fixed percentage of the current account balance Follow the big money and your trading will be much easier and much more profitable!