he Most Profitable Trading Pattern You Will Ever Encounter Read more: http://forums.babypips.com/free-forex-trading-systems/#ixzz3fkVFJWet

First thing, this pattern is not suitable to day traders. It is a trend following system, but the most evolved you will come across. Only read on if you are willing to hold a trade for anywhere from a week to a quarter.

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So most trading teachers will show you a similar picture in their courses. It is all you need to know about price movement. They would tell you price is either trending or ranging. You can only trade profitably when its trending.

Then they show this picture to explain the trend; an upmove (impulse move), which retraces to a higher-low then creates a new, higher-high and so on. Every trading system existed plays on a variation of this picture.

A support-resistance mentor would say the first high is resistance, so trade a break of that resistance. Or trade a bounce of that support. So you try that but it doesn't nearly work; you can never work out where the exact resistance or support are. Additionally, sometimes support or resistance fail causing you massive losses. So you look for another method.

So you meet another mentor and he tells you about RSI. He would tell you when price makes a higher-higher but RSI doesn't, you should sell as this is a sign of reversal. Besides the fact this is plain wrong and that divergences don't foreshadow a reversal (they actually confirm the trend). RSI divergences don't tell you when to exit. Actually most of the time the divergence is completely neglected and price continues to move in the same direction. So you move on to try trendlines, fibonacci, bollinger bands, harmonic pattern or moving averages. Nothing ever works consistently.

So they tell you trading is hard and its money management is all that matters. Well yes money management is very, very important. But those mentors also know nothing and they teach you bits and parts, a half-truth. That's why their systems don't work out.

I will show you a trend following system that works. And its not a breakout system, my trend following is much more accurate. All you need is a 20 Exponential moving average, 50 exponential moving average and a stochastic oscillator.

Lets move on...


ADDED: here is my fxbook account so people can follow.

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In this post I will share the system's rules and then post an example in a following post.
I want to point out that the picture I shared in the opening post is an important one; price does trend in that way. Its just that mentors have never helped us trade that movement properly. This is what this system will do.

Entry

Step 1: Plot the 20 Exponential moving average (ema), the 50 ema and the stochastic oscillator.

Step 2: Wait for the 20 ema to cross over or below the 50 ema. Now any moving average system tells you when (the 20 crosses above 50 goes long. when 20 crosses below 50 go short.) THIS IS WRONG! The 20 ema crossing above the 50 ema indicates a very strong upward move that is about to correct soon.
The 20 ema crossing below the 50 ema indicats a strong bearish move that is about to retrace. So how do we know when does the retracement end and when will it continue? This is where the stochastic kicks in.

Step 3: If the 20 ema crossed above the 50, the stochastic will be OVERBOUGHT (indicating that a fall in price is near. If 20 ema crosses below the 50 ema, the stochastic will be oversold. This is the pattern I'm sharing with you; stochastic will be overbought with an upward cross over and vice versa on all trading instruments on all higher timeframes.

Step 4: Keep a close eye on stochastic, wait for it to go all the way to the other extreme. Place your entry when stochastic crosses over in the other direction.

ex: 20 ema crosses above 50 ema. Stochastic will be overbought (80+). Wait for stochastic to become oversold. when stochastic crosses up at oversold, by the next candle open.

It may sound confusing, but bear with me and things will become clearer in the example. All we did is traded the picture I shared in the first post. Price went from a low point to a high point (so 20 ema crossed above 50 ema.) price then retraced (stochastic went from overbought to oversold.) We entered when stochastic crossed over from oversold because we anticipate that price will go on to make a higher now. This is the most profitable trading pattern you will encounter.


Exit
I use trailing stops. Once we enter. I draw a fibonacci extension from the low point to the high point if its a buy signal or from the high to the low if its a sell signal. I use the following levels: 1, 1.272, 1.618, 2, 2.618, 3, 3.618, 4, 4.618, 5... and so on.

When price closes above 1, I move stops to break even. When it closes above 1.272, my stop becomes a close below 1. Then when it closes above 1.618, my stop is a close below 1.272. A close above 2, sees me moving my stop to a close below 1.618 and so on.

In the next post I'll share a number of examples to clear it up.

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So here is an example. This is USDJPY in 2015 on the 4H chart. (Its important to note I prefer that time frame. Trading on the daily could keep you in trades for years! on the other hand using a shorter time frame is not advisable for many reasons.)

I doubt anyone tried shorting USDJPY this year. But the system clearly shows you a short opportunity that yielded 250 pips in five days (fundamentally, this is a counter-trend trade.) Most analysts told you it was ranging early on (by the way a buy signal in USDJPY just flashed on Friday.)

In the picture, you notice the yellow line (20 ema) crossing the blue line (50 ema). We now establish that the trend is bearish, USDJPY should make at least one lower low.

At that time, the first circle at the bottom, stochastic was indeed oversold. This confirmed to us that we are about to see a retracement. We kept following the stochastic until it got overbought, that told us that the retracement is almost over and now we will go on to make our anticipated lower low. We entered as soon as the stochastic crossed over to the downside (the second yellow circle). This happened to be at the closing of the shooting star formation on the chart, marked with the green arrow and the red horizontal line.

Once we entered. We now have our high point (that is the highest point immediately before the crossing of the moving averages) and a low point (the lowest point before the retracement.)

We plot a fibonacci extension from the high to the low. As soon as price closed below the fibonacci 1 level, we moved the stop to break even. It proceeded to close below the 1.272. We moved our stop to a close above the 1 level and so on.

You see price moved below 1.618, then moved up to close above the 1.272 (the second green arrow) this is where yo u would close the trade.

The risk on that trade was 99.7, the reward was 205 pips. So try the system out. Next I will share a trade that I'm still in and a trade that didn't work out.

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See this is a long trade that I'm currently in. It is basically the same set up but this time its a buy rather than a sell. Notice that the price has closed above fibonacci level 3, so now my exit is a close below 2.618.
I risked a total of 288.3 pips on this trade, my return will be (so far) slightly less than 1060 pips.

Next I will show what to do when the pattern fails (hint, sometimes you still end up making a profit!)

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Interesting thread, I like your strategy

hi, Philip:
THX for sharing this strategy! Really an eye opener! Can you also share the setting for your ema (applied to=? shift=)? Also you mentioned moving your stop, so where do you put your initial stop-loss when you enter a trade? THX for your time and help!

Shuo

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@Shuo: There is no shift to the EMA. Its applied to the close. For stop-loss, I use mental stops because its more comfortable that way. Those who like to place stops 10 pips above the high if its a sell and 10 pips below the low if I'm buying. So in the USDJPY sell signal I posted a picture of above, I'd place the initial stop loss 10 pips above the area I labeled "high point." Something I wanted to stress to you; the distance between the entry and the stop loss is always worth 1% of my equity on 4HR, daily and weekly charts. If I'm in the mood for over trading and use the 1hr or 5 minute charts, my stop loss is only 0.2% of my balance. I use the baby pips position size calculator to know my lot size.

@Odds on: I agree with you that stochastic is one of the best entry indicators any trader will ever use. My strategy actually started as a moving average cross over system. But I started noticing that price moved against my entry quite powerfully before storming in my favor. I started to experiment with other indicators in search for a work around the retracement problem and I came across that pattern; whenever the 20 EMA and 50 EMA crossover, stochastic will be on the other side of the crossover. It only happens with the 20 and 50 ema, it was almost magical.
The Fib addition is really my legacy to trend following systems hahaha. I think I'm the first trend follower who buys the dip rather than the break out. But I also think my system offers a much more accurate exit strategy than almost every other system. Before introducing fibs I used to give up an average of 40% of my gains. Now I enter very early and leave out only 5-10% of my gains.

Tomorrow I will share two trades that didn't work out, this is where the pattern gets really powerful.

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