Forex Breakout Method - · PDF...

Disclaimer: Futures, forex, stock, and options trading is not appropriate for everyone. There is a substantial risk of loss associated with trading these markets. Losses can and will occur. No system or methodology has ever been developed that can guarantee profits or ensure freedom from losses. No representation or implication is being made that using this information will generate profits or ensure freedom from losses. Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.

Forex Breakout Method

Forex Breakout Method Copyright © Profits Run, Inc.

About This Manual: This manual includes the slides for the corresponding video tutorial, along with a transcription of everything covered on the video. While you can certainly learn the material for this module by reading this manual, you will likely comprehend the material much more quickly if you watch the video tutorial first, and then refer to this manual as reference. To make this manual easier to understand, additional notations that no do not appear on the video tutorials have been added to certain charts. These notations appear in red and are referenced in parentheses throughout the manual for the previous chart. The corresponding slide number from the video tutorial for this module is displayed before each slide transcription for easy reference. From time to time, throughout this manual, the Momentum Method and the Spring Method may be mentioned. These are other methods that complement the Breakout Method, but that are taught in other training material. They are not necessary to fully understand and trade with the Breakout Method.



Slide 3:

The objectives of this module are to understand how to trade the Breakout Method including identifying setup methods, when to enter a trade, how to set initial stop and follow up stop orders, and how to exit a trade profitably. We’re going to go through each one of those steps so that you thoroughly understand them.



Slide 4:

Before we get into the specific trading rules, I want to give you an overview of what the Breakout Method is all about. First, we are going to be using candlestick charts. Next, any timeframe can be traded with the Breakout Method: intraday, five-‐minute, ten-‐minute, 30-‐minute, daily bars; it doesn’t matter. We are going to go after five to ten bar swings in the markets when the market breaks out of recent congestion. There is nothing new about buying on a breakout of congestion, but the problem there is there are so many false breakouts that this becomes very difficult to do. Well, we have solved that problem with the Breakout Method. You will see it is a very unique approach that really filters out most of those false signals. We are going to use only two common technical indicators together with very powerful but uncommon trading tactics.



Many of you have heard me say this before, “Conventional wisdom is just the opposite,” and that is to use a wide array of indicators with commonly used trading tactics. The only problem is conventional wisdom does not work. The two indicators we will be using are a Simple Moving Average, actually two simple moving averages, and the ATR (Average True Range). The ATR will be the key to establishing initial profit targets. Remember, to be successful you have to keep it simple. Simple is all that is required if it is done properly. We are going to minimize the initial risk in the trade, move the initial stop to a break-‐even free trade status as soon as possible, and then scale out of a position profitably with the two-‐step exit strategy. All of these methods focus on controlling risk first and foremost. We are going to error on the side of controlling risk. If that means we give up a little profit here and there, so be it. But by focusing on risk control, that keeps you in the game. That keeps you in the position to take advantage of these big profit moves that occur so often in the Forex markets. If you turn it on its head, if you are just going after the profit, you are going to get trapped by taking on too much risk and that is what so many traders do and end up missing the opportunity to become a long-‐term successful trader. You will see throughout these methods, including the Breakout Method, we are going to focus on controlling risk first and foremost, get that initial risk as tight as we can without getting stopped out prematurely, and then moving the stop up to break-‐even to get to that free trade situation. That is the initial goal of every trade.



Slide 5:

Let’s now look a little more closely at the indicators we will be using. First, moving averages. We are going to use a 20-‐bar Simple Moving Average and a 40-‐bar Simple Moving Average. Together with price action, this will help us identify tradable breakouts with as few false signals as possible. Then the ATR, the Average True Range, with a 20 setting; that provides the Average True Range of the past 20 bars. We are going to be using that to set profit targets.



Slide 6:

The Breakout Method includes four components. The first is the specific setup conditions that alert you to potential trades. The second is specific entry rules that actually trigger you into the trade. Then, three is the specific initial stop and follow-‐up stop rules to control risk and get to the free trade strategy as soon as possible. Lastly is the goal of every trade, to exit the trade profitably.



Slide 7:

Before I get into the specific trading rules of the Breakout Method, I want to define what we mean by the term buffer. You will see in many of the trading rules we make ample use of a buffer. Why is that? That is to filter out false signals. If you are an intraday trader trading five-‐, ten-‐, 15-‐, 30-‐minute charts, one-‐hour charts, you want to use a two-‐pip buffer. If you are trading daily charts on an end-‐of-‐day basis, you want to use a one-‐tenth of one percent buffer as of the setup bar close. You will see that those buffers really serve us well because oftentimes market will move just above a previous high before reversing back down. You don’t want to get caught going the wrong way when that happens. Wherever you see buffer in any of the trading rules, this is what we mean.



Slide 8:

Now it is time to get right into it and deep-‐dive the uptrend setup conditions. As I go through these, you will see that I am describing the setup conditions very precisely, using very specific language. At first pass here you are going to look at this and say, “Wow! This looks pretty complicated,” but believe me, it is anything but. It is very, very simple. I have to use specific language so you know what I am talking about. And likewise when I show you an actual chart example, I will be using these same terms. But don’t get lost in the terms right now. Just understand that there are specific setup conditions. You will be given plenty of help later on with how to easily spot those with your own trading blueprint. Once you run the play a few times, you will start to spot these automatically when you look at a chart. Before you know it, it will be secondhand, so stick with me here. Condition A: The LH5 is less than the 20SMA. What does that mean? The lowest high of the last five bars has to be less than the 20 Simple Moving Average. That is all that means. It will be clearer when you see a chart example.



That has to be case as of the lowest high five bar, wherever that lowest high five occurs, it has to be less than what the 20 Simple Moving Average was as of that bar. Either that has to have happened or the lowest high of the last five bars has to be less than the 40 Simple Moving Average of the lowest high five bar. In either case that will satisfy Condition A. Condition B: The high of the setup bar has to be greater than the 20 Simple Moving Average and also the 40 Simple Moving Average. Condition C: The setup bar must be a green candle, but not only a green candle where the close is greater than the open, but a green candle with a close in the upper 70% of the setup bar range. In other words, we want to see not only a green candle, we want to see a strong close. I don’t want to see a green candle with a weak close down in the range, only with the strong close. Then with the Breakout Method, once you do get a setup bar, the setup bar remains valid for the next two bars. It may not be triggered into a position the next bar, but it could be the bar after that.



Slide 9:

Let’s now apply the setup conditions to an actual chart. This is the GPB/USD daily bar chart and it could be any timeframe. The setup conditions are applicable the same way regardless of timeframe. Here is our target setup bar right here (D). Before I get into the A, B, and Cs, I just want to give you an overview of what we are interested in here. We are interested in looking at a 20-‐bar Moving Average and a 40-‐bar Moving Average where the market is consolidating. It is moving up and down, around like this (E). Then we are looking for a Breakout candle which is a green candle, which is what I call a 70% candle. In other words, it closes in the upper 70% of that range right in there. What does that signify? That signifies that we are breaking out of this congestion, we are breaking out above two significant moving averages, and we have strength confirmed by the 70% green candle. That is really powerful. That is a powerful signal that this market wants to go higher. Like I said before, it really avoids a lot of false Breakout signals that you would otherwise get.



Let’s take a look now specifically at this example. Here is a setup bar (D). Let’s check it out. Is the lowest high of the last five bars less than the 20 Simple Moving Average (A)? Here is the 40 (F). Here is the 20 (G). Let’s count back five bars from the setup bar (D) – one, two, three, four, five – yes, this bar right here is the lowest high (4). It is less than the 20. Or it could be less than the 40. In this case it wasn’t, but it was less than the 20, so that condition is satisfied. All I am looking for here is that the two moving averages are running fairly close together. Not always, sometimes they are further apart, but I am looking for some choppy action in here. I am looking for one of these lows to be below one or the other moving average. Then I am looking for a sign of strength. I want to see a candle come up above the moving average where the high is greater than the 20 and high is greater than the 40 (B). Here is the 40 (F). Here is the 20 (G). The high (D) is greater than both of those, so B is satisfied. Now then, I also want the setup bar to be not only a green candle, but in the upper 70% of the range (C). You can see that is clearly the case here where it almost closed right at the top of the range (D). Condition C has been satisfied. If you look closely, this bar right here (3) looks like it might have been a setup because Condition A was in place, Condition B was in place, the high was higher than both the 40 and the 20, but Condition C was not. This did not quite make the 70% hurdle. You can see that the market did move up above that, but then it came back down looking like it wanted to come back down again. So that would have been a premature trade to take. We want confirmation. Here we got it. Now the market isn't heading lower. It does really want to go up and only then do we consider this a valid setup. The key to watch for is simply that you are trading into the range of the 20 and 40 Moving Averages and you get at least one high here lower than one or the other and then wait to see if you get a confirming green candle above both averages where the close is in the upper 70% of the range. It is that simple.



Slide 10:

Let’s look at another example. This is the USD/JPY. This time we are looking at a 15-‐minute bar chart. You can see that the market is kind of trading sideways here (F) in between the 40 on the top and the 20 on the bottom. Lo and behold, we do get a high here that is less than the 20 SMA or the 40 (A). In this case it is less than the 40. This is the 40 up here (G). That satisfies Condition A. Then we have a green candle whose high is greater than the 20 and the 40. We get a confirming close, a 70% green candle well up in the range. This is a valid setup bar (D). It is very easy to see. However, remember it is good for the next two bars. We use a buffer. As you will see on the entry rules, to enter we are going to enter above the high by a couple of pips. It only went up one pip above here on the next candle and then it traded on down a little bit, so this never got triggered. That setup is over with; it is not filled in the next two bars. However, on this bar right here we have another setup. Why? Because if we go back within the last five bars – one, two, three, four, five – here again we have our lowest high of the last five bars is less than the 40



SMA (4). And we have the high of the setup bar (E) is greater than both the 40 and the 20; and we have what? A confirming 70% green candle close. In fact, it closed right at the highs (C). That is a 100% candle. That, too, is a good setup bar. If you get a setup bar here (D), and it doesn’t get filled within two bars, be on the alert for another one which occurred right here (E).



Slide 11:

Let’s move now to the uptrend entry rules. Once a setup bar occurs, we can consider placing a trade for the following bar as follows:

Buy at the setup bar high plus the buffer plus the spread on a stop Let’s take a look at those two examples.



Slide 12:

Back to the GBP/USD example daily bar chart. Here is our setup bar (A), here is our entry bar (B). We are going to buy at the setup bar high plus a buffer plus the spread on a stop (C). So the high of setup bar is the key point here, which was 1.4933. We want to add the buffer; this is a daily chart. We are going to add one-‐tenth of one percent to that. Very easily, that is simply 14.9 pips, or rounded off is 15, and then add it to the 1.4933, so you get 1.4948. So just to review, we are at 1.4933, which is the high of the setup bar. We are going to add one-‐tenth of one percent, so you just move the decimal over, which is 15 pips (D). We have to add the spread. Remember when you are buying you are going to buy at the ask, not the bid. We only want to buy if the ask is at our price. The spread in the case of GBP/USD dailies is probably three pips. It will vary from two to three, sometimes four, but mostly two to three.



We want to be buying at 1.4951 on a stop (E). Here is the buffer (D); here is the spread (E). That is our order. When the bid chart hits 1.4948, bid. By the way, this is a bid chart. Every chart you look at is going to be a bid chart showing the bid prices, not the ask prices. When this chart hits 1.4948 when you are on live trading platform, you will be filled on this stop order 1.4951. Because when the bid is 48, the ask is going to be 51. That is just the Forex mechanics we talked about earlier. By the way, I am using Trade Navigator, a charting software, in these examples. It is excellent software and it has particularly good graphics. It helps me teach you these methods with these very nice graphics.



Slide 13:

We are now going to apply the entry rules to the Japanese yen pair 15-‐minute chart example. Here was the setup bar right here (A). You can see that the high was exceeded, not the next bar, because it only went up one pip, but the bar after. This was the entry bar (B). As of this setup bar, we load in the stop/buy; the buy at the setup bar high plus buffer plus spread on the stop (C). It doesn’t get filled the next bar, but it does get filled the bar after (B). Remember, the setup bar is good for two bars. Let’s check out that arithmetic. You can see the high there is 93.71 (A). I’m going to add the buffer. This is an intra-‐date chart so I’m just going to add two pips (D) and I have to add the spread (E). On the Japanese yen it is probably three pips spread. So I am going to buy at 93.76 stop. Again, I am going to be buying at the ask price. When the ask is 9376, the bid is going to be 9373. As soon as you see on your trading platform the price hit 9373, boom, you will be



filled on the ask. Do you see how that works? That is why we have to add the spread to our order price. Okay, there we go. We are into both trades. Now we will move on to the initial stop rules. Slide 14:

Moving to the uptrend initial stop, when the entry order to buy is filled, immediately place the initial stop order as follows:

Sell at the lowest low of the last two bars from and including the setup bar minus the buffer on a stop

Let’s apply that to our chart examples.



Slide 15:

Let’s apply the initial stop to the GBP/USD daily bar chart example. Here was the setup bar (A), entered long right in here (B), and as soon as you get filled on that entry, you load in the stop right here (D) below the lowest low of the last two bars from setup bar – one, two – right in here (D). Below that low, by the buffer. The low was 1.4702. We want to subtract the buffer. It is a daily chart so we are going to use one tenth of one percent, 15 pips. So our stop is 1.4687 on a stop (E). Our stop is here (D); our entry is here (B). You are going to see when we get to the risk management rules how to control your position size so that – here you are trading a daily chart and you have a couple hundred pips of initial risk in the trade – we are going to show you why that is not an issue if you have the right position size relative to your account. Second, remember this is the initial risk. The initial risk is all about setting the stop where we don’t want the market to go or we don’t expect the market to go. If it does go there, the



premise of the trade is over with. But once we are in the trade, you will see in the trade management rules that we are going to move this stop up to break even just as soon as possible, eliminating that risk altogether. That is the initial goal of every trade as you will see. Slide 16:

Applying the initial stop now to the USD/JPY pair 15-‐minute candlestick chart, the example. Recall this is the setup bar here (A). The entry bar is here (C), having gone long right in there (B). The initial stop is to sell at the lowest low of the last two bars from and including setup bar. One, two would be right below this red candle right here (D) . The low of that red candle is 93.64. Since this is an intraday chart we are going to subtract the buffer of two pips, 93.62 stop (E). That is our initial stop order. By the way, I do want to point out that you see the ADX on here (F). We do not use the ADX for the Breakout Method, but we do use it for the Momentum Method as well as these other indicators. You



will see that it is just as easy to plot one chart template when you are trading because you are going to be applying all of these methods at the same time. There is the initial stop; let’s see how we manage the trade from here. This is very, very important. Once you get in and you have your initial stop in there, the way you manage the trade will determine whether or not you get the maximum benefit and maximum profit from that trade. Slide 17:

Before we move on, I want to circle on back and just emphasize this point on the initial stop. It is very important because the placement of the initial stop can make the difference between success and failure. If you place it too close, you are going to get stopped out prematurely; too far away you are taking on too much risk. The ideal here is to place it where we don’t expect the market to go and if it does go there, the premise of the trade is over with and we want to be out, no questions asked, and go on



to the next trade. Not every trade is going to be a winner. That is impossible with any method; that is a myth that beginning traders around the world for generation after generation have looked for, the Holy Grail where there is never a losing trade. That is a bunch of nonsense. It doesn’t exist. The good news is you don’t need that, though, to have the potential to do very, very well. What you need is a good trading method with good risk management and the discipline to follow it. Then you have the potential to do extremely well. We place the stop where we don’t expect the market to go. If the stop is hit, then we will be stopped out with a relatively small loss, especially with regard to the way you set your position size, which you will see later in the course. This is very important for a number of reasons. First, we know exactly where to place the stop. Second, we know how many points we intend to risk in the trade. And third, knowing this, we will have the confidence and discipline to place the trade. That way, when you are using good risk management, where you are using a method that you know gives you an edge, you place the trade with confidence. You don’t overtrade; you don’t fret about it; you don’t get emotional about it; you don’t stress about it. You are just following the rules. The worst that can happen is you can be stopped out with a small loss, not doing any great damage to your account size, and you move on to the next opportunity.



Slide 18:

Now we get into the management of the trade. First we have the uptrend Follow Up Stop 1. If the profit target has not been hit within five bars of the entry bar, we want to exit the trade at the market at the close of the fifth bar in the trade:

Sell at the market In other words, we want to be relatively impatient here, because of the Breakout Method we are expecting the market to not only break out, but move rather quickly. If it doesn’t, that probably means that we are not going to get that movement so we might as well exit the trade and get on to the next opportunity. That is the first follow-‐up stop.



Slide 19:

Follow Up Stop 2 is as follows: As soon as you have an open profit of at least 75% of one Average True Range based on the last 20 bars, you change the stop to break even as follows:

Sell at the entry price on a stop When this occurs, your trade becomes a free trade. The worst that could happen is that the trade breaks even. This is the initial goal of every trade, to get to a free trade status. You don’t have to do a bunch of arithmetic here. You see that I am using at least 75% of one Average True Range. When you are looking at your trading platform and your chart and you are watching the price move, especially if you are an intraday trader, you can very easily eyeball this. You will know when it moves significantly towards the first profit target.



As soon as it does, you just change your stop to break even. This is the way to do it. Now you have driven that initial risk, whatever it is, to zero. Now the reward-‐to-‐risk ratio is infinite, so to speak, because there is no risk. You have to do this in this manner so that you don’t move the stop up too quickly. It is the same old story. If you move it up too quickly you are going to get stopped out prematurely. That is why we want it to go at least 75% of one Average True Range in the direction that you expect. When it does, boom, you move it right up. Slide 20:

Let’s apply those follow-‐up stops to the GBP/USD daily candlestick chart example. Here is the setup bar right here (A). The entry bar (B), the entry price right in here (C), and we are setting a profit target which we are going to review in a moment based on one Average True Range as of the setup bar, which would be 210 pips (D).



We are going to load in a profit target at 210 pips. Once you do that, you are going to see your trading platform is going to load in a line (E) signifying that you want to exit at that point. For Follow Up Stop 2 you are going to move the stop up from here (F) all the way to here (G). What has to happen? The market has to move 75% in the direction of that one Average True Range. When it gets to right around in here (H), you are going to move the stop up immediately (G). You don’t have to be exactly 75%. Don’t get hung up on that. With a little experience, you are going to see exactly what I am talking about. You are going to see that market moving up and you will know, “Yep, that’s about three quarters of the way.” Move the stop up. Follow Up Stop 1 (I) was not triggered because the profit target was indeed, as we will see, hit within five bars. But if it wasn’t, and you weren’t stopped out, you didn’t hit the profit target, you just exit at the end of the fifth bar at the market.



Slide 21:

Applying the Follow Up Stops 1 and 2 to the USD/JPY 15-‐minute candlestick example, here was our setup bar (A), our entry bar here (B). The entry price is right here (C). Our initial stop was below that low right there (D). The market didn’t move very much; the following bar after getting into the trade. But the next bar it did. It did exceed 75% of one Average True Range (E). Again, where you look at the Average True Range (F), in this case, it was eight pips, 0.77 rounded off to eight pips. Remember, we are trading a 15-‐minute chart now so the number of pips involved here is relatively small compared to when you are trading a daily chart. You have eight pips. What is 75% of eight? Six, so once it moves six pips in the direction of the profit target, you move the stop from here (D) all the way to up to here (G). Guess what? You are in a free trade.



You are not going to get to a free trade every time. You will be stopped out on occasion, but you are going to see that this strategy does get you into a free trade much of the time. Boy, that is just sweet every time that happens and it happens a lot. From there, you rest easy. You are going after nothing but profit. It is a great way to trade. Slide 22:

Now that we are in a free trade situation, it is time to look at the exit strategy to exit the trade profitably. That strategy is to scale out in two steps. The first step is to exit the half of the position at a predetermined profit target based on one Average True Range, based on the last 20 bars as of setup bar, and tighten up the stop on the remaining one-‐half position as soon as possible. The second step is to exit the remaining one-‐half of the position based on a trailing stop, letting your profits run.



Slide 23:

We are going to follow this strategy for two reasons. First, we take a portion of our position off the table at a nice, quick profit. Second, since we already have a profit and we have the remaining one-‐half position protected with break-‐even or better stop, we can let the remaining half position run as far as it wants to go. That way we have the best of both worlds, capturing a profit in a short swing move and potentially an even greater profit in a longer swing move. You never know how far the market is going to go in your favor. That is not knowable ahead of time. You don’t want to go for a homerun exclusively. What you want to do is go for a single or double with that first half position; take that quick profit. If the market really wants to move, well then you can get the homerun with the second half. If it doesn’t, even with the second half you can oftentimes get more profit than you did on the first half. That way, regardless of what the market does, you are poised to take advantage of it either way.



Slide 24:

Specifically, for the profit target one exit:

Sell 1/2 position at entry price + 1 Average True Range 20 on a limit order When the profit target one is hit, we want to change the stop on the remaining half position to:

Lowest low of the last 3 bars - the buffer on a stop

or

Last red 70% candle low - the buffer on a stop Whichever is closer to the market if greater than break even. You continue to move the stop up after each bar closes as follows:



Sell remaining 1/2 position at most recent lowest low of the last 3 bars - the buffer on a stop

or

Last red 70% candle low - the buffer on a stop Again, whichever is closer to the market. Let’s go back to our examples.



Slide 25:

Let’s apply the exit strategy to the GBP/USD daily bar chart example. Here is our setup bar (A), our entry bar (B), entry price (C); the market had moved up and we moved the initial stop from here (D) to here (E), break even. Indeed, the bar after entering the trade, right around the high, did hit the first profit target at one Average True Range right there (F). So you are out with a very nice profit on the first half position. Then the market went sideways. Remember, we got our stop at break-‐even on the second half position (E). The next bar here traded on/off and sold right there (G). We sold at the entry price for the second half, stopped out at break even. Remember what I said about these methods. We are erring on the side of risk management first and foremost. You could say, “Gee, that is too bad because look, the market went up and we should have stayed in.” Well, you know what? It could have collapsed, too. And then what would you do?



You have to pay attention to risk first. There are no questions asked. It just barely got stopped out but that is okay. Here is another reason it is okay: We have more than one method. As you will see, the Momentum Method that we are going to cover next actually gets back into the trade and rides this move up. When you have synergistic methods like this, you don’t have to be sitting there second-‐guessing or wondering, “Oh, gee, I should have stayed in,” and all those sorts of things. That is a losing mentality. You have to stay disciplined and focused. Stay with your method. You have more than one method. You know if the market is going to keep going that you will probably get back in on a Momentum Method setup. Take your stop right there (G); it wasn’t a loss; it was a break-‐even on the second half. You did get a nice profit on the first half and see what develops. It may develop. It may not. If the market is heading back on down, you don’t want to be there anyway and you are already out safely off the table with a nice profit. It is a great way to trade.



Slide 26:

Applying the exit strategy now to the USD/JPY 15-‐minute candlestick chart. Recall that our setup bar was here (A), the entry bar over here (B), entry price (C), the initial stop was right in here (D). We soon move the stop up to break even right in here (E). The first half position hit the profit target, entry price plus one Average True Range based on 20 bars right here (F) for about eight pips. Remember, we are dealing with a 15-‐minute chart so the number of pips of profit and risk are going to be decidedly lower than when you are dealing with a daily chart. Nevertheless, the market can still run; with our exit strategy we are prepared for that. So on the second half position, what do you do? You sell the remaining half position at the lowest low of the last three bars minus the buffer on a stop, or the last red 70% candle low minus the buffer on a stop, whichever is closer to the market or whichever one will give you the most profit (G). Let’s just go here. We hit the initial profit target here on this bar (F) so the remaining half position is protected with a break-‐even stop (E). Then at the close of this bar (H), we are



still at the break-‐even stop because if you went and looked at the lowest low of the last three bars – one, two, three – it would be way down here (3). We don’t want to lower the stop. Remember, we only want to raise the stop in an uptrend. We are going to wait for either an LL3 or a red 70% candle to occur above this break-‐even point. At the end of this bar (J), still no, we can't raise the stop yet, but then we get a red 70% candle (K) closed down in the range at least 70%, in this case, right at the bottom of the range, 100%. At that point, at the close of that bar, we raise the stop from break even (E) all the way up to here (L). You can say, “Why didn’t I raise it up sooner?” Well, remember, the second half position we want to let the market run; we don’t want to get bounced out through short-‐term market action. We are giving it every opportunity to run here, but once we get a red candle we are going to tighten it up because that shows that there is selling pressure coming into the market. But we are only going to bail out if the market trades below that low minus the buffer. Well, the next bar did not (M) and the next bar it did not (N). Let’s count back three bars – one (N), two (M), three (K) – so this is still our trailing stop (K). Then at the close of this bar (O), what do we have? Another 70% red candle, so we move this stop right up to here (P) from here (L), and we get stopped out on that bar right there (R). Let’s see what that is. It is about 94.15; got in around 93.75. That looks like about a 40-‐pip profit on the second half position. By being prepared with the exit strategy for whatever the market does, you can capture the most you can out of the move without knowing beforehand. Sure, if you knew beforehand that it was going to do this, you would hold the halt position and sell here, but that is a pipe dream. This is not knowable ahead of time. You can't buy at the bottom and you can't sell at the top except by luck, and that is not how you trade. By following the exit strategy you take the quick profit. Sometimes the market then heads south from there, but at least you got that. Sometimes it runs and if it does, you are ready for it. Regardless, the point is you know what to do to get the most you can out of the trade regardless of what the market does.



Slide 27:

Let’s now turn to the downtrend setup conditions for the Breakout Method. As you might guess, these will just be the reverse of the uptrend. Let’s go through them. You will be more comfortable with this after having gone through the uptrend setup conditions. Condition A: The highest low of the last five bars must be greater than the 20 Simple Moving Average of the highest low five bar; or the highest low of the last five bars must be greater than the 40 Simple Moving Average as of the highest low five bar. Condition B: The low must be less than the 20 Simple Moving Average and it must be less than the 40 Simple Moving Average. Condition C: The setup bar must be a red candle where the close of course is less than the open, and with the close in the lower 70% of the setup bar range. Again, the setup bar remains valid for the next two bars.



Slide 28:

Let’s apply the setup conditions to a EUR/USD 10-‐minute candlestick chart. Here we have the setup bar right here (D). Let’s find out why that is a setup bar. But before we do, remember, we are looking for the market to be trading around the range of the 20. In this case, here are the 20 (E) and the 40 (F) SMAs. We should be looking for the highest low to be above one or the other or both of these moving averages. Indeed, here is the highest low of the last five bars right there (G) and it is greater in this case than the 40 SMA. That is kind of the first thing you look for. As soon as you get a low below both of these moving averages where you get a 70% red candle (C), that is your setup. That is why this is the setup bar (D). Let’s just check it out. The highest low of the last five bars is greater than the 20 SMA of that particular bar (A). Sure enough it is – not the 20 but the 40 – either one will satisfy that condition. It is above the 40, so that is satisfied. Condition B – the low has got to be less than the 20 and the 40 which it is (B). And the setup bar must be a red candle (D), where of



course a red candle means the close is lower than the open, but it has to be 70% down in the range, and it is. So there is our setup bar (D). Slide 29:

Let’s look at another example applying the setup conditions for downtrend. This time USD/CAD pair, a 60-‐minute bar chart. I am changing up the timeframes here to show you that the rules apply regardless of the timeframe. Here we have the target setup bar right here (D). Again, this one is a little different. We have the 40 going down (E), the 20 going down (F), and the market is trading in a downtrend, but then it moves back up into this range just slightly where the highest low of the last five bars – one, two, three, four, five – this one right here (3), is higher than the 20 SMA by a little bit and that is all you need.



That satisfies Condition A. Then B, the low is less than both the 20 and the 40 right there (B). C, we have to have a red candle with the 70% close in the lower half of the range (C). I just want to review that for a minute. Here is a candle and let’s look at some prices here (G). Let’s look at 1.0920 as a high and let’s look at 1.0900 as a low. The range is 20 pips, the high minus the low. Seventy percent would be 14, so this close here on this red candle has to be at 1.0906 or lower. That is 70% down in the range. If it is above 1.0906 it doesn’t qualify. If this is 21, and you take 70% of that, you are going to get 14.7. Just round it off either way. If it is 14.7, round it to 15. If it is 14.2, round it to 14. It is not that exact. The idea here is we want confirming weakness that a close down the range will exhibit. Here we go. That is our setup bar (D) because it meets all three conditions. We do not have a spring position open; that is Condition D. We are good to go. There is our setup bar and now we can apply our entry rules.



Slide 30:

The downtrend entry rules are then as follows. Once a setup bar occurs, we can consider placing a trade for the following bar as follows:

Sell at the setup bar low - the buffer on a stop Now, in this case, we don’t need to add the spread because we are selling. When you sell, you are filled at the bid price and the setup bar low is based on the bid. All we have to do is subtract the buffer.



Slide 31:

Back to the EUR/USD 10-‐minute chart example, here was our setup bar right here (A). Now we are going to sell at the setup bar low minus the buffer on a stop right there (B), which gets filled right around the low of that bar right there (C). So that is our entry bar.



Slide 32:

Back to the USD/CAD 60-‐minute chart example, here was our setup bar (A). We load in the order to sell at the setup bar low minus two pips on a stop right there (B). So there is our entry bar (C).



Slide 33:

Turning now to the initial stop, when the entry order to sell is filled, immediately place the initial stop order as follows:

Buy at highest high of the last 2 bars from and including the setup bar + buffer + the spread on a stop



Slide 34:

Back to the EUR/USD 10-‐minute candlestick example, here is the setup bar (A). Here was our entry bar (C), entry price right there (B), and we buy at the highest high of the last two bars – one, two – including setup bar plus the buffer plus the spread on a stop (D). Remember, when we are buying off of a candle bar reference point, we have to add the spread. Now we are protected. There is our initial stop.



Slide 35:

Back to the USD/CAD 60-minute candlestick example, here was the setup bar (A), the entry bar (B), entry price right in there (C). We buy for the initial stop. Buy at the high side of the last two bars from and including setup bar high plus the buffer plus two pips on a stop (D). There we are protected with the initial stop.



Slide 36:

Again, as was the case with the uptrend initial stop, the initial stop is placed where we don’t expect the market to go, and if it does, the premise of the trade is over and we want to be out. I am going to keep repeating this with every method because it is so important. This is where so many beginning traders, and even longer-‐time traders, fall down. They are second-‐guessing their stop. They are giving it a little bit more room or they place the stop too tightly. They place it too far away. They are just not disciplined around their stop and they don’t have a good location to begin with. You have to place it where it is right to place. That is what we are doing here. If the market does go there then just get out. If the stop is hit, we will be stopped out with a small loss. It is very important for these reasons. First, we know exactly where to place the stop; there is no guessing. Second, we know how many pips we intend to risk in the trade and therefore we can set our position size in accordance with the risk management rules that you will learn here shortly. Third, knowing this we will have the discipline and the confidence to place the trade. No stress, no fuss, no bother.



Slide 37:

Now that we have entered the trade and we have the trade protected with the initial stop, it is time to manage the trade. We do that first with Follow Up Stops 1 and 2. First Follow Up Stop 1 – if the profit target has not been hit within five bars of entry bar, exit the trade at the market at the close of the fifth bar in the trade:

Buy at the market



Slide 38:

Follow Up Stop 2 is as soon as you have an open profit of at least 75% of one Average True Range 20, change the stop to break-‐even as follows:

Buy at entry price on a stop Again, when this occurs, your trade becomes a free trade. The worst that can happen is that the trade breaks even. Of course, as I have said, this is the initial goal of every trade which is to get into that free trade position where the reward-‐to-‐risk ratio is infinite in your favor.



Slide 39:

Back to our EUR/USD 10-‐minute example, here was our setup bar (A), entry bar (B), entry price to go short right there (C), initial stop right in here (D). What happened? The next bar the market did trade on down (E). This bar right here (F), the open profit exceeded 75% of one Average True Range (G). One Average True Range as of setup bar was about 11, call it 12 pips. So 75% of that is nine pips. Of course, you are just going to visually track this on your screen. When you see this moving this way, you know you have your one Average True Range profit target loaded in right in here (H), the one Average True Range. Your trading platform is going to show you a line right there to signify where you have the resting order. It is very easy for you to see. It is going to have a line here where you entered (C). As soon as you see it move on down here (J), about three-‐quarters of the way, then you can move your stop to break-‐even. That is exactly what you would have done on this trade. You would move your stop from here (D) all the way down to here (C). Now you are in the free



trade. Follow Up Stop 1 was not triggered because the profit target eventually was hit well within five bars. Actually, you will see that it was hit on this bar right here (F). Now it is time in the free trade to look at managing the trade to exit profitably in the two steps. It is a wonderful place to be because the risk is gone. Slide 40:

Applying Follow up Stops 1 and 2 to the USD/CAD 60-‐minute candlestick chart example, here is the setup bar (A), the entry bar (B), and the entry price right in here (C). The initial stop is right above here (D). What happened here? After getting into the trade, the next bar, the open profit exceeded one Average True Range by 75% (E). That occurred right around in here (E). At that point, you would immediately lower the stop from here (D) all the way down to here to break even (F). Now you are in the sought-‐after free trade position. Very, very nice.



Follow Up Stop 1 was not triggered because the profit target as you will see was indeed hit within five bars. Actually it was hit later on in this bar, right around there (G). Slide 41:

Now that we are in a free trade position, it is time to manage the trade for a profitable exit. We want to exit the trade profitably by scaling out of the trade in two steps. The first step is to exit the half of the position at a predetermined profit target based on one Average True Range 20 as of the setup bar, and tighten up the stop on the remaining half position as soon as possible. The second step is to exit the remaining half position based on a trailing stop, letting your profits run.



Slide 42:

Again, I am going to be emphasizing this over and over again. We will follow this strategy for two reasons. First, we take a portion of our position off the table at a nice quick profit. We do that in the event the market isn't going to run, if it is going to just move up a little or move down in this case a little bit and then head higher, we want to get out, take whatever profit we can and get out and go on to the next trade. However, if it wants to run, we are ready for it. Since we already have a profit and we have the remaining half position protected with a break-‐even or better stop, we can let the remaining half position run as far as it wants to go. That way we have the best of both worlds, capturing a profit in a short move and potentially a greater profit in a longer swing move.



Slide 43:

So, for the profit target exit, we want to:

Buy 1/2 position at entry price - 1 Average True Range 20 on a limit order When the profit target is hit, change the stop on the remaining 1/2 position to:

Highest high of the last 3 bars + buffer + spread on a stop or

Last green 70% candle high + buffer + spread on a stop Whichever is closer to the market and only if less than the break-‐even stop. Continue to move the stop down after each bar closes as follows:



Buy remaining 1/2 position at highest high of last 3 bars + buffer + spread on a stop or

Last green 70% candle high + buffer + spread on a stop Whichever is closer to the market. You would do that every bar until eventually then you would be stopped out with hopefully a very nice profit. Slide 44:

Let’s apply the exit strategy to the GBP/USD 10-‐minute chart. Here was our setup bar (A), entry bar (B), going short there (C), initial stop there (D), lowering the stop to break even (E). Now we are going to look to see if we hit the first profit target at the entry price minus one Average True Range, and sure enough that occurs right here (F) – two bars after entry bar right here (F).



So out with half position, one Average True Range profit; buy the remaining half position at highest high of the last three bars plus buffer plus spread on a stop, or the last green 70% candle high plus buffer, spread and stop, whichever is closest. Let’s check it out. We exited half the position here (F). Now at the close of this bar (1), if you count back three bars – one, two, three – you wouldn’t raise the stop up here (D) from where it is now at break even (E), so you leave it at break even. You stay in that free trade position. Then it drops again the next bar (H). Count back three – one (1a), two (2a), three (3a) – until right around break even (E), so leave it there. After the close of this bar (J)– one (1b), two (2b), three (3b) – just a tad lower above this high right here (E). Then at the close of this green bar (L), is that a 70% candle high? Yes, it is. It is closing well up in the range, so our stop is going to be above that high effective the close of that bar. Do you see what is happening here? It went from the break-‐even stop (E) all the way down here (M) as soon as that green candle occurs. That is showing buying strength coming into the market. It is up in the range. It is a 70% candle. We don’t want to risk giving back any more profit so we load the stop in there. Then the market goes sideways. One (N), two (O), if you count back three bars – one (1c), two (2c), three (3c) – the stop is still right in here (M). Close of this bar (P) you see the market looks like it wants to go lower. You count back three bars. The stop is still just a tad lower maybe, but still right about in there (M). Then we get another strong green bar right here (R). Closing up in the range. We move the stop down to here (S) and get stopped out. The second half position from the entry price (C), you can see here is the profit and the profit on the first half position. So a small profit on the first half, more than twice the profit on the second half. Now, look – the market is dropping on down (T) – oh, my gosh! You shouldn’t have gotten out. Here again, the market is trying to train you off your discipline. Don’t do that. We have more than one method. Guess what? The Momentum Method is going to get you back in here for this ride down.



Slide 45:

Applying now the exit strategy to the USD/CAD pair 60-‐minute candlestick chart example. Here is the setup bar here (A), the entry price right here (B), the initial stop was here (D), 75% of the first profit target was realized in this bar (E). That moved the stop down to break even here (F). The first profit target was hit right here (G), one Average True Range. Now it is time to manage the second half of the position. We bought the first half right here at one Average True Range, bought it back (G). Let’s just sketch in the profit from here (F) to here (G). Let’s see how many pips that is. Well, it looks like about 25 or 30 pips. Let’s be conservative with 25 pips. Now we are going to buy the remaining half at the highest high of the last three bars plus the buffer plus the spread on a stop, or the last green 70% candle high plus buffer, spread, and stop, whichever is closer.



Let’s go. On the close of this bar (E) where the first half was taken out at one Average True Range, the stop remains at break-‐even. For the second bar when this bar closed (H), the stop still remains at break even, or does it? I’ll check it out. What we have here is a 70% green candle, just barely (H). I believe that is the case; maybe, maybe not. I would have to check it. That one is right on the cusp. In fact, let us do that. Let’s check it right now. The high is 1.0868. The low is 1.0846. The difference is 22. What is 0.22 times 70? It is 15.4. Let’s round it to 15. That close there has to be at least 15 pips above the low (H). The low was 1.0846 plus 15 is 1.0861. What was the close? The close was 1.0861, so yes, it just made it right there, boom! Don’t worry; you don’t have to do all this arithmetic. If you said, “Nah, I don’t think that is 70% candle,” and you don’t want to do your arithmetic, that is alright. Leave the stop at break even and then ratchet it on down. In this case it did technically hit it, so we would move the stop from here (F) to here (J). Then at the close of this bar (K) it would stay there. The close of this bar (L), it would still stay there. The close of this bar (M) -‐ now we lower it to above the high of this red candle (K) right here (N). At the close of this bar (P), we don’t have to count back three because we have a green 70% candle so the stop is going to drop all the way down here (Q) above this green candle high. Then we get stopped out right there on the next bar (R). The profit on the second half position is 60 pips. I think the first half we said was 25; the second is 60 pips. We get the best of both worlds again. We don’t know that the market is going to continue to run, but if it does we are there with the second half to capture it. If it doesn’t, if it turns around and goes back up, we will get 25 pips on the first half; sometimes break even on the second half, sometimes 25 pips on the second half as well. Either way, you know what to do. The market can do what it is going to do. There is nothing you are going to do to change it. But you know how to manage the trade and that is a big deal.



Slide 46:

I want to make a cautionary note at this point. The examples we just looked at were profitable trade examples, and they are indeed typical of what you’ll experience trading these markets, but not all trades will be profitable. What I showed you were those that were mostly profitable so I could demonstrate how to manage the trade. Sometimes when you put a trade on, you will be stopped out with a loss. There is no method that will prevent this. Anyone that tells you otherwise is not telling the truth. There is terrific risk trading the Forex markets, as you can imagine. These are very highly leveraged fast-‐moving markets. What you need to do is limit the risk. That’s why we pay so much attention to risk management first and foremost. If you do, you have the opportunity to take advantage of those great profit opportunities.



That’s why you need a good trading method or two or three, or the discipline and the emotional makeup to trade it. If you do, you have the opportunity to become a successful, independent trader.

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