For Forex Market

TRADING EDGE

L. C. Chonghttp://lcchong.wordpress.com April 8, 2023

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INTRODUCTION

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INTRODUCTION• Trades executed via my trading edge can be defined as

“Low risk/reward ratio trades that are back-tested to have a positive expectancy with predetermined money management parameters.”

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INTRODUCTION• All executed trades can be defined as a function of the Three Pillars.

• Trade Setup - A prejudice to either buy or sell• Trade Plan - The rules for where to enter, place stops, and exit

Methodology with an Edge

• Ensuring within financial boundary’s risk capital limit• Check out system stop and see whether methodology’s equity

momentum is positive.• Ensuring the correct position size is used.

Sensible Money Management

• The glue that keeps the Three Pillars together• The ability to execute according to the trade plan (discipline).• Go through positive affirmations to help manage hope, greed,

fear, and pain

Strong Willpower

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MONEY MANAGEMENT RULES

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MONEY MANAGEMENT RULES1. Capital Will Be at Risk

I will use 60% of my total capital as at-risk capital; the remaining 40% I will keep in a money market account in case I burn the first 60%.

2. Risk on Any Given Trade

I will risk not more than 2 percent of at-risk capital on any trade.

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MONEY MANAGEMENT RULES3. Position Size Based on Risk

I am practicing Fixed-Volatility and Fixed-Percentage formula respectively in different trading methods. By using both methods, I will be better able to determine the position size I can trade. If the stop loss is less than my acceptable risk, I will make a trade. If it is not, I will pass on it.

4. Add Position to an Existing Position

I will use Fixed-Volatility and Fixed-Percentage formula respectively in different trading methods.

Fixed-Percentage

Fixed-Volatility

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MONEY MANAGEMENT RULES5. Risk on All Open Positions

I will have no more than ten positions on at any time and/or will not have more than 20 percent of my capital at risk on open positions.

Furthermore, I also applied the rule that limits the number of open position size that I could maintain at any given time, on four different levels. Correlation of pairs (Appendix I) is also taken into consideration to limit position size.

Level Type Maximum Total Position Size1 Single Pair 42 Closely Correlated Pairs 63 Loosely Correlated Pairs 104 Single Direction – Long or Short 12

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MONEY MANAGEMENT RULES6. Acceptable Risk/Reward Ratio

Risk/Reward Ratio must be equal or better than 1:3. I will look for the next strongest resistance as potential target profit.

Nevertheless, I do not place target profit because I want my profit ride as much as possible. This is just guidance whether the trade has higher probability to succeed or not.

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MONEY MANAGEMENT RULES7. Profit Taking

Long Order Short Order

Exit of lot size if it hits Exit of lot size if it hits

Exit of lot size if it hits Exit of lot size if it hits

Exit the rest if it hits the trailing S/L Exit the rest if it hits the trailing S/L

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MONEY MANAGEMENT RULES8. Lower Risk Parameters

If I lose more than 6 percent of my capital, I will lower my risk accordingly. I will resume trading with normal risk parameter using the particular method if I managed to gain back over 70% of the 6% drawdown.

9. Cutoff Point Before Questioning Trading Plan

If I’m down 35% of my capital since I started, I will stop trading until I review my system, risk parameters, and trading plan to determine why I am losing.

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METHODOLOGY – MEDIUM/LONG TERM TREND TRADING

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PHILOSOPHY AND OBJECTIVES

Philosophy• In an uptrend, prices need to come down and go up.• In a downtrend, prices need to go up and come down.

Objective• If the market is in an uptrend, then the trader needs to locate a

good support level to enter a long position and catch a continuation of the uptrend.

• If the market is in a downtrend, the trader needs to locate a good resistance level to enter a short position and catch a continuation of the downtrend.

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TIME FRAME• Primary Time Frame – Daily Chart

• I mainly use this TF to trade.

• Secondary Time Frame – H4 Chart

• I will use this TF to trade if I missed the boat in the Daily chart.

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WHEN TO AND NOT TO TRADE?• Trading Time: 6AM to 9AM (GMT+8)

• Avoid Trading

• Two days before NFP announcement

• On the following Monday right after NFP announcement

• Two days before FOMC meeting or Monetary Policy

• On the following day right after FOMC meeting or Monetary Policy

• Bank holidays

• 20 December to 1 January

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CURRENCY PAIRS

EUR/USD USD/JPY GBP/USD

AUD/USD USD/CAD USD/CHF

NZD/USD USD/SGD

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TRADE SETUP – LONG• Primary Setup

• 34EMA on High, Close and Low

• Price above the MA channel.

• Slope of the MA channel indicates uptrend.

• Support

• Prices form a solid support level.

• Trend Lines

• Higher Lows

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TRADE SETUP – LONG

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TRADE SETUP – LONG• Secondary Setup (Optional, but probability will be higher)

• Bullish Continuation Chart Patterns (D1 and W1 TF) (Appendix II)

• Bullish Continuation Price Action Patterns (H4 and D1 TF)

• Bullish Breakout from Inside Bar

• Bullish Pin Bar

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TRADE SETUP – LONG• Secondary Setup (Optional, but probability will be higher)

• Preferably breaks resistance level/zone and form good support level/zone (D1, W1 and MN TF)

• Be cautious if the price is very near to

• 200SMA resistance

• Round Number

• 52-Week High

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TRADE SETUP – LONG• Tertiary Setup (Optional)

• Be cautious if the price enters no man’s land.

• Be cautious if there is potentially forming bearish reversal chart pattern (Appendix II).

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TRADE SETUP – SHORT• Primary Setup

• 34EMA on High, Close and Low

• Price below the MA channel.

• Slope of the MA channel indicates downtrend.

• Resistance

• Prices form a solid resistance level.

• Trend Lines

• Lower Highs

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TRADE SETUP – SHORT

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TRADE SETUP – SHORT• Secondary Setup (Optional, but probability will be higher)

• Bearish Continuation Chart Patterns (D1 and W1 TF) (Appendix II)

• Bearish Continuation Price Action Patterns (H4 and D1 TF)

• Bearish Breakout from Inside Bar

• Bearish Pin Bar

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TRADE SETUP – SHORT• Secondary Setup (Optional, but probability will be higher)

• Preferably breaks support level/zone and form good resistance level/zone (D1, W1 and MN TF)

• Be cautious if the price is very near to

• 200SMA support

• Round Number

• 52-Week Low

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TRADE SETUP – SHORT• Tertiary Setup (Optional)

• Be cautious if the price enters no man’s land.

• Be cautious if there is potentially forming bullish reversal chart pattern (Appendix II).

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TRADE PLAN• Enter the Market

• Enter the market at the market price.

• Position Size

• Position size is calculated by using fixed-volatility. Risk parameter is 2% of at-risk capital. As for adding position, the risk parameter will be 1% of at-risk capital.

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TRADE PLAN• Initial Stop Loss

• Trailing Stop Loss

Long

[𝐸𝑛𝑡𝑟𝑦 𝑃𝑟𝑖𝑐𝑒 ]− [5𝐷𝑎𝑦𝑠 𝐴𝑇𝑅 ]×2Short

[𝐸𝑛𝑡𝑟𝑦 𝑃𝑟𝑖𝑐𝑒 ]+ [5𝑑𝑎𝑦𝑠 𝐴𝑇𝑅 ]×2

Long

[𝑃𝑟𝑒𝑣 .𝐶𝑙𝑜𝑠𝑒 ]− [5𝐷𝑎𝑦𝑠 𝐴𝑇𝑅 ]×2Short

[𝑃𝑟𝑒𝑣 .𝐶𝑙𝑜𝑠𝑒 ]+ [5𝑑𝑎𝑦𝑠 𝐴𝑇𝑅 ]×2

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TRADE PLAN• Profit Taking

Long Order Short Order

Exit of lot size if it hits Exit of lot size if it hits

Exit of lot size if it hits Exit of lot size if it hits

Exit the rest if it hits the trailing S/L Exit the rest if it hits the trailing S/L

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TRADE PLAN• Exit Rules

• When the candlestick hit the stop loss.

• When the trade doesn’t work out after 4-5 days.

• When bullish/bearish shadows happen for 3-4 days.

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METHODOLOGY – MEDIUM/LONG TERM TREND REVERSAL TRADING

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PHILOSOPHY AND OBJECTIVES

Philosophy• In an established uptrend, prices bubble above the long term trend line.

Bubble will burst eventually to start a new downtrend.• In an established downtrend, prices bubble below the long term trend line.

Bubble will burst eventually to start a new uptrend.

Objective• If the market is in an uptrend, then the trader needs to locate high probability

bearish reversal to enter a short position and catch a beginning of downtrend.• If the market is in a downtrend, then the trader needs to locate high probability

bullish reversal to enter a long position and catch a beginning of uptrend.

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TIME FRAME• Primary Time Frame – Daily Chart

• I mainly use this TF to trade.

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WHEN TO AND NOT TO TRADE?• Trading Time: 6AM to 9AM (GMT+8)

• Avoid Trading

• Two days before NFP announcement

• On the following Monday right after NFP announcement

• Two days before FOMC meeting or Monetary Policy

• On the following day right after FOMC meeting or Monetary Policy

• Bank holidays

• 20 December to 1 January

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CURRENCY PAIRS

EUR/USD USD/JPY GBP/USD

AUD/USD USD/CAD USD/CHF

NZD/USD USD/SGD

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TRADE SETUP – LONG• Primary Setup

• Bullish Reversal Chart Patterns (D1 or W1) (Appendix II)

• Support

• Prices form a solid support level.

• Trend Lines

• Higher Lows

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TRADE SETUP – LONG

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TRADE SETUP – LONG• Secondary Setup (Optional, but probability will be higher)

• 34EMA on High, Close and Low

• Price above the MA channel.

• Slope of the MA channel indicates beginning of uptrend.

• Preferably breaks resistance level/zone and form good support level/zone (D1, W1 and MN TF)

39

TRADE SETUP – LONG• Tertiary Setup

• Be cautious if the price is very near to

• 200SMA resistance

• Round Number

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TRADE SETUP – SHORT• Primary Setup

• Bearish Reversal Chart Patterns (D1 or W1) (Appendix II)

• Support

• Prices form a solid resistance level.

• Trend Lines

• Lower Highs

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TRADE SETUP – SHORT

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TRADE SETUP – SHORT• Secondary Setup (Optional, but probability will be higher)

• 34EMA on High, Close and Low

• Price below the MA channel.

• Slope of the MA channel indicates beginning of downtrend.

• Preferably breaks support level/zone and form good resistance level/zone (D1, W1 and MN TF)

43

TRADE SETUP – SHORT• Tertiary Setup

• Be cautious if the price is very near to

• 200SMA support

• Round Number

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TRADE PLAN• Enter the Market

• Enter the market at the market price.

• Position Size

• Position size is calculated by using fixed-volatility. Risk parameter is 2% of at-risk capital. As for adding position, the risk parameter will be 1% of at-risk capital.

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TRADE PLAN• Initial Stop Loss

• Trailing Stop Loss

Long

[𝐸𝑛𝑡𝑟𝑦 𝑃𝑟𝑖𝑐𝑒 ]− [5𝐷𝑎𝑦𝑠 𝐴𝑇𝑅 ]×2Short

[𝐸𝑛𝑡𝑟𝑦 𝑃𝑟𝑖𝑐𝑒 ]+ [5𝑑𝑎𝑦𝑠 𝐴𝑇𝑅 ]×2

Long

[𝑃𝑟𝑒𝑣 .𝐶𝑙𝑜𝑠𝑒 ]− [5𝐷𝑎𝑦𝑠 𝐴𝑇𝑅 ]×2Short

[𝑃𝑟𝑒𝑣 .𝐶𝑙𝑜𝑠𝑒 ]+ [5𝑑𝑎𝑦𝑠 𝐴𝑇𝑅 ]×2

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TRADE PLAN• Profit Taking

Long Order Short Order

Exit of lot size if it hits Exit of lot size if it hits

Exit of lot size if it hits Exit of lot size if it hits

Exit the rest if it hits the trailing S/L Exit the rest if it hits the trailing S/L

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TRADE PLAN• Exit Rules

• When the candlestick hit the stop loss.

• When the trade doesn’t work out after 4-5 days.

• When bullish/bearish shadows happen for 3-4 days.

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METHODOLOGY – INTRADAY TREND TRADING

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PHILOSOPHY AND OBJECTIVES

Philosophy• In an uptrend, prices need to come down and go up.• In a downtrend, prices need to go up and come down.

Objective• If the market is in an uptrend, then the trader needs to locate a

good support level to enter a long position and catch a continuation of the uptrend.

• If the market is in a downtrend, the trader needs to locate a good resistance level to enter a short position and catch a continuation of the downtrend.

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TIME FRAME• Primary Time Frame – M15 Chart

• I mainly use this TF to trade.

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WHEN TO AND NOT TO TRADE?• Trading Time: 3PM to 12AM (GMT+8)

• I usually trade intraday during holiday, and when I do not need to travel.

• Avoid Trading

• Two days before NFP announcement

• On the following Monday right after NFP announcement

• Two days before FOMC meeting or Monetary Policy

• On the following day right after FOMC meeting or Monetary Policy

• Bank holidays

• 20 December to 1 January

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CURRENCY PAIRS

EUR/USD GBP/USD

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TRADE SETUP – LONG• Primary Setup

• 89EMA

• Price above 89EMA

• 34EMA on High, Close and Low

• Price above the MA channel.

• Slope of the MA channel indicates uptrend.

• Support

• Prices form a solid support level.

• Trend Lines

• Higher Lows

54

TRADE SETUP – LONG

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TRADE SETUP – LONG• Secondary Setup (Optional, but probability will be higher)

• Bullish Continuation Chart Patterns (Appendix II)

• Be cautious if the price is very near to

• 200SMA resistance (daily chart)

• Round Number

• 52-Week High (daily chart)

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TRADE SETUP – LONG• Tertiary Setup (Optional)

• Be cautious if the price enters no man’s land.

• Be cautious if there is potentially forming bearish reversal chart pattern (Appendix II).

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TRADE SETUP – SHORT• Primary Setup

• 89EMA

• Price below 89EMA

• 34EMA on High, Close and Low

• Price below the MA channel.

• Slope of the MA channel indicates downtrend.

• Resistance

• Prices form a solid resistance level.

• Trend Lines

• Lower Highs

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TRADE SETUP – SHORT

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TRADE SETUP – SHORT• Secondary Setup (Optional, but probability will be higher)

• Bearish Continuation Chart Patterns (Appendix II)

• Be cautious if the price is very near to

• 200SMA support (daily chart)

• Round Number

• 52-Week Low (daily chart)

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TRADE SETUP – SHORT• Tertiary Setup (Optional)

• Be cautious if the price enters no man’s land.

• Be cautious if there is potentially forming bullish reversal chart pattern (Appendix II).

61

TRADE PLAN• Enter the Market

• Enter the market at the market price.

• Position Size

• Position size is calculated by using fixed-volatility. Risk parameter is 2% of at-risk capital. As for adding position, the risk parameter will be 1% of at-risk capital.

62

TRADE PLAN• Initial Stop Loss

• Trailing Stop Loss

Long

[𝐸𝑛𝑡𝑟𝑦 𝑃𝑟𝑖𝑐𝑒 ]− [5𝐵𝑎𝑟𝑠 𝐴𝑇𝑅 ]×2Short

[𝐸𝑛𝑡𝑟𝑦 𝑃𝑟𝑖𝑐𝑒 ]+ [5𝐵𝑎𝑟𝑠 𝐴𝑇𝑅 ]×2

Long

[𝑃𝑟𝑒𝑣 .𝐶𝑙𝑜𝑠𝑒 ]− [5𝐵𝑎𝑟𝑠 𝐴𝑇𝑅 ]×2Short

[𝑃𝑟𝑒𝑣 .𝐶𝑙𝑜𝑠𝑒 ]+ [5𝐵𝑎𝑟𝑠 𝐴𝑇𝑅 ]×2

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TRADE PLAN• Profit Taking

Long Order Short Order

Exit of lot size if it hits Exit of lot size if it hits

Exit of lot size if it hits Exit of lot size if it hits

Exit the rest if it hits the trailing S/L Exit the rest if it hits the trailing S/L

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TRADE PLAN• Exit Rules

• When the candlestick hit the stop loss.

• When the trade doesn’t work out after 2 hours.

• When bullish/bearish shadows happen for 2 hours.

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ROUTINE

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DAILY ROUTINE1. Identify major support and resistance levels in the daily charts.

2. Identify any chart pattern and candlestick pattern in the daily and H4 charts.

3. Identify whether the market is ranging or trending.

4. Identify potential entry signal for the trading day.

5. Keep a trading journal that documents each trading day’s action.

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WEEKLY ROUTINE1. Identify major support and resistance levels in the weekly charts.

2. Identify any chart pattern in the weekly charts.

3. Identify whether the market is ranging or trending.

4. Identify potential entry signal in the coming week.

5. Identify critical new releases in the coming week.

6. Update correlation heat map of currency pairs.

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MONTHLY ROUTINE1. Identify major support and resistance levels in the monthly charts.

2. Identify any chart pattern in the monthly charts.

3. Identify whether the market is ranging or trending.

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TRADING JOURNAL• I bought a commercial trading journal spreadsheet to keep my trading journal. The

spreadsheet will generate performance report on my equity curve.

• Furthermore, whenever I put on a trade, I capture its charts and mark key signals that prompted me to act.

• Whenever I close a trade, I capture its charts again and mark up those signals that prompted me to exit.

• I may write a few lines on how I first became aware of a potential trade, how I felt entering and exiting, and so on.

• I try not to write a dissertation on every trade, and record only the key factors, aiming for speed and brevity.

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EYEBALLING• Eyeballing makes use of the ability to use experience and summarize a chart in the blink

of an eye. This experience comes from looking at many charts every day.

• At first this appears to be a time consuming process, but with practice, it is a fast and efficient way to find clear simple, profitable trading opportunities.

• I train myself to apply this technique by looking closely at the chart every time I have cause to look at a stock for any reason.

• Eyeballing remains one of the quickest and most effective ways to find profitable trading opportunities.

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WILLPOWER

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DISCIPLINE• Discipline is the glue that holds money management and methodology together.

• Without sound money management and methodology, there would not be anything for discipline to glue. Discipline is important for survival and eventual success.

• All of us know that we have to cut losses, trade less, have a risk management plan, and do homework, but without discipline it is impossible to put together all these tools and become a successful trader.

• Discipline is what ensures that all those things are carried out, and it is probably the single most important tool a trader needs.

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AFFIRMATIONS TO MANAGE PSYCHOLOGICAL HURDLES

Managing Greed •My objective in trading is not to be right or wrong but to manage my risk capital with a modest expectation.

Managing Fear •I will welcome my loss because I want to be the best loser and a long-term winner.

Managing Hope •Even when I lose money today, I will expect to have a good day, since I have followed my trade plan, which has a long-term positive expectancy.

Managing Pain •I know that maximum adversity exists to fill my trading experience with disappointment and pain. I will endure its pain. I will persevere. I will succeed.

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APPENDIX I – CURRENCY PAIRS CORRELATION

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WELL-KNOWN CORRELATIONS

Instruments Positive Correlation Negative Correlation

US Dollar and EUR/USD US Dollar and CRB Commodity Index

US Dollar and Gold USD/CAD and Oil AUD/USD and Gold

USD/CAD and Gold USD/CHF and US Dollar USD/CHF and EUR/USD

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HEAT MAP• Formula (from ForexHit):

𝑅𝑒𝑙𝑖𝑎𝑏𝑙𝑒𝐶𝑜𝑟𝑟𝑒𝑙𝑎𝑡𝑖𝑜𝑛=120𝐷𝑎𝑦𝑠𝐶𝑜𝑟𝑟𝑒𝑙+40𝐷𝑎𝑦𝑠𝐶𝑜𝑟𝑟𝑒𝑙

2×100

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INTERPRETATION

≥ 80 The currencies move in the same way – High

≤ -80 The currencies move in the opposite way – High

≥ 50 and <80 The currencies move in the same way – Medium

> -80 and ≤-50 The currencies move in the opposite way – Medium

Others The currencies don't move in the same way.

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MAIN PURPOSES• Determine Total Size of Open Position

As mentioned in “Money Management Rules”, there are four different levels of limiting total size of open positions. I will use the correlation in the heat map to categorize pairs into “Closely Correlated Pairs” and “Loosely Correlated Pairs”.

• Improve Probability of Trading

Currencies are priced in pairs, no single pair trades completely independent of the others. Once we are aware of these correlations and how they change, we can use them control our overall portfolio's exposure

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APPENDIX II – CHART PATTERNS

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CHART PATTERNS

Bullish Continuation• Bullish Flag/Pe

nnant• Bullish Breakou

t from Symmetrical Triangle

• Ascending Triangle

• Bullish Breakout from Rectangle

• Bullish Price Channel

• Bullish Measured Move

• Cup with Handle

Bullish Reversal• Double Bottom• Head and Shou

lders Bottom• Falling Wedge• Rounding Botto

m• Triple Bottom• Bullish Breakou

t from Rectangle

Bearish Continuation• Bearish Flag/P

ennant• Bearish Breako

ut from Symmetrical Triangle

• Descending Triangle

• Bearish Breakout from Rectangle

• Bearish Price Channel

• Bearish Measured Move

• Inverted Cup with Handle

Bearish Reversal• Double Top• Head and Shou

lders Top• Rising Wedge• Triple Top• Bearish Breako

ut from Rectangle

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DISCLAIMER

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• This document is

• Mainly for myself

• Educational only

• Does not contain investment advice

• I am not originator or inventor of any rules and methodology that used in this document. I am just standing on the Shoulders of GIANTS. I stated the source of ideas and material in bibliography.

• The methodology and rules that I am using definitely not 100% fit you because I have personalized the methodology and rules to my risk tolerance, capital, personality and lifestyle.