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Thread: my trading system

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    Default my trading system

    TRADING SYSTEM


    A trading system (TS) is a set of instructions which advise opening or closing trading positions based on the results of technical analysis. A trading system allows to exclude randomness in the trading process. Strict adherence to the system permits to rule out the emotional factor in the trade. For this reason, one must follow all recommendations of the system strictly even if for all that a potentially profitable position will not be opened.

    The first thing you need to do when creating a trading system is to select time periods, or working timeframes , you will work with. A lot of restrictions in this respect come from the starting deposit and principles of capital management. Long-term periods are accompanied by lesser "financial noise" than shorter periods. Technical analysis performed for long term periods is more accurate and provides a lesser number of false incitements. Long-term periods are preferable in terms of successful working, but, however, they require a larger starting deposit. Shorter timeframes are characterized by greater noise, but, hence, the technical analysis is less accurate and gives out more false signals.

    In cases of a modest starting deposit, it is not recommended to direct one's attention in trading to long timeframes, it is better to try medium and short ones first. On longer time periods price fluctuations are not as evident, but, in fact, these fluctuations may be significant enough so as to "eat up" the entire starting deposit. Thus, the first restriction for the trading system is the starting deposit that determines the choice of the working timeframe. Please bear in mind that the settings of analytical instruments for each of the periods are to be selected individually. Besides, if performing analysis for short timeframes, the requirements to the analytical instruments have to be as exacting as possible.

    The second task of the trading system is to define the entry point with the help of technical analysis. In any TS, irrespective of analytical instruments, the analysis must be started from a large timeframe and pass gradually to shorter ones. The first thing to be defined is the current market conditions as a whole.

    For instance, if our trade is guided by the trend , we first determine the global trend. Even if a signal to buy comes at the time of a downward trend, a position should not be opened in such a trading system.

    After that, the market conditions for periods of lesser order are analyzed. Eventually, the working timeframe is analyzed. If there appears a signal confirmed on long timeframes, one can open position immediately. However, to define the optimal entry point one can perform additional analysis on shorter timeframes.

    The most important task of TS's is to determine the exit point. Any system must provide not only the signal to open a position, but estimated levels of profit, as well. Order Take Profit should be placed next to this level. It is also necessary to identify the level of stop loss for the case when the market starts to move in an opposite direction. Place the Stop Loss order at this level. In other words, the TS must define exactly, up till which level the position should be held open in order to receive maximal profit, and define mechanisms for loss stopping in case of an unfavorable development of the market.

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    Time frames


    Sophisticated technical indicators evolve from simple data inputs of price and time. While most traders understand how price patterns reveal hidden opportunity, many fail to comprehend how time impacts both tactics and results. Lacking a skilled understanding of opportunity cost, they misinterpret signals and waste valuable resources. Or, trapped in common trend relativity errors, they prepare trades in one time frame but execute them in another.

    Opportunity cost defines how the trader manipulates working capital. For example, this important concept reveals why cutting losses efficiently is so important for long term survival. By its nature, taking any stock position dictates that those funds will not be available for another trade. This becomes a critical issue on account drawdowns when individual trades can dictate success or failure for the aspirant.

    All trends in the markets are time frame specific. For example, the existence of an uptrend in a daily chart says nothing about the trend in the monthly or intraday chart. This highlights the importance of correct time input in preparing technical indicators or reading chart patterns. When improperly time-tuned, technical analysis loses its effectiveness. Alternatively, resonant time readings will evoke startling accuracy with otherwise mediocre data input.

    Time Summation of indicators falls into three general categories: .

    * Moving averages of elements such as price or volume
    * Relationships between the open, close, high and/or low of individual bars
    * Repeating cycles of price or volume behavior

    Time Period of indicators falls into three general categories:

    * Short Term
    * Intermediate Term
    * Long Term

    Individual units of time are best viewed as relative periods, as opposed to daily, weekly or monthly lengths. Since no two technicians trade in exactly the same time frame, patterns and indicators must serve a broad range of uses. Fortunately, technical analysis studies a fractal market. Valid predictions may be made with indicators developed from 5-min bars or monthly ones in exactly the same manner.

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    TREND LINES


    The concept of trend is absolutely essential to the technical approach to market analysis. All the tools used by chartist support and resistance levels, price pattern, moving averages and trendlines and etc have the sole purpose of helping to measure the trend of the market for the purpose of participating in that trend.
    TREND HAS THREE DIRECTIONS

    Most people tend to think of markets as being always in either an uptrend or a downtrend . The fact of the matter is that market move in three directions: up, down and sideways. It is important if this distinction because for at least a third of the time , prices moves in flat or sideways. This type of sideways action reflects a period of equilibrium in the price level where forces of supply and demand are in a state of relative balance. We define sideways trend as trendless market.

    These type of changes is often not constant, news and rumor based. Such changes may create a trap in a bull or bear market.

    There are 3 decisions confronting the trader whether to go long , short or do nothing with the market. When a market is rising, the buying strategy is preferable. When it is falling , the second approach would be correct. However, when the market is moving sideways, the third choice stay out of the market - it is usually the wisest.

    You can see that, by changing the number of days or weeks as a time frame, the chartist can better determine the direction and duration of the trend.

    Markets are made up of several different kinds of trends, and it is the recognition of these trends that will largely determine the success or failure of your long and short-term investing.

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    Moving Average


    The Moving Average is one of the most versatile and widely used of all technical indicators. Because the way it is constructed and the fact that it can be si easily quantified and tested. It is the basis for many mechanical trend following systems.It is essentially a trend following device , therefore it only tells us that a trend has begun only after the fact.
    To find the 50 day moving average of closing price , the prices of the last 50 days are added up and the total is divided by 50. The term moving is used because only 50 days' prices are used in the calculation . Therefore, the body of the data to be averaged moves forward with each new trading day.

    Note that a moving average cannot be calculated until you have "n" time periods of data. For example, you cannot display a 50-day moving average until the 50th day of the chart.

    The most commonly used moving averages are the 20, 30, 50, 100, and 200 day averages. Each moving average provides a different interpretation on what the financial instrument's price will do. There really isn't just one "right" time frame. Moving averages with different time spans each tell a different story. The shorter the time span, the more sensitive the moving average will be to price changes. The longer the time span, the less sensitive or the more smoothed the moving average will be. Moving averages are used to emphasize the direction of a trend and smooth out price and volume fluctuations or "noise" that can confuse interpretation.

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    Accelerator/Decelerator AC


    The price is the last element to change. The price only changes after the driving force of the market has changed, and before changing direction, the acceleration of the driving force is to slow down and drop to nought. After that it starts accelerating in the opposite direction until the price makes a move that way too.

    Accelerator/Decelerator Oscillator - AC measures acceleration and deceleration of the current driving force.

    Accelerator/Decelerator Oscillator - AC will change direction before any changes in the driving force, which, it its turn, will change its direction before the price. If you realize that Accelerator Oscillator is a signal of an earlier warning, it gives you evident advantages.

    The nought line is basically the spot where the driving force is at balance with the acceleration. If AC is higher than nought, then it is usually easier for the acceleration to continue the upward movement (and vice versa in cases when it is below nought). Unlike in case with Awesome Oscillator, it is not regarded as a signal when the nought line is crossed. The only thing that needs to be done to control the market and make decisions is to watch for changes in color. To save yourself serious reflections, you must remember: you can not buy with the help of Accelerator Oscillator, when the current column is colored red, and you can not sell, when the current column is colored green.

    If you enter the market in the direction of the driving force (Accelerator Oscillator is higher than nought, when buying, or it is lower than nought, when selling), then you need only two green columns to buy (two red columns to sell). If the driving force is directed against the position to be opened (indicator below nought for buying, or higher than nought for selling), a confirmation is needed, hence, an additional column is required. In this case the indicator is to show three red columns over the nought line for a short position and three green columns below the nought line for a long position.
    Calculation

    AC bar chart is the difference between the value of 5/34 of the driving force bar chart and 5-period simple moving average, taken from that bar chart.

    AO = SMA(median price, 5)-SMA(median price, 34)
    AC = AO-SMA(AO, 5)

    Where:
    SMA Simple Moving Average ;
    AO Awesome Oscillator.

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    Awesome Oscillator - AO


    Awesome Oscillator Technical Indicator (AO) is a 34-period simple moving average, plotted through the middle points of the bars (H+L)/2, which is subtracted from the 5-period simple moving average, built across the central points of the bars (H+L)/2. It shows us quite clearly what's happening to the market driving force at the present moment.
    Signals to buy
    Saucer

    This is the only signal to buy that comes when the bar chart is higher than the nought line. One must bear in mind:

    *

    the saucer signal is generated when the bar chart reversed its direction from the downward to upward. The second column is lower than the first one and is colored red. The third column is higher than the second and is colored green.
    *

    for the saucer signal to be generated the bar chart should have at least three columns.

    Keep in mind, that all Awesome Oscillator columns should be over the nought line for the saucer signal to be used.

    Nought line crossing

    The signal to buy is generated when the bar chart passes from the area of negative values to that of positive. It comes when the bar chart crosses the nought line. As regards this signal:

    *

    for this signal to be generated, only two columns are necessary;
    *

    the first column is to be below the nought line, the second one is to cross it (transition from a negative value to a positive one);
    *

    simultaneous generation of signals to buy and to sell is impossible.

    Two pikes

    This is the only signal to buy that can be generated when the bar chart values are below the nought line. As regards this signal, please, bear in mind:

    *

    the signal is generated, when you have a pike pointing down (the lowest minimum) which is below the nought line and is followed by another down-pointing pike which is somewhat higher (a negative figure with a lesser absolute value, which is therefore closer to the nought line), than the previous down-looking pike.
    *

    the bar chart is to be below the nought line between the two pikes. If the bar chart crosses the nought line in the section between the pikes, the signal to buy doesn't function. However, a different signal to buy will be generated nought line crossing.
    *

    each new pike of the bar chart is to be higher (a negative number of a lesser absolute value that is closer to the nought line) than the previous pike.
    *

    if an additional higher pike is formed (that is closer to the nought line) and the bar chart has not crossed the nought line, an additional signal to buy will be generated.
    Calculation

    AO is a 34-period simple moving average, plotted through the central points of the bars (H+L)/2, and subtracted from the 5-period simple moving average, graphed across the central points of the bars (H+L)/2.

    MEDIAN PRICE = (HIGH+LOW)/2
    AO = SMA(MEDIAN PRICE, 5)-SMA(MEDIAN PRICE, 34)

    Where:
    SMA Simple Moving Average.

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    Force Index - FRC


    Developed by Dr. Alexander Elder, the Force Index combines price movements and volume to measure the market. Unmodified Force Index results can be rather erratic, better results are achieved by smoothing with an moving average. A 2-day exponential moving average of the Force Index may be used to track the strength of buyers and sellers in the short term while a 13-day exponential moving average better measures the strength of intermediate cycles.

    Force Index combines three essential pieces of market information the direction of price change, its extent, and trading volume. It provides a new, practical way of using volume to make trading decisions.

    Force Index can be used raw, but it works better if you smooth it with a moving average. Force Index smoothed with a short MA helps pinpoint entry and exit points. Force Index smoothed with a long MA reveals major changes in the force of bulls and bears.

    A 2-day EMA of Force Index provides a minimal degree of smoothing. It is useful for finding entry points into the markets. It pays to buy when the 2-day EMA is negative and sell when it is positive, as long as you trade in the direction of the 13-day EMA of prices.

    A 13-day EMA of Force Index tracks longer term changes in the force of bulls and bears. When it crosses above its centerline, it shows the bulls are in control. When it turns negative, it shows that bears are in control. Divergences between 13-day EMA of Force Index and prices identify important turning points.
    The Force index is calculated by subtracting yesterday's close from today's close, then multiplying by volume.

    FI:=(C-Ref(C,-1))*V;Mov(FI,13,E)

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    FRACTALS


    All markets are characterized by the fact that on the most part the prices do not change too much, and only short periods of time (1530 percent) account for trend changes. Most lucrative periods are usually the case when market prices change according to a certain trend.

    A Fractal is one of five indicators of Bill Williams' trading system, which allows to detect the bottom or the top.

    Fractal Technical Indicator it is a series of at least five successive bars, with the highest HIGH in the middle, and two lower HIGHs on both sides. The reversing set is a series of at least five successive bars, with the lowest LOW in the middle, and two higher LOWs on both sides, which correlates to the sell fractal. The fractals are have High and Low values and are indicated with the up and down arrows.

    The fractal needs to be filtrated with the use of Alligator . In other words, you should not close a buy transaction, if the fractal is lower than the Alligator's Teeth, and you should not close a sell transaction, if the fractal is higher than the Alligator's Teeth. After the fractal signal has been created and is in force, which is determined by its position beyond the Alligator's Mouth, it remains a signal until it gets attacked, or until a more recent fractal signal emerges.

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    ELDER-RAYS


    Developed in 1989, the Elder Ray is an extremely accurate and effective means of identifying divergences between bull or bear power and prices and helping time the best trading opportunities.

    The Elder Ray index actually consists of two indicators:

    * "Bull Power" (Daily High - n period moving average)
    * "Bear Power" (Daily Low - n period moving average).

    Bull Power is used to measure the potential for the price to increase above the moving average, while Bear Power is used to measure the potential for the price to decrease below the moving average. Long positions are taken when the Bear Power is below zero and there is a bullish divergence while Short positions are assumed when the Bull Power is above zero and there is a bearish divergence.
    Calculation

    A complete explanation of the Commodity Channel Index calculation is beyond the scope of this book. The following are basic steps involved in the calculation:

    1.Add each period's high, low, and close and divide this sum by 3. This is the typical price .
    2.Calculate an n-period simple moving average of the typical prices computed in Step 1.
    3.For each of the prior n-periods, subtract today's Step 2 value from Step 1's value n days ago. For example, if you were calculating a 5-day CCI, you would perform five subtractions using today's Step 2 value.
    4.Calculate an n-period simple moving average of the absolute values of each of the results in Step 3.
    5.Multiply the value in Step 4 by 0.015.
    6.Subtract the value from Step 2 from the value in Step 1.
    7.Divide the value in Step 6 by the value in Step 5.

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    Market Facilitation Index - BW MFI


    Developed by Dr. Bill Williams, the Market Facilitation Index synthesizes both price and volume data in an effort to improve trading accuracy.

    The combination of lowered volume with a rising MFI is known as a "Fake." As there is no real foundation for change behind a stock except for market activity on the floor, the price eventually reverses itself.

    A "Fade" is when volume is down and the MFI is also down. In essence, the market is bored and interest in the stock fades. Expect the price to move in the opposite direction.

    When volume is up while the MFI is down, the condition is referred to as a "Squat." Think of the stock crouching down like a sprinter before a race. Movement after the squat gives a clue to future to direction.

    When volume and the MFI are both up, the situation is "Green." This is a strong signal to follow the trendline.
    The calculation for the MFI is:

    [High] - [Low] / Volume

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    Ichomoku Kinko Hyo


    Ichomoku Kinko Hyo is a Japanese charting technique developed by a Japanese journalist who wrote under the name "Ichimoku Sanjin" prior to World War II. This study shows where a market is headed and provides entry and exit points.

    Ichimoku means "glance", Kinko translates "balance" or "equalibrium", and Hyo is Japanese for "chart".

    Ichimoku Kinko Hyo consists of the following lines:

    1.Tenkan Sen is the conversion line.
    2.Kijun Sen is the base line.
    3.Chikou Span is the lagging span.
    4.Senkou Span 1 is the first leading span.
    5.Senkou Span 2 is the second leading span.

    The Kumo, or Cloud, is the area between Senkou Span 1 and Senkou Span 2.
    Ichimoku analysis is similar to Moving Average analysis. Buy and sell signals are given by cross-overs. A bullish signal is issued when the Tenkan Sen crosses Kijun Sen from below. Conversely, a bearish signal is given when Tenkan Sen crosses Kijun Sen from above.

    Ichimoku rates the strength of bullish and bearish cross overs, too. A bullish crossover signal that occurs above the Kumo is a very strong signal. Similarly, a bearish cross over below the Kumo is considered strong.

    The Kumo indicate support and resistance levels.

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    Aligator


    "Most of the time the market remains stationary. Only for some 1530% of time the market generates trends, and traders who are not located in the exchange itself derive most of their profits from the trends. My Grandfather used to repeat: "Even a blind chicken will find its corns, if it is always fed at the same time". We call the trade on the trend "a blind chicken market". It took us years, but we have produced an indicator, that lets us always keep our powder dry until we reach the blind chicken market"

    In principle, Alligator Technical Indicator is a combination of Balance Lines (Moving Averages) that use fractal geometry and nonlinear dynamics.

    *

    The blue line (Alligator's Jaw) is the Balance Line for the timeframe that was used to build the chart (13-period Smoothed Moving Average, moved into the future by 8 bars);
    *

    The red line (Alligator's Teeth) is the Balance Line for the value timeframe of one level lower (8-period Smoothed Moving Average, moved by 5 bars into the future);
    *

    The green line (Alligator's Lips) is the Balance Line for the value timeframe, one more level lower (5-period Smoothed Moving Average, moved by 3 bars into the future).

    Lips, Teeth and Jaw of the Alligator show the interaction of different time periods. As clear trends can be seen only 15 to 30 per cent of the time, it is essential to follow them and refrain from working on markets that fluctuate only within certain price periods.

    When the Jaw, the Teeth and the Lips are closed or intertwined, it means the Alligator is going to sleep or is asleep already. As it sleeps, it gets hungrier and hungrier the longer it will sleep, the hungrier it will wake up. The first thing it does after it wakes up is to open its mouth and yawn. Then the smell of food comes to its nostrils: flesh of a bull or flesh of a bear, and the Alligator starts to hunt it. Having eaten enough to feel quite full, the Alligator starts to lose the interest to the food/price (Balance Lines join together) this is the time to fix the profit.

    Gator Oscillator

    Gator Oscillator is based on the Alligator and shows the degree of convergence/divergence of the Balance Lines (Smoothed Moving Averages). The top bar chart is the absolute difference between the values of the blue and the red lines. The bottom bar chart is the absolute difference between the values of the red line and the green line, but with the minus sign, as the bar chart is drawn top-down.

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    Default Milking the Major Currency Pairs in Live Forex Trading

    It has been theorized that your state of mind will dictate your trading methods. Experts in the field of trading psychology have pinpointed three main states of mind and how each has a direct effect on a trader's profitability.

    These three mind states are "having", "doing" and "being". Psychologists have noted that those new to trading start with a "having" state of mind. As they gain more experience, they move on to a "doing" state of mind. The pinnacle of profitability occurs when a trader moves into the last and final "being" frame of mind.



    The "Having" Mind Set
    A novice trader may focus primarily on profits. In this "having" state of mind, they are out of sync with the markets. They are blinded by their obsession to obtain the all mighty dollar and what it can afford them. Trading is not viewed as a job that must be mastered, but as a vehicle to escape from a world of mediocrity.

    Many traders are in the business to make money, as well as they should be. However, if they are blinded by greed, they tend to take uncalculated risks. Looking at the potential payoff without carefully calculating market trends and other factors is a recipe for disaster.

    It is impossible to graduate to a high performance level when you concentrate on "having" instead of how the game is won. If you trade in a "having" frame of mind, you may become frustrated when profits are not immediately forthcoming. With frustration comes a lack of focus. Without the ability to focus, you cannot gain knowledge from your experience on the trading field.

    Other negative consequences of this mindset are feelings of frustration and anger. Frustration stemming from a lack of expected profits and anger directed at oneself or the market in general. These adverse emotions will only cause further decline in profitability. Without witnessing gains from one's efforts, an individual may not give their best and may be tempted to "throw in the towel".



    The "Doing" State of Mind
    If an individual continues on to trade another day, they will eventually move from a "having" to a "doing" state of mind. Learning that there is more to trading than the amassing of money, a trader will turn their focus on learning new methods of trading and what does and doesnt work.

    This state of mind is still primarily centered on how to turn a profit. Although a "doing" mind state is essential to becoming a seasoned adept trader, the main focus is still short of the mark. It is crucial to know what works and what doesn't. However, a skilled trader will tell you there is more to the business then choosing one method and using it arbitrarily to make trades across the board.

    Becoming a trader of means requires not only a winning attitude, but also a fine honing of trading skills. To develop these skills, you must make trades using various methods under a wide spectrum of market conditions. Only then can you develop the needed intuition to master the art of trading.



    Pinnacle of Profitability: The "Being" State of Mind
    A successful trader almost instinctively knows how to make a trade using the best method available for the current market trend and/or condition. This ability does not occur overnight. It is only accomplished through perseverance, knowledge of various trading methods and learning which one works given a particular market condition.

    No trade is ever a "sure thing". However, a profitable synchronicity almost naturally occurs when you are faced with a potential trade, have a feel for the current market trends and conditions, and utilize the method best suited for a potential payoff. This "being" state of mind ultimately lends itself to long-term success in the high stakes of trading.

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    Default moving average

    n statistics, a moving average or rolling average is one of a family of similar techniques used to analyze time series data. It is applied in finance and especially in technical analysis. It can also be used as a generic smoothing operation, in which case the raw data need not be a time series.

    A moving average series can be calculated for any time series. In finance it is most often applied to stock prices, returns or trading volumes. Moving averages are used to smooth out short-term fluctuations, thus highlighting longer-term trends or cycles. The threshold between short-term and long-term depends on the application, and the parameters of the moving average will be set accordingly.

    Mathematically, each of these moving averages is an example of a convolution. These averages are also similar to the low-pass filters used in signal processing.

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    Default Simple moving average

    In technical analysis there are various popular values for n, like 10 days, 40 days, or 200 days. The period selected depends on the kind of movement one is concentrating on, such as short, intermediate, or long term. In any case moving average levels are interpreted as support in a rising market, or resistance in a falling market.

    In all cases a moving average lags behind the latest data point, simply from the nature of its smoothing. An SMA can lag to an undesirable extent, and can be disproportionately influenced by old data points dropping out of the average. This is addressed by giving extra weight to more recent data points, as in the weighted and exponential moving averages.

    One characteristic of the SMA is that if the data have a periodic fluctuation, then applying an SMA of that period will eliminate that variation (the average always containing one complete cycle). But a perfectly regular cycle is rarely encountered in economics or finance.[1]

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FXOpen Markets Limited, a company duly registered in Nevis under the company No. C 42235. FXOpen is a member of The Financial Commission.

FXOpen AU Pty Ltd., a company authorised and regulated by the Australian Securities & Investments Commission (ASIC). AFSL 412871ABN 61 143 678 719.

FXOpen Ltd. a company registered in England and Wales under company number 07273392 and is authorised and regulated by the Financial Conduct Authority (previously, the Financial Services Authority) under FCA firm reference number 579202.

FXOpen does not provide services for United States residents.

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