How to Build Your Trading Watchlist

By Raghee Horner

Text copyright 2013 TF GLOBAL MARKETS (AUST) PTY LTD
All Rights Reserved


Table of Contents
RISK WARNING
Weve all been there
Why do you need a watchlist?
Starting where you have an edge!
Find the dominant psychology in a pair
Understanding Directional Bias
Market Memory or Look back.
Trend following and Time frame Selection
The power of the 34EMA Wave!
RISK WARNING

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Weve all been there

Most of us have experienced the whipsaw, the correction that keeps on going, high volatility,
and the painful contrarian trade. And for many traders that is the sum total of their trading experience:
Frustration and confusion. What if I told you it neednt be that way, that with a handful of indicators I
can show you how to understand why trades go wrong and to reduce that helpless feeling? I can.
My name is Raghee Horner and I have been trading for over twenty years. I have traded stocks,
options, futures, and forex and have seen it all and suffered through many of the same things that may
be troubling you now. Theres no magic bullet but there are better ways to select and prioritize your
trades and increase your winning percentage so lets get to it.
Why do you need a watchlist?

Coming from a background of nearly a decade of trading futures and stocks, its not so long ago
that my mornings were filled with endless scans: Scans for the biggest percentage moves, scans for
overbought and oversold markets, scans for price breaks through a 50 or 200 day moving averages.
This was all in an effort to whittle a mammoth list of potential symbols to trade into a management
and focused watchlist. This is initially why trading the foreign exchange market was so appealing; my
world consisted of anywhere from six to seven, maybe eight pairs. Soon however this focus
became limiting as I realized that while different individual currency stories played out, I was
missing opportunities. Naturally I began to expand my watchlist and as a result it began to lose focus.
I found that a longer watchlist wasnt necessarily a productive thing and I began to see that my focus
was my edge. I began to consider why a pair was on my watchlist to begin with. I shifted my
criteria: A pair had to offer me an edge to be on my watchlist; it had to earn a spot on the list. But
with what criteria? This process had to be simply, fast, and straightforward as to not distract or slow
down my process of setting up actual trades.
Starting where you have an edge!

Starting with pairs where you have an edge is the first step. Keeping with the idea that the filter
I want to use must be equally as fast as it is effective I kept with the notion that the dominant
psychology of the market is the market TREND that will be most agreed upon. The simplicity in that
is the fact that the daily chart is the most viewed time frame across all market participants and
therefore that trend - the daily trend - is the one that most trades will agree is the dominant psychology
or trend.
My process for creating a watchlist became very simple: I would identify whether the daily
chart had an up or down trend and then include that pair on my list of symbols to consider for a trade.
Now let me mention this: Just because I am using the daily chart does NOT mean that is the time
frame I will ultimately trade, it simply is a means of looking a market with ideal price action
organization.
Think about it this way: If most (its never all) market participants agree that the daily chart is
in an uptrend, it then increases the likelihood and expectation that moves lower are corrections and
the floors that these corrections test will likely be supported and bought into. Uptrend increase the
expectations for higher highs and when a market is in an overall (dominant) uptrend, traders also tend
to gravitate towards the positions fundamentals in the market. There is a bias that a trend creates in a
market and thats why I identify a trending daily time frame as having Directional Bias.
I call my main list of pairs to scan and trade my D.B. Watchlist. D.B. of course stands for
Directional Bias and therefore my list of pairs is made up solely of pairs that are trending on their
respective daily time frames. This keeps me focused on those specific pairs that have what I call
Market Clarity. I will get into what that is and how I measure that in a moment.
Find the dominant psychology in a pair

This is where the Directional Bias concept meets the chart. I will now share with you a tool
that I have been using since I basically developed it. Its called the 34EMA Wave and it is comprised
of three exponential moving averages.
Why exponential moving averages? Most simply put, this weights the most recent price action
more heavily than older price action. In a simple moving average, all the prices (for example all the
closes in a simple moving average calculated on the closing price) are weighted equally. I prefer to
place more emphasis on what has most recently plotted on the chart. The setting I use is based on 34
periods so this means that I would be calculating the exponential moving averages on the last 34 days
on a daily chart or the last 34 five-minute candles on a five-minute chart.
Why 34? Its a Fibonacci number and as a believer in the power of Fibonacci as applied to the
way in which things in nature expand and contract, I believe there is application in the financial
markets since it is a reflection of human nature.
The last part of putting together the 34EMA Wave is the three exponential moving averages
themselves. I use three because it plots a wider footprint on the chart and gives me more insight into
the area in which price action could be accelerating, decelerating, stalling, and/or reversing. I dont
believe price action always necessarily turns on a dime. The 34EMA Wave is plotted on a chart by
inserting three separate exponential moving averages (EMA):
The 34 period EMA on the high
The 34 period EMA on the close
The 34 period EMA on the low
These three lines will move higher, lower, and sideways with price action but will also allow
you to more consistently and objectively identify the underlying market trend on any time frame,
which of course includes the Directional Bias (D.B.).
There is a process to follow to find the D.B. easily and correctly every time.

Understanding Directional Bias

Subjectivity is the bane and blessing of discretionary traders and unless you are using a system
to trade, you are to some varying degree a discretionary trader. But let me add, at some point even the
most dedicated systems trader had to have and explore discretionary ideas that eventually became
systematized. These ideas had guidelines and rules and its these rules and discipline that
discretionary traders can learn from as they build their methodology. And yes, a discretionary trader
should have a methodology; its the difference between having a system and being systematized. I
prefer the former, which is to say that I have a system or methodology but I do not mechanize it or
systematize it, rather I will execute it at my discretion when I want to and on which pairs I want to. I
do not want to deviate from that system - that is not what discretionary trading means.
The goal for a discretionary is to use their discretion to identify when their trading approach or
a particular strategy would be best applied. So for me there are two parts to being a discretionary
trader.
1) I determine which pair(s) I will look to trade.
2) I determine which strategy applies to the pair.
This all starts with Directional Bias.
Since I have the three lines of the 34EMA plotted on my daily chart I can look to it to help me
determine not just the trend but also the CLARITY of the trend which takes into consideration the
volatility, the length, and the strength of the trend. The goal is consistency and objectivity so there are
guidelines to this process. It starts with how much data I have on the chart.

Market Memory or Look back.

I find it interesting that traders dont always have a set amount of data on their chart for each
time frame. Since the time frame for determining Directional Bias is the daily, lets discuss that look
back now. Any time I begin analyzing a daily chart I will begin with a one-year view, 52 weeks, at a
minimum. From this view I will view the dominant trend of the past year, the 52-week high, low,
significant rallies and declines, trend lines, and the angle of the 34EMA Wave.
The last part, the angle, is of course by its very nature subjective because I am using moving
averages and the angle at which they are moving. This angle is more consistently determined by using
the same look back each time I view a daily chart with the 34EMA Wave. The angle can better be
described with the term clock angles. I call these clock angles because I literally imagine what
angle the trio of moving averages are making as it would line up with the right side of a clock face.
(e.g. one, two, three, four, five, and six oclock) Once you have the daily time frame chart you are
looking at filled with one year of price action, look at the angle at which the three lines of the 34EMA
Wave are travelling. Imagine that it is the hour hand of a clock. What time is it pointing at?
If the 34EMA Wave is travelling at between twelve and two oclock then it is in an uptrend.
If the 34EMA Wave is travelling at between four and six oclock it is in a downtrend. If the
34EMA Wave is flat its a three oclock angle and is consolidating. Finally, if the 34EMA Wave is
not steep enough to be a twelve to two or four to six oclock angle and not flat enough to be a
three oclock angle, its a two to four oclock which is a non-trending, choppy, congestion. That
is like a warning sign to price action organization.
In fact, if all you were to get out of this section was to AVOID pairs that have daily charts
moving in a two to four oclock 34EMA Wave, that would be reason enough to use this tool!
Here are three examples:
This is the daily NZD/JPY trending higher in a twelve to two oclock 34EMA Wave uptrend.
This is the daily GBP/USD trending lower in a four to six oclock 34EMA Wave downtrend
This is the daily USD/CAD moving in a narrow, sideways range (consolidating) in a flat,
three oclock 34EMA Wave angle.
Notice that the individual candles on the chart are not necessarily in a comfortable view and
separation for your eyes. Dont worry. Once you have taken some key information about what you see
from this vantage point, you are free to expand the chart and look at less price action. Do take note of
touch points for trend lines, support, resistance, gaps, perhaps chart patterns if you are a pattern
trader, and again be sure you take the 34EMA clock angle reading; too much price action can
artificially steepen the angle of the 34EMA Wave while too little data can flatten it out distorting the
real market trend of the time frame and therefore giving you an incorrect Directional Bias reading!
One last set of questions I would also like you to ask while the daily chart is in the market
memory or look back view of one year is concerning the way in which the 34EMA is moving. This is
called determining the MARKET CLARITY.
Are the lines of the 34EMA Wave smooth?
Are the lines of the 34EMA Wave established? (Or for how long has it been moving in the most
current clock angle?)
Are the lines of the 34EMA Wave being respected as support or resistance on pullbacks or bounces -
this depends of course on whether there is an UP or DOWN trend on the chart.
Once you have asked and answered those three questions, you now know the volatility of the market,
how long the trend has been in place (if at all!), and whether the corrections are organized. Again,
you have asked the questions that will answer whether you have clarity in the price action hence
Market Clarity. This goes hand-in-hand with Directional Bias. If D.B. tells you what the trend is (if
any) in the market, then Market Clarity tells you the quality of that trend.
This is the NZD/CAD daily chart trending higher in a twelve to two oclock angle however it
is important to notice that the uptrend has pierced the 34EMA Wave on one occasion with a wick that
broke the 34 period EMA low and notice the shaky (lack of smoothness) nature of the 34EMA
Wave itself; this reflects a higher amount of volatility and lack of price action organization.
On the other hand, notice the Market Clarity quality of the following trend which has a smooth
34EMA Wave, respect on pullback to the 34EMA Wave, and is established (it has been moving at the
current clock angle for long enough to make the overall or dominant opinion of the market more
obvious).
Each pair you are considering trading must go through this process and if the pair is not trending
(up or down) in a twelve to two or four to six oclock angle, leave it off your watchlist.


Trend following and Time frame Selection

I will now share with you another reason to understand Directional Bias and use the 34EMA
Wave to help determine which pairs are moving in up or down trends. Its about understanding
intraday time frame selection.
Remember that even though we are starting off our analysis with the daily chart, we may not
even be trading this time frame. This analysis is primarily used to determine whether there is a
dominant psychology at work in the pair. It also defines for us what constitutes a trend following
intraday trade and a counter-trend trade. This isnt just trading lingoits the difference between
going with the (price action) flow of the market or fighting the dominant opinion of the market. Trend
following is like floating with the flow of a river - while counter-trend trading is like trying to swim
against the flow! You may be able to swim upstream for a short while, but eventually (and most often)
you will exhaust yourself and succumb to the flow of the water.
Time frame selection therefore becomes much easier when you understand the flow. In an
uptrend, going long or buying is trend following just like in a downtrend, shorting the market is trend
following. That is not to say that there are not strategic times that a counter-trend trade can be
successful, its just that these trades should ideally be nimble and executed on a shorter-term intraday
time frame.
For example, if the daily is in an uptrend. Feel free to look for buy entries across any time
frame; you are trading with the Directional Bias and overall, dominant psychology However if the
market begins to correct, there will often be opportunities to take shorter-term entries that are
counter-trend. Be sure to focus on the five, 15, or 30-minute time frames for these counter-trend
entries. Remember that you are swimming against the flow. By staying nimble and not committing to
longer-term, counter-trend trades you will avoid fighting the stronger forces of the market which are
working with a clear, defined trend. You know what the clear, defined trend is because you will have
already determined the market clarity of the 34EMA Waves clock angle!



The power of the 34EMA Wave!

While these examples have focused on the way in which the 34EMA Wave is used on the daily
time frame thus also showing the Directional Bias of that pair, the 34EMA Wave can also be used on
intraday time frames to reveal the trend on shorter-term charts. The trend (or lack of trend) on
intraday charts can reveal trend-following entries (trades that follow the Directional Bias on the
daily) and counter-trend entries (trades that go against the Directional Bias on the daily). In this way a
trader can better understand their entry within the overall psychology of the market.
For example, to follow a trend is to trade with the flow of the market and the widest held
opinion of the markets movement. In this way a trade can choose to trade counter-trend trades on
only the shorter-term, more nimble time frames.
Traders can also choose to not trade markets that do not have a clear trend and thus avoid the
choppy, non-directional movement of range bound markets. Conversely traders who look to capitalize
on range-bound markets and the price action exhaustion at the extremes of range can more accurately
identify when that approach is more likely to be successful.