My Trading Ideas For The Forex and Fkli Spot Market 05022011

My Trading Ideas
For the Forex and FKLI-Spot Market
L. C. Chong
2 May 2011
http://lcchong.wordpress.com/
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Table of Contents
CHAPTER 1 – INTRODUCTION ................................................................................................. 3
MONEY MANAGEMENT............................................................................................................................... 4
METHODOLOGY ......................................................................................................................................... 4
WILLPOWER ................................................................................................................................................5
CHAPTER 2 – IMPORTANCE OF EDUCATION .......................................................................... 6
RECOMMENDED TRAINING PROGRAMS .......................................................................................................7

RECOMMENDED BOOKS...............................................................................................................................7
RECOMMENDED MAGAZINES ...................................................................................................................... 8
CHAPTER 3 – OBJECTIVES AND EXPECTATIONS ..................................................................... 9
OVERVIEW.................................................................................................................................................. 9
SETTING OBJECTIVES AND EXPECTATIONS .................................................................................................. 9
CHAPTER 4 – MONEY MANAGEMENT .....................................................................................14
OVERVIEW................................................................................................................................................. 14
FIGHTING OFF SHARKS AND PIRANHAS ..................................................................................................... 14
POSITION SIZING ....................................................................................................................................... 15
EXIT STRATEGIES ....................................................................................................................................... 17
SYSTEM STOP ............................................................................................................................................. 18
FINANCIAL BOUNDARIES ........................................................................................................................... 18
CHAPTER 5 – METHODOLOGY............................................................................................... 19
OVERVIEW................................................................................................................................................. 19
PRINCIPLES OF METHODOLOGY ................................................................................................................ 19
PROCESS OF BUILDING TRADING METHOD ............................................................................................... 25
MAIN COMPONENTS IN TRADE SETUPS .................................................................................................... 28
OTHER COMPONENTS IN TRADE SETUPS .................................................................................................. 45
DISCRETION-MECHANICAL TRADING STYLE ............................................................................................. 50
ABC RATING SYSTEM ................................................................................................................................ 51
DEEP PRACTICE ......................................................................................................................................... 52
EYEBALLING ............................................................................................................................................... 52
CHAPTER 6 – WILLPOWER ..................................................................................................... 53
OVERVIEW................................................................................................................................................. 53
TRADING JOURNAL .................................................................................................................................... 53
TRADING PARTNER ................................................................................................................................... 54
BEST LOSER IS THE LONG-TERM WINNER............................................................................................... 55
AFFIRMATIONS TO MANAGE PSYCHOLOGICAL HURDLES........................................................................... 55
CHAPTER 7 – SUMMARY ......................................................................................................... 56
METHODOLOGY ....................................................................................................................................... 56
MONEY MANAGEMENT............................................................................................................................. 56
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WILLPOWER ............................................................................................................................................. 56
JOURNEY TO BE A SUCCESSFUL TRADER ..................................................................................................... 57
A FINAL WORD ......................................................................................................................................... 57
BIBLIOGRAPHY ...................................................................................................................... 59
ABOUT ME ............................................................................................................................... 61
DISCLAIMER ............................................................................................................................ 62
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Chapter 1 – 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.”
The best traders always trade when the odds are in their favor and the reason will be
always to make money. They don’t simply trade when the market is open or simply
just to amuse themselves. The majority of the high probability trades are made only in
the direction of the major trend. If the market is up-trending, a trader will wait for a dip
and test the support level before entering. Dips are just waves in a trend, and though
shorting them can be profitable, these are low-percentage trades and should be avoided.
High probability traders know how to cut their losses and let their good trades run. You
cannot simply rush out from the game if you lose $500 when you lose and make only $200
on the good trades as you are too eager to take a profit. It is important to let profits ride
and knowing when to take a profit. Many bad traders let winning trades dwindle into
losers because they don’t know when to get out of a good trade nor they have any exit
rules.
Though going with the trend always offers the best success rate, trying to pick tops or
bottoms can have a high degree of success if the right pattern is prevalent and the trader is
quick to realize when he is wrong. When trying to pick the end of a trend, traders will be
wrong often, and so they must be able to quickly accept the fact that they are wrong.
When one is correct in picking a top or bottom, the reward can be substantial, so
cumulatively that trades can have a high probability of success. It doesn’t matter what
one’s trading style is: If a trader is disciplined and has a solid trading strategy and
money management plan, he can make money.
To be a high probability trader one needs to have a trading plan. This includes trading
setups and, more importantly, knowing how to manage risk. As each person has a
unique style, there is no perfect trading plan that will work for everyone. Each individual
has to make a plan that best suits his trading and psychology. Once a plan is set up, most
of the hard work has been done, yet many traders fail to spend the time to develop a plan
and jump straight into trading.
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In a nutshell, a trader who makes money is one who works as hard during
nonmarket hours as he does when the market is open. These traders know in advance
what markets they will trade and what their actions will be. They patiently wait for the
market to give them an opportunity to enter and are agile in getting out when they are
wrong. They look for markets or stocks that are in a trend and wait for a retracement in
order to get into the trade. They do not try to outguess the market or think they are better
than the market; they take what the market gives them. They have full control of their
emotions, are always focused, and do not spread themselves too thin or overtrade. At the
end of the day, all executed trades can be defined as a function of the Three Pillars as
shown in Figure 1.
The Three Pillars are the nuts and bolts of every practical trading. If you want to achieve
your objective of becoming successful traders, where success is measured by dollars in the
bank, you must comprehend, develop and execute a plan for each component.
Sensible
Money • Ensuring the correct position size is used.
Management
Methodology • Trade Setup - A prejudice to either buy or sell

• Trade Plan - The rules for where to enter, place
with an Edge stops, and exit
Strong • The ability to execute according to the trade

plan.
Willpower
Figure 1: The Three Pillars of my trading edge.
Money Management
Money management is the first in rank. It is secret behind survival and prosperity. Survival
will keep you from ruin while prosperity will keep a smile on your face. I will discuss the
money management strategies that I am currently using in Chapter 4.
Methodology
Methodology is day-to-day combat instructions. It articulates how you will trade for
expectancy. Methodology will consist of two parts: a setup and a trade plan.
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A setup will identify an area of future support or resistance – that is, when you should be
looking to enter the market and whether you should be looking to buy or sell. A trade plan
should tell you how to take advantage of the setup. It should have clear and unambiguous
instructions on how to enter, place stops, and exit.
In Chapter 5, I will share my principles in designing my methodology and all components

used in my trade setups and trade plans.
Willpower
Willpower is the glue that keeps the Three Pillars together. From time to time, hope,
greed, fear and pain will distract you from your path to success. The constant emotional
pain the market’s maximum adversity inflicts will challenge your resolve to stay in course.
Chapter 6 will explore what you can do to build discipline to execute trade according to
plan, and keep those emotions under control.
You may wonder why I use willpower rather than psychology here. In my opinion, the
“psychology” is like a buzzword. “Willpower” is more specific where it describes the ability
or desire to execute an action according to a plan.
In my next Chapter 2, I will share with you the importance of formal education in
preparing yourself to be successful in trading. Then in Chapter 3, I will share a way to set
trading objectives and expectations before trading.
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Chapter 2 – Importance of Education

Doctors, lawyers, and engineers need to go to school for years before they are expected to
be professionals and earn a living. A pro baseball player spends a few years in the minors
before getting called up to play with the big boys. Football and basketball players start out
by playing college ball for 4 years, and then only the best get drafted. Electricians,
plumbers, and welders are apprentices first. These people do not just decide to work in
their field and start doing so from day 1; they work up to it.
So why should traders think they are any different or better? After all, they are trying to
enter what I believe is the hardest profession of all with hopes of being successful with
little or no experience. The same way it takes years to become a surgeon, a trader needs to
put in time before expecting to be capable of doing it successfully. Just as in every other
profession, a trader needs the proper education. Unfortunately, Harvard doesn’t offer any
degrees in trading. The only “schooling” traders get in learning their profession is hands-
on, and the money they lose can be considered their tuition. It is through these losses that
they will, they hope, gain the experience needed to be a great trader.
Trading is an ongoing learning process, not something that can be learned overnight by
reading a book or going to a seminar. People can read five books on learning to play tennis
and take a few lessons, but until they get out there and practice, practice, practice, they
won’t be competitive. Trading is not much different; it takes lots of practice to get good.
The only difference between tennis and trading is that when you are bad at tennis, you
still have fun and maybe lose a few pounds while getting in shape. With trading you may
still lose a few pounds, but that’s because you may not have money for food.
Many professional traders go through extensive training before they are expected to
succeed. In some financial institutions, they expect all new traders to lose for the first 2
years. Those who come in planning to start making money immediately will be
disappointed. During those 2 years traders learn how to trade. For the first 3 months they
don’t even trade but instead just sit in classes all day learning about the different trading
opportunities and paper trading. Afterward they are given limited share size and are
forced to follow strict rules until they prove themselves. Only then are they given more
share size, buying power, and the freedom to trade independently. The firms risk very
little on these new traders during this period. Even when one loses $50,000, it means
nothing to the firm; they see it as a part of a new trader’s tuition.
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Major firms such as Goldman Sachs, Bear Stearns, and Merrill Lynch go to the top
business schools around the country and offer the top students disgustingly large sums of
money to enter training programs to become traders. They don’t just hire these people to
trade; they hire them to train them to be traders. The reason they take only these elite
candidates is that these people are proven learners. The firms figure these people will be
easier to teach than someone who was only able to get into a mediocre graduate school
with modest grades.
One should start to wonder: If professional trading firms expect their traders to take a few
years to develop and are willing to risk a large sum of money in training them, why does
the typical average trader think he can open a trading account for $5000 having never
traded before and expect to make money immediately? Even those who trade on the floor
don’t just go out and get a seat; most of them were clerks for years before they ventured
into the pit to trade. People should be realistic about their progress and plan on having
enough capital to get them there. They should not get discouraged if they lose their initial
capital; instead, they should see it as a part of the tuition toward their ultimate goal—
being a winning trader.
Recommended Training Programs

Name Trainer
Wealth Academy Trader Conrad Alvin Lim
Index and Forex Trading Brent Penfold
Trend Trading Daryl Guppy
Open Yale course：Financial Markets Robert J. Shiller
Table 1: Recommended training programs.
Recommended Books
Name Author
Technical Analysis of the Financial Markets: A Comprehensive John J. Murphy
Guide to Trading Methods and Applications
The Universal Principles of Successful Trading: Essential Brent Penfold
Knowledge for All Traders in All Markets
High Probability Trading Marcel Link
Trend Trading: A Seven-step Approach to Success Daryl Guppy
Trend Following (Updated Edition): Learn to Make Millions in Michael W. Covel
Up or Down Markets
Sentiment Indicators - Renko, Price Break, Kagi, Point and Abe Cofnas
Figure: What They Are and How to Use Them to Trade
Table 2: Recommended books.
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Recommended Magazines
Name Website
Currency Trader http://www.currencytradermag.com
FX Trader Magazine http://www.fxtradermagazine.com
Active Trader http://www.activetradermag.com
Technical Analysis of Stocks & Commodities http://www.traders.com
Futures Magazine http://www.futuresmag.com
Table 3: Recommended magazines.
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Chapter 3 – Objectives and Expectations
Overview
In this chapter, I would like to share with you the Q&A exercise (Tharp, 1998) in setting
my own objectives, expectations and trading ideas. I recognize some benefits of answering
the questions, such as:
1. When you have finished the questions, you will discover that the foundation for a
successful investing or trading business has been developed.
2. Along the way, you may realize that there are some emotional responses intact to the
questions. The emotions you feel when answering the questions will be a big clue for
you in discovering yourself. If you merely do not want to answer the questions and
are disturbed by some of the questions, then you probably have some psychological
issues.
3. When you answering the questions, at the same time you will also establish
boundaries around your trading system. When you’ve done all that, then your mind
will open up and understand your next course of action in terms of developing a
system that fits only for you.
4. You will able to emotionally orient yourself in setting
a. Professional Objective – Manage risk capital by focusing on consistent,
sensible, and sustainable trading.
b. Modest Expectation – Set a reasonably achievable return and achieves it
consistently.
Setting Objectives and Expectations
Self-Inventory Check
Q: How much capital do you have?
A: I currently have about $25000 in my account.
Q: How much money do you need to live on each year?

A: About $30,000.
Q: How much of that must come out of your trading profits?

A: Currently, none of it. I earned a salary from my current job.
Self-Assessment
Q: How much time during the day do you have to devote to trading?
A: I allocated 2-3 hours daily.
Q: When you are trading, how many distractions can you expect to have?
A: A lot of distractions.
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Q: So obviously, you need a trading methodology that allows you to deal with
those distractions.
A: Yes
Q: How much time do you expect to devote to developing your trading system?
A: Currently, I spent approximately 5-8 hours during weekend and 1-2 hours during
weekdays in planning and doing research.
Q: How would you rate your market knowledge?

A: I have extensive experience in stock investment and Forex trading.
Q: What are your psychological strengths and weaknesses, especially in terms of

trading system development?
A: I am a strategic and patience trader, which I believe are the qualities needed in
developing long-term strategies for trading. I’m also self-confident, which gives me a lot of
psychological strength in trusting the systems I develop. In terms of weaknesses, I am
always striving for perfection therefore sometimes this distract me from my primary
mission as a trader.
Q: How about your strengths and weaknesses in terms of personal discipline?

A: I am fairly good at discipline. I have no problems following a system.
Q: Do you tend to get compulsive (i.e., get caught up in the excitement of trading),
have personal conflicts (i.e., have a history of conflicts with your family, at your job,
or during past trading experience),-or have any emotional issues that constantly
crop up, such as fear or anger?
A: I certainly don’t think of myself as compulsive. I do find trading exciting but I am not
addicted to it. I don’t think I have any conflicts. My family life is reasonably stable.
Moreover, I rarely get angry or frustrated but once a while I do tense up. Whenever I feel
tense, I will practice the breathing method that I learnt from Anthony Robbins to relax
myself, and convert my state to positive.
Q: Based upon your personal inventory, what did you need to learn, accomplish, or
solve prior to beginning trading? How did you do that?
A: I think my personal inventory was and is quite strong. I’m able to trade well.
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Define Your Objectives
Q: What is your advantage or edge in trading? What is the particular concept that
you are trading that gives you an advantage?
A: I would consider myself a man with quite a number of skill sets that allows me to take
advantage of in order to become successful in trading. My number 1 advantage is that I
possess strategic thinking due to my high analytical skill set in Computer programming. In
fact, I had programmed quite a number of indicators to mechanically identify potential
support and resistance levels, and identify price action patterns. While most people don’t
take it to the level that I do. I also have the higher advantage in terms of patience and
detachment. For example, I am able to sit back and do nothing while waiting for the right
opportunities to come along, even if that means not making a trade all day or few days.
Q: Do you have the time to trade short term?

A: As of now, I only trade short-term during holidays.
Q: What do you expect to make each year as a percentage of your trading capital?
A: About 20 percent to 40 percent.
Q: How much money do you need to make each year? Do you need to live off that
money? What if you don’t make enough to live off? Can you make more than you
need to live off so that your trading capital can grow? Can you stand regular
withdrawals from your trading capital to pay your monthly bills?
A: I make it a habit to only spend my living expenses from my current salary, so I won’t
need anything additional from my trading income. As of now and until I decided to do full
time trading, trading income will simply be a second income for me.
Q: Are you being realistic, or are you expecting to trade like the best trader in the
world?
A: I want to achieve financial freedom via investment and trading. I am learning from
Market Wizards and trying to emulate them by achieving their standards. However, I am
taking one step at a time and will not force myself.
Q: What risk level are you willing to tolerate in order to achieve that?
A: About half the potential gain, so the maximum loss would be 20 percent in a year.
Q: What is the largest peak-to-trough drawdown you are willing to tolerate?

A: About 6 percent. I will commence System Stop if my methodology experience 6%
drawdown in a particular month.
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Q: How will you know your plan is working, and how will you know when it’s not
working? What do you expect from your system in various kinds of markets?
Trending? Consolidating? Highly volatile?
A: I plan everything after taking into consideration of all aspects. I set up worst-case
scenarios, and I run through them just as an exercise. I have specifications on the best case
and the worst case for each scenario. Thus, when something comes along, I have usually
planned for it and have a range of expectancy. Therefore, if the results fall within that
range, then I know everything is as per plan. However, if the results fall outside that range,
then I know that I will need to study what went wrong and get it fixed. Generally, I expect
a 40 percent return at the best and a 10 percent return at the worst, with average returns
of 15 to 25 percent. We can also conclude that the expected worst-case drawdown will be 6
percent per month.
Money Management Ideas

Q: How much capital will be at risk?
A: I’ve got around $25,000 to trade with, so I will only use $15,000 as at-risk capital, and
the remaining $10,000 I will keep in a money market account in case I burn the first
$15,000.
Q: How much risk can you afford to take on a given trade?

A: This depends on trading methods use at that time. I will just use 1% risk for short term
trading, and 2% for medium term trading.
Q: How much to risk on all open positions?

A: I will not have more than ten open positions at any time and/or will not have more
than 20 percent of my capital at risk on open positions. I applied the rule that limits the
number of open position size at any given time.
Q: How do you determine position size?

A: I practice different money management strategies – Fixed-Volatility and Fixed-
Percentage – respectively for different trading methods.
Q: What is you acceptable risk/reward ratio?

A: I will only make trades that have a risk/reward ratio of 1:3 or higher. No matter how
beautiful the outlook may be, but if I can lose more than I can make due to wrong
judgment then I will not make the trade.
Q: Will you lower risk parameters?

A: If I lose more than 6 percent of my capital, I will then lower my risk accordingly.
Q: What is your cutoff point before questioning trading plan?

A: If I’m down 35 percent of my capital since I started, I will stop trading until I review my
system, risk parameters, and trading plan to determine the root cause.
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Trading Ideas
Q: What kind of markets do you want to trade? Do you want to trade only liquid
markets, or are there some illiquid markets you’d like to trade?
A: Currently, I am trading Forex and Gold spot which are the most liquidity market in the
world.
Q: What beliefs do you have about entering the markets? How important do you
believe entry to be?
A: Entries are very important as it directly define our stop placement, initial risk, and
potential loss. The size of our losses, compared to our wins, directly affects our expectancy!
When we enter a trade, we have no idea whether the trade will enjoy a strong trend as we
do not have the crystal ball to visualize the future. We only have present and it is all about
controlling risk and trading for the opportunity to earn expectancy. Well since entries
define initial risk, it also directly affects the position sizing in money management strategy.
Q: Given your goals in terms of returns and drawdowns, what kind of initial stop
loss do you want?
A: My initial stop loss is defined by using volatility measurement (ATR) or the support
level.
Q: How do you plan to take profits? Reversal stops? Trailing stops? Technical stops?
Price objectives?
A: I am more comfortable in using trailing stops as an effective way to exit profitable
positions. I am wary of profit targets as it generally reduces profitability.
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Chapter 4 – Money Management
Overview
Money management is the secret behind survival (avoid risk of ruin) and prosperity. The
first priority is to survive, then to grind out steady gains, and finally, to make
spectacular gains. Serious traders are always focused on minimizing losses and
growing equity.
Even with the most robust and validated methodology, we can’t predict how our
performance will turn out to be. Also, we can’t influence the direction of the market. One
element that we can exercise some control over is the amount of capital we are
prepared to risk on any one trade. Money management will tell us how much money
we should risk.
The essence of proper money management is very simple – when we lose money from
trading, we should reduce our trading exposure or position size; and when we
make money from trading, we should increase our trading exposure.
Fighting Off Sharks and Piranhas

In his book “Come into My Trading Room”, Dr. Alexander Elder describes two types of
predators that are always trying to kill traders (Elder, 2002): Sharks and Piranhas.
Sharks
• A single big loss that wipes a great
part of an account equity
Piranhas
• A series of small losses, or non-
lethal “bites”, that cumulatively kill
an account.
Figure 2: Types of predators that are always trying to kill traders.

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Sharks can be defeated by limiting each trader loss to just 2 percent of account equity.
This is accomplished through the use of a stop-loss order and by trading the appropriate
number of shares or contracts. This issue is further addressed in “Position Sizing”.
To avoid an extended series of piranha attacks, Elder advocates halting trading during
any given month if accumulated losses exceed a certain threshold: the value of
account balance dips 6% below its closing value at the end of last month. Many money
managers use this type of guideline; their investment objectives dictate that monthly
drawdowns are limited to a certain value to maintain low risk and achieve more consistent
returns. For me, rather than suspending trading completely for the particular month, I will
reduce my trade size by reducing risk per trade when the 6% drawdown threshold
is reached. This will be further discussed in “System Stop”.
Position Sizing
Setting position size is not always easy, but at the end of the day, there are three basic
steps in setting position size:
1. Set risk limit per trade

2. Calculate where stops should be
3. Figure out how many contracts to trade
If the risk on a trade is too much, you don’t have to take it. Zero is an acceptable choice
as the number of contracts to trade. High-risk trades are worth skipping as you wait for
the next solid opportunity.
I personally practice 2 different anti-martingale money management strategies

respectively for different trading methods: Fixed Percentage and Fixed-Volatility.
Fixed-Percentage
Fixed percentage requires a trader to designate a fixed percentage of equity as the
maximum risk per trade. When an account is going down, this percent will represent a
lower dollar amount of risk based on the account size. When the account is going up, this
percent will represent the higher dollar amount based on the account size.
To calculate the number of contracts to trade according to fixed percentage, you would
use the following formula:
For example, if you had USD15000.00 account balance and wanted to limit your risk to 2%
of your account, you will face 150 pips risk. Pip value for EURUSD is USD1.00 (in mini
account) (CMSForex’s Pip Calculator).
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The following table illustrates how the number of contracts traded changes with account
balance and the risk of each trade.
Account Fixed Fixed % Stop Loss Contracts Added

Balance Percent dollars Points Pip $$ Vol Actual Round
Value Down
$15000 2% $300 78 $1 78 3.8 3
$15000 2% $300 156 $1 156 1.9 1
$15000 2% $300 248 $1 248 1.2 1
$15000 2% $300 387 $1 387 0.7 0
Table 4: Number of contracts to trade by fixed percentage.
Fixed-Volatility
Fixed volatility looks to limit the market’s volatility to a fixed percentage of your account
balance. To calculate the number of contracts to trade according to fixed volatility, you
would use the following formula:
Market volatility (Pips risk in dollar value) refers to market movement measured by
using ATR Stop-Reversal Level.
Fixed volatility does not take into account a trader’s individual risk. If the market’s
volatility measure is within the fixed-percentage account limit, a trade is taken, regardless
of its individual risk. Similarly, if the market’s volatility expands and exceeds the fixed
percent account limit, a trade will not be selected, regardless of its individual trade risk.
For example, if you had USD15000.00 account balance and wanted to limit your risk to 2%
of your account, you will face 200 pips risk which determined by using 10-day ATR. Pip
value for EURUSD is USD1.00 (in mini account).
The following table illustrates how the number of contracts traded changes with the
market’s volatility.
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Account Fixed Fixed % Market’s 10-day ATR Contracts Added

Balance Percent dollars Points Pip $$ Vol Actual Round
Value Down
$15000 2% $300 64 $1 64 2.3 2
$15000 2% $300 157 $1 157 1.9 1
$15000 2% $300 269 $1 269 1.1 1
$15000 2% $300 533 $1 533 0.56 0
Table 5: Number of contracts to trade with various levels of market volatility.
Add Position
The wrong way is to start with one contract and then add a second contract as it goes in
your favor, then add two more contracts, then add three, and so on. The problem with this
is that the trade becomes top-heavy as most of the contracts are done at higher prices. If
the market does a quick turnaround, it can be costly. When a position is top-heavy, the
market only has to retrace a portion of what it has moved to erase all the profits made in
the initial move.
The proper way to pyramid (add position) is to have the most contracts at the bottom
and then, as the trade begins to work, to add fewer and fewer. Thus, if you had started
with ten contracts, you’d add seven, and later four, two, and one. This way, when the
market turns, you don’t risk nearly as much and can keep most of the early gains. I
personally reduce risk of trade in adding position if I already have a trade on the same
direction.
Exit Strategies
There are two goals that a good exit strategies attempt to achieve:
1. Strictly control losses

2. Ride a profitable trade to full maturity
In my trading, I use four different exit strategies in different trading methods as shown in
the following table.
Exit Strategy Method

Barrier Exit  Average True Range (ATR)
 Recent support or resistance level
Trailing Exit  Average True Range (ATR)
 A fixed distance of previous day’s high or low.
Profit Target Exit Risk:Reward more than 1:2.
Time-based Exit Getting out of the market on a market order after having
held a trade for a fixed period.
Figure 3: Exit strategies (Jeffrey Owen Katz & Donna L. McCormick, 1998).
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System Stop
Even though I know my strategies have an edge, there is no guarantee they will continue
to have an edge into the future. Just as we should always trade with a stop, so we should
trade with a system stop. Using a system stop on each of my method will prevent me from
losing the farm (Penfold, 2010).
My rule on System Stop for all trading methods is I will reduce risk parameter for a
particular method, where the method caused 6% drawdown in my account balance.
When this happens, I will reduce risk per trade. I will resume trading with normal
risk parameter using the particular method if I managed to gain back over 70% of
the 6% drawdown.
Using a system stop will reduce profitability because it will have you on the sidelines when
your strategy starts to climb out of its drawdown. System stop is designed to preserve
capital. I certainly believe the cost of missing out on some profit opportunity is well
worth it to preserve my precious capital.
Financial Boundaries
Just like using stops when you trade, you should place a financial boundary around your
trading careers. You should establish your personal financial commitment to learn how to
trade successfully. This is the risk capital you are prepared to invest in your education or
the total amount you are prepared to lose. You should make a personal commitment that
if you lose the total, you will accept that trading is not for you and you will walk away. Just
like trading, where you should always use a contingency stop, you should know what you
are prepared to lose before you embark on a trading career.
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Chapter 5 – Methodology
Overview
Trading methodology (or systems) development is part art, part science, and part common
sense. Our goal is not to develop a system that achieves the highest returns using
historical data, but to formulate a sound concept that has performed reasonably well in
the past and can be expected to continue to perform reasonably well in the future.
Principles of Methodology
Trade Setups
Humility is the key success factor in trading. Humility means we understand and
acknowledge that other people in the market know much more than we know. They
understand what is happening in the economy, or in government, or in the business for a
particular company. Other people have much better analysis skills, or much better
information. We cannot be smarter than the market or the people in the market.
Humility means we appreciate their knowledge and we learn to follow their conclusions in
the market. All of their information and analysis skill is revealed in the chart of price
activity. Every day, intelligent people buy and sell in the market. We can measure their
opinion by watching the price activity. This behavior develops four important basic
relationships as shown in Figure 4. I will the below four components to derive different
trading setups.
Support and Relationship Price Activity Market

Resistance between • Price actions Sentiment
• Stable support traders and • Divergence • Volume
and resistance investors patterns • US Dollar Index
• Round Numbers • Price extremes. • Reading news
• Guppy Multiple
•Dynamic support Moving Average. •Index ratios.
and resistance
• High Probability
Chart Patterns
Figure 4: Four components in market analysis.

20
The trade setups will help us to identify areas of possible support and resistance:
1. A support level will not only exist in an uptrend; it should also confirm the uptrend.
2. A good resistance level will not only exist in a downtrend; it should also confirm the
downtrend.
After determine the possible support and resistance, we will be able to decide what our
preference should be – whether we should be looking to buy or sell.
Tom Demark commented that general technical analysis doesn’t work due to it being
so subjective. Tom believes in simple, non-optimized, and objective mechanical systems,
and believes they should be universal across all markets and all time frames and hold up
under all bull market and bear market conditions. He doesn’t believe markets change over
time because markets only reflect human nature – fear and agreed, which never changes
(DeMark, 1994).
Therefore, when I design my methodology, almost every component in the methodology

is programmed to be mechanical and objective. I do not even manually draw horizontal
lines, draw trend lines, identify divergence patterns, etc... The software will do the
necessary computation and provide me the necessary information automatically. I am
happy with 80-90% accuracy, and the most important, no need strain my eye by looking at
the chart. Besides, doing this also helps me to achieve better time management. I do not
want to become a slave to the market, continually searching for setups and deciding
whether to trade.
Although my trading methods are mechanical and objective, I am a discretionary

mechanical trader. I develop and trade according to a very structured trade plan.
However, I use my discretion (which is necessary) over when I will follow my trade plan.
And when I do decide to trade, I will follow my trade plans to the letter.
Trade Plans
At the core of trading, trading is simply the identification of potential support and
resistance levels to allow us to:
1. Place precise stops that when triggered provide evidence the potential support or
resistance level has failed
2. Enjoy profits when the potential support of resistance level holds.
The trade plan tells us how to take advantage of our setups. There are plenty of
techniques for entering trades, placing stops, and exiting positions. In my opinion,
the very fundamental of an effective trade plan is it should support and confirm our
setup. In another words, while all trade setups consist of five steps in trade plan (Figure 5),
the trade plan is tailored for each trade setup.
21
Wait for a
confirming Hopefully
entry signal. Place a stop. take profits.
Enter the Manage the

market. trade.
Figure 5: Every trade setup has its own trade plan.
In a nutshell, if our setup has found a potential support level, our trade plan should expect
the market to move higher before committing to a trade. Similarly, if we have found a
potential resistance level, our trade plan should wait for lower prices before committing to
the market. In other words, if we have support, our entry price should be higher. If
we have resistance, our entry price should be lower. When trading, it is good practice
to assume our setup is wrong until the market proves it right. For both situations, we
place stop at a level we believe the methodology’s analysis will be proven wrong.
Three Important Criteria

There are three important criteria that my trading method must be able to fulfill: positive
expectancy, adequate opportunities and avoid multicollinearity. I will also explain
the reason I do not put emphasis on accuracy in this section.
Positive Expectancy
According to Brent Penfold, expectancy is the idea that is the least understood by most
traders. Expectancy refers to what you can expect to earn, on average, for every dollar you
risk in a trade. To calculate methodology expectancy, we can use the following formula
(Penfold, 2010). Some people use profit factor (Mock, 2010), but the concept is same with
expectancy.
( ) ( )
A methodology must be able to deliver a probable positive expectancy. Expectancy is

made up of accuracy and payoff. Improving the accuracy and the average win-to-average
loss payoff are important tools to reduce our risk of ruin.
For example, if your probability of winning is 35%, your average winning trade profits $10,
and your average losing trade loses -$3, the expectancy of your trading system is:
( ) ( )
This trading system has a positive expectancy because over the long-term, it should yield
an average profit of $1.55 per trade.
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Think of a casino. The odds are in its favor on every single game played, whether it is
roulette, craps, or blackjack. Sure, it could lose any single game at any time, but over the
long run it knows with mathematical certainty that it will come out ahead.
In contrast, consider a trading system that wins 90% of the time gaining $1 on average but
loses $20 on average on the 10% of losing trades:
( ) ( ( ))
This trading system is worthless despite its 90% success rate because it has a negative
expectancy. An example of such a losing system is selling deep out-of-the-money call
options. You win most of the time but the few times you lose destroy your trading account.
Why Not Accuracy?

Trading is not a one-shot deal. Rather, it is a never-ending series of trades that collectively
should make money. Some will be winners and some will be losers. In fact, according to
Tharp (Tharp, 1998), the best traders have a win rate of only 35%-50%. The best, most
successful traders lose more often than they win. They are successful because their
winners are much more profitable than their losers are unprofitable.
Many novice traders think that accuracy is the most important thing. They think that one
who wins on 9 out of 10 trades must be a better trader than one who wins on only 4 of 10
traders. Professional traders realize that accuracy is irrelevant to success. What is
important is the expected value of your trades – i.e., how much profit your trading system
generates.
Adequate Opportunities
Opportunities simply refer to the number of times you can apply to your expectancy. You
can have a methodology with the highest expectancy, but unless you get opportunities to
trade it, there will be little reward. I implemented two ways to increase opportunities:
1. To trade extra markets.

2. To trade multiple timeframes.
Trading extra markets and multiple timeframes are only sensible if your account can
afford the extra margin requirements and you are comfortable with the potential extra
drawdowns.
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Avoid Multicollinearity
A cardinal rule for the successful use of technical analysis requires avoiding
multicollinearity amid indicators. Multicollinearity is simply the multiple counting of the
same information. The use of four different indicators all derived from the same series of
closing prices to confirm each other is a perfect example (Bollinger, 2001).
Multicollinearity is a serious problem because collinear variables contribute redundant
information and can cause other variables to appear to be less important than they really
are.
The best way to quickly determine if an indicator is collinear with another one is to chart
it. Make sure you have enough data on the chart to get a good indication. If they basically
rise and fall in about the same areas, the odds are that they are collinear and you should
just use one of them.
Based on my research, I have arranged technical indicators that I am currently using into
three categories to keep from using too many from the same category (Table 6).
Momentum Trend Volatility

 MACD  Moving Averages  Average True Range
 Stochastic  Bollinger Band
Table 6: Category of technical indicators.
Portfolio of Methods
Developing and combining complementary and independent methods is extremely
important. They will be nearly 100% objective, independent, and work across many
markets under all market conditions. They would be profitable and be able to stand
alone on their own two feet. When I combine their equity curves, I will observe and enjoy
smoother ride in my account balance. When the trend-trading methods hit a rough patch,
I would expect my swing-trading methods to be enjoying profits and vice versa.
Furthermore, I also look to diversify my methods further across time frames. I trade a
portfolio of short-term and medium-term swing and trend continuation patterns
methods across multiple time frames across index and currencies markets. Table 7
shows characteristics of three different trading styles that I currently use.
I do not trade long-term trend trading (like Turtle Trader) because it requires larger stops
than the medium-term trading method. Based on surveys, drawdown of long term trend
trading can be very huge, and I am not able to stand such a loss. Besides, long term trend
trading also requires high financial commitment to trade 20-30 markets due to its low
accuracy and low opportunities per market.
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Medium-term trend Medium-term swing Short-term

trading trading trend trading
Management Portfolio of 5 – 7 pairs 5 – 7 pairs 1 – 3 pairs
markets1
Money
Drawdowns Medium Medium Small

Drawdown Period Medium-term Medium-term Short-term
Financial Medium Medium Small
Commitment
Time Frame Medium Medium Small
Accuracy High Medium High
Avg. win: Avg. Good Medium High
Methodology
loss
Expectancy Good Good Good
Opportunities per Medium Slightly Low High
market
Brokerage and Medium Medium Medium
slippage
Emotional hurdles Medium Medium Medium
Psychology
Table 7: Characteristics of different trading styles.
Prediction or Forecasting?
Chart analysis is often confused with predicting or forecasting the market. Here, let me
share Daryl Guppy’s opinion on prediction and forecasting (Guppy, Prediction OR
Forecast?, 2002).
“Forecasting uses the higher probability situations in an attempt to project future

price action and acts in anticipation of this. It straddles the boundary between trading
and investing. Here we stand at the traffic lights, stepping out confidently when the walk
sign flashes. Sometimes we get wiped out as a car crashes through the walk signal, but most
times the signal is reliable. When we see the signal we can forecast the action for a selected
period of time. Here traders act when the event occurs.
1
Portfolio of Market is actually very subjective to individual, especially size of capital.
25
Prediction is a different beast altogether. It carries a high level of certainty about the
occurrence of events at a specific time. Some Gann and Elliott wave analysts make quite
specific predictions. This is like saying that I know there is a set of traffic lights at the end of
the block, and that at 10.38 am the signal will be flashing walk. This leaves little room for
probability, although there are times when such predictions match the co-incident events.
This means the predictions come true. Separating the co-incidence for accurate
predictive ability is difficult. The tendency with prediction is for traders, or
investors to act in anticipation of the event.”
So, based on Guppy’s explanation, my trading approaches match the characteristic of

forecasting, but not prediction. I agreed with his opinions.
In my opinion, technical analysis is definitely not about predicting the future. No one can
really do this! All of the schools (Elliot Wave, Fibonacci, W. D. Gann, etc…) that believe in
future prediction are very subjective tools.
Process of Building Trading Method
Start with a
concept
Turn it into
Evaluate a set of
the results objective
rules
Visually
Formally
check it out
test it with
on the
a program
charts
Figure 6: 5 steps to build a trading method (Murphy, 1999).

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Step 1: Start with a Concept
I will begin by looking at as many charts as I can, trying to identify moving average crosses,
oscillators configurations, price patterns or other pieces of objective evidence which
precede major market moves. I also attempt to recognize clues that provide advance
warning on moves that are likely to fail. I studied chart after chart after chart in the hope
of finding such answers. This “visual” approach has worked for me, and I highly
recommend it.
In addition to study price charts and reading books, I also study trading systems and study
what others have done. Although no one is going to reveal the “Holy Grail” to us, there is a
great deal of useful information out there. Most importantly, think for yourself. I have
found that the most profitable ideas are rarely original, but frequently our own.
Most of the successful trading systems are trend following. Counter trend systems should
not be overlooked, however, because they bring a degree of negative correlation to the
table. This means that when one system is making money, the other is losing money,
resulting in a mother equity curve for the two systems combined, than for either one alone.
Principles of Good Concept Design

Good concepts usually make good sense. If a concept seems to work, but make little sense,
you may be sliding into the realm of coincidence, and the odds of this concepts continuing
to work in the future diminishes considerably. Your concepts must fit your personality in
order to give you the discipline to follow them even when they are losing money (i.e.
during periods of drawdown). Your concepts should be straightforward and objective.
Most importantly, your concepts must make money in the long run (i.e. they must have a
positive expectancy).
Designing entries is hard, but designing exists is harder and more important. Entry logic is
fairly straightforward, but exits have to take various contingencies into account. I prefer
systems that do not reverse automatically – I like to exit a trade first, before putting on
another trade in the opposite direction.
Another suggestion is try to optimize as little as possible. Optimization using historical

data often leads one to expect unrealistic returns that cannot be replicated in real trading.
Try to use few parameters and apply the same technique across a number of different
markets. This will improve your chances of long run success, by reducing the pitfalls of
over optimization.
Step 2: Turn It into a Set of Objective Rules

This is the most difficult step, much more difficult than many of us would at first expect!
To complete this step successfully, we must express our idea in such objective terms that
100 people following our rules will all arrive at exactly the same conclusions.
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Determine what our system is supposed to do and how it will do it. It is with this step that
we produce the details needed to accomplish the programming task. We need to take the
overall problem and break it down into more and more detail until we finalize all the
details.
Step 3: Visually Check It Out On the Charts

Following the explicit rules we just determined in Step 2, we have to visually check the
trading signals that are produced on a price chart. This is an informal process, meant to
achieve two results:
1. We want to see whether our idea has been stated properly

2. Before validating the idea by program, we want some proof that the idea is a
potentially profitable one.
Step 4: Formally Test It with a Program

I am using a MT4 trade simulator (which is developed by LearnForexHome.com) to back
test my trading methods. This tool replays market data and allows me to trade like in a
live market. At the end of the test, it will produce one back-test report for me.
Besides, we must decide how much data to use when building our system. I use the entire
data series, without saving any for out-of-sample testing. Many experts would disagree
with this approach, but I believe it to be the best with my methodology that relies on good
solid concepts, virtually no optimization, and a testing procedure that covers a wide range
of parameter sets of markets.
I do not account for transaction costs (slippage and commissions) when testing systems,
but instead factor them in at the end. I believe that this keeps the evaluation process more
pure and allow my results to remain useful should certain assumptions change in the
future.
Step 5: Evaluate the Results

A particular method must pass three very important criteria in a back test, in order to be
included into my trading arsenal:
1. Expectancy (Tharp, 1998) must be positive and preferably more than 60% or 60
cents if invested 1 dollar.
2. Adequate opportunities (Penfold, 2010) – more than 10 trades per month.
3. Drawdown (Link, 2003) is less than 10% of account balance.
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Main Components in Trade Setups
Support and Resistance Levels
Stable Support and Resistance

--Applicable to all markets
I adopted Mel Widner’s theory in implementing precise comparison of price to identify

important support/resistance levels. I found a MT4 indicator in a forum, which is able to
identify the 6 current support and resistance levels (Figure 7) by using Mel Widner’s
mathematics formula (Widner, 1996). I prefer to use daily and weekly time frame
because support and resistance levels become much more apparent if compare to smaller
time frame.
Figure 7: Automated support and resistance levels.
Because technical analysis is not an exact science, sometimes it is useful to create support
and resistance zones. Sometimes, exact support and resistance levels are best, and,
sometimes, zones work better (Figure 8). Generally, the tighter the range, the more exact
the level. If the trading range spans less than 2 months and the price range are relatively
tight, then more exact support and resistance levels are best suited. If a trading range
spans many months and the price range is relatively large, then it is best to use support
and resistance zones. These are only meant as general guidelines, and each trading range
should be judged on its own merits.
If there is a major support or resistance zone just right ahead, I will be extremely cautious
in making the trading move. Most of the time, I will just wait for a better signal which
when the price breaks the support or resistance zone (Figure 8).
29
Figure 8: Major support and resistance zone.
Furthermore, I will also be extra cautious if the price enters no man’s land. For instance,
AUD/USD reached the parity level and had been ranging for many weeks (Figure 9).
AUD/USD has never reached the parity level in its entire history and this indicates that
there’s no any reference available on the resistance level. In this case, I will be extra
cautious and would rather avoid trading AUD/USD.
Figure 9: Example of no man's land.

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Round Numbers
Round numbers in the prices of currency pairs present strong psychology barriers in the
progress of a trend. Such levels tend to define strong support and resistance areas. I
created one indicator to draw the nearest round numbers as shown in Figure 10.
Figure 10: Round numbers identified by my indicator.
As the market approaches these numbers, people get in just to push it there, but as soon
as it gets there, interest dies down because the chase is over. This is a psychological barrier
that is self-imposed. When a market starts dropping and approaches a round number,
buyers wait to see what it does. There will be an abundance of limit orders at the number
that will start getting hit, causing a slight bounce. People on the sidelines then may rush
in, causing the market to bounce even higher; then the shorts start to cover and the down
move is temporarily over, causing a reversal. When you do see the market headed for a
key number, you should assume it will bounce off that number. However, be prepared for
a breakout just in case.
Dynamic Support and Resistance

I am very concern of subjectivity in drawing trend line. Different individual may draw
different trend line. Therefore, I adopted mechanical method to draw trend lines by
programming some rules into an indicator (Figure 11).
A trend line that is too steep is not very reliable and is easy to break. Based on my
observation, a trend line with a slope of 20 degrees will hold much better than will one
with a slope of 60 degrees. There is no hard rule for this. Sometimes, we have to use
common sense in judging reliability of a trend line.
31
A trend line acts as the equilibrium between buyers and sellers as they struggle with the
balance between supply and demand in the market. The market goes up because there are
more buyers than sellers and goes down because there are more sellers than buyers. In an
uptrend the trend line is the point where the buyers take over and the sellers back off. As
the market gets farther away from the trend line, the buyers will begin to lighten up and
some sellers may appear. This will cause the market to retreat back to the trend line where
the buyers are eagerly waiting to get back in again, and the process starts again.
Figure 11: Draw trend line using programming.
Long Term Chart – Weekly and Monthly Chart

I use weekly and monthly charts as accompany chart to analyze major stable/dynamic
support and resistance levels, as well as chart patterns. Long term charts provide a
perspective on the market that is impossible to achieve with the use of daily charts alone.
This is because these charts compress price action in such a way that the time horizon can
be greatly expanded and much longer time periods can be studied (Murphy, 1999).
Based on my observation, support/resistance levels and reversal patterns identified in

weekly/monthly charts are more prominent and carry a great deal more significance if
compare to daily charts. Another important pattern that occurs quite frequently on
weekly charts is the weekly reversal:
 An upside weekly reversal occurs when prices open at a lower level on Monday and
on the following Friday close above the previous week’s close.
 A downside weekly reversal occurs when prices open at a higher level on Monday
but close lower than the previous weeks close on the following Friday.
32
Nevertheless, long term charts are not meant for trading purposes. A distinction has
to be made between market analysis for forecasting purposes and the timing of market
commitments. Long term charts are useful in the analytical process to help determine the
major trend, support and resistance, as well as price objectives. They are not suitable,
however, for the timing of entry and exit points and should not be used for that purpose.
For that more sensitive task, daily and intraday charts should be utilized.
High Probability Chart Patterns

In my opinion, chart patterns are derivatives of support and resistance levels. Those high
probability chart patterns are able to indicate whether the price will continue in its
current direction or reverse so we'll also be devising some nifty trade strategies for these
patterns. Figure 12 shows the chart patterns that I concern. To learn more about chart
patterns, please visit ChartSchool.
Up-trend Down-trend Bullish Bearish

Continuation Continuation Reversal Reversal
• Ascending • Descending • Head and • Head and
Triangle Triangle Shoulders Shoulders Top
• Bullish Price • Bearish Price Bottom • Double Top
Channel Channel • Double • Triple Top
• Cup with • Inverted Cup Bottom
Handle with Handle • Triple Bottom
Figure 12: High probability chart patterns that I concern.
Relationship between Traders and Investors

Here, it is not my intention to explain the GMMA in very depth, but I will explain some
very important points about the GMMA. If you are interested in the GMMA, please study
Trend Trading: A Seven-step Approach to Success.
33
According to Guppy (Guppy, Trend Trading, 2004), we do not create the trend, and the
level of our trade participation alone is not enough to maintain the trend. For trend
continuation we must rely on the activity of many other traders and investors.
Understanding what they are thinking and how they are behaving is the most significant
aspect of successful trend trading. Understanding how we are going to manage the trade
once we buy the instrument underpins our trading profitability.
The Guppy Multiple Moving Average (GMMA) (Figure 13) provides a guide to the
inferred activity of each of these groups. The GMMA consists of two groups of moving
averages:
1. The short term group is a 3, 5, 8, 10, 12 and 15 day EMA. This is a proxy for the
behavior of short term traders and speculators in the market.
2. The long term group is made up of 30, 35, 40, 45, 50 and 60 day EMA. This is a proxy
for the long term investors in the market.
This indicator tool is based on moving averages, but rarely does it apply the standard
interpretation of moving averages which tends to be fixated on the point of any crossover.
Each group of averages in the GMMA is used to provide insights into the behavior of the
two dominant groups in the market – traders and investors. The indicator itself does not
initiate an entry or an exit. It is used to confirm the signals delivered by other indicators.
It allows the trader to understand the market relationships shown in the chart and so
select the most appropriate trading methodology, and the best tools to go with it.
Figure 13: Guppy Multiple Moving Average.

34
The relationship within each of these groups tells us when there is agreement on value,
they are close together; and when there is disagreement on value, they are well spaced
apart. The relationship between the two groups tells the trader about the strength of the
market action. A change in price direction that is well supported by both short and long
term investors signals a strong trading opportunity. The crossover of the two groups of
moving averages is not as important as the relationship between them. When both groups
compress at the same time it alerts the trader to increased price volatility and the
potential for good trading opportunities (Guppy, Using Multiple Moving Averages, 1998).
Using the GMMA indicator, we can derive four main trading rules, but it is not a stand-
alone indicator. It is most useful as a confirming entry signal, although it can assist with
timing exits. The direction of the move should be confirmed with the results of other
indicators and price plots. The trading rules for the GMMA are as following (Guppy, Using
Multiple Moving Averages, 1998) and illustrated in (Figure 14).
1. When the bands from both groups begin to narrow down and converge, prepare for
price action as the agreement on valuation collapses.
2. Trade in the direction of the crossover. Go long if the crossover is on the upside and
short or exit long positions with downside crossovers.
3. The long-term averages confirm the trend direction.
4. The bubbles created by the short-term group of averages show the favorable exit
points. Judging the top is difficult, so look for the leading two or three averages to
converge or come together. Confirm this early signal with other indicator readings.
Figure 14: GMMA trading rules

35
Price Activity
Divergence Patterns
I use MACD for only one purpose: identification of regular and hidden divergence. I have
programmed the indicator to detect regular and hidden divergence patterns
(BabyPips.com, Divergence Trading, 2010) for me.
Figure 15: MACD with divergence detection capability.
Especially in lower time frame, we often experience a situation where bearish regular
divergence and bullish hidden divergence (or bullish regular divergence and bearish
hidden divergence) happen almost at the same time shown in Figure 16. When this
happens, my action will be stay out of the market. Fortunately, this situation rarely
happens in high time frame like D1.
36
Figure 16: Bearish Regular Divergence and Bullish Hidden Divergence Happen almost at the same
time.
High Probability Price Actions

--Applicable to all markets, but currently only used on Forex
Rather than straining my eye to identify price actions on the chart, I have created an
indicator to assist me automatically to identify these high probability price actions: Inside
Bar (Fuller, 2009), Pivot Reversal (IncredibleCharts, 2010), Will Reversal (Cerny, 2009),
Will Reversal II (Cerny, 2009), and TD Carrie (ActiveTrader, 2001). Besides, I
incorporated GMMA Oscillator into this indicator to determine the potential breakout
direction. It will automatically calculate the direction, entry price, stop loss, 1st target
profit and 2nd target profit based on the rules of respective price pattern.
37
Figure 17: Alert if Inside Bar, Pivot Reversal, Will Reversal, Will Reversal II, and TD Carrie are
detected.
1. Pivot Reversal
Bullish Pattern: Close[1] < Low[2] AN Close[1]

< Open[1] AND Close[2] < Open[2] AND
Uptrend
Figure 18: Bullish pivot reversal.
Bearish Pattern: Close[1] > High[2] AND

Close[1] > Open[1] AND Close[2] > Open[2] AND
Downtrend
Figure 19: Bearish pivot reversal.

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2. Inside Bar
Bullish Pattern: High[1] < High[2] AND

Low[1] > Low[2] AND High[1]!=Low[1] AND
Uptrend
Figure 20: Bullish inside bar.
Bearish Pattern: High[1] < High[2] AND

Low[1] > Low[2] AND High[1]!=Low[1] AND
Downtrend
Figure 21: Bearish inside bar.
3. Will-Reversal
Bullish Pattern: (Close[1] < Close[2]) AND

(Close[1] < Open[2]) AND Uptrend
Figure 22: Bullish Will-reversal.

39
Bearish Pattern: (Close[1] > Close[2]) AND
(Close[1] > Open[2]) AND Downtrend
Figure 23: Bearish Will-reversal.
4. Will-Reversal II
Bullish Pattern: (Low[1] < Low[2]) AND

(Low[0] < Open[1]) AND Uptrend
Figure 24: Bullish Will-reversal II.
Bearish Pattern: (High[1] > High[2]) AND

(High[0] > Open[1]) AND Downtrend
Figure 25: Bearish Will-reversal II.

40
5. TD Carrie
Bullish Pattern: (Day4TrueHigh > High[2] OR

Day4TrueHigh > High[3] OR Day4TrueHigh >
High[5]) AND (Close[1] < Close[2]) AND
(Open[0] < Day4TrueHigh) AND Uptrend
Figure 26: Bullish TD Carrie.
Bearish Pattern: (Day4TrueLow < Low[2] OR

Day4TrueLow < Low[3] OR Day4TrueLow <
Low[5]) AND (Close[1] > Close[2]) AND
(Open[0] > Day4TrueLow) AND Downtrend
Figure 27: Bearish TD Carrie.
6. Pin Bar
Bullish Pattern: Price must move down

forming a long pin at least twice the size of the
head (distance between the close and open) and
return to close at or higher than the low of the
previous bar.
Figure 28: Bullish pin bar.

41
Bearish Pattern: Price must move up forming
a long pin at least twice the size of the head
(distance between the close and open) and
return to close at or lower than the high of the
previous bar.
Figure 29: Bearish pin bar.
Price Extremes
Here, I refer price extremes to “Overbought” and “Oversold”. I believe most of you can ask
Uncle Google about the definition of “Overbought” and “Oversold”, so I will only explain
the usage of price extremes in my methodology. I use price extremes specifically in
counter trend trading, and measured by using combination of three indicators:
Bollinger Band (www.bollingerbands.com) Stochastic Oscillator and MACD
(divergence patterns). Please refer to Chapter 12 to learn how I use these indicators in
doing counter trend trading, but here I briefly explain Bollinger Band and Stochastic
Oscillator.
Bollinger Band
Bollinger bands (Figure 30) consist of a center line and two price channels (bands) above
and below it. The center line is an exponential moving average; the price channels are the
standard deviations of an instrument being studied. The bands will expand and contract
as the price action of an issue becomes volatile (expansion) or becomes bound into a tight
trading pattern (contraction). When prices continually touch the upper band, the prices
are thought to be overbought; conversely, when they continually touch the lower band,
prices are thought to be oversold, triggering a buy signal. To learn more about Bollinger
Band, please google.
Stochastic Oscillator
As a bound oscillator, the Stochastic Oscillator (Figure 30) makes it easy to identify
overbought and oversold levels. The oscillator ranges from zero to one hundred. No
matter how fast a security advances or declines, the Stochastic Oscillator will always
fluctuate within this range. Traditional settings use 80 as the overbought threshold and
20 as the oversold threshold. To learn more about Stochastic Oscillator, please google.
42
Figure 30: Bollinger Band and Stochastic Oscillator.
Market Sentiment
Volume Data
--Applicable to Futures only
Volume is used to confirm price movement. When price moves with strong volume, the
market is more likely to follow through, whether it is a reversal or a matter of following
the trend. Volume shows the demand for the commodity and determines the strength of
the trend. If price moves up while volume increases, a trend is more likely to stay strong.
When volume begins to wane, it could indicate that everybody who wants to be long
already is. At that point there is no one left to participate in the buying, and so
momentum may soon change.
I applied 21-day Simple Moving Average on Volume (VMA) (Figure 31) to observe
volume changes over time and have a smoothing effect on short-term volume spikes. A
rising VMA indicates that a larger than usual number of contracts have changed hands.
Significant volume surges often precede trend reversals on the indexes. The higher a
VMA's period, the more it will tend to smooth out volume spikes. In this way, the use of a
high-period VMA will ensure that only the larger volume surges are reflected.
43
Figure 31: Volume analysis.
US Dollar Index
--Applicable to Forex only
Currencies have a market sentiment indicator called the US Dollar Index (BabyPips.com,
What is the Dollar Index?, 2011). By using a combination of technical analysis (Figure 32),
we can form a view of the US Dollar based on long term trends, possible short term and
long term reversals and changes in market sentiment, against the major currencies in the
basket. It is important to understand, the US Dollar dictates the trends in all the major
currencies, and therefore this index provides an excellent starting point for determining
the US Dollar’s strength or weakness in relation to the currency pairs. In fact, when the
market outlook for the U.S. dollar is unclear, more often times than not, the USDX
provides a better picture.
Figure 32: USD Index (data provided by Alpari).

44
In 2010, the CME Group created a new dollar index that can be easily broken down into its
component parts. The Dow Jones CME FX$INDEX consists of the four major currencies:
EUR, JPY, GBP and CHF and the two top commodity currencies: CAD and AUD (Luca,
2010). The new index component futures contracts are quoted in U.S. dollars per foreign
unit. I will monitor the liquidity and popularity of this new index.
Reading News
Every morning, I will quickly glance through the local newspaper and few reputable
websites, in order to understand any major events, major political and economy decisions.
The market will tell you where it should go, and your opinion doesn’t mean anything to
the market. By focusing on the market and not on the fundamentals, one can be more
objective and have a better grasp of what is going on. The few websites that I visit almost
every day is Bloomberg (www.bloomberg.com), HeXun (forex.hexun.com) and
ForexCrunch (www.forexcrunch.com).
I do not trade news. In fact, the news doesn’t really matter. What is important for me
is the other traders’ aggregate position and what they are expecting when the news comes
out. As soon as news comes out, I will look to see how the market reacts and what the
other traders are doing. The most important thing a high probability trader wants to do
before a scheduled news release is to be flat.
While I believe that technical factors do lead the known fundamentals, I also believe that
any important market move must be caused by underlying fundamental factors. Therefore,
it simply makes sense for us to have some awareness of the fundamental condition of a
market in order to fundamentally justify a significant market move identified on a chart.
In addition, seeing how the market reacts to fundamental new can be used as excellent
technical indication.
Index Ratios
--Applicable to all markets, but currently only used on Forex.
There are two well-known index ratios that provide us some ideas of the market
confidence:
1. The Gold/USD Ratio (Figure 33) is a good economy indicator to gauge the strength of
USD. If the ratio is high, it means USD is weak; vice versa.
2. The Dow/Gold Ratio (Figure 33) is important because it indicates the optimism for
financial assets versus that of hard assets. A rising ratio demonstrates high
confidence in the economy and falling inflation expectations while a declining
ratio indicates low confidence in the economy and rising inflation expectations.
45
Figure 33: Gold/USD Ratio and Dow/Gold Ratio.
Other Components in Trade Setups
Currency Pairs Correlation

--Applicable to all markets, but currently only used on Forex
Basically, pair correlation is an estimate of how closely pairs move together or how
opposite their actions are over a specified period of time. However, correlation between
pairs can easily change over time. The strong correlations that are calculated today
might not be the same this time next month. Due to the constant reshaping of the Forex
environment, it is imperative to keep current. Table 8 shows several well-known
correlations.
Instruments Positive Correlation Negative Correlation

US Dollar and EUR/USD 
USD/CAD and Oil 
AUD/USD and Gold 
USD/CAD and Gold 
USD/CHF and US Dollar 
USD/CHF and EUR/USD 
Table 8: Well-known correlations.
I have created one heat map (Figure 34) using Microsoft Excel. The heat map is generated
based on the following formula (ForexHit, 2007). Table 9 shows the interpretation of
correlation in the heat map.
46
Figure 34: Correlation heat map.
≥ 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.
Table 9: Interpretation of heat map.
There are two main purposes of knowing the correlation between the pairs:
1. Determine Total Size of Open Position

As mentioned in “Money Management Rules”, Error! Reference source not found.
hows the 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”.
The important point is to reduce as many correlated positions as possible to avoid
huge drawdowns in big moves. If I have long signals on the euro and pound – two
highly correlated pairs – against the dollar, I will mostly select the stronger signal and
go with it rather than doubling my exposure by taking both trades. Sometimes, I will
take full position on EUR/USD, and take partial position on GBP/USD.
2. 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 (Lien, 2007).
For instance, by knowing that EUR/USD and USD/CHF move in opposite directions
nearly 100% of time, you would see that having a portfolio of long EUR/USD and long
USD/CHF is the same as having virtually no position - this is true because, as the
correlation indicates, when the EUR/USD rallies, USD/CHF will undergo a selloff.
47
Helper Indicators
ATR Stop-Reversal Level

--Applicable to all markets.
Volatility-based trailing stop loss level (Vervoort, 2009) is a non-emotional exit strategy
for trading methodology. Trailing Stop losses help to remove the emotion usually involved
with exiting trades thereby helping to control risk. In a long position, the trailing stop loss
level trails (or follows) below price and ratchets itself higher as prices rise. Conversely, in a
short position, the trailing stop loss level trails (or follows) above price and ratchets itself
lower as prices fall. However, if price retreats back towards the trailing stop loss level the
trailing stop loss level will remain at its previous level never "backing away" from price
thus helping to protect potential profits or limit loss. A long trade exit is signaled when
price crosses back below the trailing stop loss level. A short trade exit is signaled when
price crosses back above the trailing stop loss level.
Figure 35: ATR stop-reversal level.
AbleTrend1
AbleTrend1 is the market “direction” indicator which is created by AbleTrend (John Wang
& Grace Wang, 2010). It shows trend direction by colors (Figure 36). When the market
changes to or stays in an uptrend, the icon becomes or remains AQUA. When the market
changes to or stays in a downtrend, the icon becomes or remains MAGENTA. This
indicator is particular useful to confirm entry signal and add position signal.
48
Figure 36: AbleTrend1.
ATR Lines
This indicator measures the minimum and maximum volatility of a pair for past 14 days,
and then displays 2 ATR boundaries (TheRumpledOne, 2010). This indicator is useful for
D1PAT. In theory, the currency mostly will move within the ATR boundaries. You will
notice when price enters the boundaries, it will usually retrace. For example, if one is day-
trading a pair with an ATR over the last 14 days of 125pips per day and it has already had
80 pips move for the day, the pair most likely will not breakout the price level indicated by
D1PAT. The pair has moved its average range, and unless it’s a special day, it most likely
will start to fizzle out or hit resistance.
49
Figure 37: ATR lines.
Mini Chart
I attached a mini chart on D1 chart to view price activity in H4 time frame. I do not use
this as signal, but just to learn what is happening in the lower time frame.
Figure 38: Mini chart.

50
Discretion-Mechanical Trading Style
Why not 100% Mechanical Trading?

The major problem is the failure of the system to recognize when the market is not
trending and its inability to turn itself off. The measure of a good system is not only its
ability to make money in trending markets, but its ability to preserve capital during non-
trending periods. It is this inability of the system to monitor itself that is its greatest
weakness (Murphy, 1999).
Another drawback is that no allowance is generally made for anticipating market reversals
(Murphy, 1999). Mechanical trend-following systems ride with the trend until it turns.
They don’t recognize when a market has reached a long term support or resistance level,
when oscillator divergences are being given. Most traders would get more defensive at
that point, and begin taking some profits. The system, however, will stay with the position
until well after the market has changed direction.
Alternatives in Using Mechanical System

The mechanical system signals can be used simply as a mechanical confirmation along
with other technical factors (Murphy, 1999) which I mentioned previously. Even if the
system is not being traded mechanically, and other technical factors are being employed,
the signals could be used as a disciplined way to keep the trader on the right side of the
major trend.
Furthermore, mechanical system signals can also be used as an excellent screening

device (Murphy, 1999) to alert the trader to recent trend changes. The trader can simply
glance at the trend signals and instantly has several trading candidates. The same
information could be found by studying all of the charts. The mechanical system just
makes that task quicker, easier, and more authoritative. The ability of the computer to
automate system signals and then alert the trader when signals are triggered is an
enormous asset, especially when the universe of financial markets has grown so large.
Guidance for Discretion in Trading Decision

I realized that discretion is pretty subjective as it involves emotions in it. I managed to
reduce influence of emotions in my trading decision by relying on few components
(especially weekly or monthly charts):
1. Support/resistance zone
2. Round number
3. Trend line
4. Divergence patterns
5. Chart patterns
51
ABC Rating System

Trading is not about being brilliant, not about making forecasts, and not about scanning a
huge universe of trading vehicles. Trading is about managing – our capital, our time, our
analysis, and ourselves. If we manage right, we’ll grind out profits. Managing time is an
important aspect of success. The ABC Rating System (Elder, 2002) is designed to deliver
major time savings, allowing us to track and trade more markets in the same time.
The ABC Rating System helps us concentrate on the markets in which a trade seems
imminent and spend less time in less promising markets. The ABC system calls for a
quick weekly review of all markets that you track and sorting them into three groups
show in Figure 39.
• For those you think you might trade

A tomorrow.
• For those you think you may trade later

B in the week.
• For those you do not expect to trade in

C the coming week.
Figure 39: ABC Rating System.
The real work begins after you have filled in your ABC spreadsheet. Now you must study
each pair you have marked with an A. Apply your trading system, set up entry levels, stops,
and profit targets, and write down your orders for the day ahead. Do this for every pair
you have rated an A, leaving aside all others. After the closing on Monday, go through all
your A-rated markets. If you have entered them, fill in a page in your trading diary and
continue to manage those trades according to your plan. If your entry orders have not
been triggered, review those markets again—do you still want to enter on Tuesday?
Filtering out B and C groups saves time and lets you concentrate on the most promising
trades.
Repeat the procedure after the closing on Tuesday, but now also review the pairs you
rated B over the weekend. Now is the time to decide whether you can upgrade them to an
A and start monitoring them daily or downgrade them to a C and leave them alone until
the weekend.
52
The ABC system provides an elegant solution. It lets you monitor all your markets in a
quick and efficient manner, while dedicating most of your time and attention to the most
promising trades. Once you get used to applying the ABC system, you can easily double
the number of markets you follow and increase your trading opportunities.
Deep Practice
According to Ray Barros (Barros, 2010), you can have all the best trading knowledge, a
sensible money management strategy and a robust positive-expectancy trading
methodology. However without practice, you will be disoriented, thrown off your trade
plan’s course, not know whether you should be buying or selling. It’s Ray’s belief that if
properly implemented Deep Practice (Figure 40) will quicken traders along their path
toward trading success. By using trade simulator, I can keep deep practicing my
methodology and money management, while experiencing and learning to handle
maximum adversity. If you want to learn more about Deep Practice, you can refer to
Daniel Coyle’s “The Talent Code”.
Figure 40: Deep practice (Coyle, 2009).
Eyeballing
Good trades leap off the chart. They are clear trend trading opportunities, or clear trend
breakout opportunities. Specialist trades, such as parabolic trends, are most easily seen
when we look at the chart.
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.
We train ourselves to apply this technique by looking closely at the chart every time we
have cause to look at a stock for any reason. In time you will learn to recognize clear
trends, and clear price actions. This is an important trading skill.
Eyeballing remains one of the quickest and most effective ways to find profitable trading
opportunities.
53
Chapter 6 – Willpower
Overview
Willpower (or in another word, discipline) is the glue that holds money management
and methodology together. For argument sake, without money management and
methodology, there would not be anything for willpower to glue. Willpower is important
for survival and eventual success. However, it is all a matter of degree. If we get money
management and methodology right in the first place, they will go a long way to making
both our conscious and subconscious selves feel comfortable about trading. If our money
management and methodology are not right, both will do everything in its power to stop
us trading (Penfold, 2010).
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.
The following few facts show the importance of discipline:
1. Most successful market professionals achieve success by controlling risk. Controlling

risk goes against our natural tendencies. Risk control requires tremendous discipline.
2. Most successful speculators have success rates of 35 to 50 percent. They are not
successful because they predict prices well. They are successful because the size of
their profitable trades far exceeds the size of their losses. This requires tremendous
discipline.
3. Most successful conservative investors are contrarians. They do what everyone else is
afraid to do. They have patience and are willing to wait for the right opportunity. This
also requires discipline.
Trading Journal
A journal will help in evaluating performance and in seeing patterns developing in trading
that show what one is doing right or wrong. Doing this on a regular basis will help us see
what works and what doesn’t or what markets one does better or worse in. We can gather
valuable information on ourselves by keeping a journal. For me, a trading journal also
helps me to build the one thing every successful trader needs: Discipline.
I bought a commercial trading journal spreadsheet (Figure 41) to keep my trading journal.
The spreadsheet will also generate performance report on my equity curve.
54
Figure 41: Trading journal spreadsheet
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.
Trading Partner
A lot of traders may not realize the importance and value of having a trading partner. Your
trading partner does not necessary have to be trader, but he or she must be someone you
respect. He or she must be a person who will take an interest in what you are doing and
agree to help. For your information, my trading partner is my wife.
A trading partner will help you remain rational and honest. He or she will play two
important roles:
1. The trading partner will help you to validate your trading methodology. The partner
may not able test your methodology by doing trading, but you can try to explain your
methodology to the partner. If the partner puzzled after listen to your explanation,
most likely your trading methodology is too complicated and may not work. Besides,
the partner will act as your conscience and keep you honest.
2. The partner will know your financial benchmark, which should include, as a minimum,
your financial boundary, your modest expectation, and your money management rules.
Each month, you should make a report and ask your partner to measure your
performance against your financial benchmarks. The partner will act as your trading
confessor. This will help your discipline and consistency. Your will find it harder to
stray from your trade plan when you know your trading partner is watching. This will
also help you to remain rational.
55
BEST LOSER is the Long-term Winner

The truth of trading is “TRADING IS A LOSING GAME AND THE BEST LOSER IS THE
BIG WINNER!” (Phantom, 1997) Phantom’s quote encapsulates what is required to
succeed. Most traders are bad losers. They hate taking losses, moving stops and looking
for any excuse to keep a trade alive, finding all sorts of reasons to rationalize their actions.
While they have money left in their accounts, poor traders will ignore a losing position
until it become so large they can no longer ignore it and are forced to stop themselves out
of a catastrophic loss. They hate to acknowledge they are wrong. Most people are only bad
traders because they are bad losers.
Learn to take losses as an integral part of trading and you will have taken your first
concrete step towards success. Successful long term trading will require you to be a good
loser.
Affirmations to Manage Psychological Hurdles

1. Managing Greed
My objective in trading is not to be right or wrong but to manage my risk capital with
a modest expectation.
2. Managing Fear
I will welcome my loss because I want to be the best loser and a long-term winner.
3. 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.
4. 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.
Table 10: Affirmations to manage greed, fear, hope and pain (Penfold, 2010).
56
Chapter 7 – Summary
In this document, I have shared the basic philosophy of my trading edge. I covered the
Three Pillars of successful trading: Money Management, Methodology and Willpower. Let
me summarize the Three Pillars.
Methodology
Your first step is to identify whether a setup exists. If it does, you will determine trade
plan’s entry level, step level, and exit instructions. From your estimated entry and stop
levels, you will calculate the amount of money you will be risking on a per contract or
position sizing basis.
Money Management
Three important survival tasks:
1. To determine whether you are still within your financial boundary’s risk capital limit.
If your cumulative trading losses have exceeded your risk capital limit, it is time to
hang up your trading boots and walk away. If not, you can continue.
2. To look at your system stop and see whether your methodology’s equity momentum is
positive.
3. To calculate the number of contracts or position size. You can trade given your money
management strategy and your account size. Once you have worked out your position,
or trade size, you will need to welcome your loss!
Willpower
If you are placing a trade, you should expect to lose money. As you know, the only real
secret in trading is that the best loser is the long-term winner, so you should debit your
profit and loss spreadsheet with your expected loss. You should then go through your
positive affirmations to help manage your hope, greed, fear, and pain. Once you have
accepted your loss, the next step is to place your order.
57
Journey to be a Successful Trader
Switch
React to news/tips Begin an education Switch Gurus
methodologies
Switch client
Switch markets Switch timeframes Blame psychology
advisor
Learn money Learn to respect

Discover risk of ruin Start questioning
management maximum adversity
Look for simplicity,

Learn positive Become process
Begin validating structure &
expectancy oriented
certainty.
Set professional Set modest Achieve discipline

objectives expectations and consistency
Figure 42: Journey to be a successful trader. (Penfold, 2010)
A Final Word
Here, I would like to stress the importance of trading systems again, especially to the
beginners. Trading systems can improve your performance and help to make you a
successful trader. The reasons for that are clear:
 Force you to do your homework before making a trade

 Provide a disciplined framework, making it easier for you to follow the rules
 Enable you to increase your level of diversification.
With lots of hard work and dedication, anyone can build a successful trading system. It is
not easy, but it certainly is within reach. As with most things in life, what you get out of
this effort will be directly related to what you put into it.
58
And please remember, there is no rush for you to commence trading. Take your time to
master the basics, getting back to fundamental core truths of successful trading. No one is
going to hand you a gold medal for being the first to place a trade, and while democracies
and capitalism survive, there will always a market waiting for you somewhere with plenty
of setups to trade.
So be patient, develop a simple, objective, and independent methodology, validate its

expectancy with back testing, marry it with an anti-Martingale money management
strategy, and only when all the boxes are ticked and you have a 0 percent risk of ruin
should you consider placing a trade, and not beforehand!
When you do commence trading, please concentrate on being a good loser and a good
winner. Be quick to take losses, and be slow to bank profits. And remember, trading’s only
real secret is: the best loser is the long-term winner.
Lastly, I hope that my experience will help you. Thanks for reading and good luck to you.
59
BIBLIOGRAPHY
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BabyPips.com. (2010). Divergence Trading. Retrieved March 10, 2011, from BabyPips.com:
http://www.babypips.com/school/divergence-trading.html
BabyPips.com. (2011). What is the Dollar Index? Retrieved 2010, from BabyPips.com:
http://www.babypips.com/school/what-is-the-dollar-index.html
Barros, R. (2010). Ray Barros Successful Trading Concept. Retrieved December 19, 2010,
from Ray Barros Successful Trading Concept: http://www.tradingsuccess.com/
Bollinger, J. A. (2001). Bollinger on Bollinger Bands. New York: McGraw-Hill.
Cerny, M. (2009). Trading system All2Gather.
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http://www.forexhit.com/analyze-forex/currency-correlations.html
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strateg/
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Analysis, p. 10.
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Commodities, 77-82.
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Lien, K. (2007). Investopedia. Retrieved December 10, 2009, from Using Currency
Correlations To Your Advantage:
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trading-Marcel-Link/dp/0071381562: McGraw-Hill.
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2010/Pages/Building-a-better-index.aspx?page=1
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61
ABOUT ME
My name is L. C. Chong, Malaysian. I had been investing in Kuala Lumpur Stock Exchange
(Malaysia stock market) for almost 7 years.
Few years ago, I started to learn Forex trading. Honestly, I was a living example of what a
trader should not do. If there was a way to lose money trading, I think I did it.
I learnt Forex trading from Greg Secker. My performance was very inconsistent. I thought
I was still lack of good understanding of trading. How could a person beat professional
traders by attending a 2 days training? I stopped trading for almost 4 months. I
approached and learnt from Daryl Guppy, Conrad Alvin Lim and Brent Penfold. I also read
articles/books that written by Larry William and Tom Demark.
After learning from these market wizards, I finally have a crystal clear understanding on
technical analysis and how to make profit from trading. I created my own trading strategy
that fit my trading style, risk tolerance, personality and lifestyle. For the past 2 years, I
have been fine tuning my trading strategy along the way, and I am proud that my trading
has been consistently profitable in overall.
I would like to share my trading edge to the community, especially those just started to
learn trading. Hopefully they can get some ideas to develop their very own trading
strategy and achieve high probability trading. Besides, learning is a life long journey. I
hope that I can gain more knowledge by sharing. I welcome your positive input and
sharing.
62
DISCLAIMER
1. This document is
a. Mainly for myself
b. Educational only
c. Does not contain investment advice
2. 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.
3. 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.
4. If you are expecting to find Holy Grail in this document, this book is definitely not for
you. I know that we have always come across some seminar advertisements or books
claiming to be able to do that easily. I wonder what the heck they are smoking. Any
trading system will never be perfect. If you still looking for the perfect system, come
on, wake up and stop your day dream.

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My Trading Ideas

For the Forex and FKLI-Spot Market

CHAPTER 2 – IMPORTANCE OF EDUCATION .......................................................................... 6

RECOMMENDED TRAINING PROGRAMS .......................................................................................................7

CHAPTER 3 – OBJECTIVES AND EXPECTATIONS ..................................................................... 9

CHAPTER 4 – MONEY MANAGEMENT .....................................................................................14

CHAPTER 6 – WILLPOWER ..................................................................................................... 53

CHAPTER 7 – SUMMARY ......................................................................................................... 56

Methodology • Trade Setup - A prejudice to either buy or sell

Strong • The ability to execute according to the trade

Figure 1: The Three Pillars of my trading edge.

In Chapter 5, I will share my principles in designing my methodology and all components

Chapter 2 – Importance of Education

Recommended Training Programs

Chapter 3 – Objectives and Expectations

Setting Objectives and Expectations

Q: How much money do you need to live on each year?

Q: How much of that must come out of your trading profits?

Q: How would you rate your market knowledge?

Q: What are your psychological strengths and weaknesses, especially in terms of

Q: How about your strengths and weaknesses in terms of personal discipline?

Q: Do you have the time to trade short term?

Q: What is the largest peak-to-trough drawdown you are willing to tolerate?

Money Management Ideas

Q: How much risk can you afford to take on a given trade?

Q: How much to risk on all open positions?

Q: How do you determine position size?

Q: What is you acceptable risk/reward ratio?

Q: Will you lower risk parameters?

Q: What is your cutoff point before questioning trading plan?

Chapter 4 – Money Management

Fighting Off Sharks and Piranhas

Figure 2: Types of predators that are always trying to kill traders.

1. Set risk limit per trade

I personally practice 2 different anti-martingale money management strategies

Account Fixed Fixed % Stop Loss Contracts Added

Account Fixed Fixed % Market’s 10-day ATR Contracts Added

1. Strictly control losses

Exit Strategy Method

Support and Relationship Price Activity Market

Figure 4: Four components in market analysis.

Therefore, when I design my methodology, almost every component in the methodology

Although my trading methods are mechanical and objective, I am a discretionary

Enter the Manage the

Figure 5: Every trade setup has its own trade plan.

Three Important Criteria

A methodology must be able to deliver a probable positive expectancy. Expectancy is

Why Not Accuracy?

1. To trade extra markets.

Momentum Trend Volatility

Medium-term trend Medium-term swing Short-term

Drawdowns Medium Medium Small

Table 7: Characteristics of different trading styles.

“Forecasting uses the higher probability situations in an attempt to project future

So, based on Guppy’s explanation, my trading approaches match the characteristic of

Process of Building Trading Method

Figure 6: 5 steps to build a trading method (Murphy, 1999).

Principles of Good Concept Design

Another suggestion is try to optimize as little as possible. Optimization using historical

Step 2: Turn It into a Set of Objective Rules

Step 3: Visually Check It Out On the Charts

1. We want to see whether our idea has been stated properly

Step 4: Formally Test It with a Program