Learn Trading System simply

1. Chart Setup

Set GBP/USD Chart to the 4 Hour time frame

1.1 Place an Exponential Moving Average, set to 5 periods, to the HIGH of the price (5 EMA High)

1.2 Place an Exponential Moving Average, set to 5 periods, to the Low of the price (5 EMA Low)

2. Setup Bar

A setup bar is a candle or bar whose price action has either exceeded the 5 EMA High or been lower than the 5 EMA Low by 5 pips or more during the 4 hour period.

This price action may have crossed the 5 EMA or may have occurred fully outside the 5 EMAs throughout the whole of the period.

Price breaching or above the 5 EMA High gives a setup for a short or sell trade

Price breaching or below the 5 EMA Low gives a setup for a long or buy trade

The only exception to this is when a bar breaches both of the 5 EMAs within the period.

See examples below

2.1 Example – Identification of Bars

1. Examples of long setup bars. Price can be fully below 5 EMA, start between the EMAs and move down or start outside the EMAs and move up. Price does not have to touch the 5 EMA low
2. Examples of short setup bars. Price can be fully above 5EMA, start between the EMAs and move up or start outside the EMAs and move down. Price does not have to touch the 5 EMA high
3. Examples of bars that do not qualify as setups. They are either fully between the EMAs throughout the period or do not exceed the EMAs (high or low) by more than 5 pips.
4. Examples of bars that do not qualify as setups as the price action exceeds or is equal to (that is, it just touches) both of the EMAs during the period

Note – every bar shown on the chart is a type 1, 2, 3 or 4 but not all have been labelled!

Also note – on this and on other examples shown, ignore any lines other than the two 5 EMA ‘envelope’ lines – they are not relevant to this system.

2.2 At the close of a setup bar for a long order

• A buy stop order is placed at 5 pips plus your broker’s spread above the highest level of the setup bar
• A contingent stop loss is placed 5 pips below the lowest level of the setup bar (that is, a stop loss that will be activated only if the buy stop order is activated)

2.3 At the close of a Setup bar for a Short order

• A sell stop order is placed at 5 pips below the lowest level of the setup bar
• A contingent stop loss is placed 5 pips plus your broker’s spread above the highest level of the setup bar (that is, a stop loss that will be activated only if the sell stop order is activated)

2.4 In the case of a long setup bar, the following bar will be either:

• A new long setup bar
• To qualify as a new long setup bar it must have a lower low than the previous bar
• A reversal bar
• To qualify as a reversal bar its high must exceed that of the setup bar by 5 pips plus the Spread – we cover Reversal Bars in detail in the next section
• A Failed Reversal Bar
• A failed reversal bar is one that does not fill the stop order on the setup bar but does not make a lower low than the setup bar

2.5 In the case of a short setup bar, the following bar will be either:

• A new short setup bar
• To qualify as a new short setup bar it must have a higher high than the previous bar
• A reversal bar
• To qualify as a reversal Bar its low must be lower than that of the setup bar by at least 5 pips– we cover reversal bars in detail in the next section
• A failed reversal bar
• A failed reversal bar is one that does not fill the stop order on the setup bar but does not make a higher high than the setup bar

We will deal with failed reversal bars in more detail in Section 5.

2.6 Note:

Most brokers add the spread to the buy or offer price. This spread is only added once per trade (a trade consisting of a buy then sell or a sell then buy)

Therefore, if the spread is 3 pips, you would sell a position at the market price but buy a position at the market price plus the spread.

Some brokers will quote their bid / offer prices on either side of the market price; if this is the case then you must allow for this calculation when placing your orders and stop loss positions.

3. Reversal Bar

3.1 The reversal bar is the bar that fills the buy or sell stop order placed on the setup bar.

• For a long order the reversal bar must have exceeded the high of the setup bar by at least 5 pips plus your spread.

• For a short order the reversal bar must have been lower than the low of the setup bar by at least 5 pips.

3.2 When the long or short order is triggered, the contingent stop loss order is automatically triggered.

3.3 Occasionally the reversal bar may develop a lower low than the setup bar (for a long position) before progressing upwards and triggering the order; in this circumstance, when the reversal bar has closed, the stop loss position must be manually adjusted to 5 pips below the low of the reversal bar.

3.4 For a short position the opposite applies but in this case the stop loss must be moved to 5 pips plus the spread above the high of the reversal bar as this will be a buy stop to close the position.

3.5 The stop loss is only adjusted if the reversal bar has developed a lower low than a long setup bar or a higher high than a short setup bar.

3.6 Another occasional occurrence is that the order is filled, creating the automatic stop loss position, and then the price reverses through the stop loss closing your position. This is unfortunate and you must now wait for a new setup bar and start the process again.

More will come soon on this.