The primary signal in the system is bounce off from a level. We only start thinking about rating a position if there has been a bounce off. Once we have a bounce off, we can rate it using the confirmation signals of Oscillators, Candles. Time and Trend .

Bouncing off a Level:

Bounce-off:

Support and resistance levels are the key concept of the trading system and they provide the primary signal. When we say primary signal we mean that you cannot open a position in unless there has been a bounce-off.

When price hits a level of support and resistance it is more likely to bounce off that level than break through it.

Hourly charts are monitored for a bounce-off. When price has bounced off a level, we can then check for confirmation signals to rate the signal.

Our definition of bounce-off:

Bounce-off to buy. When price reaches a support level and then starts rising; or when it breaks through this level only to rise back above it and keeps rising after that.

Bounce-off to sell. When price reaches a resistance level and then falls back or if it breaks through the level only to fall back below it and keeps falling after that.

Charting the levels:

A bounce-off is rated on the significance of the level that was providing support or resistance. Levels that were on a daily chart were more significant than levels on a 6 hourly chart which were, in turn, more significant than those on the hourly charts.

The trader needed to monitor levels of support and resistance on charts with different time frames.

There is a number of ways of identifying levels on the charts.

How to identify levels on a day chart by using weekly highs and lows that are also pivot points ?

This Daily chart shows the levels that have been identified on it using the above method:

Monitoring 6-hourly charts with price levels: The below chart shows the levels generated by Price Channel  in light blue. The pink levels are significant levels which were identified on the above chart:

We can also use the levels confirmed on hourly and 30-minutecharts. Support and resistance levels for these time frames should be set simply by identifying highs and lows on these charts that have been retested twice.

The theory behind all this is sound. However, charting levels in this way and giving variable ratings proved to be both impractical and ineffective.

In this trading system we set the levels using the indicators Lev 1 and Lev 2 on an hourly chart. Lev 1 and Lev 2 accelerate and simplify the process of charting relevant levels. A bounce off from any of these levels has a rating of 5.

Hourly chat: levels generated by Lev_1 and Lev_2:

Lev_1 and Lev_2:

These two sets of levels are charted on hourly charts.

Both sets of levels are generated by a super-candle which is made up of the last 480 hourly candles. 480 hours is the natural cycle of four trading weeks.

Lev_1 takes the high and low of this super-candle to identify the mid-point. It then charts a number of levels at shifts of +/- 0.5% along the price axis. The number of levels that Lev_1 generates depends on the price range of the last 480 hours and the current circumstances.

Lev_2 takes the super-candle and charts its mid point and high and low. This gives us three levels. It then charts the mid points between these levels which gives us 5 levels in total. Finally, it charts the midpoints of these 5 levels, giving us 9 levels in total.

This trading system also recognizes the round number levels which are divisible by100. For example with EUR, significant levels of support and resistance are found at 1.3500; 1.3600; 1.3700 and so on.

Experienced users of this system can opt to chart a reference line which is used for setting price targets, stops and entry points. This reference line is an MA (480) and is shifted in +/- 0.5% steps as desired.

Candles:

Bearish Candles:

The following candles give a confirmation signal when price bounces off a level which is offering resistance. The rating for the signal is shown in the Marks column:

Bullish Candles:

The following candles give a confirmation signal when price bounces off a level which is offering support. The rating for the signal is shown in the Marks column:

When is a candle bouncing off a level?

Traders who have been using this system often commented that they were not sure when a candle could be said to be bouncing off a level. In this system we accept signals from candles in the following situations.

Types of bounce off from resistance (for support reverse situation):

Bounce off from resistance: 

Type 1 Black or white candle with its high touching resistance.

Type 2 Black or white candle with its upper shadow breaking through resistance.

Type 3 The first candle is white and its body breaks through resistance and closes above. This is NOT a bounce off. We only have bounce off from the level with the second candle, a black candle which closes below resistance.

Type 4 Black or white candle with its high 5 points or less from the level.

Type 5 A rated bearish candle with a high 8 points or less from the level.

Type 6 A white candle with no upper shadow which closes on resistance.

Bounce off from support: 

Type 1 Black or white candle with its low touching support.

Type 2 Black or white candle with its lower shadow breaking through support.

Type 3 The first candle is black and its body breaks through support and closes below. This first candle is NOT a bounce off. We only have bounce off from the level with the second candle, a white candle which closes above support.

Type 4 Black or white candle with its low 5 points or less from the level.

Type 5 A rated bullish candle with a low 8 points or less from the level.

Type 6 A black candle with no upper shadow which closes on support.

A sticky level: If three candles in a row have closed within 5 points of a level, then this is a sticky level. There can be no primary signal from a sticky level. A level stops being sticky when a candle closes more than five points from it.

One very useful tip given in the book is to monitor the candlesticks on half-hourly charts. If you get a clear pattern around a level on the half-hourly chart, the chances are that you will get a signal of an equal strength on the hourly chart.

Homework:

Let’s concentrate on candles in this homework task by finding as many rated candles that you can that are giving signals on your hourly charts by bouncing off the levels. This will help become familiar with the candles, the definitions of bounce-off and the sticky rule.

Please reply to this thread and post your charts. We will discuss and comment on them.

Oscillator Settings:

In this system we use the confirmation signals from two oscillators, RSI and Stochastic. The settings for RSI are 9 (period) and 1 (smoothing). The Stochastic settings are 6 (%K period), 2 (%K slowing) and 1 (%D period). We do not use overbought and oversold zones in this system, but if you would like to set them for your own reference, please use the levels we talked about them above. These levels are 60 and 40 for RSI and 70 and 30 for Stochastic.

The three types of signal that either oscillator can give us are direction; divergence and double divergence.

Direction:

When an oscillator is rising, it confirms a buy signal and when it is falling it confirms a sell signal. Each confirmation is rated 2, giving a maximum possible rating of 4 (that’s 2 from RSI and 2 from Stochastic).

RSI and Stochastic giving confirmations to sell: a total rating of 4:

Simple Divergence:

Price moves in one of three directions. It can rise; it can fall and it can remain at the same level. The oscillator signal also moves in these directions. Simple divergence occurs when price and an oscillator move in different directions. Take a look at the below charts. Notice that in the first chart as price rises to the level; the oscillator moves horizontally. The second chart shows a divergence at the bottom of the market. Price continues to fall while the RSI charts a rise.

Divergence (type 2) at the top of the market:

Divergence (type 6) at the bottom of the market:

There are six types of simple divergence, three at the top of the market and three at the bottom. The below chart illustrates the six types.

Six types of simple divergence 1, 2 and 3 are divergences at the top of the market and 4, 5 and 6 are divergences at the bottom of the market:

Remember that a valid divergence must have taken place within the last 48hours at the most and cannot stretch over more than two calendar days.

A simple divergence has a rating of 4. You can only rate a divergence from one oscillator so the maximum rating is 4.

Double Divergence:

Double divergence is basically two simple divergences, one immediately after the other (see the below charts).

Double divergence is a very emphatic signal and has a rating of 5. Double divergence can occur both at the top and the bottom of the market. Chart 3shows the types of double divergence found at the top of the market and chart 4shows the types of double divergence found at the bottom of the market.

Chart 1 (hourly) Double divergence at the top of the market:

Chart 2 (hourly) Double divergence at the bottom of the market:

Chart 3 Types of double divergence at the top of the market:

Chart 4 Types of double divergence at the bottom of the market:

Remember that a valid divergence must have taken place within the last 48hours at the most and cannot stretch over more than two calendar days.

You can only rate divergence from one oscillator. Therefore the maximum rating for double divergence is 5. If you have a double divergence you cannot rate the simple divergence as well.

Homework:

Plot your oscillators and rate the oscillator signals for the bounce-offs that you identified in the candle homework task.

Then please reply to this thread and post your findings for our comments and advice.

RAVI:

This system does not put a great deal of importance on the trend on the market. However, trading in the direction of the trend is given a rating as is trading on a trend less market.

This system simplifies the process by using RAVIfor both hourly and daily charts .

The settings for RAVI are 12 and 72 or 24 and 120with the signal lines set at +/- 0.3% on the hourly chart (see chart 1). For daily charts use settings of 7 and 65 with signal lines at +/- 1%.

When RAVI is above the positive signal line and rising, an uptrend is signaled. When RAVI is below the negative signal line and falling, a downtrend is signaled. If your position is going to be opened against the trend, the trend rating is 0. If you are trading in the direction of the trend or the market is flat, then the rating is 1point. The rating for the hourly and daily RAVI signals are added together, so the maximum rating possible is 2.

100 point rule:  If price has moved 100points or more in one direction on the current day then you should not open a position in the opposite direction.

Homework:

Add RAVI’s confirmation signals and ratings to the bounce-offs that you have been working on in the last two tasks.

Then please reply to this thread and post your findings for our comments and advice.

Day of the Week:

Time has a significant effect on market behavior. The trading system we have focused on here on this page takes both the day and the hour into account when rating a signal.

Friday is the worst day to open a position because the market experiences the ‘weekend effect’. Many of the big players on the market do not want to hold positions over the weekend because of their uncertainty about what will happen on Monday. Uncertainty leads to caution meaning positions are less likely to be opened and more likely to be closed. The weekend effect means that the rating for a position opened on Friday is 0.

Monday trading is also affected by the weekend. Short to intermediate trends are still in the process of being formed on a Monday which can muddy the waters. A position opened on a Monday rates 1 point.

Tuesday, Wednesday and Thursday are more stable and rate 2 points each.

Time of the Day:

Different currency pairs experience different levels of activity throughout the trading day. This system favors periods of time when significant moves have been see to take place in the past.

This table gives the ratings for the four main currency pairs throughout the24-hour trading cycle.

Trading hour ratings for the currency market:

Two ratings are given for each pair sum (summer) and win (winter). This takes Daylight saving into account.

Homework:

We expect you have guessed today’s homework task. Rate the signals that you have identified in this module and take time into account.

Remember that comments, questions and homework tasks are always welcome on this forum.

The unexpected:

The total maximum rating with this system is 20. This does not mean that a scoreof 20 ensures a 100% probability of the success of a position. There is no such thing as a sure thing. If you would like a percentage guide to your rating, multiply it by 4. This means that the maximum possible is 80%. Life is full of surprises. It should remind us that even when we are sitting on a position with the maximum rating, we should always expect the unexpected. We truly do not know what is round the corner.

This system also manages the unexpected by ruling that a position should not be opened when high impact news affecting the currency pair is scheduled in the coming hour.

Stop Loss:

Setting appropriate exit points is one of the biggest challenges a trader faces.

There are a number of different approaches available to the trader, just ensure that you have identified your exit strategy at the before opening the position. Here are two strategies which you could consider:

Strategy A:

Your stop-loss should be 3 5 points higher than the high of the signal candle or the previous one (whichever is highest) for a short position and 3 5 points lower than the low of the signal candle or the previous one (whichever is lower) for a long position.

Please remember that you buy at the ASK price and sell at the BID price and make sure that you are setting your stop loss using the correct price.

Buy position with stop loss:

Sell position with stop loss:

Strategy B:

Strategy B uses the central premise that price is more likely to bounce-off levels of support/resistance than to break through them. Therefore if you are opening a long position you should set your stop loss below the closest support level and if you are opening a short position, your stop loss should be above the nearest level of resistance. Always remember that you buy at the ask price and sell at the bid price.

Excess stop-loss rule: If your stop-loss has to be bigger than35 points, you cannot open the position.

Managing Orders:

This system provides a number of strategies for closing the position. Choose the best strategy for the current situation. Decide on this strategy before you open the position and stick to this decision for the life of the position.

The strategies are:

1. When price is moving in the direction of your position you can reset your orders at the end of each hour. If your position is long then you should reset your stop 3 points below the low of the previous hourly candle. If you have a short position you should reset your stop 3 points above the high of the previous hourly candle. Once again you should factor in whether you are using BID or ASK prices and include the spread where appropriate.

2. You can trail your stop loss in the direction of your position, using a fixed margin of between 20 and 35 points.

3. You could preset your take profit. This could be set by using a multiple of your original stop loss. If your stop loss was 35 points then your take profit could be set at 1.5, 2 or 3 x 35pts from the entry level. You could also set your take profit above (for a short position) or below (for a long position) the next significant level of support/resistance.

Homework:

Take a final look at the signals that you have identified in this system.

If everything is OK, add up the points from the ratings:

5 pts for bounce-off

4 or 5 pts for the oscillator signal

2 to 4 pts for your bounce-off candle

0 to 2 pts for trend

0 to 2 pts for the hour

0 to 2 pts for the day

You are left with a total rating out of 20.

If the position rates 15 or more this system is signaling to open a position.

If the position rates less than 15, it is a signal not to open.

This is how this system works. You are now qualified to use it.

Emotional Detachment:

A lot of people find trading very involving and for some unfortunate people it can become an obsession. Some traders find themselves trading all of the time. This is physically and mentally unhealthy; it can have a detrimental impact on your life outside of trading and, most importantly, it’s not going to make you a better trader.

Trading systems in general allow you to be emotionally detached from the market. This system has already set the requirements necessary for opening a position before you expose yourself to the frantic pace of the market. If you have accepted the system as your trading system and it signals that you must open a position, then you must open the position. You should then place your orders and that’s it for the moment. It’s time to move on to other matters.

When you use this system you won’t need to make any decisions whilst you are on the market. You will be able to maintain an emotional distance from the market. This system also means that you can precisely manage the time you spend trading. This trading strategy helps you pre-select your trading hours and the way our system is designed means you can limit the time you spend on the computer during those trading hours. You will find that you will only need to spend 20 minutes on your computer every trading hour. You can then spend the other 40 minutes doing something completely different. You could spend this time with your family, get some fresh air, have a snack, do some exercise, anything that you fancy doing as long as you can get back to your desk when in time for the next 20-minute session. I think these breaks are very important. If you spend hour after hour constantly monitoring the market, you are going to burn yourself out and find it very difficult to trade effectively. This will lead you to having little time and energy to spend on other areas of your life, which will further affect your ability to trade well. It’s a vicious circle.

Time Management:

Let’s say that your currency pairs are EUR and GBP (if you want to use this system for forex trading). You need to be trading these pairs when conditions are at their best. Take a look at the hours of the day rating table (see the below chart). The most favorable times for these two pairs are from the 08.00 hrs close to 10.00 hrs close and from the 14.00 hrs close to the 16.00 hrs close. These two periods cover all the hours that either EUR or GBP are rated 2. These are the ideal times to trade these pairs.

This gives you 6 closes to trade on. With two pairs you have 12 opportunities to get a signal to open. That should be enough and you are left with the rest of your day for other interests.

As you now know, this system only considers opening a position when there has been a bounce-off. You can only decide if there has been a bounce off or not when the hourly candle has closed. When you have decided that there has been a bounce-off, you need to rate the position as quickly as possible. The best way to do this is to open up your trading platform ten minutes before the hour. Check your pairs for potential. Is there a possibility of a bounce off? What’s the situation with your oscillators and the candle pattern? You already know the ratings for the current day and hour. If a position were signaled, what would your stop-loss and take-profit be? On the close of the hour all you need to do is confirm bounce-off for your main pair, then oscillator signal and then candle signal. Add in the hour and the day. Is it good to go? Then open your position and place your orders. Do this within 5 minutes and move on to your back-up. Take another 5 minutes to confirm the situation, total the ratings and if it’s 15 or above, open the position and place your orders.

That’s the time you should spend on the market, tops. Ten minutes before the hourly close until ten minutes after.

The only other consideration with time management is preparation time. It’s a good idea to be at your desk 50 minutes before first going onto the market. Use these 50 minutes to review your day, check the economic calendar, fine-tune your charts and ask for our comment and advice by replying to this thread.

I review my day at 17.00 hrs. If the positions had moved in my favor enough to allow me to move my stop-losses into a stop-trade situation without reducing the distance between my stop order and the current price, I would do so. After that I would close my trading platform for the day and get on with my life.

So my trading day looks like this for EUR and GBP: