The Forex System

THE FOREX SYSTEM By John Anthony

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TABLE OF CONTENTS

INTRODUCTION ....................................................................... 3 STRATEGY TOOLS ................................................................... 5 STRATEGY SETUP ................................................................... 9 TRADE EXAMPLES ................................................................ 14 TAKING THE RISK OUT OF OUR TRADES ....................... 23 NOTE ON EXITS ...................................................................... 28 CONCLUSION .......................................................................... 32

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INTRODUCTION
This trading system will enable you to pinpoint low risk reversal points and will generate amazing profits in a short period of time. As long as you understand the strategy, and trade it exactly as described, you will have a very successful trading business. The key is to stick to the trading plan that you establish, and dont ever get emotionally involved with any trade. The second you feel emotion is driving any of your trading decisions, exit all your trades and walk away from the market, and only enter back in when you can remove the element of emotion. This strategy is designed so you know exactly when to enter and exit and also how to manage the trade regardless of what the market does, therefore eliminating the element of emotion. It is very important that you practice this strategy with a demo account, and only when you are ready to trade and have practiced enough, then you can start trading a real account. Many traders fail because they have not prepared themselves enough, not just in terms of practicing their strategy, but also in terms of not being aware of the psychological forces that are in play in the trading game. Fear and greed are the 2 main emotions that govern most trading decisions in the market, and it is your job to make sure that you eliminate these emotions from your trading. The top 5% of all traders (that are the only ones that are

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consistent) are successful because they have learnt to master these 2 powerful forces: fear and greed. As long as you stick to the strategy and keep your psychology in check, you will achieve great success in your trading! I wish you all the best in your trading!
John Anthony

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STRATEGY TOOLS
This strategy is a great way to capture the short term waves as well as long terms moves. We will be using the following Tools:

Bollinger Bands (BB) Originally created by John Bollinger, Bollinger bands are a tool that allows investors to analyze volatility and relative price levels over any particular period of time. This indicator is comprised of three bands which will reflect any particular investments price action. These bands consist of a moving average in the middle, with an upper and lower band of two standard deviations above or below the simple moving average. The standard deviation is a statistical measure that offers a good reflection of price volatility. Sharply changing prices will result in widening of the bands, while a lack of volatility will be reflected by their narrowing. Closing prices are normally used for computing Bollinger bands. Bollinger bands are a great way to see Overbought and Oversold levels. The upper band indicates overbought levels while the lower band indicates oversold levels as shown in the chart below:

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We will be using Bollinger Bands for Market entry. As you can see from the chart above, Bollinger Bands give a good indication of market reversals:

CANDLESTICK FORMATION We will be looking at a particular candle formation that has proven to be very accurate when predicting reversals. The formation consists of inside bars. It is pretty much self explanatory. We are looking for bar ranges (high to low) that are within the previous bars range. Lets take a look at the formation we want to see:

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What is actually happening here in terms of sellers and buyers? We are basically playing on the fact that there is indecision in the market. If today the bar could not break either the high or low of yesterday, then we are seeing some indecision and depending on which is broken tomorrow (todays high or low), we can get an indication of which way price is going to move. We are also combining the overbought/oversold indicator (bollinger bands) to make this trading signal stronger.

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Please note: this formation is more powerful if it forms after a successive rise or fall.

So for this formation to be effective: 1. There should be a decent rise or fall in price before this formation. 2. The bar before the inside bar should be touching one of the Bollinger bands. If it is touching the upper band, then we are only looking to go short. If it is touching the lower band, then we are only looking to go long.

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STRATEGY SETUP
TOOLS AND SETTINGS -Bollinger bands (20,2,C): Period/Length: 20 Standard Deviation: 2 Source/Apply to: Close

-Candlestick Formation: Inside bar

-Time frame: This strategy can be used on the daily, 4 hour, and hourly time frame, although the larger time frames are the best time frames.

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LONG POSITIONS Buy Signal: Candlestick bar touching lower Bollinger band (activator bar). Inside bar formed the next day Entry Point: Break of high of inside bar

Abort Signal: Abort entering the trade if the high of the inside bar is not broken the day after the inside bar. Stop Loss: Place stop loss below the low of the activator bar (account for broker spread)

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EXITING LONG POSITIONS Exit Point: Candlestick bar touches upper Bollinger band.

Re-entry: Re-entry as per normal entry method.

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SHORT POSITIONS

Sell Signal: Candlestick bar touching upper Bollinger band (activator bar). Inside bar formed the next day

Entry Point: Break of low of inside bar

Abort Signal: Abort entering the trade if the low of the inside bar is not broken the day after the inside bar.

Stop Loss: Place stop loss above the high of the activator bar (account for broker spread)

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EXITING SHORT POSITIONS Exit Point: Candlestick bar touches lower Bollinger band.

Re-entry: Re-entry as per normal entry method.

So as you can see, the setup and rules are quite simple. Now all you have to do is practice, and most importantly: STICK TO THE RULES!

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TRADE EXAMPLES
Please note: in all trade examples, the upper blue line is the upper Bollinger band, the red line in the middle is the 20 ma and the lower blue line is the lower Bollinger band.

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GBP/USD -4 HOUR CHART

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Entry: 1.6549 Stop: 1.6622 Exit: 1.6266 Total Profit = +$2,830 Reward to Risk: 3.87 to 1 !!!

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EUR/USD -DAILY CHART

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Entry: 1.3516 Stop: 1.3740 Exit: 1.2965 Total Profit = +$5,510 Reward to Risk: 2.45 to 1 !!!

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SWISS FRANC 4 HR CHART

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Entry: 1.0959 Stop: 1.1024 Exit: 1.0781 Total Profit = +$1,623 Reward to Risk: 2.74 to 1 !!!

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AUSTRALIAN DOLLAR -4 HR CHART

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Entry: 0.7033 Stop: 0.6985 Exit: 0.7278 Total Profit = +$2,450 Reward to Risk: 5.1 to 1 !!!

Please Note: Notice that I have pointed out the movement of price before the entry signal appeared. It is very important that you notice how much more powerful these trades are when the signal appears after a good rise or decline in prices.

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TAKING THE RISK OUT OF OUR TRADES

We want to remove the risk from our trades as soon as possible, but cannot do this too soon as we run the risk of getting stopped out prematurely. What I mean when I say remove the risk is simply to move our stop loss to our entry price, so if price stops us out after this, we dont lose anything (breakeven) For this strategy we will be moving our stop to our entry price when: For long positions: - when a bar closes above the 20 ma For short positions: - when a bar closes below the 20 ma

Below are examples of the point at which we would move our stop loss to our entry price (hence removing our risk from the trade) The price at which we do this is indicated by a blue box in each of the charts below:

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NOTE ON EXITS
You may also want to look at additional exit points when putting together your trading plan. Just having one exit where you close out your whole position is absolutely fine, and there is no need to change this as you will be very profitable doing this. But for some people, this will not suit their personality, as there will be some trades, where they see that they could have taken some money off the table at a more profitable place. Of course it all balances out, whether you do one thing or another (as long as you stick to it), so searching for which one makes you the most amount of money is just a waste of time, as in some trades one exit strategy will work better, but in other trades another exit strategy will work better. This is not the point of showing you alternative exit points. The point is to give you the choice of how to manage your trades, as one person may prefer one way and one the other. The point is to try them and see which one you prefer. Why would someone prefer one way over another? Well the answer to that lies inside the personality of the trader. Is he patient? Can he give away profit now for a greater return later? Does he want big wins that come with more losses or mediocre wins and fewer losses? In other words what type of management will allow the trader to carry on trading the strategy, without any losses or any part of the strategy affecting his psychology to carry out more trades? This is a question only you can answer, and although I could have just given you the one exit point, I wanted to give you some alternatives, should you wish to add them to your trade management. You may wish to explore this other exit point:

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Take something off the table (sell some of the position if long or buy back some of your position if short) when the other Bollinger band is hit. You may want to take off half of the position each time the Bollinger band is hit (which allows for 2 touches before you are out of the whole position. You will have to block off each touch to the other Bollinger band as there will be many groups of bars ( in some cases) that are touching the BB. You will have to treat this as a single touch until price moves away from the BB and comes back and touches it again (this will then be the next exit point)

Some examples:

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USD/CAD DAILY CHART

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AUD/USD DAILY CHART

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CONCLUSION
The strategy was created so you can spend the least amount of time possible trading the market. It enables you to enter where there is the least amount of risk and take profit at the highest probability for a reversal. With this strategy you can trade even with a full time job and the rules for trading this strategy are very simple, ensuring that you can easily identify entry and exit points without any confusion. Deciding on your exit strategy comes down to you as a person. My advice is to try both and see which one you prefer. BUT you must stick to one or the other, and always stay consistent in your approach once you have decided which exit strategy you like best, otherwise your trading will lean towards random trading, which always ends up in disaster. You will suffer some losses and you will have some bad trading days. This is perfectly normal in the forex trading business. But the important thing is that you stick to your rules and carry out each trade without any emotion. If you can stick to the rules then success is the only outcome. Losses are inevitable, but if you carry out this strategy as described here, your wins will easily cover your losses and you will have a very successful trading business. Take care of your losses and the wins will take care of themselves! Good trading! John Anthony

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RISK DISCLOSURE STATEMENT / DISCLAIMER AGREEMENT

The contents of this eBook are for informational purposes only. No part of this publication is a solicitation nor an offer to buy or sell any financial market. Examples are provided for illustration purposes and should not be construed as investment advice or strategy. No representation is made that any account or trader will or is likely to achieve profits or loses similar to those discussed in this eBook. The information found in this eBook is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject us to any registration requirement within such jurisdiction or country. CFTC RULE 4.41 -HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

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THE FOREX SYSTEM By John Anthony

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