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Setups To Trade The Financial Markets
I have had the opportunity to review quite a few trading courses & systems available on the
internet over the past two years, & so what follows are some trading setups that I have put
together in no particular order that implement some of the techniques I have learnt.
Of all the trading philosophies I have come across & had the chance to review, I have found
that the courses & systems that made sense to me are the ones that make use of time
tested techniques combined to give you a synergistic trading method. What do I mean when
I say “Time Tested”? I am referring to the generally well known forms of technical analysis‐
‘The study of market action primarily through the use of charts, for the purpose of forecasting
future price trends’ (John Murphy).
I hope you find the following interesting & helpful. Perhaps you could incorporate some of
the following principles in your own trading.
Bret
www.tradingsetup.com
The Stochastic Indicator
The reason I am mentioning this indicator to begin with is because of all the courses &
systems I have looked at over the years this indicator has been used more often than any
other. It can also be easily integrated with other trading tools.
I won’t bother you with the specifics of this indicator, since there is already heaps of
information available on the internet. Just do a Google search and you will find thousands of
sites explaining the mathematics behind this indicator.
The parameters used for the stochastic indicator below are: 5,5,3. These values are based
on my own research into the indicator, & my own preferences. Feel free to experiment with
different settings yourself.
The Basic Buy Signal – Bullish Convergence
A buy signal occurs when there is convergence between the indicator and price. The
following is an example of a bullish convergence occurring in the E‐Mini S&P 500 144 Tick
Chart.
Please note that in the following examples the stochastic indicator is the blue indicator
overlayed on price. This line is the %D line only, since George Lane the creator of the
Indicator contends that the most important signal is the divergence between %D & price.
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• Price makes a lower low or double bottom
• Stochastic makes a higher low
• Signal confirms on the first bullish candle after the indicator hooks upward.
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The Basic Sell Signal – Bearish Divergence
• Price makes a higher high or double top
• Stochastic makes a lower high
• Signal confirms on the first bearish candle after the indicator hooks downward
Notice the Stochastic indicator is making a lower high, while price makes a higher high. A
bearish candle confirms the bearish setup. At this point a question arises, and that is how far
should price travel away from the high or low point before it becomes a bad fill? This is
difficult to answer since the market is changing all the time; however I have found that on
this particular market (E‐Mini S&P 500) a value of 1.25 points seems to work nicely for me.
However this value may differ depending on your own preferences.
Please note that in the above example, you must visualise the stochastic indictor being
lower than price. The way this chart setup was captured makes it look like the price &
indicator are converging, while in fact they are diverging.
Of course there are other variables in trading such as where you take your profits, and
where you place your stop loses. My aim here in this report is to show you how different
methods of technical analysis could be combined to complement each other. You should
use these setups as guides to develop your own trading framework.
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Higher Probability Signals Using Stochastic
The above setups using the stochastic indicator form the basic buy & sell structure. However
other methods of analysis can easily be integrated with this basic framework to improve the
overall strength of the signal.
Higher Probability Buy Signal
• Price makes a lower low or double bottom, at an area of support
• Stochastic makes a higher low
• Signal confirms on the bullish candle after the indicator hooks upwards.
In the example above, observe that the bullish convergence buy signal coincided with a
trend‐line support area, adding strength to the buy signal. On top of this the confirming
candle is a bullish hammer pattern (price has moved and closed near the high of the candle,
after trading a lot lower), in fact there is also a candlestick pattern known as a doji occurring
just before the hammer indicating indecision in the market. Multiple candlestick patterns
occurring together form what’s known as a confluence of candlesticks. This can give a
stronger indication that a change in trend is about to occur.
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Higher Probability Sell Signal
• Price makes a higher high or double top at an area of resistance
• Stochastic makes a lower high
• Signal confirms on the first bearish candle after the indicator hooks down
In the example above, observe that the bearish divergence sell coincided with the trend‐line
resistance area, adding strength to the sell signal.
So you see the basic principle here is having the indicator create divergence / convergence at
a key level of support & resistance. This support & resistance level doesn’t necessarily have
to be a trend‐line, this was just used as an example. You could also use other levels such as
pivot points, Fibonacci retracements, as the support & resistance levels depending on your
own preferences.
Other types of analysis you could also use in conjunction with this basic framework include
anything from Elliott Wave analysis, trendiness breaks & candlesticks to name a few.
In fact there are many traders who make use of services offered by Elliott Wave
International, who provide forecasts on various financial markets using the Elliott Wave
Principle. Traders use these as guides along with their own trading system to add an extra
layer of confidence and reliability to their setups.
If you’re interested in what Elliott Wave can do for you, they have a free club you can join to
learn more about this principle. They also offer regular forecasts for various markets using
Elliott wave analysis, which can make it easier for those who haven’t got much time
analysing the markets using Elliott Waves.
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Click Here To Join Their Club For Free.
Here are some additional filters suggested by George Lane himself (The creator of the
Stochastic Indicator) in “Self Managed Trading with Stochastics” which you can get from
singing up with INO TV. Just search for “George Lane” when you’re a member and you will
be able to find his workbook & mp3 file.
1. A Trend‐line (used in the examples above)
2. A longer term Stochastic
3. A 38‐bar moving average
4. Another Indicator (MACD or CCI)
5. A chart of larger degree with Stochastics
Stochastic & Trendline Breaks
In the preceding examples of high probability signals, the trend‐line acted as support &
resistance. However, it can also be used to indicate strength or weakness in an uptrend or
downtrend. Observe the image below:
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In the aabove chart,, we have p price makingg a lower lo
ow while thee stochasticc (Blue Line) is
making a higher low which givves bullish cconvergence. Also notiice there are three points
where p price has hit a trend‐linne and thenn continued downward ds. You will notice that the
third caandle after tthe bullish cconvergencce has been confirmed,, price breaks through the
trend‐line resistance area, ind dicating that the bulls w
were back in control.
p would be as a bullish falling wed
Another way you ccould look aat this setup dge in an up
ptrend.
Which iis a continuation pattern in upwarrd trending markets. NNotice how u using both o
of these
method
ds of analysis confirmed the bullishness of this trend.
If you are not familiar with chart patterns I would su ng a look at Dan Zanger's
uggest takin
websitee. He has made millions trading chhart patternns alone, and has a freee section on
n his
websitee explainingg the most important chart patterns.
Chart
t Patternss, Trendlines, Ca
andlestick
ks & Morre
The following is a b
brief section
n on a few ttrading setu
ups I have fo
ound that m
make use off
multiplee methods of technical analysis to
o confirm a signal.
The chaart above is BHP on a w
weekly timee‐frame. The e first setup
p you can seee is called aa falling
wedge, characterissed by the nnoticeable sslant to the downside. This type o of pattern is
bullish signaal in an uptrrend. The buy point is at the break of the
generallly considered to be a b
upper trend‐line.
As pricees move higgher, you will notice that after a sttrong rally h
has taken place, a speccial
candlesstick reversaal signal forrms known aas an evening star. On top of this it is occurring at a
trend‐ line resistan
nce level, givving you a b
better indiccation that tthis might b
be a good tim
me to
short th
his stock
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Another principle o
of trading o
often talked about in so
ome tradingg courses is that of multiple
time‐fraames.
So to deemonstratee this, there is a chart b
below of the
e same stocck BHP on a monthly
timeframe.
The beaarish engulffing pattern
n was also co
onfirmed bearish by th
he stochastiic indicator being
over bo
ought, and hhooking dow wn. The rest is history.
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Here’s another chart of BHP.
In this example a morning star candlestick reversal forms right on an area of support in the
form of a double bottom. Also note the strong gaps that have been integrated with this
candlestick pattern. These enhance the strength of the reversal signal, giving you more
confidence that the double bottom support was strong enough to reverse the downside
move.
Below is another example of a bullish morning star candlestick pattern occurring at an area
of support. This is a chart of Microsoft on a daily time‐frame.
In this particular example, two trend‐lines merge creating a strong point of support. A short
uptrend follows.
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Most of the candlestick gurus will tell you that candlesticks are not a trading system alone,
they are a tool. You need to merge them with other forms of technical analysis to confirm
what they are telling you. So observe the chart below of Telstra on a daily time‐frame:
This particular candlestick formation circled is known as a bullish kicker, this is probably the
most powerful candlestick signal you can get. To better understand why it is significant in
determining investor sentiment, consider how it is formed:
This signal is a two day pattern. The first candle opens and moves in the direction of the
main trend (down in this case). The candle then closes further in the direction of the trend.
Then a dramatic change takes place which ultimately changes the direction of the market.
The second candle opens at or above the open of the previous candle & continues in exactly
the opposite direction, giving you an indication that the investor sentiment has changed
dramatically.
To top this off, note that the stochastic indicator is hooking up from the oversold area,
confirming the bullish change in trend.
If you’re wondering why I have used candlestick signals in many of these examples it is
because they are time tested. They have been around for a long time, around 300 years and
started off in Japan. In fact once you start learning what each of the different patterns
mean, it becomes apparent that all they are doing is giving you a good visual explanation of
what is happening in the market. If you would like to learn more about candlesticks, I
suggest you check out Steve Bigalow’s website. He has made some very helpful videos on
using candlestick analysis along with other technical tools, just like I have done in the
examples above.
They can also be easily joined with western charting tools as seen in some of the examples
above.
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Chart patterns often work well alone, however having them confirmed with other technical
tools makes the signal a whole lot more reliable. In the above chart notice a triangle pattern
has formed, and as soon as price broke through the upper trend‐line of the triangle, the
stochastic indicator hooked upward forming a bullish divergence to price confirming the
bullish continuation.
I hope I have been of some help. For some I hope this has opened your eyes to the
possibilities of these trading models. For others, I hope you have picked up an idea that may
be of use in the future.
Best of trading,
© 2008 http://www.TradingSetup.com
www.tradingsetup.com
Additional Resources / Educational Programs
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Candlestick Forum – Candlestick Pattern Education
Elliott Wave International Free Club ‐ Elliott Wave Analysis & Education
Disclaimer: Futures, forex, stock, and options trading is not appropriate for everyone. There is a
substantial risk of loss associated with trading these markets. Losses can and will occur. No
system or methodology has ever been developed that can guarantee profits or ensure freedom
from losses. No representation or implication is being made that using these methodologies or
systems will generate profits or ensure freedom from losses.
I understand that: The presenter/s and authors of this information are not financial planners,
advisors, registered accountants, or financial professionals.