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2ways2wealth Overbought Oversold

Module: Over Bought Oversold Assist Strategy

Objective
The objective of this module is to become familiar with the Over Bought Oversold Strategy
including placing the selected indicators onto a chart and learning to identiIy the 6HW8Sand
Trigger` Conditions. This trading system provided for 2ways2wealth by Wealth F X.

Introduction
There are generally three major trading approaches.
Trending Systems and strategies that generate signals when the market is trending or
returning into the major trend direction after a retracement
Breakout Systems which focus on getting in as a breakout starts and as close to the
breakout point to maximise the return on the trade.
Volatility Systems or Over Bought Over Sold trading strategies are used where the
market is moving into areas of unusual or extreme price conditions or trading a channel
where clear top and bottom prices are identified

The 2ways2wealth OBOS system is focussed on prices moving into extreme areas looking for
over extensions of price moves in the short term, while looking to identify opportunities as the
momentum starts to run out, yet the price is still moving in the same direction.

It is a trading system looking to generate signals indicating when to get into the market as prices
move back towards more normal market conditions.
This strategy is all about identifying the either the point where the move has ended and the prices
are returning back to normal conditions or anticipating the retracement as prices are still moving
strongly.

This is a contrarian trading system which means that the price is moving very strongly in one
direction and we are trying to pick it as it exhausts itself and identify entry points into the
currency in the opposite direction from the current short term market trend as the price returns to
normal areas or pricing.

Loading the system indicators and settings
There are a number of ways to add indicators from a chart you will need to familiarise yourself
with your charting program to achieve this.

Marketscope
If you use the FXCM Tradestation, Marketscope charting function the instructions for adding the
specific indicators are below.

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2ways2wealth Overbought Oversold


You can either use the Add Indicator function on the (FXCM) Marketscope tool bar or secondly
using the Windows menus (right Click and select Add Indicator) or click the letter I` on your
keyboard to bring up the Add Indicator Function.

Note: You will need to subscribe to the Wealth FX Assist oscillator to use this system effectively

Once you have the Add Indicator function open you can add the indicators and the settings
required for this trading system.
Indicator 1: Wealth FX Assist (WFXA)
Indicator 2: Bollinger Band 4321 (BB)
This Indicator will need the settings altered for each one of the four Bollinger Band indicators
you add to this chart.
Indicator 3: Relative Strength Index (RSI) there are personalised settings required for this
indicator

Introduction to our indicator settings
This section will cover in detail the placement and set up of your indicators.
All the parameters of the indicators are set and loaded separately for each of the Bollinger Band
indicators we will overlay on our chart, whereas the Assist will use the default settings and the
RSI will need specific settings also.

Indicator 1: Wealth FX Assist
Place the WFX Assist on to the chart using the Indicator function button.



The Screen should look like the screen shot above.

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2ways2wealth Overbought Oversold
This indicator can be found by scrolling down to the indicators under the Wealth FX section.
You can also press the letter W` on your key board to auto scroll to the W` section..
The screen shot above is displaying the 5 minute candlestick chart and the Wealth FX Assist
Indicator at the bottom of the chart in a separate window area.

Indicator 2:
The second indicator we are going to introduce is the Bollinger Band with four different settings
of the Standard Deviation figure.
We are going to use one, two, three and four standard deviations from the 20 Period Simple
Moving Average, which is the basic construction calculation standard for the Bollinger Band.
The Bollinger Band will display a centre line which is a 20 Period Simple Moving Average and
we are going to Add this indicator four times with the four different settings to overlay on top of
each other with what looks like a complex series of lines on the chart, seven in all.

First select the Add Indicator Function and scroll to the Bollinger Band


Click OK` and then we are going to alter the number in the Standard deviations from 2 to 1.
Your settings box will look like this.





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2ways2wealth Overbought Oversold
Alter the figures and then Click OK.
Repeat this step 4 times using the figures 2, 3 and 4 in the Standard Deviations

2 Standard Deviations


3 Standard Deviations


4 Standard Deviations


When you click OK the last time the chart will appear with the four Bollinger Bands displayed
and the centre line which is our 20 Period Simple Moving Average.
Your Chart should look like this screen capture below.




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2ways2wealth Overbought Oversold



Indicator 3
The last of the indicators is the RSI or Relative Strength index which monitors the internal
strength of a currency and plots the results on a separate chart area at the bottom under the Assist
Chart Window.

We are going to make alterations to the look and the settings of this indicator and firstly we need
to select the RSI from the list of indicators in the FXCM Marketscope and click OK
The Indicator settings box will appear and you will need to alter the number of periods from the
default to the number 10.


This screen shot below displays the RSI Properties box with the Period altered to 10 (ten periods
of data).

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2ways2wealth Overbought Oversold



Next we need to alter the settings for the Overbought Level and Oversold Level settings from 70
and 30 to the new figures of 80 and 20

The RSI Properties box should look like this screen capture below.


We have altered the colour of the RSI line to black using the colour palate available, we have also
altered the colours of the 80 and 20 lines to red by using the same palate function.

To alter the colour of a line or alter its properties you can click on the colour and a small grey box
will appear with 3 black dots across the bottom, click on this and the palate with colour selections
will appear like this palate below.

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2ways2wealth Overbought Oversold


Your complete chart should look like this depending on which order you add the Assist and the
RSI.



The first indicator you add will sit at the top of the bottom section and the second will sit below it
like this chart above.


NOTE: If you find the indicator legend is getting in your way as you add the Bollinger Band
indicators, you can un-tick the show legend check box and these will be hidden from view .


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2ways2wealth Overbought Oversold


This will leave the chart free of text clutter which will free up vital screen real estate.
You can do the same with both of the other indicators if you are short of screen real estate.



You can always add them back again by reversing this process and checking the boxes again if
you need to.

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2ways2wealth Overbought Oversold
Trading Strategy
The overbought and over sold nature of this trading strategy indicates that there is a condition
happening that is unusual and we are going to take advantage of that unusual market condition.

What the Bollinger band does is to display the prices between a pair of wavy lines which are set
either side of an average. What we have done is add different calculations of the distance those
lines are set from the average. We have added four versions and the chart will look like this close
up shot.




The Dark Blue line is the Simple Moving Average of the price set over 20 periods with sets of
parallel wavy lines set above and below the average.

Bollinger Band construction displaying standard deviations from the price will mean that 90% of
all Price candles will close inside the Bollinger Band 2 parallel lines (BOLL 2).

When the prices move and the candles close outside the Bollinger Band 3 and the Bollinger Band
4 lines (BOLL 3, BOLL 4) the condition of the prices is extreme. We use the word extreme in the
fact that the price has moved away from the 20 Period Simple Moving Average (20SMA) fast
and/or a long way.

This over stretched condition is like an elastic band where once the prices move away with thrust,
venom or volatility and when the move away ends as it always does the likely hood of a
retracement in price back to more normal levels` is a high probability.

Prices are expected to move back towards the average at some point and our goal is to identify
when the move has finished and the price is starting that retracement.

This predicted move back towards the average is what we as traders are looking for and as we
only elect to trade when a certain amount of volatility is present. I.e. the price has closed outside
the BOLL 3 line which means we can relax until it as happened and this is the first step to our
trading approach.

Below is a screen capture of an example trade placed after a move up outside the BOLL 2 and up
towards the BOLL 3.

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2ways2wealth Overbought Oversold


If we look at this screen shot we can see the prices are rather extreme.

The next screen shot (below), we can see that the price move up has stalled and the move back to
more normal pricing has started.



This is a perfect trade and shows the potential and also the key signals we are watching out for.
This trade has rewarded the trader with a 10 pip profit

Trading conditions
Trading Tab with Profit of +10 result and the Stop Loss level
Momentum
Falling
RSI Overbought

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2ways2wealth Overbought Oversold
Trade Set Up conditions
Bollinger Bands and Price Candles: Price has risen or fallen outside the BOLL 3 or BOLL 4
during the move.

Wealth F X Assist: Signal Bars are overextended and the last two bars are generating less
momentum (the Assist bars are falling on a sell trade and rising on a buy trade) so the momentum
is swinging back towards the centre line.

RSI : The RSI levels should be around our overbought/oversold levels of 80 on the high or
overbought side and 20 on the oversold or low side. If this looks to be heading down on a sell
trade and up on a buy trade this is good.

Entry: While market is over stretched we are looking for the prices to stop the move away from
the average and turn back again.

We can take three types of entry and you will need to practice each one so you are confident of
your trading system. (The next part of this strategy will cover the three different trading
approaches used to enter an Overbought Oversold Assist trade.

Stop Loss Placement: It is suggested that we wait for a candle to start which has a lower extreme
before entry. I.e. If a Sell trade is selected after a long move up we need to wait for a candle to
form below the highest point. This is a great place for us to hide our Stop Loss above the last high
point and possibly above the next Boll line on the chart above.

Risk on Trade: Stop Loss no more than 20 pips and no less than 10 pips and where ever you are
placing the Stop Loss you should risk no more than 1% of your trading capital as you are going
against the trend
Note: Use the Wealth FX Trading Spread sheet to calculate the Stop Loss and Position size
relationship to control your risk on the trade (See Money Management).

Exit Strategies: There are a couple of exit approaches that are popular and each has its own
advantages and disadvantages.

F ixed target: This is where you can set a specific target based on pips or cash profit and the
Trading Station will close out the trade when this level is reached.
An Example is set a 10 pip Stop Loss and a 10 pip Profit/Limit target or set a 10 pip Stop Loss
and set a 20 pip Profit target.

F loating target based on market conditions. Set a fixed Stop Loss and then manage the exit
manually by using the market conditions, movement or current prices combined with market
indicators to determine when to close this trade.
Example 1: We have a Sell trade and we set a 10 pip stop loss and the market moves down
as predicted quickly and we are up 18 pips and as the price has just crossed the centre line we exit
the trade there and lock in whatever profit we can.
Example 2: The prices drop as predicted and we enter a Sell trade but when the prices fall
around 50% of the original move up, we determine that the price is unlikely to fall further and
close the trade right there.

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2ways2wealth Overbought Oversold
Example 3: We wait until the price starts to rise again in the opposite direction to our trade
and close out on the first strong upwards candle.

In this screen capture here we can see the price has fallen to a point where we are now making
more profit than we are risking and there is an area where we could exit this trade profitably (the
Green Box). Different people will exit the trade at different points based on their experience
confidence and psychology.



In this example we could have exited the trade at:
The Limit/Profit target set at 10 pips.
At the low point of the Profit Zone square giving a result of plus 30.1 pips (highly unlikely
we can pick the exact bottom).
Use the additional indicators to indicate` when the downwards push appears set to end, an
example could be if a MACD starts to cross the signal line.
The price crosses the centre line or one of the other BOLL lines which we are using as a
target.

The most important thing about this trading system is taking an exit a point that makes the trade
worth taking in the first place.

You do not want to risk 15 pips on an OBOS trade and then exit the trade at 8 pips.
Taking the trades is easy closing for a reasonable amount of profit is a touch harder.

The Screen shot below displays a great trade which has moved into the profit zone and after
finding a new low has then started to rise again.

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2ways2wealth Overbought Oversold


Exiting the trades as different technical conditions occur is the key to trading this system
profitably.

This trade was good but depending where you took the exit the profit potential was different for
each exit.

The three entry conditions in detail
Aggressive /Anticipatory trade: The trader enters the trade before the price has started to fall.
This type of trader is anticipating the turnaround and is trying to get in at the absolute top or
bottom of the move to give an entry which promises a larger win loss ratio as the actual pip risk
should be small and the gain could be considerable.

This trading style will mean that the move is not yet over so you will get stopped out of trades
quickly as the price continues to stretch. This trading style can deliver 5 or 6 times your risk but
may only win 30% of the time and may need to include multiple trades on the same move as the
price knocks you out you re-enter again at a higher/lower point with the confidence that the price
will fall eventually.

Note: Staking strategies can be used to give this type of trading a real turbo charge. This ent ails
increasing the position size of subsequent trades so when you do finally win you get a big trade
with bigger position size than the previous trades with a small position size and small stop loss.
This type of trading will deliver a regular reward of winning day by day but when things go
wrong you can lose many days winnings in quick succession.






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2ways2wealth Overbought Oversold
The trade below indicates the market in an extreme condition and a trade entering at the top and
selling the market.






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2ways2wealth Overbought Oversold
The trade below shows a buy trade taking entry at the bottom of the move.
NOTE: The trades above were anticipation trades taking the decision to trade contrarian to the
move under way and trying to pick the top or bottom of each move.

We entered at the very extreme of the market once the highest candle started to fall leaving a tail.
Conservative/Patient: Enters the trade aIter all oI the indicators have indicated` that there is a
turn around occurring and is removing the chance of getting knocked out quickly as the volatility
is drying up as the prices drift back to the average.

This is definitely not about trying to pick the top or the bottom but about deciding when the
market has actually run out of steam and the indicators are all showing this clearly.
The market is turning back from the extreme move.

When the market is showing clear signs of a technical reversal we can elect to take a trade in the
opposite direction to the initial move.



In the example above the MACD was starting to fall with the WFX Assist showing lower
momentum and the RSI was showing lower price strength.

As the price made two higher highs and with lower momentum there were a couple of excellent
opportunities to enter in the OBOS trade.

This next approach is focussing on one condition to occur in a specific order.

Set Up:
The price must touch the BB3
The price must have moved more than 30 pips from the centre line (20SMA) on the
Bollinger Bands.
The RSI must read over 80 for buy trades and less than 20 for sell trades.
Market creates a new High or Low

Trigger :
The price must make a new high (or a new low) while the WFX Assist is diverging

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2ways2wealth Overbought Oversold
Momentum is running out, and confirms with RSI
Check for additional support and resistance at old high/low prices

Exit: Look for areas like BB-1 to enter and BB+1 for the exit.
Use the amount you are risking (Stop Loss amount and add 25%): Stop Loss 15 pips target is 18
Pips Stop Loss 20 pips Target is 28 pips.

This screen capture below shows each stage of the trade, Step one and Step two are the Set Up
and the focus is on the size of the move and its extremeness by triggering a BB 3 touch, a RSI
80/20 reading and a specific amount of actual movement from the SMA.



Step 3 and Step 4 are the Trigger and Step 5 is all about exiting the trade with a decent return on
risk.

This is a great trading system for taking 20 to 40 pips out of the market regularly and quickly and
works really well around 4 - 6 pm ESDT in Australia, as it covers the moves that start when
Frankfurt and London open.

Automation
Using the Price Alerts function you can set alerts around 30 pips above and below the sideways
market and wait till one of them is triggered.

This saves screen watching as most of our currencies we trade use the USD or the JPY as the
quote currencies then we get alerted when today`s fastest mover hits the Price Alert.
This automates the process and cuts down on screen time

If you want to see some live OBOS trading videos click on the link below and view the videos
and workshop clips.



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2ways2wealth Overbought Oversold
Additional Indicators
There are additional indicators which will help to fine tune your entry and exit points into this
type of trade.

We can look at the Wealth FX training site and specifically lessons 9 and 10.