You are on page 1of 15

3 Tools To Trade

Like a 30-YEar
Seasoned Vet
Written By Sam Shames
with Simpler Trading®

Raghee Horner

SIMPLERTRADING® | Austin, Texas | (512) 266-8659 | Support@SimplerTrading.com


A TREND AT A GLANCE - RAGHEE HORNER’S PRIMARY INDICATORS
At Simpler Trading we aim to
keep our approach to trading…
simple. One of the of the hardest
decisions a trader must make is
what indicators work best with their
trading style.

One indicator seems like we are


not making full advantage of the
flood of information the market
is providing us. One hundred
indicators seem like we are
amplifying noise looking for a signal.

Newer traders tend to believe there


is a Holy Grail indicator that can
predict the next move. Intermediate
to advanced traders can fall into
the trap of ‘tweaking’ their system
or adding indicators when a trade
goes wrong instead of asking themselves whether they applied their system in the market environment
in which it works best. Markets have three directions after all—up, down, and sideways. There is no magic
bullet indicator. If there was, the market would eventually adapt and the signal would no longer work.

Part of our job, as traders, is to adapt to the underlying trend of the market and to understand the price
psychology that powers those trends. Let’s keep it simple.

“I am not a systems trader, but I am systematic.”


— Raghee Horner, Futures and Currency Expert for Simpler Trading

Today we will review indicators created by our very own lead futures and forex trader, Raghee Horner—
The 34-EMA Wave & Grab Candles, Darvas 2.0, and Propulsion Dots.

First, we will discuss how the indicators are created then we will discuss how to interpret what they tell us
about the price structure and psychology of a market.

2
BUILDING THE INDICATOR MATRIX

RE S
Each indicator provides us a different piece of information.
D
N

UP STANCE
• 34-EMA Wave and Grab Candles gives us TREND

SI
TRE

PO
• Darvas 2.0 gives us Price Levels or SUPPORT AND

RT &
RESISTANCE

• Propulsion Dots gives us MOMENTUM

When we combine the information provided by Raghee’s MO M


indicators our charts begin to take shape and we can apply
MENTU
the trading rules to trade what we see in any market and any
timeframe.

THE 34-EMA WAVE & GRAB CANDLES


Plotting the 34-EMA Wave
The 34-EMA Wave plots three exponential moving averages, EMAs:

• 34-bar EMA of the price high, plotted green by default

• 34-bar EMA of the price low, plotted red by default

• 34-bar EMA of the price close, plotted blue by default

3
Grab Candles – What Do They Mean?
• A candle paints green when price closes above the 34-EMA of the high

• A candle paints red when price closes below the 34-EMA of the low

• A candle paints blue when price closes between the 34-EMA high and low

GRaB Candles use lighter and darker shades of green, red, and blue. The lighter shades reflect an “up
close” where the price is closing above the previous candle, while the darker shades reflect a “down close”
where the price is closing below the previous candle.

Above is an example of the 34-EMA Wave and Grab Candles on a daily chart of the Dow

E-mini futures (YM). We have our 34-EMA Wave plotted on the high, low, and close which allows us to see
the market trend at a glance.

4
Point A shows light green candles transitioning to dark green. A dark green candle means that price has
closed lower than the previous day’s close but remains above the 34-EMA high. Green candles indicate
bullish sentiment and momentum.

Point B shows light red candles changing to dark red. A dark red candle means that price has closed
lower than the previous day’s close and remains below the 34-EMA low. Red candles indicate bearish
sentiment and momentum.

Point C shows light blue candles changing to dark blue. A dark blue candle means that price has closed
lower than the previous day’s close and remains between the 34-EMA high and 34-EMA low. Blue candles
indicate neutral sentiment and momentum.

Now that we understand how the indicator is built we can start to see that the 34-EMA Wave and Grab
Candles allow us to very quickly determine the dominant psychology and trend of a market as defined by
sentiment and momentum.

34-EMA WAVE & GRAB – UNDERSTANDING THE NARRATIVE


The best indicators are merely an interpretation of the most important variable on a chart, the price.
What makes 34-EMA Wave & GRaB so powerful is that it can be applied to any market on any timeframe
and allow for consistent interpretation of sentiment and momentum.

If we understand sentiment and momentum then we can also interpret the underlying trend of the market.

As traders, we may be inclined to think “Heck, I know a trend when I see one… up is bullish and down is
bearish.” While that may be partially correct, it will be benefit our P/L to actually define a trend, this is one
valuable way to use the 34-EMA Wave and GRaB Candles.

Trend = Organized Sentiment + Momentum


A trend is defined as “organized sentiment plus momentum.” It is important that green candles dominate
a market that is moving upwards with higher highs and higher lows. Red candles should then dominate
a market that is moving downwards with lower highs and lower lows. Blue candles will dominate in a
market that is in consolidation or chop.

Quick shifts between green, red, and blue candles are a sign of volatility and congestion. The psychology
of a congested market is one of indecision between buyers and sellers and is marked by sideways 34-
EMA Wave and choppy trading.

In the next example we see an uptrend that meets our criteria:

• We have organized sentiment shown with the upward arrow in the form of the uptrending 34-EMA
Wave with green, blue, and red all rising

• Momentum in the form of overwhelmingly light green Grab Candles as price extends to new highs.

5
No defined trend on the daily chart tells us that we should look to shorter timeframes (1hr, 30 min, etc
for entries and position ourselves more conservatively if we decide to take a trade, or look elsewhere for
a better setup.

6
We see in the example above a market dominated by indecision and choppy trade as buyers and sellers
struggle to establish a narrative or trend. We see a broken uptrend on May 1st that is followed by choppy
trading indicated by quick shifts in the Grab Candles as well as lack of clear up or down direction in the
34-EMA Wave.

Once we think we have a defined trend, the next step is analyzing the trend clarity.

Since we defined a trend as organized sentiment + momentum then we also need to define the clarity of
the trend so that we may be consistent and systematic in qualifying what is and what is not yet a trend.
We want to find markets that are trending and go in the direction of the trend.

Three points define trend clarity:

• Smoothness of the 34-EMA Wave

• Established in terms of angle (12 to 2 o’clock uptrend or 4 to 6 o’clock downtrend)

• Respect of the trend in terms of price (applies only to trending markets)

* Smoothness of the 34 EMA Wave - we want to see smooth 34 EMA Waves because that tells us that
price is not choppy or volatile and the trend is progressing. This implies one side of the market is winning
the psychological battle by consistently pushing price up or down.

7
* Established angle - we want to see that the 34-EMA Waves are established over time, meaning that
the angle of ascent or descent is established directionally and is not horizontal. Point 2 are examples of
established angles; on the downtrend we see a “4 to 6 o’clock angle” and on the uptrend we see a “12 to 2
o’clock angle.”

* Price respect for support/resistance (trending market) - we want to see prices respect, or respond
to, the 34-EMA Wave as dynamic support or resistance; an important point is this only holds true in a
trending market. On each point marked 3 we see price respond to either the green, blue, or red 34-
EMA. On the downtrend, it is marked by sellers selling into the downtrending 34-EMA Wave as a form of
dynamic resistance. On the uptrend, it is … marked by buyers buying into the uptrending 34-EMA Wave
as a form of dynamic support.

Understanding the Narrative – Why 34?


Why 34-period for the EMAs, why not 20 or 50, how did you get to that number?” Raghee backtested
many Fibonacci numbers as she was working on creating the indicator, the 34-period was chosen
because it was the Fibonacci number that tested best.

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597

Above is the basic Fibonacci series; it is created by adding the last two numbers in the sequence together.
Raghee tested the indicator all the way to the 1597-period and the best results were achieved with 34.
Simple as that.

Fibonacci has many applications within the market from price retracements to price extensions as well
as applying it to time across the x-axis. It is a fascinating natural sequence that appears consistently in
nature, art, the human body, and most importantly to traders—the market.

Understanding the Narrative – The Daily Chart


An important point to note before moving on to the bigger picture…

The daily chart is the most psychologically relevant timeframe to begin your reference. It allows us to
understand where the market is in reference to longer term price structure and adds validity to shorter
timeframe trades, meaning that if you are trading on an hourly or 15-minute chart and see a trend and a
good setup for entry there, it is further validated by a complementary defined trend on the daily chart.

No defined trend on the daily can still be profitable on shorter timeframes, however, be cautious whenever
trading short-term trends against daily chop.

8
34-EMA Wave & Grab Candles – Let’s Make Some Trades!
So far, we have discussed…

• How the indicators were created

• How to use the 34-EMA Wave and GRaB Candles to analyze market sentiment and momentum

• How to determine defined trends versus chop.

As traders, however, we want to know how to use this information to find tradable setups, good price
entries, and to set exit targets. In this section, we will talk about how to use the indicators to make
tradable decisions.

The 34-EMA Wave serves two purposes:


• Identifying a trend and understanding sentiment

• The moving averages of the 34-EMA Wave act as dynamic support or resistance

Understanding how this works is key to trading off the indicator and we will review an example showing
multiple types of entries.

9
Above is an example of a market that allowed multiple types of entries simply by using the 34-EMA Wave
and Grab Candles. For these examples let’s assume the chart is a daily chart.

Point A shows a simple trend following strategy that would have allowed us multiple entries on the 34-EMA
high (green MA). As prices rose in a trending manner, every retracement to the 34-EMA high was bought
and pushed price up. This is an aggressive strategy in an uptrend, as we would be buying the first dip in to
the 34-EMA Wave. We can be more aggressive when we have trend and momentum in our favor. Price is
respecting the 34-EMA high as buyers add to positions or open new positions on those retracements to that
level. Point A would have an aggressive entry on a retracement back to the green (high) EMA, a conservative
entry on retracement back to the blue (closing) EMA, and a stop could be placed a tick below the red (low)
EMA.

In strongly trending markets the conservative entry may not always be filled as buyers step in and buy
the pullback as soon as it happens. Placing a trailing stop a few ticks below the red EMA allows us to

define our risk as prices rise.


Point B is defined as chop or consolidation. As we have previously stated, in these market conditions we

10
want to be conservative with our position sizing and go to smaller timeframes such as the 4hr, 1hr, or 15-
min chart.

When we do this, it is important to understand going smaller in timeframe does not negate the overall
daily trend, so when trading on a timeframe shorter than the daily keep that in the back of your mind. For
example, while the 15-minute chart may look very bullish and even have a defined and clear trend; the
overall trend of the market at Point B is still skewed bearishly.

In consolidating markets the 34-EMA will not work as well for support or resistance unless it is applied to
shorter timeframe charts with the daily trend kept in the back of our minds.

Point C shows us another trend, this time a downtrend, that meets our definition in terms of sentiment
+ momentum + clarity. When we have a defined downtrend like this we can use the 34-EMA Wave as
dynamic resistance. Aggressive entries in a downtrend would be to short any retracement to the red
(low) EMA, with a stop above the green (high) EMA. Conservative short opportunities would be at the
downtrending blue (close) EMA, again with a trailing stop above the green EMA.

PROPULSION DOTS
Plotting Propulsion Dots
Propulsion Dots plot the relationship between a fast EMA and a slow EMA. The default setting is the
8-period fast EMA and the 21-period slow EMA.

When the fast EMA is above the slow EMA we get a Propulsion Dot plotted on our chart. Direction of price
movement does not matter, Propulsion Dots can show up on a strong uptrend, strong downtrend, and
even briefly in choppy markets.

Propulsion Dots should not be weighted on their own, but rather, as a piece of the puzzle that gives us
information about the momentum behind price movement.

Propulsion Dots – Understanding the Narrative


Raghee has described Propulsion Dots as “the market hitting the gas pedal.” When a Propulsion Dot
shows on our charts it lets us know that the market has increased near-term acceleration. The 8-period
EMA above the 21-period EMA tells us that we have increased acceleration, or price momentum, as
buyers or sellers take charge.

Why is acceleration and momentum important to know?


A major part of our analysis at Simpler Trading is understanding the price levels the market has
determined as support or resistance. The 34-EMA Wave and Darvas 2.0 give structure to where these
potential levels are in any market. Propulsion Dots give us the missing piece of information of whether
the market has enough “force” in the form of acceleration + momentum (Propulsion Dot plotting on
chart) to break or hold these levels.

11
The chart of Chipotle (CMG) below shows a very strong example of Propulsion Dots revealing a market
that is “hitting the gas pedal.”

The example shows the progression of how we layer our studies to form an overall picture of a market’s
behavior using Raghee’s indicators.

• The first image shows simple Grab Candles.

• The second image layers on the 34-EMA Wave + GRaB Candles and starts to give structure to the chart.

• The third image adds an additional layer and shows Grab Candles + 34-EMA Wave + Propulsion Dots
which leads us to a complete understanding of the psychology and price levels driving this market.

We see on the Chipotle chart that once the daily downtrend was established via red Grab Candles;
Propulsion Dots began plotting on the chart. This indicates to us real selling pressure as sellers
overwhelm buyers and price accelerates to the downside.

The information that Propulsion Dots reveal to us as traders is an early indication that momentum is
shifting. They are a simple, clear way to see near-term momentum shifts in any market.

Propulsion Dots – Understanding the Trade


Propulsion Dots work best in a trending market. As the market is trending, Propulsion will tell us whether
the next support or resistance level is likely to break or hold.

Propulsion Dots showing on the chart as the price moves up towards prior resistance increases the
probability that resistance can be broken. Broken resistance means that buyers overwhelm sellers at that
area and price will continue in the direction of the original trend, up.

12
Propulsion Dots showing on the chart as price moves down towards prior support increases the
probability that the support will not hold. Broken support means that sellers overwhelm buyers at that
area and price will continue in the direction of the original trend, down.

If we do not have a confirmed trend using our defined 34-EMA Wave rules of clarity, then we have choppy
prices. In choppy markets we want to discount the effect of Propulsion Dots as the market is effectively
“boxed in” from the range low to range high. We want to either avoid these setups or find a smaller
timeframe chart that does show a defined trend.

Support and resistance can be dynamic and constantly changing as is the case when we use the 34-EMA
Wave as support/resistance. Support and resistance can also be static and marked by horizontal levels
such as intermediate tops and bottoms.

We will talk about how to find and automate these price zones in the next section.

DARVAS 2.0
Plotting Darvas 2.0
Darvas 2.0 is modern day calculation and automation of support and resistance that works on all
timeframes and all markets.

Darvas 2.0 support and resistance levels are not projections of potential support and resistance but
actual proven levels. The main benefit to us as traders is there is zero guesswork when finding decision
levels when we apply Darvas 2.0 to our charts.

Darvas 2.0 – What Do They Mean


Darvas 2.0 uses minor highs and lows with a four-day box count to automate support and resistance. It is
a way to quickly find horizontal support or resistance levels based on prior intermediate highs and lows.

When the Darvas plots yellow it means that it is plotting from an intermediate new high to low.

When it plots magenta, it means the Darvas is formed by a new swing low to high.

13
The meaning of the Darvas box does not change on the color, the color is simply a quick way of
understanding if the new levels are also new highs.

Darvas 2.0 – Understanding the Trade


There are only three reactions that a market has at a decision level—accelerate, stall, or reverse.

Darvas automates these levels so that we may be prepared for a reaction in price as we trade.

Every indicator we place on our charts only has one job—identify decision levels that the market will react to.

Darvas 2.0 excels at this because it is automated and references levels where the market has reacted
to in the past. By automating our support and resistance levels based on where the market has been
as opposed to projections it allows us to remove “speculating” from our trading. Darvas 2.0 identifies
trendlines or price levels that are based on previous price.

UTILIZING THE INDICATOR MATRIX


Each one of the indicators we have discussed provides us a different piece of information.

• 34-EMA Wave and GRaB gives us TREND

• Darvas 2.0 gives us Price Levels or SUPPORT AND RESISTANCE

• Propulsion Dots gives us MOMENTUM

By combining the information provided by Raghee’s indicators our charts start to take shape and we can
apply our trading rules to trade what we see.

A B C D

Below are two examples of charts that have been “built up” using the indicator matrix.

The indicators work on any market and on any time frame.

14
We start with a basic chart, then in the next panel we layer on the 34-EMA Wave to understand trend.

In the next panel, we have layered on Propulsion Dots to understand momentum.

In the final panel, we have layered on Darvas 2.0 to understand support and resistance levels.

The example above shows a strong uptrend in KWEB, the Chinese internet ETF.

Now let’s look at how these indicators identify a down trend. The example below shows a strong
downtrend in OIH, the oil services ETF.
At the end of the day… what makes a market is millions of participants mostly seeing the same
information and acting in their own self-interest creating price movement.

The market is full of emotion and noise, but as traders we can find a calm in the storm by staying
consistent in our interpretation of what we see. The 34-EMA Wave and GRaB Candles, Darvas 2.0, and
Propulsion Dots allow for a consistent view of many markets using one mind, one indicator set.

The actual instrument (stocks, futures contracts, commodities, Forex) is irrelevant to us as traders. What
we strive to do is trade the psychology of price levels not the news or the noise. The 34-EMA Wave and
GRaB Candles, Darvas 2.0, and Propulsion Dots allow us anchor ourselves to a systematic approach and
then build on that foundation with our own trading experience and personality.

Having the right tools is just a piece of succeeding in our trading goals. Raghee can be joined at Simpler
Trading to learn in-depth strategies on how to utilize these indicators in every trade, in any market.

Installing Raghee’s indicators to your platform


Follow the links below to install the 34-EMA Wave and GRaB Candles on your trading platform!

TradeStation | ThinkorSwim | Installation

15