Price Action Strategy The STEAMM PDF

For more FREE Ebooks, strategies and materials you can visit:
http://theultimatetradingedge.com/
or email me at svetlin@theultimatetradingedge.com
TABLE OF CONTENTS
PREFACE
A SHORT HISTORY
ROAD MAPS
TRADING BEFORE THE LONDON OPEN

False break – 2B
STEAMM STRATEGY
The trend
Exponential moving averages
Entry filters
The STEAMM set up
REAL TRADING EXAMPLES

PREFACE
“An investment in knowledge pays the best interest.”
~ Benjamin Franklin
Trading is a zero sum game.

If you are winning someone else is losing and vice versa.
This is the first thing you have to understand about the financial markets.
If you don't get this you have good chances to join the 95% club of unsuccessful
traders.
The good news is that you can make nice income working from home just a few
hours a day because trading is like any other business.
The other important aspect of the trading is that it is not an art gallery which
means that technical analysis is not all you need to know.
You must learn how markets operate which are the main players and what they
exactly do.
Also you have to learn what market conditions you can trade and which financial
instruments you should use.
To tell the long story short trading is a business and you have to treat it like that
and if you consider treating it like a hobby you’d better do something more relaxing.
The fact that trading is a zero sum game implies one very important requirement
- you must have an edge if you want to be a successful trader.
This is the reality and you can't change it.
After the 18 years that I’ve spent on the financial markets as an individual trader,
risk manager (during the world financial crisis) and FX dealer (during the EU debt
crisis) I‘ve learned one thing - the ULTIMATE trading EDGE you need before you name
yourself experienced trader is KNOWLEDGE.
It is not a holy-grail trading system or secret method for analysis.
Financial markets are always changing and if you want to make money in the
long term you must adapt.
And you can't adapt to the new market conditions if you don't have sufficient
knowledge.
You have to know how the markets work, what the large participants do, what
types of instruments you can use, how the fundamentals affect the prices, etc.
Remember! Knowledge about the markets will pay the highest interest on your
capital.
Bon voyage!
-Svetlin
A short history
Financial markets are changing often and in order to trade successfully, you need
to use a range of a few strategies to trade the different market conditions.
More important, everyone should have a specific trading style that suits his/her
temperament, experience, vision of the financial markets as a whole, risk aversion, etc.
In this book I will try to explain in more detail what exactly my trading style is
and how I trade the FX market.
For the past 15 years I have seen a lot of strategies that work well and then fail,
but it could not be otherwise.
Technology is developing too fast and it is used by large funds and banks to give
them an advantage. Also the role and behavior of market makers are changing and that
also requires adaptation of some rules of the trading systems.
There is no way in the presence of super-fast computers and the light-speed
Internet and increase of the daily volume from 1.2 to 5.3 trillion USD, to apply the same
strategies without any change. It should not be forgotten that the methods of the classical
technical analysis were developed in quite different conditions and speed of
dissemination of information.
The currency market was not available for many of the current players back then.
More popular were the stocks and commodities futures.
The development of various technologies allows almost anyone to trade on the
foreign exchange market, as well as contracts for difference (CFD) and any other
financial instruments.
The development of the same technologies, however, created the so-called "high
frequency traders" (HFT). Armed with super-fast computers, servers and the Internet
connection they have significant advantage over other market participants.
In the middle of the past decade, the forex market was joined by large sovereign
funds (mainly from Asia). They significantly increased the liquidity, but started to have
a serious impact on price movements. EUR/USD managed to reach 1.60 in 2008 fueled
at least partly by sovereigns buying. This trend was not confirmed by the fundamentals
and as a result, the pair tumbled to 1.23 in just 3 months. This event convinced me that it
doesn't matter what I think about the forex market or what the classic fundamental and
technical analysis are telling me.
Much more important is what the big market players are intending to do. They
have the resources to move the prices wherever they want, and their only purpose is to
make more money from money. Everything else is irrelevant for their managers and
traders.
For the above stated reasons, I found that for me it is best to follow the "big
money", of course as far as possible.
It is wishful thinking to imagine that a manager of a large fund or dealer at a
major bank in London or New York would call me to tell me exactly when to buy or
sell. Somehow I have to identify what they are doing and try to follow their actions.
Initially I started with trading strategies based on technical indicators and chart
patterns. This is inevitable, since at the beginning there is no way that you have an
accurate idea of what exactly are the financial markets and what's working best.
In fact, these strategies were working very well, because the market was not as
crowded as today. Also the computers were not the largest group of traders. The uptrend
in EUR/USD since the beginning of 2002 to the end of 2004 was perfect for trading.
With the opening of London usually a new leg in the direction of the trend started.
Pullbacks were pretty clear creating good entry points.
Around 12:30AM London time a deeper correction after a test of the European
session extremum (high/low) used to start, which was providing great trading
opportunities. The most popular chart patterns worked almost perfectly and breakouts of
flags or triangles on 1- hour chart could be traded easily.
In 2006, however, major sovereign funds joined the forex market. They were
well capitalized with money (mainly dollars for diversification into other currencies)
from exports (China) or the high prices of raw materials (the Middle East, Russia). The
market was no longer the same and the old strategies did not work so well. Funds had
enough resources to buy or sell without any retracement. This immediately changed the
notions of divergence, overbought and oversold conditions.
First breakouts of chart patterns were usually false, because the entry and exit
points were crowded. Then I found out about the price action trading and the other
methods of Joe Ross.
TTE (Trader’s Trick Entry) is an excellent strategy and can be used in any
financial market, as long as there is a trend. However, I did not like the size of the stop
and I had to do something to reduce it. Trends were not as clear anymore and I had to
trade on 1 minute chart.
Unfortunately, at such small time frame this strategy is not effective. Then I
decided to add the good old moving averages to my trading toolbox. This of course did
not happen by accident.
After long hours of screening time, I noticed that before the next leg of the trend
starts, the price retraces to the moving average. Of course there is no way it will always
be the 20-period EMA, because everyone will learn the set up and trade it. Therefore I
had to find a filter that can restrict the number of losers, but at the same time not
increasing the size of the stop. The quote reading was perfect for achieving these goals.
Moreover, it could help to meet the basic principle of the strategy, which is to follow
big money.
As I wrote, the quotes are the first source of information that can be used by
traders to get an idea of what orders are executed. Of course entries had to be in the
direction of the trend, and the moving averages could be used as dynamic trend lines
and support or resistance levels. Their location and direction gives us insight on
whether a trend is present and whether it is bear or bull.
Basically, this is the short history of my trading strategy that I named first TTE of
TTE (the terminology of Joe Ross) and then someone came up with the name STEAMM
(Simple Trick Entry And Make Money). As I said, every trader must have a range of
strategies. In this book you can read about how I trade at the spot market. Every
morning, I start by reading the main news affecting the financial markets (not just forex),
quick overview of the closing of the previous day (in all major markets) and drawing
the so-called road maps.
Road maps
Roadmaps show the technical picture and give me the first entry levels for the
day. They depict the major support and resistance levels and especially the points of
confluence.
I draw my road maps on 15-minute chart, but everyone can select the time frame
suitable for his trading style.
The road maps show all major price levels from daily to 15-minute chart. Most
important for me are the levels on the 1-hour chart, as they are often tested throughout
the day.
Longer-term traders can start with weekly or monthly charts and go down to 4-
or 1-hour time frames. In such cases it may not be required to update the road map every
day. I use the following levels of support and resistance:
- Swing highs and lows

- Trend lines
- Moving averages – 20, 500, 100 and 200 EMA
- Pivot points
- Fibonacci retracements
- Psychological levels (round numbers)
- Bollinger bands
The is updated every morning before the start of the European session, but when
you gain experience, it takes only a few minutes. Major levels on a daily time frame
change less frequently, while the moving averages and pivot points are drawn
automatically by the charting software. Only the horizontal support and resistance levels
and probably trend lines and Fibonacci levels should be updated.
Also it makes no sense to trade all financial instruments that are available. You
have to choose only 2-3 major currency pairs and learn everything about them. At some
point you can guess, with a good degree of probability, what comes next just by
watching the quotes or the candles.
I trade mostly EUR/USD, GBP/USD and EUR/JPY and sometimes the stock
indices DAX and FTSE. The whole procedure of drawing of road maps takes less than
5 minutes. On charts 1 and 2 you can see road maps for EUR/USD and EUR/JPY. The
ellipses show the buying zones, while the rectangles show the sell zones.
The first area where you can look for a long position in EUR/USD is 1.3045/40.
This area is based on the confluence of the central pivot point and the 200-period EMA.
Short position could be open around 1.3100, where we have a round number, swing
high and a pivot (R2). Between the two sell zones there are several resistance levels
(upper boundary of a consolidation, pivot, and Fibonacci retracement) but none of them
is strong enough.
For EUR/JPY the situation is slightly different. The pair has been in an upward
trend and therefore it is much safer to open only long positions. We can identify to buy
zones and as they are within 10 pips, it is advisable to look for a long entry between
them, or closer to the second one (129.80).
When you plot all support and resistance levels on the chart, it looks like a
maze. The idea is not to look at all horizontal, vertical and diagonal lines. Important for
us are only the points where there is a confluence of at least 2-3 support or resistance
levels. In addition, I have set some priorities. For me, most reliable are the swing highs
and lows, moving averages and trend lines. All other levels are only for confirmation
and without one of the main, I would not look for an entry. The more types of support
and resistance are concentrated at some point, the more likely there is someone else to
buy or sell around the same level.
Road map EUR/USD
Chart 1 - Source: MetaQuotes Software Corp.

Road map EUR/JPY
With a few more examples of roadmaps I will try to make it clearer how the
levels of support and resistance are determined and the principles for defining the buy
and sell zones.
On Chart 3 of the currency pair EUR/USD was initially in a downtrend, but then
the price entered a period of consolidation.
In such cases, the direction of the market is no longer clear and we can look for
short and long entries.
On road map initially could be marked first two levels in each direction. If the
technical picture changes throughout the day, the roadmap should be updated. The first
buy zone is 1.3200/195. Round numbers are always very good support and resistance
levels and this time about 5 pips below the figure we have a swing low, at which was
formed a bullish engulfing pattern. This shows that there was a strong reversal of the
direction of the price move, which is an indication of the presence of larger bids.
The next buy level is 1.3160. At this support the downtrend stops, then the
market goes into consolidation, which forms upward price channel. When a strong price
move ends, it is usually not by accident. It could be expected that, when the same level
is tested again, there will be a good bids or offers. Sell zone will be just over 1.3250
(swing high and Fibonacci level) and then around 1.3270 (swing high, central pivot and
200 EMA). I would prefer to look for short entry around the latter.
Road map EUR/USD
Chart 3- Source: MetaQuotes Software Corp.
On Chart 4 is presented a roadmap of USD/JPY. The pair has been in

consolidation and therefore we can select entry levels in both directions. As 20, 50 and
100 EMA show some signs of an upward price move, the first buy zone is between
95.15 and 95.00. In principle, a break below 100 EMA will put the bears in control, but
95.04 is a swing low, and 99.00 is a round number.
Major market players like to break minor levels and when the price goes to a
stronger support, they start to buy. If there is any stronger support (swing high/low and
round number) near, I prefer to look for entry around it. Short position could be open
around the upper boundary of the consolidation, which in this case is 95.80. The entry
set up could be 2B (false break of the swing high).
Road map USD/JPY
On Chart 5, you can see another road map of EUR/USD. In this case, the
currency pair is in an uptrend and it is better to look mostly for long entries. Two small
breaks of the trendline however indicate that the prolonged uptrend is facing difficulties
and therefore we can determine also a sell zone. This will be the last swing high
(1.3415), which could be tested at least.
Appropriate entry techniques are 2B (higher high) or TTE in anticipation of a 1-
2-3 top reversal (lower high). Three buy zones could be identified on this chart. The
first one is 1.3385/80 and it is formed by swing lows and 100 EMA. The second buy
zone (1.3370/65) is stronger, as there are two trend lines and 200 EMA. As I said
upward price move was long and may need a larger correction. This is why I have
identified a third area to open a long position (1.3330/25). This is determined by the
swing low where a strong rally started. In this case, I would open a long position in the
first zone, only if the quotes or price price action strongly confirm the entry. The second
and third zone are much better options.
Road map EUR/USD

Trading before the London open
Once you have the technical picture and buy and sell zones you can follow the
price action to determine the exact entry levels, while the pair did not show clear signs
of trending. Usually the direction of the trend for the day is determined after the London
open with a break of the Asian range. The buy and sell zones can be used during the rest
of the day. If the currency pair is in a clear trend, it is advisable to open positions only
in its direction.
One of the best setups is based on a false price move that occurs between the
opening of the Frankfurt and London (respectively 5:00AM and 6:00AM GMT).
On Chart of 6 you can see a roadmap of EUR/USD around 5:15AM GMT. The
pair was in a strong downtrend and therefore it is advisable to look for short entries.
The first sell zone is around 1.2880, which is defined by a swing high and 23.6%
Fibonacci retracement. They are just below the 20 EMA. Then comes the second sell
zone around 1.2895/900, where we have a swing high, 100 EMA and round number.
The third area is 1.2918/20, where are the 200 EMA (this is approximately 50 EMA on
the 1 -hour chart) and 38.2% Fibonacci retracement. There is only one buy zone and it is
around the swing low reached during the downward price movement (1.2830). The pair
has tumbled 2 big figures in the previous day without a major correction and a short
squeeze is possible. It is not a bad idea to look for a long entry with a small stop.
Road map EUR/USD
On Chart of 7 you can see how the situation has evolved during the day. Before
the opening of the Frankfurt started an upward price move, which ended at 1.2881. We
can refine the position entry on a chart with a smaller time frame. The price nears the
first area for opening of a short position and during the test 200 EMA is just above the
same area. In this case you can sell at 1.2880 or ate the 200 EMA, which is one pip
higher. The initial protective stop is from 6 to 10 pips. The target of any downward
price move is the low of the previous day (1.2830 ). With such a stop you will trade
with a maximum risk/reward ratio of 1:5 to 1:8. Depending on the rules for position
management that ratio may fall to 1:3, which is also acceptable. In this case, the position
would have survived with a stop of 6 pips, and the maximum profit was between 20 and
40 pips.
After the initial test of the resistance there is another one, which I think gives a
better opportunity to open a short position. In my experience, the test always occurs
around 7:30 AM GMT (±10 minutes). In this case we have a very good price action
signal. At 7:20AM there is a large white candlestick that breaks a few pips above the
resistance level. This shows that the bulls have serious intentions to drive the pair up
and test the round number. However, the next candle shows that the bulls may have the
intentions, but they are not strong enough. Two consecutive inside candles form, and the
second one's range is the lowest range for the last four periods.
When there is no follow-through after a strong price move, we can expect
reversal. With two successive inside candles the entry level is clear. We could place a
sell stop order 1 pip below the minimum of the second inside candle (in this case
1.2880). The initial stop is above the last swing high (1.2887). Seven pips stop is
perfectly normal for this position. You can see that after the break below the inside
candles the downward price move is fast. The pair tumbles 40 pips in about 30 minutes.
This is precisely the idea of this strategy. To open a position when major players are
looking for liquidity before the London open. They know their job well, and we just
have to manage the position in order to catch a larger part of the price move. Of course
we have to do this with very small risk.
Short position in EUR/USD

False break – 2B
In general, it is not advisable to trade when the market is in consolidation and

has no clear trend. Unfortunately, the currency pairs are trading in a range very often and
it is better to have a strategy for such cases.
Most importantly, this strategy must have very precise rules for a protective stop
and money management. The problem with the ranging markets is that the price has no
clear trend and we have to guess what will happen.
Another, much larger problem comes from the fact that many traders do not
manage their risk and open position without stop. If you trade in a trend that is not so
fatal, but if the market is in a period of consolidation, it may cost you the entire account.
When a currency pair has traded in range for a while, both bulls and bears have
gathered enough power to start a new trend after a breakout. When this breakout
happens, if you are in the wrong direction, you can realize huge loss for a very short
time. As novice traders do not realize that, they often trade without a protective stop,
and suffer severe consequences. The stop is mandatory in every situation, but if you
open a position when the market is in consolidation, you should place it every time.
The 2B strategy (a.k.a. false break or turtle soup) is very suitable for trading in a
range. The levels for entry and initial stop are perfectly clear. I think this should be a
mandatory feature of any strategy and is something that should not be compromised. The
idea is to buy around the lower boundary of the range or sell around the upper boundary,
after a false breakout. This false breakout shows that the bears or the bulls still do not
have the strength to drive the market down or up and possibly the consolidation will
continue. Furthermore, during the breakout some traders will open new positions in its
direction. When the price returns back in the range, their stops will be hit and some of
them will reverse. This will accelerate the price move further.
The rules of the 2B strategy are pretty simple. Position is open when the price
breaks one of the boundaries of the range, and then returns back below or above the
broken boundary. 2B can be used as a standalone strategy or as an option for entry for
other strategies. The boundaries of each range are determined usually by swing highs or
lows could be determined very accurately. When the price breaks one extreme we can
prepare an order to open a position in the opposite direction of this breakout. The entry
level is the oldest extreme ± few pips. How many pips you will add or subtract from the
level depends on what time frame you are trading.
For example, on a 1-minute chart it is better to subtract 1 pip of a swing high if
you want to open a short position, but on the 1-hour chart you should use a buffer of 2-3
pips. For example, let's assume that the upper boundary of the range is defined by the
1.3560 swing high. When the price breaks above this high we place a sell stop order at
1.3559. The stop is on the other side of the extremum, that is reached after the breakout.
The positions should be opened only if the size of the stop is within reasonable limits.
When the break is too large it could be a start of a new trend. The first objective of the
price move is the opposite boundary of the range. Therefore, the size of the stop must
ensure a risk/reward ratio of at least 1:3. If the break is too large and does not allow us
to do that, just skip the signal and wait for the next one.
Chart 8 shows one perfect example of a situation in which can be used the 2B
strategy. Generally, during the Asian session liquidity is lower and therefore usually
currency pairs trade in range. The first price move when the European traders come to
work is often false. Usually it is used by the larger market participants to find liquidity
to open positions for the main price move, which begins after the London open. In such
cases it is better to wait for a false breakout and look for 2B entry. Let's see what
happens on Chart 8. The lower boundary of the Asian range is 1.51350 and the price
breaks below. Immediately we place a buy stop order 1 pip above this level at 1.51375
(the spread should be added in this case). The calculation is pretty simple:
1.51350 (previous low)+ 0.00010 (buffer) + 0.00015 (spread) = 1.51375
You can open the position with a market order, but the stop order is a much
better option. I recommend the stop order, because it eliminates the human factor.
If you try to open the position with a market order, a moment of hesitation and
you will miss the entry.
When you place the entry order you should use the options of the trading
platform and attach the protective stop. Again, I would like to emphasize that the risk
management is extremely important and therefore you should try to limit the possibilities
for unnecessary errors. We don't know in advance what should be the size of the initial
stop. When I place the entry stop I attach a protective stop of 15 pips to this order. When
the position is open I calculate the right size of the stop and adjust the level. Thus way I
have a kind of insurance against sudden price spikes that can have unpleasant
consequences for my account. Such price moves do not happen often, but if you want to
trade longer, you have to take care of everything. In the situation shown in Chart 8, we
have a long position in the GBP/USD at 1.51375, with an initial stop at 1.5127. Given
that we expect a price move to 1.5175, the stop of 10 pips is quite reasonable.
In the present example the price move went beyond the initial target 1.5175, but
this is normal given the fact that the entry was around the London open. This is a very
important issue, so I want to pay it more attention. Liquidity and volatility are cyclical
throughout the day, which is largely determined by the working time of the major
financial centers. The price move will have more potential when we open a position at
the right time. The best periods for entry are the opening of the European and U.S.
session. The biggest market players come to work and their actions can provide strong
support. You should keep this in mind and use it in your strategy. In the example on
Chart 8 the maximum profit was about 60 pips, but the actual result depends on the
position management rules.
2В GBP/USD
You can use the 2B strategy not only when the market is in range. The trend is a
sequence of higher (up) or lower (down) highs and lows. When the price fails to
confirm a new high in an uptrend, we can expect a pullback or trend reversal. In such
cases we can use 2B (false breakout of the last extreme ) for early entry in the direction
of the new price move. This entry is pretty aggressive, as the old trend is still intact.
Although, if it is successful, the risk/reward ratio will be perfect and it is worth trying.
Ideal conditions for such attempts are present when:
- the price move is losing momentum;
- strong support or resistance level is near;
- the market is oversold or overbought.
On Chart 9 the currency pair USD/JPY was in an uptrend. Another swing high
was broken, but the candles were showing that bulls have some problems. First candle
has a long upper shadow and a very small body, which is in the lower half of the range.
This is almost perfect shooting star that signals a possible end of the uptrend. The next
candle is a doji with a close almost at its minimum. This doji could be used for the short
entry in anticipation of a false breakout of the last swing high of the trend.
With the 2B strategy the exact entry point could be not only the previous
extreme, but also a reversal or breakout candle. Inside candles with smaller range are
also a good entry point. In this example a short position is opened 1 pip below the
minimum of the doji candle (100.41) with initial stop 2 pips above its maximum ( the
spread should be added - 100.48). Seven pips stop is pretty normal, given that the target
of a possible downward price move is the lower boundary of the consolidation, which
is 100.20. Maximum profit that could be realized from this position was 25 pips. In this
case it was just the start of a pullback, not a trend reversal.
2B USD/JPY
On Chart 10 you can see another example of the 2B strategy with the currency
pair USD/JPY. This time the chart time frame is 15 minutes. The upward price move
reached strong resistance around 100.85 and the market has gone in consolidation. The
latest swing high of the trend has been tested, but the price couldn't break above.
Formation of a lower high indicates that a trend reversal could be expected. In such a
situation it is wise to look for options to open a short position.
If we are right we will be short at the very beginning of the new downtrend.
Moreover, this all happens just before the London open, which I think is the best time to
open positions, especially if there is some element of surprise (in this case false
breakout of a lower high).
We have a choice of many different strategies, but in this case I think the most
suitable is 2B. I've noticed that when the entry is not around an important extremum,
very good results could be achieved. Usually always the best positions are opened after
some hidden set ups, as almost all market participants are focused on another more
obvious scenario. Before most of the good trending price moves, part of the traders
should be surprised and then forced to close out positions and pursue the new trend.
This is providing further acceleration which is very good if you entered earlier.
In the example on Chart 10 is 1 pip below the lower high at 100.79. The stop in
this case can be over each of the last two swing highs and the difference is only 3 pips.
More conservative option is the higher high, but there are two tests and the possibility
of a third is very small. Whatever option you choose, the risk/ reward ratio is
acceptable as the first target of any downward price move is 34 pips. As you can see,
USD/JPY tumbled about 150 pips and the aggressiveness was worthwhile.
2B USD/JPY
The 2B strategy is not always profitable, but there are situations when you can
avoid unnecessary losses.
On Chart 11a you can see a roadmap of EUR/USD. The pair made a downward
price move in the previous day and during the Asian session retraced some of the
losses. First sell zone is around 1.3030/35, where there are matching a swing high
(1.3032), the central pivot and 200 EMA.
The next appropriate level for a short position is 1.3040, which is determined
by previous swing low. This is a good set up for a 2B entry. We have to wait for a break
above 1.3032 with the hope it will be stopped by sell orders 1.3040. The entry will be
at 1.3031, and the initial stop is probably between 6 and 10 pips. The first target of any
downward price move is the round number support (1.3000), which allows an
acceptable risk/reward ratio.
Road map EUR/USD
Chart 11a - Source: MetaQuotes Software Corp.
Chart 11b shows how the situation developed during the day. The first breakout
that allows us to apply the 2B strategy is around 7:20AM London time. The initial stop
is 6 pips and the subsequent downward price move is 12 pips. Depending on the
position management rules you could realize a small profit or end up with a stop hit at
break even. The price goes up again, be this time we are looking to sell around 1.3034
(the new swing high). This upward price move is much faster and on 15-minute chart
we have a large bull candle. The bears do not have control of the market anymore and it
is not worthwhile to go short. In such cases it is better to miss a trading signal than to
incur unnecessary losses. Moreover, during the upward movement after the opening of
London it's better to look for a STEAMM entry. Try to avoid trades that are doomed
from the start. This is one of the characteristics that distinguish successful from
unsuccessful traders.
EUR/USD 15-minute chart

Chart 11b - Source: MetaQuotes Software Corp.
STEAMM strategy
Strategy that I designed is based on the "Trader's Trick Entry” (TTE) by Joe
Ross. The idea is to identify a trend, and then to open a position in its direction during a
pullback. The rules are very simple and straightforward and meet one of the most
important principles in trading - KISS (Keep It Simple and Stupid).
As I said the name STEAMM was proposed by a fellow trader and means
Simple Trick Entry and Make Money (STEAMM). The idea of Joe Ross is to use the
TTE to open a position before most other traders. My idea is to open a position even
before Joe Ross. Now I will give you the basic rules for opening and management of
positions, and will explain why and when to apply them.
The trend
The first thing we have to determine is whether there is a trend and what is its
direction. As you know very well, there are various methods to do this, but I prefer to
use the exponential moving averages (EMA ). When the EMA is calculated, greater
weight is attached to the recent closing prices and the EMA reacts more quickly to the
changes in the direction of the price. This enables me to see early when a new trend
begins and to look for entry signal.
To determine the trend in my trading system I use 20-, 50-, 100- and 200-period
EMAs. As I said, the rules are simple, but they do a good job. When the 20-period is
above the 50-period EMA and together are moving up, the trend is bullish (Chart 12).
When the 20-period is below the 50 -period EMA and both are moving down the trend
is bearish (Chart 13).
During an uptrend I look only for long entries while in a downtrend I prefer to
sell. The remaining two exponential moving averages (100- and 200-period) are used
mostly as dynamic support and resistance levels. If there is no very sharp reversal, 100-
and 200-period EMAs show that the old trend is still valid and can provide good
opportunities for entry. The first test of the 200 EMA is one of the best trading signals in
my arsenal. I trade it with spot position or binary options. For additional filter I use the
quote reading.
Uptrend

Downtrend

Exponential moving averages
Once the presence and the direction of a trend are determined, you just have to
wait for a pullback. The first pullback is the best time to open a position in the direction
of the trend. The trend is just starting and the price move has more potential. The time
when the major financial centers (London and New York) come to work provides very
good trading opportunities.
When more money enters the market, the liquidity and volatility increase. Good
places for entry are the levels of support and resistance and I use exponential moving
averages for this purpose. The advantage of EMA compared to the swing highs and
lows, Fibonacci retracement and pivot points for example, is that they are dynamic and
quickly adapt to the direction and acceleration of the price movement. This fact gives
me an advantage over the other market participants who watch only the static levels of
support and resistance.
Of course, I chose EMAs as entry levels for my strategy not by coincidence.
This happened after watching the market long enough to find out that when a trend is
developing, often the pullbacks end at EMA. Price usually returns sharply from the
EMA which indicates that large orders were filled.
Probably a hedge fund or bank open positions at the same level. Moreover, they
do not trade for 5-10 pips and the price move will be large enough. I will have the
opportunity to join at the first correction and make at least a small profit. If major
market participants buy or sell, they probably have a reason for this and it is good for us
to do the same. My basic principle in trading is "follow the big money". Of course if
every pullback ends at the 20 EAM on 1-minute, everyone will begin to open position at
the same place and make money. This is impossible in the real life trading. Therefore,
sometimes the pullback stops before the 20-period exponential moving average occurs
before the middle or at 50- or 100-period. This uncertainty imposes the use of
additional filters to determine the exact level and time of entry.
The time frame of the chart is extremely important. This is the parameter that
determines the initial risk and potential profit for each position. The larger the time
frame of the chart we use for generating trading signals, the greater should be the initial
stop, but bigger potential profit can be expected. STEAMM strategy and almost any any
strategy could be traded on charts with various time intervals. I prefer to trade with low
risk and the 1-minute chart is the right for me. The potential for profit is smaller, but if
the position is open in the direction of the trend of larger time frame, the results could
be much better than expected. Sometimes with the risk of 1-minute Chart, you can join a
price move with potential that is normal for daily chart. Moreover, the smaller charts
generate greater number of signals and therefore they are suitable for people who do not
have the patience to wait to get the perfect conditions to open a position.
If I have to wait several hours or days to find a good set up, surely I would trade
a few others in the meantime. As you can guess most of the positions will be losers.
From my experience I know, that on a 1-minute chart, 2 to 5 good set ups could be
expected. On a daily chart you can wait for good trading signal days even weeks. There
is no right time interval that is valid for everyone. You should find your own, depending
on how much risk you are willing to take and how much patience you have to wait all
the conditions to open a position to be met.
Entry filters
The test of exponential moving average is only the first requirement for the set
up. To avoid unnecessary losses it is better to use additional filters, which can reduce
the number of losing trades. When signals are generated on 1-minute chart the choice is
limited, because the price moves are smaller and shorter.
For example, you could find a lot of reversal candles or false breaks. If you
trade this or any other strategy on a chart with larger time frame, there will be a better
choice. Additional filters that I use are the following:
- levels of support or resistance - usually swing highs and
lows;
- quote reading;
- Correlation with other currency pairs and financial
instruments.
Large orders could be expected around price level where several different types
of support or resistance match. In addition to the exponential moving average, I use
swing highs and lows. Best conditions for STEAMM are created after a double bottom
bull flag (Chart 14) or double top bear flag (Chart 15) according to Al Brooks'
terminology.
The slight difference is that a breakout of the trend extreme is allowed, but the
requirement for a double top or bottom, at the end of the correction remains. Actually
this is the most important element of the pattern.
What is the logic in using these configurations to open a position?
First, there is the beginning of a new trending price move, which could be
identified by the crossing of 20- and 50-period EMAs.
Let's see what the price action is. The first leg of this trend ends at some point
and a pullback begins. Usually this first leg is with greater acceleration and the 20-
period EMA lags behind the current price levels. For this reason, the first retracement
ends before the moving average is reached. There is another leg in the direction of the
trend and its extreme is tested. This extreme can be broken or not reached. The idea of
the STEAMM set up is that if there is a trend, those who have started it, will continue to
buy or sell at any pullback, until it is valid. Once they have bought or sold at any price
level, it is likely they continue to buy or sell at the same level. This process will be
double top or bottom on the chart. The bottoms or tops should be formed within
reasonable time limits, because if the trend is strong, the correction should not be very
large in price and time.
Double bottom bull flag
Chart 14
Double top bear flag
Chart 15
On Chart 16 you can see how should be traded the STEAMM strategy after a
double bottom bull flag forms (a little later there will be real examples). With thin line
is plotted the price movement and the thicker line is the 20-period EMA. We have an
uptrend, followed by a correction reaching above the 20-period exponential moving
average. The next leg of the trend ends around the first swing low.
During the second correction however, the swing low of the first one coincides
with the 20-period EMA. This is the best place and time to open a long position. The
initial protective stop is just below the double bottom and for EUR/USD (1-minute
chart) is usually 4-5 pips. For GBP/USD, USD/JPY and EUR/JPY the stop is larger by
1-2 pips because of the spread and volatility. The first target of the new leg of the trend
is the swing high. It is recommended that this distance is at least 2 times greater than the
initial stop, but I'm trying to achieve even 1:3.
STEAMM after double bottom bull flag
Chart 16
Another filter that I use is the quote reading. This is the most important factor
that determines whether I will open a position and exactly what level to do this. The
quotes give an idea about whether around the exponential moving average are filled
large orders in the direction of the trend.
My basic rule is the ticks in the direction of the trend should be larger than the
ticks in the opposite direction. When looking for a buy signal, the size of the ticks during
the pullback towards the EMA should be 0.4-0.6 pips for example (sometimes may be
smaller or larger). When the price bounces off the EMA the upticks should be larger and
they are typically between 1 and 3 pips. This indicates that larger orders are filled in
the direction of the trend. Based on this information, we can assume that the larger
market participants still open positions in the direction of the prevailing trend. There's
no way we can be 100% sure that this is indeed true, unless we have a very close friend
at the dealing desk of a large bank in London or New York.
In trading all decisions are based on probabilities, and we must learn to rely on
them, especially when backed by experience gained over the years.
The actual opening of the position should not be done at the very first test of the
exponential moving average. There is no way to know in advance that the first tick will
be larger.
Usually I wait for a double or triple bottom or top on tick chart and only then
buy or sell (Chart 17). In fact, I watch the quotes from the platform's quote board rather
than tick chart, but this is a matter of personal preferences. The principles are the same.
Another important rule is that I buy at downtick and sell at uptick. Given that the size of
the ticks usually is at least one pip, I can reduce the initial stop 20 %. If we consider a
single transaction, a pip is nothing. Given, however, that daily I have 3 to 5 trades in
long-term the difference is significant and the efforts are worthwhile. Major market
players also buy at downtick and sell at uptick, because they need liquidity to fill their
orders .
Tick chart
Chart 17
The third filter that I use in my strategy are correlations between the currency
pair that I trade and other currency pairs and financial instruments. The quotes of many
financial instruments move in tandem for a variety of reasons.
Factors that determine price movements are similar and therefore generate
similar trading signals. Correlations worked best when the risk appetite determined the
actions of the major market participants. Then all risky assets (currencies like the
British Pound, Euro, Australian and New Zealand dollars, gold, silver, copper, oil,
stock indices, etc.) were bought or sold almost simultaneously. This greatly facilitated
the trading, and the traders just had to follow one or more assets from this group to
move before the financial instrument they trade, and to take advantage of this delay
opening position in the specified direction.
Usually, stock indices were the most active and generate good signals, which
could be traded with currency pairs like EUR/USD, EUR/JPY, AUD/USD and
NZD/USD. Furthermore, some large market participants were simultaneously
purchasing one currency pair (e.g. EUR/USD) and its crosses (EUR/JPY). EUR/USD
and GBP/USD have always had a good correlation, as the economies of the Eurozone
and the UK are linked and influenced by the same factors. UK is not in the Eurozone, but
is an EU member.
For the above reasons, when trading EUR/USD, I also follow the currency pairs
GBP/USD and EUR/JPY, as well as a major stock index like DAX or FTSE100. With
the price moves of the currency pairs and indices can be filtered the entries in
EUR/USD. Sometimes EUR / USD is testing the 20-period EMA, but the same EMA
was already pierced by the EUR/JPY and cross was headed towards the 50-period
EMA. In such cases it is better to wait for both currency pairs simultaneously to test the
EMA and then to open a position in EUR/USD. Of course there should be a confirmation
from the quote reading also.
The perfect case, when working with correlations, is when all financial
instruments that we use as a filter have completed their retracements and resume the
trend, while the main currency pair is lagging behind. In this case, we have an edge,
because we can use the other financial instruments for signal when to close the position.
However, correlations don't always work perfectly. For example, for several
months the correlation between EUR/USD and EUR/JPY was very low because the
activity in USD/JPY increased substantially. EUR/JPY is a cross pair and is influenced
by both currencies. Therefore the cross (EUR/JPY) could not be used as a filter for the
trading of the major currency pair (EUR/USD). Currently, the entries in EUR/USD can
be filtered only with GBP/USD and not all the time. Unfortunately, situations like these
exist, and the only sure thing in the financial markets is that they are constantly changing.
The STEAMM set up
Now let me summarize what are the conditions for the opening of a position with
the STEAMM strategy:
- 20 and 50 EMA show that the market is in a trend. When the
fast EMA is above the slow EMA and they are heading north, the
trend is up. When the fast EMA is below the slow EMA and they
are heading south, the trend is down;
- after the last leg in the direction of the trend (best trades are
after the first one) starts a pullback and the EMA is tested;
- the exponential moving average, around which we look for
entry, coincides with previous local swing high or low (this
condition is not required, but if it is met, we have a better chance
of success);
- financial instruments that have a high correlation with the
currency pair we trade, also test EMA (it is better if they already
bounced off);
- the quote reading shows that around the exponential moving
average are filled larger orders in the direction in which we
intend to open the position.
Once you open a position, it is better to manage it actively, not just wait for the
market to hit the initial stop or limit.
Basically, when you are trading the financial markets, you can often see one of
the following two situations. In the first situation you have a limit of 50 pips, the market
goes to 49 pips profit, but then returns in the opposite direction and hits you 10 pips
stop. In such cases, we get angry why we've missed the 49 pips profit for just 1 pip
more, and realized a full 10 pips loss.
In the second case, we have a limit of 50 pips, which is hit and we get the target
profit. However, the pair continues in the same direction and goes for another 200 pips.
We feel totally screwed by the market as for 250 pips price move, we had realized only
some 50 pips profit. Many traders are wondering what to do to not feel bad in any of
these two cases. The solution to this dilemma is to close the position in several parts. I
have to admit that I learned this style of position management from books by Linda
Raschke and Joe Ross years ago. As it usually happens, until I was convinced that this
is the right way, a few years passed. My advice is not to waste your time and solve this
problem faster. The problem that you feel fooled by the market is not so scary in itself.
Rather, its consequences could be fatal for your account. The market is always right and
you should not try to revenge for whatever reason.
There are various styles of position management. Al Brooks closes his positions
in two parts, while Joe Ross closes in three parts. I think there cannot be universal
rules, as traders are different and each has its own understanding of risk and good
profits. You have to choose a specific strategy to manage the position and to apply it
consistently.
I prefer the system of Joe Ross. Of course the rules were adapted for my trading
strategy and risk preferences (Chart 18).
The first part of the position is closed for 5-6 pips profit, which is equal to the
size of the initial stop. The second part is closed around the last extreme of the trend.
Usually the profit is 10-15 pips. With the closing of the first two parts I have ensured a
positive financial result, which fully covers the amount of the initial stop, and usually
provides some profit.
Position management
Chart 18
With the closing of the first two parts of the position we solve the problem with
feeling tricked by the market. Now we have some profit even the stop of the third part is
hit. This fact will let us wait patiently for the price action to develop. Moreover, if the
market is in consolidation, we have some positive result, which is a much better option
than collecting losses.
Closing the third part is slightly more complex and solves the second problem -
not feeling like a loser and catch only 10 or 20% of the entire price move.
There are two options for closing of the third part. The first is to use a fixed
trailing stop (10 pips for example) and wait for it to be activated. The second option
requires a bit more work. In this case it is positive that we have some control over the
situation and not leave it to the chance.
Recall again that the uptrend is a series of higher highs and lows (Chart 12),
while the downward trend is a sequence of lower highs and lows (Chart 13). Therefore,
if within the uptrend we have a lower high or within downtrend we have a higher low,
we can expect that trend may be ending. Accordingly, if we have an open position in the
direction of the trend, it is wise to close it and wait until the situation is clarified, and a
new trading signal is generated.
Rules for managing of the last part of the position are simple. They are based on
the key principles of the development of the trend. Once the price breaks the last
extremum of the trend (for example swing high in an uptrend), I move the stop to break
even. Then, if the trend continues, a series of higher (or lower) highs or lows will be
formed.
When you have a long position, after the price breaks above a swing high, move
the stop 1 or more pips below the last swing low.
When you have a short position, after the price breaks below a swing low, move
the stop 1 or more pips above the last swing high.
That's all about the management of the last part of the position.
When you move the stop 3 times, that means that the trend may have gone too
far, and the probability for a larger pullback is high. In this case, close the position or
move the stop closer to the current market levels. You can also switch to a higher time
frame and move the stop according to the same rules.
If you want to have long-term success as a trader, it is important not only to find
the right place to open positions. Probably much more important is to manage your
working capital. There's no way to make money on consistent basis if you lose more
than you gain in a single transaction. Therefore any strategy for trading should include
rules for money (capital) management.
There are all kinds of complicated formulas for this, but I've chosen a simple
strategy that I found in one of Larry Williams' books.
Once again, the simplest methods give the best results in trading.
For each position my risk is about 0.5% of the current account balance.
Sometimes, when the set up is very good, I allow the risk to be 1%, but no more.
My approach is a little conservative, but meets my preference to take risks and
gives me peace of mind when I trade. You have choose for yourself how much of your
account to risk for every particular position, but I think more than 5% is too much.
In my experience, traders take more risk than they should, because they want to
make for example $ 500 per month, trading with a $ 1,000 account. This is unreal and
can only lead to undesirable consequences. The other reason is because they have the
opportunity to trade with much larger volume because of the leverage. Always look at
what is real and not plan for miracles. If they occur, you will be pleasantly surprised,
but do not count on them.
By the money management rules you have to calculate the size of every position.
First you must determine how much you will risk in dollar terms depending on the size
of the account. Then divide this amount by the size of the initial stop (as determined by
the trade set up). As a result you will get what should be the value of a pip of your
position size. Here is one example:
- Current balance of the account: $1,000
- Risk per trade: 1%
- Value of the risk per trade: $10
- Size of the stop (pips): 5
- Value of 1 pip: $2
- Position size (EUR/USD): 20,000
The money management system with a fixed percent of the account balance has
one big advantage. This system automatically adapts the amount of risk per trade,
depending on whether we are in a series of winning or losing trades.
For example, if you have several consecutive gains, the size of the trading
account will increase. If you keep the same percentage for risk, the dollar amount that
you risk per trade will increase. In principle, the size of the stop is approximately the
same and you will automatically trade with larger volumes. When you get into a losing
streak, the size of the account will begin to decline. This will automatically reduce the
amount you risk per position, and hence the trading volume .
On the subject of money management can be written dozens of books, but I'm not
going to waste your time. What you have to remember is that trading is a game of
probabilities. To win in the long term, we need somehow to get these probabilities to
work for us. The easiest way is to risk a small share of the account for each position and
trade with risk/reward ration of at least 1:2. If you follow these simple rules, you will
be surprised by the effect.
The design of a good trading system is not sufficient to be a successful trader. It

turns out, that to apply consistently a few simple rules, is much more difficult than we
think. Sometimes our brain decides to play tricks, and although you have to buy the test
of the 20-period EMA, you buy a few pips higher. Of course, when you experiment,
protective stop is not required. In most cases, the price will reach the 20-period EMA
and you will add to the position to get a better average price.
Again, you don't protect the position with a stop, because it is only an
experiment (although with real money). It seems like the market knows that you don't
trade by the rules and the price continues to go against you. Usually, the size of position
increases steadily, until you no longer have funds for new entries. Then you go in a
hoping mode, and pray the price to return at least a couple of pips to get rid of the
position at break even or small loss. Typically, these situations have two outcomes. One
is to close the trade for a huge loss (with or without margin call) and the market almost
immediately to go in your direction. The second option is a little better. You close the
position at break even and only then the market goes in your direction.
A bigger problem, however, are the consequences. If you have a large loss
usually, you want to revenge to the market and continue with stupid trades. Sometimes
the luck helps and you think that you will always get away, but eventually you come
back to the first situation.
What is the problem with this style of trading?
Discipline to follow even a few simple rules is the most difficult issue in
trading. There are enough good rules for opening and management of positions, and
money management.
Most traders, however, do not realize that if they want to make money trading
these systems, they have to apply their rules, not others. Moreover, many traders do not
bother to develop their own trading system. The fact that someone else is making money
trading by certain rules, does not mean that everyone can do the same. Strict discipline
is very important in order to be successful trader. To be disciplined you must have the
proper mind set. That means that you have to trade in a way that best suits your
temperament, daily routine, experience, etc. If you try to be someone else, don't expect
to become a successful trader.
Real trading examples
I will start with a typical case of STEAMM (Chart 19). Initially EUR/USD was
in consolidation phase, as evidenced by the flat exponential moving averages. Around
the New York open (3:00PM London time) an uptrend began, which was confirmed by
the upward sloping EMAs. When we have indications of a trend we should wait for a
signal to open a long position during a test of the 20-period EMA. In this case, the first
test ended just above the average and the entry was missed.
Soon there was a second test where a long position is opened at 1.28302. The
lowest level, reached during the pullback was 1.28290, and therefore we place initial
stop 2 pips below it at 1.28270. The size of the initial stop is just 3.2 pips, and the
distance to the last swing high is 8 pips. This gives us a risk/reward ratio of 1:2.5,
which is perfectly acceptable.
After the test of the 20 EMA the uptrend resumes. The first part is closed with a
profit of 6 pips profit and the second with 11 pips profit. In this case, the acceleration of
the upward movement is good, so we can close the second part above the swing high
gaining some extra pips. After the break above 1.28380, the stop for the remaining of the
position is moved at break even.
The uptrend continues and after the break of every swing high, we move the stop
2 pips below the last swing low. Finally, the stop is hit at 1.28510, which gives about
21 pips profit for the third part. The average profit for the position is 12.6 pips, making
the risk/reward ratio of 1:4.
STEAMM off 20 EMA

Chart 19 - : MetaQuotes Software Corp.
On Chart 20 the exponential moving averages indicate a downtrend, but the test
of the 20 EMA does not give a good opportunity for short entry. The attempt for
resumption of the trend, however, failed and the pair returned again to test the EMA.
This time we are looking to sell around the 50-period EMA. The quote reading suggests
that someone else is selling, and open a short position at 1.39369, with 5 pips initial
stop. For more than 10 minutes EUR/USD is barely moving, but we manage to close the
first part of the position for a profit of 7 pips.
A subsequent attempt of the bulls to return the pair up met a new wave of sales.
This shows that we have chosen the right entry level. In the ensuing sharp downward
price move the second part of the position is closed for profit of 9.8 pips. The stop of
the remaining of the position is moved at break even.
After the consolidation, the downward price move is developing rapidly and the
stop is moved at +30 pips and then at +40 pips. The third part of the position is closed
for 70 pips profit, as the quotes show that large buy orders appeared. The average profit
of the position is 29 pips with initial stop of 5 pips. This is providing a risk/reward
ratio of almost 1:6.
STEAMM off 50 EMA
On Chart 21, you can see how the price move developed after the position from
the previous example was closed. As I said, the quotes shown that large buy orders
entered the market. Candles on the 1-minute chart indicated that the bulls have intentions
to stop the downward trend. After the selloff, EUR/USD was in oversold condition and
a squeeze of the short positions was possible.
In such cases, wait for the pair to enter a period of consolidation and look for an
entry around the boundaries of the trading range. In this case, we open a long position
near the lower boundary at 1.38458, with a stop at 1.38358. The initial stop is larger
than usual, but if you really think that a short squeeze could be expected, the upward
price move will be with increased momentum. Position is closed again in 3 parts,
respectively for 7.5, 11 and 40 pips profit. The average profit is about 20 pips, which
gives us risk/reward ratio of 1:2.
Given that this is a position against the main trend, this ratio is acceptable. In
general it is not advisable to trade this way, but it is also not absolutely forbidden.
When you decide to do it, you should follow three basic rules:
- market is in overbought or oversold condition and near major
support or resistance - this implies a probability for a long or
short squeeze;
- price action and quote reading signal that there are orders in
the opposite direction;
- Always use protective stop.
In the example on Chart 21 I underestimated the strength of the bulls, as the
upward price move continued throughout the next day for 4 big figures. Such cases show
that Al Brooks is very right in saying that with the last part of the position we should
follow the price move to its very end. Sometimes the profit can be much greater than we
may think.
Short squeeze
Following the publication of important economic data have usually the prices go
in one direction and this could provide good trading opportunities. In such cases the
direction of the market is clear and you just have to wait for the first pullback to find an
entry.
For this purpose, you can use a variety of strategies, including STEAMM.
On Chart 22 you can see an example how you can trade after the publication of
the services PMI index for UK. The results were better than expected and the first
reaction of GBP/USD was a 40 pips rally. Then the pair began a slow correction and
you can look for a long entry. In this case, 20 EMA is around 1.5200 and the round
numbers are some of the best support and resistance. The price has hovered just around
exponential moving average for more than 2 minutes, which is a plenty of time to open a
position. I bought at 1.51995 with 1.51940 protective stop.
For currency pairs like GBP/USD it is recommended that the initial stop is 3
pips below the low (or above the high) of the retracement. Once the quotes touch the 20-
period EMA, they bounce off sharply for another leg up. Because of the high
acceleration of the upward price move I was able to close the first two parts for bigger
than usual profit respectively at +7 and +15 pips. With such strong upward momentum it
is advisable to move quickly the stop to breakeven.
Finally the third part is closed when the stop is hit at 1.5242. The average profit
of the position is 21 pips with initial stop 5.5 pips. This provides risk/ratio of 1:3.9.
STEAMM after the release of major economic news
According to Al Brooks, second attempts are more reliable, because often when
the market tries to do something twice and fails, it does the opposite. For this reason,
many pullbacks have 2 legs and he prefers High or Low 2 as a set up for entry. Two
legs pullbacks can be used for trading the STEAMM strategy.
On Chart 23 you can see a real example. If we had opened a position during the
test of the 20-period EMA, the initial stop would be hit. In this case we have one more
reason to wait for the second leg of the correction. The second option for entry is the
50-period EMA, which is close to a round number (1.3100).
As you know, round numbers are one of the best levels for entry and if they are
close to the market it is better to wait for a test. In the example on Chart 23, after a 2
legs pullback, the price hovered around 50-period EMA. In such cases it is better to buy
around the minimum reached during the downward retracement. The initial stop is 5
pips and during the subsequent upward price move first two parts of the position are
closed for 5 and 10 pips profit. The third part was stopped at break even. The average
profit of the position was 5 pips with 5 pips initial stop.
You should always take into consideration the particular market situation and
choose the most suitable option for entry.
STEAMM after 2 legs pullback
After a break out of a range, you can expect trending price action, so it is wise to
look for entry on the first correction. On Chart 24, you can see how you can trade this.
The price breaks out of the Asian range and the first correction goes just to the 20-
period EMA. We sell at the EMA with 4 pips initial stop. First part is closed for 5 pips
profit and the second for 11 pips profit. Then the quotes go back up and stop of the third
part is hit at break even. This could be expected, because the price move before the
opening of London is often false. The big market players are looking for liquidity.
However, after the breakout of the Asian range it is normal to have at least some
price move in its direction. With 4 pips stop we can afford to try whether it will
continue. If we are wrong, there will be a new crossing of the exponential moving
averages, which will provide us with an opportunity to open a new position.
STEAMM after range breakout
The pair EUR/JPY usually is trending well and is very good for trading with the
STEAMM strategy. On Chart 25 20- and 50-period EMA cross and go up, giving an
indication of the beginning of an uptrend. We are waiting for the first correction to look
for entry for a long position. However, the price does not reach the 20-period
exponential moving average, and then sharply goes back up. During the next pullback,
there is an opportunity for a double bottom bull flag (Al Brooks terminology).
We have two options for entry. One is the 20-period EMA, and the second is the
swing low of the first correction, which coincides with the 200-period EMA. For me,
the second option is much better, because we have to types of support levels. In this
case, we buy at 120.325, with an initial stop at 120.268 (5.7 pips). Short consolidation
just above the 200-period EMA allows us to refine the entry and thus have a close stop.
Uptrend continues and we close the first part for profit of 6.2 pips and and the second
for +9.8 pips. The stop is moved below every swing low after the price breaks above
the last swing high.
Another sharp upward price move is followed by a sharp return in the opposite
direction, indicating that the bulls may have problems. In such situations, I prefer to
close the remainder of the position and wait for a new signal. Profit of the third part is
37 pips, which makes an average profit of 17.7 pips. Risk/reward ratio is 1:3. You may
have noticed that in this example the position was opened before the opening of the
European markets. For currency pairs like EUR/JPY this is normal as it is active during
the Asian session.
STEAMM EUR/JPY
Sometimes even if all the conditions for entry are satisfied, the price move may
not develop as expected. For this reason, I use time stop and limit that help me to escape
unnecessary losses. In the situation presented on Chart 26 we have perfect conditions
for a short position. The pair breaks below round number support after the opening of
London. This normally should lead to a downward price move during the European
session. The first pullback stops at the 20-period EMA, which is close to a round
number and we open a short position at 1.2997. The initial stop is just 4 pips. The pair
begins to move slowly down, but this is not normal, given that recently the largest
financial center opened. Usually the time limit for the first part is activated 5 minutes
after the position was opened. In this case, we close the first part for +3 pips profit.
Downward price move continues with slow momentum, and 10 minutes after we
sold the second time limit is activated. This time, the profit for the second part is 5 pips.
The stop on the remainder of the position is moved at -3 pips. The pair did not even
reach the low of the first leg down. The stop of the third part was hit and the average
profit of the position is 1.7 pips. If we had not managed the position actively probably
we could end up with a loss of 4 pips.
The difference between the two results is not that great, but I in the long run it
makes sense to use this type of position management.
STEAMM EUR/USD
The following two charts (27 and 28) also show trades from 14/05 and are
perfect examples what the point of trading a strategy like STEAMM. is The pair
EUR/USD was trading in a range at the beginning of the European session and I had a
position with 1.3 pips loss (not shown) and another one with 1.7 pips profit (Chart 26)
for the day. When the market has no clear direction a trend trading strategy with active
position management will provide financial result around break even. After 10:00AM
London time the exponential moving averages give another signal for beginning of an
uptrend (Chart 27). During the first pullback I opened a long position at 1.30145, with
initial stop of 4 pips. The first part was closed for 6 pips profit.
There was another test of the 20-period EMA and the prices went up again, but
the quotes were showing the presence of large sell orders. For this reason, I closed the
second part for 7.5 pips profit. Bears failed managed to take control and pushed the
prices down. The stop of the last part of the position was hit for a 4 pips loss. The
average profit for this position was 3 with initial stop of 4 pips. The market still had no
direction, but closing in parts helped me to end up with a positive financial result.
New downward price move was confirmed by a cross of the exponential
moving averages. I expected a pullback and test of the 20-period EMA (Chart 28). The
upward momentum was slow during the test, and I sold at 1.29855, with a stop at
1.29905. The initial stop had to be at 1.28890 (3.5 pips), but I prefer not to place orders
above or below the levels in multiples of 10.
For this trade the stop was 1.5 pips higher, but it is not a big deal. It seems that
this day liquidity was lower and horizontal corrections were developing slightly longer
than usual. During the seventh minute after the opening of the position I closed the first
part for 1.5 pips profit, and at the tenth minute the second part for +4 pips. Bears seem
to have decided not to give up easily this time and downward price move continued.
Prices tumbled over 10 pips in about 2 minutes. Immediately I moved the stop at break
even. The downtrend was intact, and I followed by moving the stop above each swing
high. After another attack on the support level 1.2950, it appeared that the bulls will not
give up and the last part was closed for 32.5 pips profit. The average profit for the
position was 12.7 pips with initial stop of 5 pips.
From the last three examples you can see how with active management of the
position you can safely wait for the big market players to decide in which direction will
move the market and then just to follow them.
STEAMM EUR/USD

Like any other strategy STEAMM also has losing positions. On Chart 29 you can
see one of them. I will not fool you that this is the ultimate strategy producing only
winners. When you trade with a 5 pips there is not much you can do if the market goes
against you. Accept the loss and just wait for the next trading opportunity. That's all. You
have to treat your losses as inevitable costs of business.
STEAMM EUR/USD
The first two signals on Chart 30 were missed because the pullbacks were very
strong and the price was turning up sharply. Also there was no confirmation from the
quotes that someone is buying. It is better to miss a signal if it does not meet important
criteria than to incur unnecessary losses. The price approached the 50-period EMA and
there was a chance for a double bottom bull flag. I opened a long position at 1.28690,
with initial stop at 1.28645 (4.5 pips). The upward price move resumed and I closed the
first two parts respectively for 4 and 8 pips profit. After a quick rally, however, the
quotes sharply returned back down. This is an indication that large sellers emerges, so I
closes the rest of the position for 8 pips profit.
Once the bears show signs of strength, I do not want to stay with a long position.
The average profit was 6.7 pips with initial stop of 4.5 pips. When trading on charts
with smaller time frame, we can always have the luxury to close position if it is not
clear which of the two camps prevail currently. After the situation is clarified, we will
again have the opportunity to enter in the direction of the trend (no matter which way it
is).
STEAMM EUR/USD
On Chart of 31 you can see how to use technical indicators as additional filter
when trading the 2B set up. The pair EUR/USD has traded in a range during the Asian
session, which lasted through the beginning of European. There was a false breakout of
the lower boundary and it was logical to at least test the upper one. During this test,
however, we have a divergence between the price and the stochastic oscillator, which
indicates that the upward price move is losing momentum.
Once there was a false breakout of the lower limit of the range, it is better to sell
just after the price action shows that the right direction is down. In this case we have
another advantage. The first top is just below a round number at (1.4400), and these are
some of the best levels of support and resistance. You can expect that almost every time
large orders are placed below and above the round numbers. The entry level is clear
and it is one pip below the first high. The test of 1.4400 met strong offers and the
currency pair moves down again. We have a short position at 1.43969, with an initial
stop at 1.44040. The risk is 7.1 pips, which is perfectly acceptable for a signal at 15-
minute chart. The entry could be below the low of the bearish engulfing patter, but then
the stop will be significantly larger.
Each trader must decide for himself whether he wants to have a small stop and
or a better confirmation by the price action. The first part of the position is closed for 7
pips profit and the second for 12 pips profit. Then the downward price move
accelerates, and we follow it by moving the stop above the high of every candlestick.
The last part of the position is closed for 200 pips profit. What happens in this example
is an exception rather than the rule and you should not expect any time to make such
large profits.
However, you must be ready when the position is opened at the beginning of a
large price move, to wait for it to develop and get as much profit as possible.
2B EUR/USD
Usually, there are many trading opportunities around the round numbers. These
are natural levels of support and resistance and large market players place various
orders. After a break of a round number support or resistance, there is often a pullback
where we can look for a STEAMM entry.
On Chart of 32 EUR/USD breaks above 1.4200 and initially the quotes go a few
pips above the figure. Before going long, however, I wait for stops to be hit above the
round number, which results in 10-15 pips jump in prices. Then it is more likely that the
whole operation has not been a search for liquidity.
After the break prices usually test the 20-period EMA and if the quote reading
shows that someone is buying I will open a long position. In this case, I bought at
1.42009, with an initial stop at 1.4195 (5.9 pips). First part was closed almost
immediately for 7 pips profit. After a brief consolidation above the round number,
upward trend continues and the second part was closed for 10 pips profit. Then the stop
is moved below every swing low after a break above the last swing high. Third part
was closed for 61 pips profit. The average profit of the position was 25 pips with 5.9
pips initial stop.
STEAMM at round number
STEAMM after a break above or below a round number is one of the best
strategies and I will give you one more example.
The pair EUR/USD was in a downtrend, as evidenced by the location of the 20-
and 50-period exponential moving averages (Chart 33). The first attack of the round
number (1.4200) was stopped by large bids, but the second managed to activate the
stops below the figure and the quotes tumbled 20 pips. First pullback reached the
broken support, now resistance, and I opened a short position at 1.42001, with an initial
stop of 1.42055 (5.4 pips). Almost immediately the downtrend resumed and the first
part was closed for 5 pips profit. The second part was closed less than a minute later
for 9 pip profit.
Because of the rapid collapse of the EUR/USD after the test of 1.4200, the stop
was moved to +1 pip, and then to +10 pips. Downward price move lost momentum and
I close the last part of the position for +36 pips profit. The average profit was 16.7 pips
with initial stop of 5.4 pips.
STEAMM at round number
Chart 33 - Source: Forex Strategy Builder
When the market is in consolidation we can look for entries close to its borders.
Best strategy in such cases is 2B, but sometimes you can use other methods if you have
confirmation by the price action.
On Chart 34 the currency pair EUR/USD attempted an upward price move, but
around the 1.4170 resistance have emerged strong offers. These orders were confirmed
by the sharp return from the level the bear trend candle on 1-minute chart. A little later,
second attempt for a break above 1.4170 followed, but it also was unsuccessful. You
can note several combinations of a large white candle followed by a large black candle.
This is a sign that the bulls cannot take full control of the market and implies that a break
above the resistance level is less likely. The third attack gives us the opportunity to
open a short position.
We can choose a more conservative approach (2B) or an aggressive sell at the
double top. Short position was opened at 1.41659 with initial stop at 1.41708 (4.9
pips). Prices go back down sharply, and a triple top appears on the chart. The next
minute we close the first and second parts of the position respectively for 6.2 pips and 9
pips profit. Then we follow the downward price move by moving the stop, which
eventually was hit for 19 pips profit.
Unfortunately, the lower boundary of the range is not tested and another attack on
the resistance level follows. The average profit is 11.4 pips with 4.9 pips initial stop.
When trading in a range always use protective stop, because a break against your
position may lead to huge losses.
Triple top short position
The time before the London open is appropriate to look for a false breakout of
the Asian range. The best option for opening of a position is after a small break of
previous extreme (2B).
Some experienced traders can also use more aggressive approach. One of these
methods is the formation of a double bottom or top close to strong support or resistance
levels.
On Chart 35 you can see one of these cases. EUR/USD breaks below the Asian
range low shortly before 7:00AM (London time) and goes to the 1.4170 support, where
are clustered strong bids. In general, liquidity before the opening of London is not large
and these orders can stop the downward price move. So we have a reason to join with
the idea that a double bottom will form. The stop is very small when we use aggressive
approach, so it is worth a try.
Of course it is good to have confirmation at least from the quote reading. When
you want to go long (as in Chart 35), upticks must be larger than the downticks. Buy on a
downtick (at 1.41698), as close to the first low as possible. The stop has to be two pips
below the first swing low (4.9 pips). Double bottom is formed and upward price move
starts. The first part is closed for 5.2 pips profit and the second for 10 pips profit. As
this rally is very fast, the stop is moved immediately at +3 pips. Third part of the
position is close at the 100-period EMA for 29 pips profit. The average profit is 14.7
pips, which provides us with risk/reward ratio of 1:3.
Long position at double bottom
Correlations between different financial instruments are some of the best filters
for trading the STEAMM and any other strategy.
Charts 36 and 37 show how correlation can be used in practice. EUR/USD
tested the 50-period EMA, but EUR/JPY was still above its EMA. I waited for
EUR/JPY to touch its 50-period EMA and opened a long position in EUR/USD at
1.41978. Both pairs went back up together almost immediately, and this allowed initial
stop of 4 pips. The first part was closed for 5.4 pips profit and the second for 10.5 pips
profit. Unfortunately, 200-period exponential moving average stopped the upward price
move of EUR/USD. The stop of the remainder of the position was hit for 4 pips loss.
Ultimately, the average profit for the position was 4 pips.
Unfortunately, correlations do not work well recently, but you should know
them, as they are a very good tool for any trading strategy.
STEAMM for EUR/USD with confirmation from EUR/JPY

There is an interesting modification of the strategy that I call "Early STEAMM

entry". In this case, we open the position at the very moment of crossing of the
exponential moving averages before they are heading in one direction. Mandatory
condition is that before the entry the pair should consolidate in a narrow range on 1-
minute chart. Also the quotes must show the presence of larger orders in the direction in
which we will open position.
The advantage of the "Early STEAMM entry" is that we enter at the very
beginning of the new trend. If you open the position near one of the borders of the
consolidation range, you can afford very small stop. It is better the market to be trending
on a higher time frame and the position that we open to be in its direction. On Chart 38
the currency pair EUR/USD has been in tight consolidation just below the 20- and 50-
period EMA. We sell near the upper boundary of the range at 1.39619 with an initial
stop of 4.6 pips.
Shortly after the crossing of the two exponential moving averages a new
downward price move started. The first two parts of the position are closed
respectively for 5 and 10 pips profit. Pullback follows and the exponential moving
averages are tested but the bears are selling and the next leg down begins. Such price
moves are often exhausted quickly, and we can close the last part for 31 pips profit. In
such cases you can only move the stop closer to the current price levels. The average
profit of the position is 15.3 pips with initial stop of 4.9 pips.
Early STEAMM entry
STEAMM strategy can be traded on any time frame. The difference is that the
greater the time interval, the higher the initial stop, but we can also expect bigger profit.
On the hourly chart of EUR/USD (Chart 39) exponential moving averages indicate a
bearish trend. The second correction of the downtrend tested the 50-period EMA, which
coincides with the level of the swing that was formed by the first correction. We have
perfect conditions for STEAMM and open a short position at 1.4282. The initial stop
this time is 10 pips, because the trade is on a larger time frame. The position could be
opened at the level of 50-period EMA.
You can also wait for a little break above the EMA and sell 1 pip below it for
2B entry. The third option is to determine the exact entry level on a smaller time frame
chart as this could be a double top or breakout of consolidation pattern. The test of the
50-period EMA is followed by a sharp selloff. We close the position in 3 parts, as the
profit targets must be consistent with the size of the initial stop. The stop for the third
part should be moved above the swing highs on 5- or 15-minute chart. In this case, the
maximum profit for the third part was about 140 pips.
STEAMM on hourly chart
Finally, let me show you an example form the last few days. This is a very
interesting case, because it shows a lot of advantages that we have with the STEAMM
strategy. The USD was under selling pressure for fundamental reasons and I was
looking only for long entries. Major currency pairs were trending upwards during the
Asian session and the 200-period EMA was supporting GBP/USD. Around the London
open EUR/USD was bought, while the GBP/USD was still testing the 200-period EMA.
This is a perfect buy set up:
The market has an upside bias;
Correlated currency pair (EUR/USD) starts to move in the direction of the trend;
Currency pair we trade is testing strong support (200 EMA).
In this case GBP/USD tested the 200-period EMA with double bottom and I
bought at 1.5985. The initial stop was at 1.5979 (6 pips). First part of the position was
closed during the tight consolidation for 5.5 pips profit. The upside price move started
with good momentum and the second part was closed for 14.5 pips profit. Stop was
moved to break even. Let me turn your attention to the first test of the 20-period EMA.
When the quotes show that someone is buying with large orders, I add to the
position when there is a good STEAMM set up. This time a bought 1/3 of the original
size at 1.6023 with 5 pips stop. The last part of the position was closed when the stop
was hit at 1.6073.
STEAMM GBP/USD
STEAMM is a strategy for trading in the direction of the current trend, which is
determined by the position and the slope of the 20-, 50-, 100- and 200-period
exponential moving averages. Positions are opened at the end of the pullbacks to the
EMAs (mostly 20- and 50-period). The following conditions could improve your
trading results:
- levels of support or resistance - usually swing highs and
lows;
- quote reading;
- correlation with other currency pairs and financial
instruments.
The more of these conditions are met at the time of the opening of the position,
the more likely it is to be profitable. Each position must be actively managed and closed
in parts. The first part is closed when the profit is equal to or greater than the size of the
initial stop. The second part is closed when the profit is two times greater than that of
the first.
After the second the second part is closed, move the stop to break even. For the
remainder of the position follow the price move by moving the stop above the swing
highs or below the swing lows. Used time stop/limit and close the first part after 5-10
minutes (for 1- minute chart entry) if the price stop or limit are not activated. The
second part is closed after 15-20 minutes, and the third after 30 minutes. Position may
be closed if the quotes show the existence of large orders in the opposite direction.
STEAMM strategy can be traded on any time frame. The higher it is, the larger will be
the size of the initial stop, but also a large profit can be expected. Also, by increasing
the time interval of the chart, we reduce the number of the trading signals.
When trading STEAMM as well as any other system you must strictly apply the
rules for money (risk) management. Very simple but very effective rule is to risk a fixed
percentage of the current account balance.
Follow the big money and your trading will be much easier and much more
profitable!

Price Action Strategy The STEAMM PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Price Action Strategy The STEAMM PDF

Uploaded by

Copyright:

Available Formats

For more FREE Ebooks, strategies and materials you can visit:

TRADING BEFORE THE LONDON OPEN

Exponential moving averages

The STEAMM set up

REAL TRADING EXAMPLES

“An investment in knowledge pays the best interest.”

Trading is a zero sum game.

- Swing highs and lows

Chart 1 - Source: MetaQuotes Software Corp.

Chart 2 - Source: MetaQuotes Software Corp.

Chart 3- Source: MetaQuotes Software Corp.

On Chart 4 is presented a roadmap of USD/JPY. The pair has been in

Chart 4 - Source: MetaQuotes Software Corp.

Chart 5 - Source: MetaQuotes Software Corp.

Chart 6 - Source: MetaQuotes Software Corp.

Chart 7 - Source: MetaQuotes Software Corp.

In general, it is not advisable to trade when the market is in consolidation and

Chart 8 - Source: MetaQuotes Software Corp.

Chart 9 - Source: MetaQuotes Software Corp.

Chart 10 - Source: MetaQuotes Software Corp.

Chart 11a - Source: MetaQuotes Software Corp.

EUR/USD 15-minute chart

Chart 12 - Source: MetaQuotes Software Corp.

Chart 13 - Source: MetaQuotes Software Corp.

The design of a good trading system is not sufficient to be a successful trader. It

STEAMM off 20 EMA

Chart 20 - Source: MetaQuotes Software Corp.

Chart 21 - Source: MetaQuotes Software Corp.

Chart 22 - Source: MetaQuotes Software Corp.

Chart 23 - Source: MetaQuotes Software Corp.

Chart 24 - Source: MetaQuotes Software Corp.

Chart 25 - Source: MetaQuotes Software Corp.

Chart 26 - Source: MetaQuotes Software Corp.

Chart 27 - Source: MetaQuotes Software Corp.

Chart 29 - Source: MetaQuotes Software Corp.

Chart 30 - Source: MetaQuotes Software Corp.

Chart 31 - Source: MetaQuotes Software Corp.

Chart 32 - Source: MetaQuotes Software Corp.

Chart 33 - Source: Forex Strategy Builder

Chart 34 - Source: MetaQuotes Software Corp.

Chart 35 - Source: MetaQuotes Software Corp.

Chart 36 - Source: MetaQuotes Software Corp.

There is an interesting modification of the strategy that I call "Early STEAMM

Chart 38 - Source: MetaQuotes Software Corp.

Chart 39 - Source: MetaQuotes Software Corp.

Chart 40 - Source: MetaQuotes Software Corp.

You might also like