Russ Horn

FOREX MASONRY
ForexMasonry.com

Presents

Derivative
(1-2-3 Derivative
Trade Type)
 Forex Masonry

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 Forex Masonry

Welcome
There is a powerful yet simple chart formation called the 1-2-3, or the A-B-C pattern.

The market moves in a very distinct and regular way presenting us with this 1-2-3
formation on a regular basis.

The foundation of a 1-2-3 is understanding that in a trending market condition, the

market will make bigger moves in the trending direction, each followed by smaller
pullbacks, or corrections, and then a big move in the trending direction again.

The main bigger move in the direction of the trend is called the "impulse" or "main"
move, and the smaller move in the opposite direction is called the "pullback", or
"correction". This is how the market naturally moves, so the way to take advantage of
this is to use a formation called the 1-2-3. It's a formation that suggests the market will
continue to move in the direction of the trend.

• In a trend that is moving upwards, the market will make progressively higher
highs and progressively higher lows.
• In a trend that is moving downwards, the market will make progressively lower
highs and progressively lower lows.

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The 1-2-3 Formation In An Uptrend.

Part 1:
The market will make a move upward. This will generally be a decent sized movement,
not something small or accidental looking.
Part2:
There will be a pullback (correction), but it will not pull back as far as the previous low
from leg number 1. Often, the pullback will be about 50% of the leg 1 movement.
Part 3:
The market will rise up to the high that was made by leg movement 1.
We are looking for the market to get 1 pip above this swing high, when this happens, we
can look at this as a trade signal to go long.

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The setup and signal of a 1-2-3 buy trade.

The stop loss and the target of the 1-2-3 buy trade.

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The 1-2-3 Formation In A Downtrend.

Part 1:
The market will make a move downward. This will generally be a decent sized
movement, not something small or accidental looking.
Part2:
There will be a pullback (correction), but it will not pull back as far as the previous high
from leg number 1. Often, the pullback will be about 50% of the leg 1 movement.
Part 3:
The market will drop down to the low that was made by leg movement 1.
We are looking for the market to get 1 pip below this swing low, when this happens, we
can look at this as a trade signal to go short.

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The setup and signal of a 1-2-3 sell trade.

The stop loss and the target of the 1-2-3 sell trade.

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Understanding Timeframes
Now that we understand how the basic 1-2-3 setup and trade works, we can start
looking into the Derivative version. The Derivative trade is an adaptation of the 1-2-3
formation and has a high success rate.

The Derivative trade is best traded on a higher timeframe, something like the 4 hour or
the daily, but you can trade it on any timeframe you like as long as the market you are
trading is not stuck moving sideways and range-bound.

Timeframes are the backbone of how the system functions, but the good news is the
system takes care of that part, we don't have to flip from timeframe to timeframe.

When we look at a 15 minute timeframe, we understand that each candle is 15 minutes

in duration. When we then look to the 1 hour timeframe, we understand that one candle
is 1 hour in duration. The 1 hour candle absorbs 4 of the 15 minute candles. This means
that what we see as 4 candles on the 15 minute chart is only a single candle on the 1
hour chart.

In the example below, the first half of the image is a 1 hour timeframe and the pullback
that occurs. The second half of the image is the same section of the chart, but from the
4 hour timeframe. The 4 hour has absorbed many of the candles of the 1 hour making
the pullback look small and insignificant.

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Trend Direction
We want to be taking trades in the right direction, so we will be looking to identify the
trending direction. We can use the Forex Masonry indicators to get an idea of the
direction to trade.

We will use the 34 EMA and the Dots indicators.

• In an uptrend, price will be above both the 34 EMA and the Dots.
It does not matter what order the 34 EMA and the Dots are, as long as the price is
above them both.

• In a downtrend, price will be below both the 34 EMA and the Dots.
It does not matter what order the 34 EMA and the Dots are, as long as the price is
below them both.

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Setup Candle
Once we have established a trending direction, we will be waiting for a candle of the
opposite direction to close. This is our setup candle.

In an uptrend, the candles will be bullish, and in our case, the bullish candles are blue.
We will be waiting for a bearish candle to print, and for us, that is a red candle.

In a downtrend, the candles will be bearish, and in the Masonry template, the bearish
candles are red. We will be waiting for a bullish candle to print, and for us, that is a blue
candle.

Once we get a setup candle, we can place our entry, stop loss and target.
This is truly a set-it and forget-it system. The trade won't trigger right away, we will have
time to get the orders placed.

Once we have identified our setup candle, we can place our orders.

• In an uptrend, we get a bearish setup candle, we place our entry order just above
the setup candle. The stop loss goes just below the setup candle and the target
can be 1:1 or even 2:1

• In a downtrend, we get a bullish setup candle, we place our entry order just
below the setup candle. The stop loss goes just above the setup candle and the
target can be 1:1 or even 2:1

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Buy Trade
Setup
• The trend is up, price is above 34 EMA and the Dots.
• A bearish candle forms and closes.

Entry Order
• Place entry order above the high of the setup candle.

Stop Loss
• The initial stop loss is placed just below the low of the setup candle.

Target
• The target can be 1:1, 2:1 or let the trade run.

Manage
• The trade will be entered as price touches the entry order. Trail the stop loss
along Dots once the Dots move past the initial stop loss.

Buy Trade - Setup

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Buy Trade - Orders

Buy Trade - Manage

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Sell Trade
Setup
• The trend is down, price is below 34 EMA and the Dots.
• A bullish candle forms and closes.

Entry Order
• Place entry order below the low of the setup candle.

Stop Loss
• The initial stop loss is placed just above the high of the setup candle.

Target
• The target can be 1:1, 2:1 or let the trade run.

Manage
• The trade will be entered as price touches the entry order. Trail the stop loss
along Dots.

Sell Trade - Setup

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Sell Trade - Orders

Sell Trade - Manage

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Entry Limitations
There are a few restrictions when it comes to the entry order. Under certain situations,
we will cancel the entry order because the market isn't doing what we want it to in a
timely manner, or the trend has changed while we were waiting for the trade to be
triggered.

5 Bars
If the trade we are waiting for takes longer than 5 candles to trigger, we can consider
canceling the order. After 5 candles, there is a chance the market is headed in the other
direction and a trade with the trend can be more of a fake-out than an actual market
movement.

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Dots Switch Sides

We want to be trading with the trend, and when the Dots switch sides while we are
waiting for a trade to be triggered, technically, the trend has come to an end. When the
price moves in between the 34 EMA and the Dots, the market is in what could be a
transitional phase as the direction of the trend could be changing. This makes for a
higher than average risk on whatever trade we take.

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Conclusion
The Derivative trade is an excellent way to add more trading opportunities to a higher
timeframe like the 4 hour or the daily. Instead of waiting for days or weeks, you will find
opportunities in hours or days.

The foundation of the Derivative trade is based on the market's natural movement, so it
becomes a high probability type of trade.

One thing I would suggest is to avoid trades that have small stop losses, a trade that
has anything less than a 10 pip stop loss increases the risk of a losing trade, so I like to
keep the setups wider than 10 pips.

The Derivative trade might be one of the only set-it-and-forget-it kind of trade types that
I like. I don't generally like the idea of a trade that goes unmonitored, but this is a trade
type that can conveniently take care of itself.

Often when a trade is triggered, the trade will open and close in profit within sometimes
a single candle. It's not often that a Derivative trade will run on for several candles, and
this makes for an exciting trade type, even on the daily timeframe (we aren't supposed
to excited about a trade, but I still get giddy about a quick in and out trade).

Thank you for reading the Derivative manual.

Best of luck to you and in your trading career!

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