You are on page 1of 22

A Traders Universe - A Complete Resource Site For Traders

Trading Rules for the 2S4H Forex System.

Phase 1
Phase 1 involves waiting for just two indicators. Stochastics 5,3,3 and 30,3,3 to go either oversold or overbought together on the 4 hourly chart. See the examples on the chart below. The higher of the two stochastics is 5,3,3 and the lower 30,3,3. The blue arrows indicate where both have reached an oversold or overbought condition together. Until we see this, we do not proceed to the next phase. Another thing you might notice in the chart below, is that on some occasions, the upper stochastics is not in fact in the overbought area, but is diverging to price. Because the lower stochastics is in the overbought area, and the upper stochastics had previously been overbought, then we can use the divergence as a phase 1 trigger. Below is a 4 hour chart of the USD/CAD currency pair. As you can see, phase 1 triggers occur quite frequently, but these by no way mean an instant entry. Task: Go through all of your favourite currency pairs and on the 4 hour charts, place arrows or mark points where you see phase 1 triggers.

A note: Phase 1 triggers only require that the leading %K line be in the overbought/oversold zones. The %D line is irrelevant.

Another words. they determine their view and then place their orders around the level in question and leave it. they will leave it until it reaches (hopefully) their desired target which will happen to be the next level of support or resistance.Phase 2 Phase 2 is a confirmation phase. Below is an example taken off the daily of the AUD/USD pair. they will then reassess and make the next move. There are a couple of ways to find major resistance or support levels. This will depend on your level of aggression as to whether or not you feel you want to use this phase. are we near a major resistance level to add weight to our view. Quite simply. well done! There is a reason for this. Task: Go through all of your currency pairs and on the 4 hour and daily charts. If you noticed that all the lines seemed to be relatively equal in distance apart. look back over a 4 hour or daily chart and look for levels of support or resistance that are near our current price action. When they see price nearing a level. but it's still important to at least read through. Institutions that trade large amounts on behalf of clients use horizontal lines of support and resistance to do their trading. mark levels of support and resistance. The first is to look for them in price. I want you to look at all the levels of support and resistance I have drawn in and tell me what you see. and as such are a useful tool for the small trader. What we are looking to confirm is whether we have support on the bigger time frames for our view. . If price does indeed reach the next level. If their order is triggered. if phase 1 triggers an overbought condition. Another words these levels of support and resistance are the domain of the institutional trader.

If there was a nice run up or down prior to the current price action.6% retracment point. 50.2% level.6% level. and then price retraces at the 38.6%. and the top or bottom you are looking to find may be a retracement of this run. 61. and retraces again at the 78. The example to the right sees a nice run down. consolidates at the 50% level. but you should make a habit of drawing fibonacci retracements whenever you see an impulsive move that starts to correct.The second way is to use fibonacci retracements. Most charting software comes with fibonacci retracement tools. and the retracements are clearly marked as 38. Example 1 to the left is a simple run up from the bottom to the top. .2. price retraced off of the 78. and it's a matter of plotting the retracement on your chart. On their own I don't rely on fibonacci because using one indicator on it's own is fraught with danger. then using fibonacci can help. As you can clearly see by the oval tool. There are a couple of examples below.8 and 78.

. price at an institutional level.63. and therefore we want to see phase 1 trigger. There are four circles I have drawn in. to see how often they are respected by price. and then have some confirmation that there is some major support or resistance in the form of either institutional support and resistance and/or fibonacci retracements. Take a look below and see how on several occasions we had a confluence of events. What we want is a confluence of events. and also at a fibonacci retracement of the major impulsive move that you can see starts from the bottom left of the chart and ends where you can see 143. On each of these occasions we have had a phase 1 trigger.Task: Go through all your currency pairs and find moves that look impulsive (not choppy) and draw fibonacci retracements.

.

What do you notice? I see that phase 1 triggered 5 times yet on only two of those occasions did price make any sort of decent move the other way . For the moment however I do not want you to concern yourself with this.63. institutional areas and fibonacci levels. This is one of the major weaknesses of an oscillator such as stochastics.I also want you to take a look at the number of times phase 1 triggered during the impulsive move up to 143. . Task: Now go through all those 4 hour charts you have been working on and find confluent events.see below. Why? Because when price is in a trending or impulsive move. stochastics can remain in the overbought or oversold zone for a lot of that move. involving phase 1 triggers.

.

if anything about the impulsive move up from the bottom left hand corner to the 143. which are basically trending moves. but there is way to judge what price may be doing right now in relation to it's energy. often move in 3 leg structures. meaning we are in a definite impulsive trending move or uptrend.63 point. Now for an even more powerful insight.A final note: It's impossible to pick tops or bottoms. In fact it's only half correct. look at the diagram below. Leg 1 being A to B. if price is in a strong trending move. leg 2 being C to D and leg 3 being E to F. Can you see that? Price has not overlapped the previous low. Now I'm not going to go into a whole thing about this. Can you see that it looks as if there are three legs? If you can't see that. or a trading range. but it's something you should look out for. stochastics can fool you by staying in the overbought/oversold zone for quite some time. If you wanted to enter trades based purely on stochastics reaching these zones you're going to find yourself stopped out an awful lot. such as a retracement of an impulsive move. when price made the second higher high on the chart here at D. An uptrend is indeed higher highs with higher lows but without any overlap. . As I stated below. But if you look at recent price action and you see higher highs and higher lows but with overlap. Impulsive moves. This is the same impulsive move in the chart above but with the three legs drawn in. and there's plenty of information out there on Elliot wave theory and so on. but that higher low did not cross below the first high at B. it then made a higher low at E. right? Well I have since learnt that this is not entirely correct. Take another look at the diagram above and tell mewhat you notice. Can you tell me the definition of an uptrend? The definition of an uptrend in most text books is 'higher highs with higher lows'. Another words. then it's more than likely a corrective move.

which will be explained later.There is an example below of a corrective move that is not an uptrend (diagram 2). or a definite trend line break. although it still makes higher highs and higher lows. . If you see an impulsive move like diagram 1 and you have a phase 1 triggering. If I was an options trader (where time is my enemy) the distance between A and B is vitally important. know that price is trending and that you may have to wait. Anyway. maybe for 3 legs to occur. you need to keep these things in mind when looking for phase 1 triggers. yet in most text books. Diagram 1 obviously offers the trader a better return than diagram 2. both diagrams are classed as an uptrend.

For this system. at the end of a retracement. the best places for trading are in the blue zone (see below). At the end of an impulsive move that has 3 legs. Task: Your charts are probably looking quite messy by now. which should have an overlapping look to it. and large trading ranges. Go through them one more time and seek out impulsive trending moves. . and see how often the phase 1 triggers result in a decent move when price is trending and when it is not. retracements with overlapping price moves. trading ranges and also topping formations such as double tops and bottoms etc.

If price has been falling. Here is a table that will explain in simple terms the pro's and con's for each. then it stands to reason that we should be able to draw some sort of trend line that represents a line of resistance. I'm not talking about the big impulsive trending moves. then price must have been moving up and we should be able to draw some sort of trend line that represents support. That's perfectly okay. we should notice that price has been in some sort of move in one way or the other. Once we have phase 1 and phase 2 complete. Conservative Less Entries Stopped out less often Smaller potential profit per trade There are several indicators we use to look for the turn in price in the phase 3 section. Of the factors involved. what I'm talking about is that in order for stochastics to be reading an extreme oversold condition. Phase 3 will determine the plan you need to draw up in order to trade. your own personal character is an important one. they are:• • • • • Trend lines Stochastics Candlestick Patterns Chart Patterns Bollinger Bands To start out. Aggressive More entries Stopped out more often Bigger potential profit per trade Of course you may decide you are in between. let's look at what a conservative trader will need to see in order to enter a trade. . As previously stated in the trading plan. price must have been falling.Phase 3 You now have your phase 1 trigger and your phase 2 confirmation. If on the other hand stochastics is overbought. If you are aggressive then you will be using a different plan to someone who is conservative. Take a look at the diagram below and notice that we have a very simple trade on offer.

3.When the phase 1 first triggered. my first action would have been to draw a trend line. .3) is in oversold is enough. In this case it was a simple resistance line hugging the highs made as price declined (the steeper one). Below is the hourly chart of the chart above. as can be seen from the yellow lines. We wait for price to break the trend line and we go long. The fact that the stochastics (remember on the lower charts we use 14. But when it comes to entering I would have gone down to the hourly. but it did also offer divergence. The trend line is exactly in the same place as the one on the 4 hour. What I then do is look for some form of confirmation.

(I haven't . and once broken. Now. and if there isn't one of these available. If price does break violently. if you don't think the trade feels right. I will use a previous low (on this chart. Task: Go through all your charts again. I will use an average range of the last 10 price bars. then don't trade it.What constitutes a trend line break? What I would suggest is two closes above the trend line. see if stochastics is confirming. after two closes. then I would use that. offered at least 15-25 pips. it would be the low you can see at the start of the yellow line). There will be plenty more. and where you found phase 1 triggers. and see if you could have drawn in trend lines that would have represented support or resistance. move down to your 60 minute charts. So if the average range of the last 10 price bars happened to be 8 pips.

offered an easy to draw trendline that once broken. the AUD/USD pair does not move like the GBP/USD pair and so you may want to only look for 15 pips with the AUD/USD pair. price advanced about 20 pips and then returned to almost touch the trend line) How many of these trades offered 15-25 pips before price re-tested? . Note: Looking for 15-25 pips may depend on the currency pair. would these have resulted in at least 15-25 pips after the previous low/high was broken? Could you have used the average range of the last 10 price bars and used that as an entry. and if so. Notice on the hourly that after price broke and we had two closes above. 5. 6. record your research and answer these questions. How many phase 1 triggers (and phase 2 confirmations if you are using them). Once you've done this. 7. how many offered at least 15-25 pips after that 10 bar range was broken? After a trend line break. offered at least 15-25 pips after two closes? How many of these had stochastics confirming? How many trend line breaks saw price move in such a way that would not have allowed you to wait for two closes? (Another words. For example. after price broke the trend line.The chart on the left is the 4 hour and the chart on the ri ght is the 1 hourly.mentioned phase 2 confirmations because you may choose not to use phase 2 confirmations. 3. 4. how many times did price re-test the trend line? (An example below . 1. but if you do then find trades that have both). price moved in the desired direction at least 15-25 pips without even closing on the hourly chart) Could you have used a previous low/high for these quick moves and if so. and 20 (or even 25) with the more volatile pairs such as the GBP/USD and the USD/CHF. 2.

involve candlestick patterns. an upside down version of the hammer in our example. if you find that 30% of all trend line breaks broke out violently. you should have the information you need in order to determine what set ups you will trade. the size of the two price bars are usually fairly equal. For conservative traders. and once again. Just like the hammer. That is a suitable trendline. and then the bulls retaliate. and hammers on longer time frames. or some confirmation such as stochastics. Candlestick Patterns also known as reversal candlestick patterns. Look for a phase 1 trigger. What changes you make to your phase 3 trade set up will be determined by your own personality and the results of your research. The bears push price down and the bulls then push price back up. but the whole purpose of asking the questions above is so that you can gauge what your personality will enable you to handle. a phase 2 confirmation.What you now have to do is work with your research and determine how you want to plan your trades. On the left we have what is called a hammer. If we were looking to go short then an upside down hammer. The colour of the small body part (green in this example) is irrelevant. is just that. with stochastics confirming. and just work with the other 70% of trend line breaks. On the diagram on the right. we have what is called railway tracks. There is also more s trength in longer hammers. . then you may decide to just leave them alone. but what is important is that the leg (or handle) is at least twice as long as the body part. As far as this system goes with phase 3 planning for conservative traders. With railway tracks. and then wait for price to close twice above or below. longer railway tracks and those found on longer time frames have more strength. and a less aggressive trader would like to see a trend line break on the 15 minute chart. For example. the bears push price down. and a phase 3 set up. chart patterns and bollinger bands. The more aggressive type phase 3 set ups. I would suggest only dealing with the trades that don't break out violently. depending on which direction you're trading on the hourly. An aggressive trader would enter at the close of one of these candlesticks and would look for them on the hourly or even the 15 minute.

You can look for these on the 5. and you are way in front. however some people can't handle having more losing trades than winning trades. so if the 123 forms on the 5 minute. then your strike rate only needs to be 50% to break even. If all you ever did was trade one lot. Put simply if it was a bearish 123. With all of these more aggressive set ups. To enter. it would only take one of these runs to net you 100 pips. advances again to a level similar to the previous high (3 point) and then breaks through the low (the white line represented by the 2 point). You could afford to have several losses before you eat away all of that initial profit. it will add even more strength. But what if you traded two lots. or double tops and bottoms. When entering a trade based on a candlestick or chart pattern. As with candlestick patterns. Bollinger Bands . wait for price to break the 2 point and enter straight away. and you place your stop 5 pips below the low. . or bollinger break. The bollinger bands are handy to use when you aren't getting any candlestick or chart patterns forming. your stop should be placed on the other side of the event that got you in. You can use them on their own or as combinations.9985. 15 and 60 minute charts. where price advances to form a high (1 point). and I'd suggest paper trading first.Chart Patterns . and so it really does come down to your tolerance level. So that is the upside to aggressive trading. it would also be called a double top. retraces to form a low (2 point).2000. however the majority of 123's you'll probably find on the 15 and 5 minute charts. and a 20 simple moving average. The upside to this argument is of course risk to reward. it's low is 1. then you are risking 20 pips plus spread. One of the best ways to utilize bollinger bands is when you see price break outside one of the bands and then fall back in. but they are more aggressive and therefore can fail more. Of cours e you may even want to use the bolllinger bands as another confirming tool for candlestick and chart patterns. there is more strength in 123's on the longer time frames. You can see here in our example on the left that price did indeed break out of the band and then back in. You'll only know once you start trading. If you see price break out of and back into the bollinger bands on more than one time frame. So if you find a hammer and it closes at 1. A bullish 123 would be called a double bottom and would be the exact opposite of the example here.The ones we'll be looking at are called 123's. look for extreme stochastics on the 15. or you could wait for a close of the price bar to confirm. which would be 19980. You may also want to have some confirmation such as stochastics on the next higher time frame.Probably the best setting for bollinger bands is 20 with two standard deviations. it will come down to what you're most comfortable with. took your first lot's profit at 15-25 pips and allow ed your second lot to run.

but if it's quite often. Take a look at the chart below for an example. A 60 minute chart (the same chart as our first example at the top of the page). It will come down to how far price will have to move back if it is to retest the trend line. depending on the currency pair. then the distance price has to travel to retest would be quite large. and you can simply move your stop to the next retracement on the 60 minute. which would be break even. say 50% of the time. The exception to this would be if you were going away on holidays or something and you felt you would like to be out of the market because you won't have access to the internet. Allow price to move in your direction and only move your stop when price retraces. you'll still be in front. Stick to this exit plan and don't deviate. If the trend line you have drawn in is quite steep. 5 pips below the low that was formed. you move your stop to break even. If you are using a more aggressive approach. Take your first lot's profit at 15-25 pips. but at the same time. and as you progress. Even if price doesn't retest. you've banked your first lot of 20 pips. You should never exit your second position because you feel like it. then you have to know how often price retests the trend line after breaking it. Place your stop. Paper trade with the simple exit rules explained above. and then move your stop to your entry point. let's say you go long. This is where your previous research comes in. or because you're thinking of the money. then you can use the same approach as above. The answers to these questions will take time and practise. For example. You should always let the market take you out. forms a low on the 60 minute and then proceeds to move higher again. which is to wait for large trend line breaks. . If it's only a small number of times. then price advances 60 pips and then retraces 20 pips.Phase 4 Phase 4 is your exit plan. then place your stop 5 pips away from the event that got you in. I think you'll find with your research that the steeper the trend line. the less often price retests. look to move your stop only after price has retested. If you're using the more conservative approach. then you may need to use a different approach.

So you are looking at four bars in total. You can see from my example above I have only moved my stop up when the lows have formed according to my rule. and this does NOT include inside bars. . and I do NOT include inside bars. Be thorough. I'll repeat it. A high has not formed unless the low of the last price bar is lower than the three bars previous. The final stage of phase 4 is to record your trade. A low has not formed unless the high of the last price bar is higher than the previous three bars. entries and exits.My rules for a high or low to form are quite simple. and a list of questions and answers such as those below. take your time as these journals will help you immensely in the long run. A low has not formed unless the last price bar's high is higher than the three bars previous. I do not count inside bars. with screen shots of your charts.

8% fibonacci retracement Stochastics. If I do manage to get in.2047 10 lots 1.5 lots Allow to run. Entry Price Date/Time Stop Loss Size of Trade Price Target 1 Price Target 2 Risk Exit 1 1.2087 is reached I will move my stop to 1. 9:02am London time 1.2087 .(this is just an example) Date/Time Currency Pair Type of Set Up Direction 1st Reason 2nd Reason 3rd Reason Trade Plan Long Phase 1 on 4 hourly. oversold on hourly. I will wait for two closes above the trend line on the 15.2067 May 15th 2006. long term support.Trading Journal . a big long hammer forms on 15 minute Because the hammer formed on the 15.20 pips per lot 1. I will set stop 5 pips below low of hammer. Hammer forms at the end of a run down I have formed by joining recent highs. 8:30am London time EUR/USD Aggressive. I am going to wait for a trend line break on the 15min which May 15th 2006. If 1. coincides with 61. otherwise I will pass on the trade. shorter stochastics also diverging Phase 2 on Daily.2087 . I will wait for some sort of pullback towards trendline to enter.2067 and then move stops under lows 200 pips . If price takes off more than 20 pips before closing twice.

and when the hammer appeared on the 15. but instead I decided to wait for a trend line break as it was quite an easy trend line to draw in. I am happy that the amount of time to reach my first target was short as it enabled me to move my and turn off my computer for the night. 9:45am London time Price target met 1.575 Phase 1 and Phase 2 were very straight forward. Total 515 pips 200:515 = 1:2. Once the trend line was broken price only advance 8 pips before closing twice so it was an easy entry. What Did I Learn This time I learned that it seems to be a good time to look for aggressive trades after the London open. I am grateful for the trade. I Date/Time Reason Profit/Loss Risk to Reward Feelings Towards Trade would have preferred to see a hammer on the hourly also.2154 May 16th.Date/Time Reason Exit 2 May 15th. I will explore this idea more Did I Follow My Golden Rules Yes I Did! . 6:02am London time Stopped out at adjusted stop 5 lots of 20 pips less spread= 85. 5 lots of 87 pips less spread= 420 pips.

and the reason is because too many people just assume that trading is easy. They Just Trade The Process. not only on the system you plan to trade but on yourself! I wish you the best and. you have been taught some of it. a complete study of technical analysis and should not be deemed as such. One day. I've heard that before! In the end. no one had ever done this course and asked for their money back. a sales man was trying to sell me a trading seminar over the phone. 95% of traders fail and th is number is no different for the people who pay for trading courses and those who don't. but the psychological part was by far more important. and then as soon as they go live. Don't Think About The Money. yet it's how all successful traders think. stocks and stocks options. and that was this one comment the teacher made "Those Who Succeed In Trading. The size and the duration of the markets move. nor should any of the examples presented be deemed as such. there was a lot of technical stuff I took away from that seminar as well. It was a day long seminar of a method that had a 70% success rate. This is not. I said to him "I don't want to learn another system. He stuttered and stammered and finally told me he didn't know what to say other than. I have spent thousands of dollars on systems. but it's their mindset.Conclusion You may have noticed early on that this is not a straight system where by I tell you exactly what to do in order to find trades and then trade them. they went from trading a process. It's simple. When he told me this I got quite irate. There is a risk of loss in trading futures and futures options. all claiming to have 70% or better success rate and yet most have them have not worked for me. They work for other's but not for me. Happy Trading Dean Whittingham The information contained here on this web site. take your time. It's impossible to teach someone something if you are unaware of what it is you are good at. This is just not true. and do plenty of research. nor is it intended to be. or I was unable to adapt them to my personality. they fall apart. to thinking about the money. and without giving it away. The above statement really rings true when you see people do really well paper trading. The reference to statistical probabilities does not pertain to profitability. and I was glad in a way. because what I took away from it was what I wanted. I want to be taught how to be a trader!" This took the fellow quite by surprise. Another assumption is that as soon as someone shows them a few rules. in any email or on any video does not containspecific recommendations to buy or sell at particular prices or times. but rather to the direction of the market. it's all plain sailing from there. (c) A Traders Universe 2006 . forex." No one had ever told me this before. they just haven't realized it. I went to this seminar. I think one of the problems is that a lot of teachers think it's their system that made them a success. I urge you to start from the start. I will say. as well as entry and exit prices ultimately determines success or failure in a trade and is in no way represented in these statistics. CFD's and any other financial product and you should carefully consider your financial position before making any trades.