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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Triad Trading F O R M U L A
System 1: Trend Finder System 2: Squish-Squash System 3: Target Breakout
Training Manual This manual is property of:
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Legal notice NO RIGHT TO REDISTRIBUTE MATERIALS. You agree that you will not re-distribute, copy, amend, or commercially exploit any materials found in this document or related Web Sites without Sharptrade Partners, LLC. and/or ForexImpact.com express written permission, which permission may be withheld in Sharptrade Partners, LLC and/or ForexImpact.com sole discretion. NO INVESTMENT ADVICE. The information contained in this product has no regard to the specific investment objective, financial situation or particular needs of any specific recipient. Sharptrade Partners, LLC and/ or ForexImpact.com do not endorse or recommend any particular securities, currencies, or other financial products. The content published in this document is solely for informational purposes and is not to be construed as solicitation or any offer to buy or sell any spot currency transactions, financial instruments or other securities. Sharptrade Partners, LLC and/or ForexImpact.com do not represent or guarantee that any content in this document is accurate, nor that such content is a complete statement or summary of the marketplace. Nothing contained in this document is intended to constitute investment, legal, tax, accounting or other professional advice and you should not rely on the reports, data or other information provided on or accessible through the use of this product for making financial decisions. You should consult with an appropriate professional for specific advice tailored to your situation and/or to verify the accuracy of the information provided herein prior to making any investment decisions. INDEMNITY. You agree to indemnify and hold Sharptrade Partners, LLC and/or ForexImpact.com, its parent, subsidiaries, affiliates, directors, officers and employees, harmless from any claim, demand, or damage, including reasonable attorneys’ fees, asserted by any third party or arising out of your use of, or conduct on, this product and/or website. COPYRIGHT. The Product, Web Site, and Tools are protected by copyright law and international treaty provisions and may not be copied or imitated in whole or in part. No logo, trademark, graphic or image from the Web Site may be copied or retransmitted without the express written permission of Sharptrade Partners, LLC. and ForexImpact.com. All associated logos are trademarks or registered trademarks of Sharptrade Partners, LLC. and ForexImpact.com and may not be copied or transmitted without the express written permission of Sharptrade Partners, LLC. and ForexImpact.com.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Table of contents
I. welcome to the triad trading formula | p. 5
trend finder | p. 8
squish-squash | p. 10
target breakout | p. 12
II. system #1: trend finder | p. 14
trend finder explained | p. 15
indicators | p. 17
trading with all trend finder indicators | p. 25
trend finder trade signal | p. 26
the setup | p. 27
the entry | p. 29
the stop loss | p. 31
the exit | p. 33
trend finder trading rules | p. 35
trading trend finder: long example | p. 36
trading trend finder: short example | p. 40
Final thouhts on trend finder | p. 44
III. system #2: squish-squash | p. 45
squish-squash explained | p. 46
indicators | p. 48
the setup | p. 55
the entry | p. 56
the stop loss | p. 58
the exit | p. 59
squish-squash trading rules | p. 60
trading squish-squash: long example | p. 61
trading squish-squash: short example | p. 65
best time to trade | p. 69
using squish-squash to trade news announcements | p. 70
Final thouhts on squish-squash | p. 72
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The Forex Trading Formula Triad Trading Formula - Training Manual
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IV: system #3: target breakout | p. 73
target breakout explained | p. 74
indicators | p. 82
the setup | p. 83
the entry | p. 85
the stop loss | p. 87
the exit | p. 89
target breakout trading rules: Long trades | p. 91
target breakout trading rules: short trades | p. 92
trading target breakout: long example | p. 93
trading target breakout: short example | p. 97
Final thouhts on target breakout | p. 101
v. money management and parting words | p. 102 VI: bonus trading systems | p. 104
friday special | p. 105
gpb/usd trend system | p. 126
the carry trade | p. 149
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I
The Forex Trading Formula Manual Triad Trading Formula - Training Introduction
Introduction
by Jason Fielder
Welcome to the triad trading formula Let me be the first to congratulate you on taking your first steps into the profitable world of Triad Trading. Throughout this course you will learn three separate and independently profitable trading systems. You will learn one trend system, one counter-trend system, and one breakout system. You will learn how to trade each system, as well as the theory behind them and why they work. But before we get into all of that, let me explain how all this began… Have you ever had an event that was a “life-changer?” Well, one such event happened to me attending an advanced trading workshop in Houston, TX in 2006… While at the workshop, I was struck by how almost everyone in attendance was approaching their trading business (and yes, it is a business) in completely the wrong way. I’ve attended trading seminars like these in the past, but none this advanced, and to my shock even the more advanced traders had MASSIVE HOLES in their trading strategies! It was at that moment when I realized I had something…something that 99.9% of the active traders out there didn’t have: A strategic formula for consistently pulling massive profits out of almost any market, no matter how that market is moving (up, down or sideways). I knew then that I could no longer sit on the sidelines and allow so many traders to lose so much money due to some basic misunderstandings about the trading business. The result of that life-changing event is the Triad Trading Formula! The Triad Trading Formula is a theory of trading that recognizes that the markets really only move in three ways: 1. Trends 2. Counter-Trends 3. Breakouts So, to make the largest amount of profits you will need to trade a trend system, a countertrend system, and a breakout system. This will allow you to profit no matter what the
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
market is doing. For example...
What do you see on the chart below?
How many possible trades do you see?
How would you trade it and what type of system would you use?
I’ll show you what I see… •
There is one area of the chart where the market was trending down somewhat sharply...
•
This is followed by a period where the market was moving sideways (i.e. in a countertrend direction)...
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The Forex Trading Formula Triad Trading Formula - Training Manual
•
by Jason Fielder
Then, there was a breakout from the counter-trend market that seems to be pushing higher...
In my experience, most traders would have only traded the trend and missed out on five other trades. In fact, I counted a total of seven trades in all. How many trades did you see?
We’ll talk more about the theory of Triad Trading before this course ends, but for now let’s take a break from that and look at the three systems that make up the Triad Trading Formula™.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
System #1: Trend Finder™ As you may have guessed by the name, Trend Finder is our trend trading system in the Triad Formula. Below is an example of one of the trends that was identified by Trend Finder™.
If you’ll look closely at the chart, you’ll see that this particular move (which you can tell was identified by Trend Finder™ because of the characteristic green arrows) accounted for almost 700 pips of profit! Not too shabby for one move... But this is where the hype stops. The truth is that every system, no matter how good, will be wrong at some point. The beautiful thing about trading the Triad Trading Formula™, however, is that when you have a bad trade, most likely there will be in another trade that will hedge your position. For example, when you enter a trend trade that turns out to be wrong, that’s usually because the system triggered on a “false breakout” that was really just a ranging, choppy market.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Fortunately, your counter-trend system will also detect this choppy market, and any profitable trades it generates should more than offset the one bad trade your trend system got you into. That’s the beauty of Triad Trading!
Example of a Trend Trade Gone Bad As you can see on the chart below, there is a trend trade that was triggered by Trend Finder™ that would have resulted in a loss of about 100 pips. However, since the market started moving in a counter-trend direction, this triggered two profitable counter-trend trades that combined totaled a profit of 445 pips. So, even with the 100 pip loss, you’re still 345 pips up! Is the power of Triad Trading starting to sink in yet?
This brings us to the 2nd trading system in the Triad Trading Formula™ ... Squish-Squash™.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
System #2: Squish Squash™ The counter-trend system that is used in the Triad Trading Formula™ is called the Squish Squash Trading Method™. As you’ve already seen, this system is designed to trade in counter-trending or ranging markets. It does this by identifying when the market is moving sideways and then finds the extremes of the range which, historically, is the best time to buy or sell. In the example below, there are five trades. Four of the trades are profitable, making a total of 708 pips. As with the Trend Finder™ system, with Squish-Squash™ you buy at the first green arrow, sell at the first red arrow and so forth.
However, as we have seen previously not every trade is a winning trade. The last countertrend trade in this example was a 103 pip loss which occured when the market broke out to the downside.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
If you were only trading a counter-trend system, then you would have lost 103 pips on the last counter-trend trade when the breakout occurred. You’d still be well up, but why give back money when you don’t have to? And when you’re Triad Trading, you don’t have to... By trading with the Triad Trading Formula™, when the market broke out you would have made 58 pips from our breakout system, which is the third and final system in the Triad Formula™.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
System #3: Target Breakout™ The Target Breakout System™ uses a proprietary price-action-based algorithm to determine areas of support, resistance and consolidation in the market. These market conditions are, historically, some of the best predictors of an impending breakout, making Target an incredibly accurate and profitable system. Below is an example of when the market is ranging and then breaks out to the down side. (Notice the long and short breakout lines created by the Target Breakout™ indicator as well as the red down arrow which signals it’s time to enter a trade.) This particular trade was taken on the hour time frame and resulted in a profit of 18 pips...
The Cycle Continues… Typically breakouts like the one above turn into new trends (which would then signal a
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Trend Finder™ trade) and the cycle of profiting from different market movements would continue over and over again. And at each point in the cycle, you’ll be able to pull profits out of the market while all the other traders are sitting on the sidelines half the time. Alright, now that you have a good grasp on the theory of Triad Trading™ and how it functions in real-world trading, let’s get into the nitty-gritty and start learning the systems themselves...
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Triad Trading F O R M U L A
System 1: Trend Finder System 2: Squish-Squash System 3: Target Breakout
Trend Finder™ Trading System
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The Forex Trading Formula Manual Triad Trading Formula - Training Introduction
Trend Finder
by Jason Fielder
Trend finder™ explained Good trend systems are without a doubt the most difficult type of trading system to develop. The typical trend system dives into a lot of trades in an effort to catch as many new trends as early as possible. The downside to this strategy, however, is that most of these trades are not profitable. Fortunately, the gains in a good trend system far outweigh the losses, so overall it’s possible to be profitable even with an accuracy that’s well below 50%. Still, I knew I could do better... There are two issues that make developing trend system difficult: 1. Trends don’t occur all that often - only about 35% of the time. 2. It’s difficult to filter out trades when a market is ranging or moving sideways, so as I’ve already discussed you have to make the choice to jump into as many potential trends as possible, or sit on the sidelines and risk missing the trend completely. It’s this 2nd challenge that ultimately determines the success or failure of a trend system, and it’s also the area that I spent the most time testing and researching when developing Trend Finder™. As with most trend systems, the development on Trend Finder™ started with moving averages. I chose to use moving averages because historically they have proven to be effective at locating potential new trends. The only issue with using moving averages alone, however, is that they get you into a lot of trades...many unprofitable. Still, it’s a good base to start from. Once you have a base indicator that will find the trends, the next step is to start filtering out the negative trades. And trust me, this sounds much easier than it really is... The key is you must be able to strike a balance between filtering the bad trades and filtering too many good trades. Some filters, for example, did a great job of cutting out all
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
but a few unprofitable trades. Unfortunately, they also cut out a fair bit of profitable trades so that the system became more or less worthless. As with most things, an ideal balance must be reached. During the research I conducted to build Trend Finder™, I tested over 120 different filter combinations. Ultimately, I settled on a combination of 5 indicators that, based on extensive back-testing and forward-testing, performed the best. But this just gets us the ENTRY to our trade... I haven’t even begun discussing EXITS and the research that was conducted to locate the ideal exit-point for this system. But I’ll save that discussion for a later point in this course. For now, let’s look at the indicators that make up the Trend Finder™ system...
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Indicators Trend Finder Indicator (FXI_Trend Finder) The original Trend Finder indicator was built as a histogram that represented two moving average crosses, the 2-period and the 10-period moving averages. As you can see from the chart below, the trend finder indictor does “find” the trend. (The green bars on the histogram indicate a buy and the red bars indicate a sell.) With the correct trading rules and money management, this indicator can be profitable all by itself. I wanted to improve the accuracy of the system, however, so that’s when I began adding other filters to the base indictor.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Trend Finder Linea Planus (FXI_Trend Finder LP) The following chart is the basic trend finder histogram with the Linea Planus indicator (LPI) added to it. LPI locates markets that are moving sideways by taking the median price of the last 4 bars and averaging them. If this median price is within a certain range (10 pips for this particular system), you know the markets are in fact moving sideways and therefore this is NOT a good time to put on a trade. If you refer to the chart below you will notice that there are times when the bars on the histogram turn into dots. This is when the LPI has flat lined and the market is moving sideways.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Pivot Indicator (FXI_Pivot) The pivot indicator locates pivot points: pivot highs and pivot lows. Pivot highs are bars that have a higher high than the bar before it and after it. Pivot lows are bars that have a lower low than the bar before it and after it. The pivot points are adjusted up and down if the market is moving in only one direction. The histogram indicates which pivot point you are closest to: green for the pivot high and red for the pivot low. The idea is that if you are closer to the pivot high then you should have a better chance of making money by going long. If you are closer to the pivot low then you are more likely to make money by selling short. In this way we are able to determine the direction of our trend and stay out of ranging markets.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Strength Oscillator (FXI_SOI) The Strength Oscillator indicator (SOI) distinguishes between trending and sideways markets. In a trending market, one would expect the price on Wednesday to be substantially higher (or lower) than the closing price on Monday. (Otherwise the market is moving sideways and not trending.) SOI helps determine these trending points by taking the median average price for the past two days and comparing it to the price today. This works by setting the median average price for the past two days to zero, and then watching for deviations from this value. A deviation of 1 (regardless of direction) is an indication of a breakout and beginning of a new trend.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Linea Planus (FXI_LP) We’ve already talked about LPI in this section, but for this 2nd version we’re using it in a slightly different way. The first version of LPI that you learned about (FXI_Trend Finder LP) was used to determine whether we’re in a sideways market or not. With this version of LPI, however, we’re simply looking at the difference between the previous bar’s LP value and the current bar’s LP value to determine directionality. If the current LP value is higher than the previous bar then the trend is up and the histogram will show a green bar. Conversely if the previous LP value is higher, the trend is down and the histogram will show a red bar instead. The length of the bar indicates the size of the LP value difference, but this is largely ignored because we’re only trying to confirm if the market trend is moving up or moving down.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Price Action Channel (FXI_PAC) The famous Turtle Traders used the price action channel indicator (PAC) to determine breakouts in the commodities markets. Since breakouts often signal the start of a new trend, I decided to incorporate this proven concept into Trend Finder™. Price action channels are determined by taking the highest high and the highest low of the past X bars. For the Turtle Traders they looked at the past 20 and 55 bars. For this system, we’re just looking at the past 5 bars. The previous closing price has to be above the PAC line for a buy entry and below the PAC line for a sell short entry.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Super Stop Loss (FXI_SSL) The super stop loss (SSL) is represented by the purple dashed line below. The dashed line is a combination of two moving averages using the same length (in our case 5 periods). SSL is one of the stop losses that we use to lock in profits and get out of the market. The other stop losses and how they are used will be discussed later in this course. NOTE: The SSL line actually switches from displaying the high moving average line to the low moving average line when the price closes above the high moving average. Conversely, when the price closes below the low moving average line, the indicator then displays the high moving average line on the chart. This is why you’ll occasionally see sharp “jumps” in the line as it moves from one side of the bars to the other.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Candle Stop (FXI_CS) The candle stop is the other stop loss that we use to lock in profits and get us out of the market. This particular stop loss takes the highest high and lowest low of the past three bars then averages them with the current open and previous close. When the price touches or crosses the value of the CS line, that is our indication to exit the trade.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Trading with all Trend Finder Indicators Below are all of the indicators on one chart. As you can see, it’s a bit overwhelming which is why I’ve created a simple, arrow-based trade signal that does all the work for you. If you prefer using all the indicators together though, the rules are simple: Buy when the histograms are all green and sell when they are all red. The SOI has to be either above 0.341 for buy entries or below -0.341 for sell short entries. The exit is equally as simply to determine: If two or more of the indicators change to a different color other than the entry color, exit the position.
But again, you don’t have to trade with all these indicators unless you want to…
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Trend Finder Trade Signal Below is an example of the Trend Finder Trade Signal (FXI_TrendFinder-TS). The trade signal takes all the indicators and puts them into one easy to read arrow-based indicator. The green arrows mean buy and the red arrows mean sell short...it’s as simple as that! If there are no arrows, then either exit if you are in a trade or stay on the sidelines.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
The Setup For the setup, we are looking for all the Trend Finder indicators to turn green at the same time (or for a green or red arrow to appear if you are using the FXI_Trend Finder Trade Signal). When this occurs we have a setup for entry.
Example of a Long Setup: The long setup has been highlighted. If you notice, the previous close was above the blue PAC line and the two stop loses, SSL and CS, are both below the price. The SOI is higher than 0.341 and all the other indicators are green, so we have our setup.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Example of a Short Setup: In the example below, the short setup occurs when the previous close is lower than the PAC line, the SOI is below -0.341, price is above the stop loses, and the other indicators are all red.
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The Forex Trading Formula Triad Trading Formula - Training Manual
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The Entry Long Entry We are looking for all the indicators to turn green, SOI above 0.341, the stop loses to be below the price, and the previous close needs to be above the PAC signal for a buy entry.
Example of a Long Entry: The entry for this long trade is at the open when we have a setup, as indicated on the chart below by the highlighted area.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Short Entry We are looking for all the indicators to turn red, SOI below -0.341, the stop loses to be above the price, and the previous close needs to be below the PAC signal for a sell short entry.
Example of a Short Entry: As indicated below, sell short on the open when you have a sell short setup.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
The Stop Loss The stop losses we will be using are the Super Stop Loss (FXI_SSL) and the candle stop (FXI_CS).
Example Long Stop Loss: The super stop loss (FXI_SSL) and the candle stop loss (FXI_CS) have been indicated on the chart. Use the lower of the two stop losses for the initial stop loss. The SSL and the CS can be used as trailing stops. A trailing stop loss moves in the direction of the trade to lock in profits, moving with the position. If price moves against the position then the trailing stop loss does not move, hopefully getting you out of the market with a small loss.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Example Short Stop Loss: The super stop loss (FXI_SSL) and the candle stop loss (FXI_CS) have been indicated on the chart. The initial stop loss should be the furthest from the entry price. In the example below, this would be the SSL.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
The Exit Long Exit The long exit occurs when one of the stop losses is hit or when two or more of the indicators turn red.
Example of a Long Exit: As you can see from the chart below, this trade was exited because both of the stop losses was hit and one of the indicators turned red. The arrows require that we have two exit conditions, which is why you do not see an arrow at the exit bar.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Short Exit The short exit occurs when one of the stop losses is hit or when two or more of the indicators turn red.
Example of a Short Exit: As you can see from the chart below, this trade was exited because both of the stop losses were hit and one of the indicators turned green. Note also that a red arrow does not appear over this bar which further indicates we need to exit the position.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Trend Finder™ Trading Rules Long Trades Long Setup: We are looking for all the indicators to turn green, SOI above 0.341, the stop losses to be below the price, and the previous close to be above the PAC signal for a buy entry.
Long Entry: Buy at the open if setup occurs. When using the Trend Finder Trade Signal, buy when a green arrow appears.
Long Stop Loss: The stop losses we will be using are the super stop loss (FXI_SSL) and the candle stop (FXI_ CS). Use the lower of the two.
Long Exit: Exit a long trade when you are stopped out or two or more of the indicators have turned red. When using the Trend Finder Trade Signal, exit when a green arrow fails to appear.
Short Trades Short Setup: We are looking for all the indicators to turn red, SOI below -0.341, the stop losses to be above the price, and the previous close needs to be below the PAC signal for a buy entry.
Short Entry: Sell short at the open if setup occurs. When using the Trend Finder Trade Signal, sell short when a red arrow appears.
Short Stop Loss: As with the long trades, exit at the higher of the two stop losses.
Short Exit: Exit a short trade when you are stopped out or two or more of the indicators have turned green. When using the Trend Finder Trade Signal, exit when a red arrow fails to appear.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Trading Trend Finder: Long Example Long Setup We are looking for all the indicators to turn green, SOI above 0.341, the stop losses to be below the price, and the previous close needs to be above the PAC signal for a buy entry. The arrow appeared at the open of the bar showing that all of the setup conditions are there.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Long Entry The entry for this long trade is at the open when we have a setup, as indicated on the chart below by the green arrow.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Long Stop Loss The super stop loss (FXI_SSL) and the candle stop loss (FXI_CS) have been indicated on the chart below by a black line. Use the lower of the two stop losses. Use the FXI_SSL and the FXI_CS to trail your stop loss up with the position to lock in profits.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Long Exit As you can see from the chart below, the exit occurred when there were no more arrows at the open of the new bar.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Trading Trend Finder: Short Example Short Setup We are looking for all the indicators to turn red, SOI below -0.341, the stop losses to be above the price, and the previous close needs to be below the PAC signal for a sell short entry. The red arrow indicates that all the criteria have been met for a short setup.
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The Forex Trading Formula Triad Trading Formula - Training Manual
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Short Entry The entry for this short trade is at the open when we have a setup, as indicated on the chart below by the red arrow.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Short Stop Loss The super stop loss (FXI_SSL) and the candle stop loss (FXI_CS) have been indicated on the chart by a black line. Use the higher of the two stop losses. The FXI_SSL and the FXI_CS will be used to trail your stop loss down with the position to lock in profits.
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The Forex Trading Formula Triad Trading Formula - Training Manual
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Short Exit As you can see from the chart below, when the arrows no longer appear at the beginning of a bar, that is yor signal to exit.
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The Forex Trading Formula Triad Trading Formula - Training Manual
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Final Thoughts on trend finder The Trend Finder System uses several indicators for the setup and exit of the trade. There are several different ways that these indicators look at the market. This has been done, so that when we are getting a buy or sell short from all of them, we should have the best opportunity to profit. Trend Finder allows you to trade on different time frames. However, I would recommend if you are trading on the hour or four hour time frame that you trade during the more volatile times. For example, trade from the open into about four hours of the three major sessions. This will allow you to have the best odds of catching a trend. You should not be trading when the markets are quiet or closed. As far as money management goes, I would recommend that you use only 2% of your account per trade. Take the amount of your account and multiply it by two percent. Then, divide your answer by the stop loss amount. This will give you the number of lots/mini-lots that you can buy/sell per trade. I’m confident that if you take the time to trade this system, you will be able to profit from this trend system.
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Triad Trading F O R M U L A
System 1: Trend Finder System 2: Squish-Squash System 3: Target Breakout
Squish-Squash™ Trading System
I
The Forex Trading Formula Manual Triad Trading Formula - Training Introduction
Squish-Squash
by Jason Fielder
Squish-squash™ explained Here’s a little piece of trivia that you may find interesting. (I know I did the first time I heard it…)
Did you know that the markets trend only about 35% of the time?
That’s right, nearly 2/3 of the time the market moves sideways, which has always been a huge frustration to trend and breakout traders who only know how to make money when the markets move. Now don’t get me wrong…I love massive moves as much as the next guy, and few things on this earth can match the feeling you get when you jump in at the bottom of a trend and then ride that baby all the way to the top! But let’s be honest, how often does that happen? Well, if my research is correct, the answer is only 35% of the time. And even if you catch every single opportunity that comes your way (which is highly unlikely even with a rocksolid trend system like Trend Finder™), that still leaves a whopping 65% of the time where you’re left on the sidelines. I don’t know about you, but that doesn’t sit too well with me… So that’s why I began work on a counter-trend system that would capitalize on the 65% that almost every other trader was ignoring! Out of this concept was born the Squish-Squash Trading Method… The Squish-Squash Trading Method has been in development for the past three years. The first two years were spent creating the Squish-Squash indicator and the additional year was spent creating filters to complete the system. When it was finished, I had a system that could adapt to the ever changing Forex market, including the quick moves during news announcements as well as the different personalities of the major pairs.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
In the pages that follow, you will learn about the indicators that make up the SquishSquash Trading Method: • Squish-Squash indicator • Linea Planus indicator, and the… • Strength Oscillator indicator You will learn what they do and how they function together to signal trades. In addition to learning the Squish-Squash trading method, I have also included market research that will help you determine the best times to trade for the maximum profit. (This one page alone is probably worth the investment you made in this training.) I’m confident that the Squish-Squash Trading Method will give you the skills and confidence you need to trade when most people don’t know what to do. And let me tell you…that’s an incredibly powerful feeling. Let’s get started…
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Indicators The Squish-Squash indicator is the foundation and trigger of this trading method. It identifies and filters the extreme conditions within a market so you are able to recognize and profit during counter-trend conditions. The Linea Planus indicator identifies the mode and direction of the market. The Strength Oscillator indicator distinguishes between trending and sideways markets. Now, let’s go through each of them one-by-one…
Squish-Squash Indicator (FXI_SquishSquash) Unlike other envelope indicators, the Squish-Squash indicator uses the median price of the Open to the High, for the upper band, and the Open to the Low, for the lower band (along with a few other proprietary calculations) to obtain the upper and lower bands. This seemingly minor tweak of using the MEDIAN rather than the open/close or high/low is the key that makes the entire system run. This is because the median filters the outliers, thereby giving you a “smoother”, more predicable result over the long-term. The Open to the High and Open to the Low was also used to limit the “whipsaw” effects that are normally displayed when averaging over a smaller time frame during sideways markets. By combining the two I was able to get less lag with less whipsaw. This was a huge leap in creating a working counter-trend system, but it still wasn’t perfect. You see, while the bands worked great during a sideways market, during a trend or news announcement there were too many false signals. For this reason, I added momentum as a filter when it is beyond the normal range. This momentum variable is labeled “Momentum Threshold” within the Inputs of the indicator. This allows for the indicator to track normally under regular conditions, but change if a large amount of momentum is added to the market suddenly. In other words, as volume increases, the momentum filter kicks into gear, widens the Squish-Squash bands and eliminates the vast majority of the false signals.
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This addition of momentum was the second big leap in creating a counter-trend system that actually works. The example below shows how the indicator tracks a sideways market. I have circled the “extremes” where the prices touched or broke through the Squish-Squash bands. Note that in a high-volume market, the addition of the momentum filter would eliminate many of these signals…
Inputs The Squish-Squash indicator has several settings so you can tweak it based on your own trading style. On the following page is a screen shot of the Squish-Squash inputs with my default settings in place...
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What follows is a brief explanation for each input in case you want to test your own combinations: Basic Bars High: This input determines how far back the Open to High range will be referenced. The larger the number the smoother the line will be. This input makes small changes in the overall calculation. The default is set to 100. Basic Bars Low: This input determines how far back the Open to Low range will be referenced. The larger the number the smoother the line will be. This input makes small changes in the overall calculation. The default is set to 100. Bars Back SS High: This input determines how many overall bars you want to reference. The larger the number the more lag that will be introduced into the calculation. This input makes large changes in the overall calculation. The default setting is 2. Bars Back SS Low: This input determines how many over all bars you want to reference. The larger the number the more lag that will be introduced into the calculation. This input makes large changes in the overall calculation. The default setting is 2. U: This input determines the vertical distance that the bands are from the price. This input makes large changes in the overall calculation. The default setting is one. There are the settings I use on the four major pairs: GBP/USD = 1, EUR/USD = .5, USD/JPY = .5, and USD/ CHF = .5.
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Momentum Threshold: The momentum threshold input allows you to add the current momentum into the calculations. By adding momentum to the calculation, we are adding the current rate-of-change. This effectively eliminates any lag that has been introduced into the equation. If the momentum threshold is set to 0 then momentum is added from the start. If you set the momentum threshold to 100, then there should be no momentum added to the equation. The default settings for the momentum threshold change depending on the time frame that you are trading on. Below are the default settings for the different time frames:
5 Minute: 15 Minute: 30 Minute: 1 Hour: 4 Hours: 1 Day: 1 Week:
2.5 3.5 4.5 5.5 10 25 50
Remember, that if you do not want the momentum added into the calculation then the input has to be set to 100. This will generate the most possible trades. If you always want momentum added to the calculation then the input has to be set to 0. Setting the momentum to 0 will generate the fewest trades, but increase the accuracy of each trade.
Linea Planus Indicator (FXI_LPI) The Linea Planus indicator (LPI) filters out the noise produced in a sideways market so that we have a nice flat line. During trending markets the Linea Planus indicator follows the market, but does have about a four period lag. The Linea Planus indicator’s default setting for length is 20. I use the LPI on a setting of 4 with this system, but feel free to do your own testing and adjust the length as you see fit. The screenshot on the next page shows the Linea Planus indicator in relation to the SquishSquash lines. Note how it moves above, below and in-between the bands…
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You will use this indicator to identify when the market is moving sideways. We do this in two different ways: 1. The first way to use the Linea Planus indicator to identify sideways markets is by comparing the current bar’s Linea Planus indicator value with the previous bar’s Linea Planus value. If the current bar’s value and the previous bar’s value are within the predefined range, then the market is moving sideways. The default predefined range for trading on a one hour bar chart or less is 2 points; this refers to the furthest decimal point to the right.
Example: EUR/USD 0.0003 or USD/JPY 0.03. If you are trading on the day time frame or greater then the predefined range is 4 points; example 0.0004 or 0.04.
If you want the most conservative entry parameters for Linea Planus use the predefined range of zero. If the current bars value and the previous bars value are outside of the
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predefined range then the market is in a trending mode. 2. The second way that we use the LPI is to compare where it is in relation to the Squish-Squash lines. If the LPI is in-between the Squish-Squash lines then there is a greater chance that the market is moving sideways. If the LPI indicator is above the upper Squish-Squash line then the market is trending down. If the LPI is below the lower Squish-Squash line, then the market is trending upward.
Strength Oscillator (FXI_SOI) The Strength Oscillator indicator (SOI) also helps to distinguish between trending and sideways markets. If you recall from the section on Trend Finder™, SOI was used to filter out sideways markets. Well for Squish Squash we’re actually using it to seek out these kinds of markets! The theory that drives this indicator is that the trending component is stronger when prices are farther from fair value and the noise of sideways movement is greater when the price is near value (the near value being zero). SOI helps determine these counter-trend points by taking the median average price for the past two days and comparing it to the price today. This works by setting the median average price for the past two days to zero, and then watching for deviations from this value. If the price breaks out of the one standard deviation area, whether it be to the upside or the downside, then the pair is in a trending mode. The Strength Oscillator (SOI) helps counteract the lag that we see in the Linea Planus Indicator (LPI). It also gives us another way of filtering out the extremes of the market. On the next page you’ll see a close-up screenshot of SOI...
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The Setup To have the setup for the a Squish-Squash trade, the Linea Planus Indicator line (LPI) has to be within the SSHigh and SSLow lines, the previous LPI value has to be within 3 points of the current LPI value, and the Strength Oscillator Indicator (SOI) has to be within one standard deviation from fair value (again, with fair value being zero).
Example of the Setup:
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The Entry Long Entry Example of a Long Entry: The Linea Planus indicator (LPI) is between the SSHigh and SSLow lines. The previous bars LPI value is within 3 points of the current bar’s LPI value. (Remember: Point value refers to the smallest decimal point to the right.) The Strength Oscillator is within the one standard deviation lines, 0.341 and -0.341. The Price broke below the SSLow line signaling a buy order.
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Short Entry Example of a Short Entry: The Linea Planus indicator (LPI) is between the Squish-Squash High (SSH) and SquishSquash Low (SSL). The previous bar’s Linea Planus indicator (LPI) value is within 3 points of the current bar’s Linea Planus indicator (LPI) value. For this example, the previous bar’s LPI value was 1.2939 and the current bar’s LPI value was also 1.2939. When the values are the same, as in this example, it creates the ideal setup. Remember, point value refers to the smallest decimal point to the right. The Strength Oscillator (SOI) is within the one standard deviation lines, therefore we are in a sideways market. When the price touches or breaks through the SSHigh, we sell short.
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The Stop Loss The stop loss that I use is the range of the SSHigh and SSLow. For a long entry stop loss, take the SSRange (SSHigh-SSLow) and then subtract it from the SSLow. For a sell short stop loss, take the SSRange (SSHigh-SSLow) and add it to the SSHigh.
Example of Both a Long and Short Stop Loss: In the chart below, there are two possible exits marked. If the Strength Oscillator (SOI) breaks above 0.341 and you’re in a short trade or below -0.341 and you’re in a long trade, then exit. The other possible exit occurs if the Linea Planus (LPI) breaks out of the SSHigh and SSLow range.
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The Exit Long and Short Exit In the example below you would sell short when the price touched the SSHigh. Then, when the price touched the SSLow, you would close out your short order with a buy to cover order and immediately open a buy order. Next, when the price touched or broke the SSHigh you would close your buy order with a sell order and reverse again with a sell short order. Then, as in our example, you would close your short order by buying to cover. Finally, you would have reversed by buying, but this trade would have been closed out because the Strength Oscillator indicator broke above the 0.341 level and the LPI was beyond the SS lines, signaling it’s time to exit. The four trades below netted 470 pips in 9 days.
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Squish-squash™ Trading Rules Long Trades Long Setup: The Linea Planus indicator (LPI) is between the SSHigh and SSLow lines. The previous bar’s LPI value is within 3 points of the current bar’s LPI value. [Point value is smallest decimal on right.] The Strength Oscillator is within the one standard deviation lines: 0.341 and -0.341.
Long Entry: Price touched/broke below the SSLow line signaling a buy order.
Long Stops: Long entry stop loss, take the SSRange (SSHigh-SSLow) and subtract it from the SSLow.
Long Exit: Price touched/broke the SSHigh line. Possible Exits: If the SOI breaks out of the one standard deviation lines, or if the LPI breaks out of the SSH or SSL lines.
Short Trades Short Setup: The Linea Planus indicator (LPI) is between the SSHigh and SSLow lines. The previous bar’s LPI value is within 3 points of the current bar’s LPI value. The Strength Oscillator is within the one standard deviation lines: 0.341 and -0.341.
Short Entry: Price touched/broke above SSHigh line signaling a short order.
Short Stops: Short entry stop loss, take the SSRange (SSHigh-SSLow) and then add it to the SSHigh.
Short Exit: Price touched/broke the SSLow line. Possible Exits: If the SOI breaks out of the one standard deviation lines, or if the LPI breaks out of the SSH or SSL lines.
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Trading squish-squash: Long Example Long Setup The Linea Planus line moved between the Squish-Squash High and Squish-Squash Low lines. The Strength Oscillator moves into the one standard deviation area. At this point we are looking for the price to touch or break through the SSLow to trigger a buy order.
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Long Entry The chart below shows that the LPI was between the SSHigh and the SSLow and the SOI is between the one standard deviation lines; so we have our setup. The long entry occurs when the price breaks below the SSLow line as indicated on the chart.
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Long Stop Loss The LPI is between the SSH and SSL. The SOI is within one standard deviation from fair value. The price broke below the SSLow line, so we bought. The long stop loss was calculated by subtracting the SSLow from the SSHigh and then subtracting the answer from the SSLow. Stop Loss = SSLow - (SSHigh – SSLow)
Stop Loss = 1.4584 - (1.4701 - 1.4584) Stop Loss = 1.4467
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Long Exit The Linea Planus (LPI) was between the Squish-Squash High (SSH) and Squish-Squash Low (SSL) lines and the Strength Oscillator Indicator (SOI) was within one standard deviation from fair value; for our setup. The price broke below the SSLow line forming our entry. The stop loss was placed at the SSLow minus the SSRange (SSH-SSL) at 1.4467. The long exit occurred when the price broke above the SSHigh line.
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Trading squish-squash: Short Example Short Setup The Linea Planus line is between the Squish-Squash High and Squish-Squash Low lines. The Strength Oscillator is within the one standard deviation from fair value. In the example below, the setup is present. Now we are look for the price to touch or break the SSHigh to trigger a sell short order.
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Short Entry The Linea Planus line is between the Squish-Squash lines and the Strength Oscillator is within one standard deviation of fair value for our setup. The price touched the Squish-Squash High line resulting in a sell short order to enter the market.
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Short Stop Loss The LPI is between the SSH and SSL. The SOI is within one standard deviation from fair value. The price touched the SSHigh line, so we sold short. The short stop loss was calculated by subtracting the SSLow from the SSHigh and then adding the answer to the SSHigh. Stop Loss = SSHigh - (SSHigh – SSLow)
Stop Loss = 115.93 + (115.93 – 114.51) Stop Loss = 117.35
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Short Exit The Linea Planus (LPI) was between the Squish-Squash High (SSH) and Squish-Squash Low (SSL) lines and the Strength Oscillator Indicator (SOI) was within one standard deviation from fair value; for our setup. The price touched the SSHigh line forming our entry. The stop loss was placed at the SSHigh plus the SSRange (SSH-SSL) at 117.35 The short exit occurred when the price broke below the SSLow line. This trade resulted in a 123 pip profit.
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Best Time to Trade The best time to trade using the Squish-Squash Trading Method is when market volatility is low. So, I conducted research to find out when the market volatility is the lowest for the four major pairs. This information has been included for you.
Note: All time is in Eastern Standard Time.
EUR/USD = 5:00 pm to 2:00 am
USD/JPY = 12:00 pm to 7:00 am
GBP/USD = 5:00 pm to 2:00 am
USD/CHF = 5:00 pm to 2:00 am
The times listed above are conservative. If you want to trade a little bit more aggressively, you can start trading at 12:00 pm instead of 5:00 pm. I would not recommend trading Squish-Squash intraday between 8:00 am and 12:00 pm EST, as this is when the markets are most volatile. If you are going to trade during this time, either trade it in conjunction with a trend and breakout system such as Trend Finder™ and Target Breakout™ or make sure the momentum threshold is set to zero.
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Using Squish-Squash To Trade News Announcements If you are thinking I’m going to tell you to avoid trading Squish-Squash during news announcements…you’re right! Remember, Squish-Squash is a counter-trend system, so the hard moves that occur during news announcements are absolute poison. But, that doesn’t mean that you can’t use this system to trade the news BEFORE the announcements are officially released. Let me explain… Before the five large U.S. news announcements: FOMC Interest Rate Decisions, Non-Farm Payrolls, Trade Balance, CPI, and Retail Sales; the markets go quiet in anticipation. In other words, the markets move into a range and begin a sideways progression until the news announcement actually occurs. During this time (prior to the actual announcement) you can capitalize the low volatility and ranging markets by trading a counter-trend system! Below are the results of tests conducted on the EUR/USD and the USD/JPY of the price ranges prier to a news announcement: EUR/USD Average Range: 5:00 pm EST – 8:29 pm EST, prior to a US news announcement. FOMC Average Range = 93.17 pips Unemployment Average Range = 55.04 pips Trade Balance Average Range = 65.34 pips Retail Sales Average Range = 68.90 pips CPI Average Range = 65.58 pips USD/JPY Average Range: 5:00 pm EST – 8:29 pm EST, prior to a US news announcement. FOMC Average Range = 85.34 pips Unemployment Average Range = 63.6 pips Trade Balance Average Range = 73.42 pips Retail Sales Average Range = 68.65 pips CPI Average Range = 68.8 pips
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To trade the news using the Squish-Squash Trading Method, set the input “U” to zero and the “Momentum Threshold” to one hundred. Setting “U” to zero will move the lines in closer to the price action. Setting the “Momentum Threshold” to one hundred will insure that no momentum is added into the calculation. This will produce a lot more trades. (See screenshot below…)
Start trading at 5:00 pm EST the day before the news announcement up until 8:29 am EST. Trading before a news announcement is best performed on the hourly time frame. You should have several trades making small profits on each. Just remember to stop trading before the news announcement is released.
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Final Thoughts on squish-squash Even though the markets move in a counter-trend ranging motion about 65% of the time, you are still exposing yourself to more risk with counter-trend as opposed to trend trading because you are buying/selling against the current direction. So, to limit your potential losses, make sure you have stop losses in the market. I can’t stress this enough… If you don’t, one massive breakout could blow your entire trading account. (And trust me, this is a mistake you’ll only make once.) Also, there are numerous combinations and ways to use the Squish-Squash indicators included with this training, and I encourage you to play with them until you find what works best for you. I’ve given you my “default setting”, but even I deviate from those settings from time to time… For example, one conservative trade I enjoy putting on is to place all the indicators at their default settings except Momentum Threshold. Set it to zero so that the current momentum is added into the calculation from the start. I enter the trade if the price touches or breaks the SSHigh or SSLow on the hourly time frame, then I exit at the end of that hour. This trade grabs a few pips a couple of times a week, and doesn’t require much thought or effort. In the end, I hope you have fun with it and I hope it makes you a better trader. Just having the ability to capitalize on ranging markets will put you light-years ahead of most traders – even the professionals – and the Squish-Squash Trading Method allows you to do just that.
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Triad Trading F O R M U L A
System 1: Trend Finder System 2: Squish-Squash System 3: Target Breakout
Target Breakout™ Trading System
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The Forex Trading Formula Triad Trading Formula - Training Manual Introduction
Target Breakout System
by Jason Fielder
target breakout™ explained Having a breakout system in your portfolio is vital to making the most amount of money you can in the market in the shortest amount of time. For one, breakout systems will help offset the losses from your counter-trend system as the market moves out of consolidation. In the same manner it will help offset the losses from false starts that are indicative of most trend systems. In developing the Target Breakout System, I had to go back to the basics in a matter of speaking and ask myself some questions.
Where is the most likely location to find potential breakouts?
What indicator is the best to find this location?
The answer to these two questions resulted in the development of the Target Breakout System™. To answer the first question, the locations that have the best potential for a breakout are where support, resistance, and/or consolidation have come into the market. And the best indicator to identify these periods in the market isn’t actually an indicator at all - it’s price action! With Price Action we’re looking real-time at what the price of a currency pair is right now as compared to the last few bars. So in a sense, we’re looking at the chart itself to tell us what is going on.
The upside to trading with price action is that (unlike other indicators) it doesn’t lag behind the market.
The downside, however, is that it requires you to look closely at the chart itself to determine these areas of support, resistance, and/or consolidation without the aid of traditional indicators.
But don’t worry...I’m not going to make you look at a blank chart and guess where the
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breakouts will occur. I have developed a proprietary indicator called the Target Breakout Indicator that will aid you in trading with price action. But before we get into the Target Breakout Indicator and how to use it, I want to delve into what this indicator is looking for in the market and how it works. As I said earlier we are looking for areas of consolidation, support, and resistance.
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Consolidation Consolidation is an area where price moves into a smaller range than normal and stays at or around the same price for a period of time. This typically occurs at support or resistance areas, however, it can occur at any time. Markets generally consolidate for one of two reasons: 1. The market has hit an area of support and resistance and the buyers and sellers are at equilibrium, causing the price to remain within a range as in the example below...
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2. It could also be that a news announcement is being released soon and the trading is thin, as both buyer and sellers wait to see what the market is about to do. Regardless of the reason for consolidation, there is a higher than normal probability that the market will breakout very soon after consolidation has begun, allowing us to profit enormously. The Target Breakout Indicator (TBI) identifies these areas of consolidation by referencing the Average True Range (ATR). The ATR is an indicator that measures volatility (or price movement). It does this by subtracting the Low from the HIGH for that day (including any gaps that may occur when the markets open). If the ATR is moving lower, TBI will use this information to determine if the market is consolidating.
Support Support is an area where price has moved low enough that buyers have started coming into the market creating more buyers than sellers. When this occurs, the price will typically reverse and start moving back up. The lowest point during this reversal will create an area or price of support. The opportunity for profit comes when the price breaks through this support line as in the example on the next page...
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Because this price has already been tested, one of two things will occur: 1. The market will move to the support price and buyers looking for a “deal” will flood the market. This causes the price to reverse back up above the support line once again. 2. If buyers do not come into the market, the price will continue to fall. If the market falls fast enough, this could produce a breakout. Obviously when trading breakouts we’re looking for #2 to occur. There is such a thing as a “false breakout,” however (which occurs with scenario #1), so it’s the job of the Target
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Breakout Indicator (TBI) to locate these areas of support while at the same time keeping us out of the false breakouts. TBI locates areas of support by looking for a series of lows within a defined range. If the market is trending up or down, the lows will not be within a range and therefore will not qualify as a support area. If the lows are within a defined range then the Target Breakout Indicator will identify that location as a new area of support.
Resistance Resistance is an area where price has moved high enough that sellers start to enter the market and eventually outnumber the buyers, ultimately causing the market to move lower. The area or price where this occurs is the resistance area or price.
Note: More often than not there will be an “area” of support/resistance rather than a defined “price”.
As you may have surmised, just like areas of support, areas of resistance offer a strong potential for breakouts and therefore PROFIT if we have a system that can get us into these breakouts early enough. And just like areas of support, there are two possible scenarios with trading resistance: 1. The market can hit the resistance area and then pull back. If the market moves fast enough and far enough this could signal a breakout in the other direction. 2. The market can continue through the area of resistance to move higher allowing us to make a profit. The Target Breakout Indicator (TBI) locates areas of resistance by looking for a series of highs within a defined range. If the market is trending up or down the highs will not be within a range and therefore will not qualify as a resistance area. If the highs are within a defined range then the Target Breakout Indicator will identify that location as a new area of resistance.
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Once the Target Breakout Indicator has determined that we are in an area of support, resistance, or consolidation, the indicator will look at price action for the next step. Price action determines the direction of the breakout. To determine price action we look at the current price and the High/Low range for that bar compared to the support, resistance, and/or consolidation area. Then we confirm this with the next lowest time frame to make sure they match up. This allows us to confirm that the market is at a support, resistance, and/or consolidating area
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and also allows us to pinpoint our entry. If all this sounds complicated, don’t worry! The Target Breakout Indicator does all the math for you, so you don’t have to track eight screens with two different time frames while at the same time doing calculations with the ATR just to trade the four major pairs on one time frame. Think about it...would you want to have eight screens open at all times that looked like this?
I’m guessing your answer is “No,” so let’s look at the Target Breakout Indicator and see how we use it to trade breakouts...
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Indicators Target Breakout (FXI_TBI) As you’ve already learned, the Target Breakout Indicator identifies areas of potential breakouts by locating support, resistance, and consolidation. After locating these areas the Target Breakout Indicator uses a proprietary algorithm that incorporates the ATR (average true range), price action, and the next lowest time frame to “target” the ideal price to enter a breakout trade. As you can see from the screenshot below, the indicator itself is very simple and consists of a series of horizontal support and resistance lines...
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The Setup Long Setup For the setup, we are looking for the target breakout indicator to draw a support or resistance line. When this occurs we have a setup for entry.
Example of a Long Setup: The long setup is shown as a light green resistance line, as indicated on the chart below.
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The Forex Trading Formula Triad Trading Formula - Training Manual
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Short Setup Example of a Short Setup: In the example below, the short setup is shown as a light red resistance line.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
The Entry Long Entry We are going to look for a break above the resistance line of one pip or more to go long.
Example of a Long Entry: The entry for this long trade is one pip above the green resistance line, as indicated on the chart below.
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Short Entry We are going to look for a break below the support line by one pip.
Example of a Short Entry: As indicated below, sell short one pip below the red support line. (Note that in this example the price did, in fact, breakout below the line of support.)
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The Stop Loss Long Stop Loss Since the markets move very quickly during a breakout, we will be using a trailing stop loss so we can lock in any gains while still protecting us against the downside. The trailing stop loss amount will vary depending on the time frame that you are trading as indicated in the chart below: Time Frame: Trailing Stop Loss: 30 Minute 15 pips 60 Minute 30 pips 4 Hour 45 pips 1 Day 60 pips 1 Week 150 pips
Example Long Stop Loss: The trailing stop loss line on the chart is set at 45 pips below the entry because we are trading on the four hour time frame.
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Short Stop Loss Example Short Stop Loss: In this example we ara trading on the daily time frame, so the trailing stop loss is set at 60 pips above the entry as indicated in the screenshot below:
NOTE: The trailing stop is a pip for pip trailing stop, meaning that as the market moves higher or lower by one pip then the trailing stop will move higher or lower by one pip.
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The Exit Long Exit The long exit occurs when the market moves against your trailing stop loss to the point where it is hit. At that point you are taken out of the market.
Example of a Long Exit: As you can see from the chart below, the trade was closed out when the market moved against the trailing stop loss to the point where the stop was triggered.
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Short Exit Like the long exit, the short exit occurs when the trailing stop loss is finally hit.
Example of a Short Exit: As you can see from the example below, the trade was closed when the market moved higher and hit the trailing stop loss.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Target breakout™ Trading Rules Long Trades Long Setup: We are looking for all the indicators to turn green, SOI above 0.341, the stop losses to be below the price, and the previous close to be above the PAC signal for a buy entry. We are looking for the Target Breakout Indicator to create a resistance line.
Long Entry: Buy one pip above the resistance line.
Long Stop Loss: Place a trailing stop loss below the entry. Time Frame: Trailing Stop Loss: 30 Minute 15 pips 60 Minute 30 pips 4 Hour 45 pips 1 Day 60 pips 1 Week 150 pips
Long Exit:
The trailing stop loss will exit the trade for you.
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The Forex Trading Formula Triad Trading Formula - Training Manual
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Target breakout™ Trading Rules Short Trades Short Setup: We are looking for the Target Breakout Indicator to create a support line.
Short Entry: Sell short one pip below the support line.
Short Stop Loss: Place a trailing stop loss above the entry.
Time Frame: 30 Minute 60 Minute 4 Hour 1 Day 1 Week
Trailing Stop Loss: 15 pips 30 pips 45 pips 60 pips 150 pips
Short Exit: The trailing stop loss will exit the trade for you.
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Trading Target breakout: Long Example Long Setup We are looking for the Target Breakout Indicator to draw a light green resistance line. The resistance line indicates a potential location for a breakout.
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Long Entry Once you have established that a Target Breakout has occurred, buy one pip above the resistance line.
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The Forex Trading Formula Triad Trading Formula - Training Manual
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Long Stop Loss Place a trailing stop loss below the entry. In the example below, we are trading on the day time frame so we would use a 60 pip trailing stop loss. The black line below the entry indicates the placement of our trailing stop loss. Make sure to place your trailing stop loss as soon as you enter the trade.
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Long Exit Sell to close the trade when the trailing stop loss is hit. The chart shows our setup, entry, stop loss, and the exit of the trade. It’s very important to use the correct trailing stop loss for the time frame that you are trading on. This will ensure that you exit from the trade in the most efficient manner.
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Trading Target breakout: Short Example Short Setup We are looking for the Target Breakout Indicator to create a light red support line. When the light red support line is created we have a short setup.
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Short Entry The red support line is the setup for a short entry. As the chart below shows, the short entry is one pip below the red support line.
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Short Stop Loss Place a trailing stop loss above the entry: In the example below we are trading on the day time frame, so we would use a 60 pip trailing stop loss. The black line above the entry indicates the placement of our initial trailing stop loss. Make sure to place your trailing stop loss as soon as you enter the trade.
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Short Exit Buy back to close the trade when the trailing stop loss is hit. The chart shows our setup, entry, stop loss, and the exit of the trade. It’s very important to use the correct trailing stop loss for the time frame that you are trading on. This will ensure that you exit from the trade in the most efficient manner.
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Final Thoughts on target breakout By identifying areas of support, resistance, and consolidation, the Target Breakout System uses the fundamental movement of the market to predict and capitalize off of the large moves that frequently occur in the Forex. And since this system utilizes a trailing stop, you can literally set your trade, walk away and wait for price to hit your stop and exit your position (hopefully for a big profit). Another nice aspect of this system is that you can trade it on virtually any time frame you like. I personally like to trade it on the 30-minute time frame during the first 4 hours of the New York session since that’s when I’m awake, but you could do the same for the London or Tokyo sessions as well. I’m confident that if you take the time to trade this system, you will be able to profit from the many breakouts the Forex market throws at you. And when combined with the other Triad systems, you’ll maximize your overall profits at both the beginning of trends as well as the end of ranges.
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The Forex Trading Formula Manual Triad Trading Formula - Training Introduction
Conclusion
by Jason Fielder
Money Management and Parting Words... The Triad Trading Formula acknowledges that the market moves in three basic ways: trend, counter-trend, and breakout. It also makes the correct assumption that you can’t make money if you aren’t in a trade. So, it makes sense that if you can trade all three types of markets profitably, you will make the most amount of money if you do just that. But to trade the three types of market actions, you need three different types of trading systems. With the Triad Trading Formula™, you’ve just been handed three such systems: 1. Trend Finder™ 2. Squish-Squash™ 3. Target Breakout™ With these three systems you should be able to make the most amount of money in the shortest amount of time in the most varied of trading conditions. But the real benefits come when you can trade all three systems in one account on the same amount of money. You are able to do this because the systems are non-correlated. By doing this you’ll continually hedge against the inevitable bad trades and keep the sharp spikes out of your equity curve.
A Word About Money Management As far as money management is concerned, I recommend that you use a percent amount money management. Only use 2% of your account per trade. If you are trading all three systems at one time, your risk should be no more than 6% at any one time (and these times will be few and far between). To determine the amount of lots/mini-lots/micro-lots to trade just do the following calculation:
trade account size * 2% = risk per trade
Then...
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The Forex Trading Formula Triad Trading Formula - Training Manual
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risk per trade/stop loss amount = number of lots/mini-lots/micro-lots to be traded
You now have the knowledge to go and trade no matter how the market is moving, and let me tell you that’s a power that few traders – even the professionals – possess. I’m confident that if you apply the systems and strategies in the Triad Trading Formula™ you will be successful. All you really need to do is TAKE ACTION and start trading. Thanks again for your investment in this training, and as always... Good trading,
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Triad Trading F O R M U L A
Bonus System 1: Friday Special Bonus System 2: GPB/USD Trend Bonus System 3: Carry Trade
Bonus Trading Systems
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The Forex Trading Formula Introduction Triad Trading Formula - Training Manual
Friday Special
by Jason Fielder
Friday Special™ Explained While doing research at about 2:00 a.m. one night (err…morning), I came across a trading system that has been in the public domain for a good while. The system sounded interesting because it was not complicated and it had fundamental reasons as to why it should be profitable. Of course after having come across other “Free” systems and being disappointed with the results, I have learned to test before trading or even getting excited about a system. So, test I did… As I expected, the original system’s test results were not impressive, so over the next few days I conducted additional research on how to improve the system. In this case, it turned out that LESS truly was MORE! Friday Special is the result of the research and testing that was conducted. This trading system is a breakout system that takes advantage of both fundamental and technical analysis. (Don’t worry the fundamentals are built into the system, so you won’t have to read through boring reports on the world economies.)
Why Fridays? As you may have already guessed “Friday Special” is only traded on Fridays (the day when most major news announcements are released). By only trading on Friday’s you get to take advantage of these news releases and the fundamental impact that they have on the markets. For example, the USD has their employment figures released the first Friday of every month. The Non-farm payroll is part of the employment figures and is second only to a Fed interest rate decision, as far as its ability to move the market. Other key USD news announcements that are released on Friday are the PCE core inflation report, the current account balance, and the advance retail sales. While currently the USD news announcements tend to move the market the most, there are still other countries that also release economic data on Fridays.
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The JPY release their housing starts and leading economic index typically on Fridays. The CAD has their employment figures, GDP, and retail sales release throughout the month on Fridays. The EUR has news releases that occur on Fridays such as the current account report and their CPI report. The effect that these news releases can have on the market is enormous, and the Friday Special takes advantage of these fundamental news releases.
Why the “Friday Special” Works… To qualify the possible breakouts that can occur from the fundamental news being released, we use a technical analysis tool: the highest high and lowest low. This technique was made popular by Donchian breakouts. You may be familiar with the Price Channel indicators or trading Channel Breakouts. The price channel indicator helps to identify volatility by showing when the market price has pushed through the high (resistance level) or low (support level) of the past several days. When trading the Friday Special we use the past ten days to generate our price channel indicator. (NOTE: This indicator has been recognized as one of the top ways of identifying breakouts and trending markets, which is why I chose to incorporate it into this system.) So, by combining the predictive nature of the price channel with news announcements known to move the market, you get a breakout system that is highly predictable and highly profitable. This profitability stems out of the fundamental, technical, and truly simplistic genius that is the Friday Special. In the following pages we will cover how to use the Price Channel indicator and how to trade the Friday Special breakout system using channel breakouts…
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The Setup For the setup, we are looking for a 10 day high/low channel breakout on a day chart on Friday. (NOTE: I recommend this system be traded on the day time-frame only.) A 10 day high channel breakout occurs when the price breaks through to one pip above the high of the past ten days. A 10 day low channel breakout occurs when the price breaks through to one pip below the low of the past ten days.
Example of a 10 Day Price Channel Indicator:
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Example of the 10 Day High Price Channel Indicator: In the example below, we have identified the tenth bar from the current bar, the ten period price channel upper band, and the ten day high. If you would notice that the ten day high and the upper blue band are at the same price.
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Example of the 10 Day Low Price Channel Indicator: On the chart below, we have identified the tenth day back from the current bar, the ten period price channel lower band, and the low for the past ten days. The ten day low is indicated by the lower red band.
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The Entry Long Entry We are going to look for a breakout of the high of the past ten days, but only on Friday. We are going to place a buy order one pip above the high.
Example of a Long Breakout Entry:
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Short Entry We are going to look for a breakout one pip below the low of the past 10 days, but only on Friday. We are going to place a sell short order one pip below the ten day low.
Example of a Short Breakout Entry:
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The Stop Loss The stop loss should be placed 100 pips below/above the entry price. The stop loss was not just picked out of thin air, but instead was determined by extensive trading and testing.
Example Stop Loss of a Long Channel Breakout: The stop loss line on the chart is set at 100 pips below the entry.
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Example Stop Loss of a Short Channel Breakout: The stop loss is 100 pips from the entry indicated on the chart.
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The Exit Long Exit The long exit is at the end of the bar, assuming that you are not stopped out.
Example of a Long Exit: As you can see from the chart below, we closed the trade at the end of Friday’s session.
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Short Exit Like the long exit, the short exit is at the end of the bar.
Example of a Short Exit: As you can see, we closed the trade at the end of the bar. The chart also shows the setup, entry, and stop loss.
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Friday Special™ Trading Rules Long Trades Long Setup: We are looking for a breakout one pip above the high of the last ten days, on Friday only.
Long Entry: Buy one pip above the high of the past ten days on Friday.
Long Stop Loss: Place a hard stop below the entry: 100 pips
Long Exit:
Sell at the end of the bar.
Short Trades Short Setup: We are waiting until Friday to look for a breakout below the ten day low.
Short Entry: Sell short one pip below the low of the last ten days.
Short Stop Loss: Place a hard stop above the entry: 100 pips
Short Exit: Buy to cover at the end of the bar.
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Trading Friday Special: Long Example Long Setup We are looking for a breakout above the high of the past ten days on Friday.
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Long Entry Once you have established the ten day high and it is Friday, you need to look to enter the trade at one pip above the high of the last ten days.
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Long Stop Loss Place a hard stop below the entry: 100 pips. The black line below the entry indicates the placement of our 100 pip stop loss.
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Long Exit Sell to close the trade at the end of the bar. Since we are trading on a daily time frame, the exit would be at 5:00 pm EST. The chart shows our setup, entry, stop loss, and the exit of the trade. The trade was closed out at the end of the day for a profit.
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Trading Friday Special: Short Example Short Setup We are waiting until Friday and then looking for a breakout below the 10 day low.
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Short Entry Sell short one pip below the low of the last ten days.
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Short Stop Loss Place a hard stop above the entry: 100 pips. The black line above the entry indicates where our stop loss would be placed. You would want to place your stop 100 pips above your entry.
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Short Exit Buy to cover at the end of the bar. The chart below shows our setup, indicated by the down arrow. The sell short entry would be one pip below the low of the pivot bar. The stop loss would be placed 100 pips above our entry, as indicated by a black line. The exit is located at the end of the bar.
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Final Thoughts on friday special The Friday Special Breakout System uses the fundamental movement of the market to predict and capitalize off of the large moves in the markets. The fact that this system is based on the fundamentals should only increase its robustness and longevity. I have and will continue to improve on the Friday Special Breakout System. I’m confident that if you take the time to trade this system, you will be able to add your own ideas and improve on an already profitable system.
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The Forex Trading Formula Manual Triad Trading Formula - Training Introduction
GPB/USD Trend System
by Jason Fielder
GBP/USD Trend Trading System explained There are numerous ways to find and trade trends in the GBP/USD, but there is one system in particular I use that produces consistently great results. Now, if you’ve read any of my other reports or trading systems, you’ve no-doubt heard me preach that you should stay away from systems that only work in one pair. As a general rule I believe this is true, however I’m breaking my own rule this time. “Why?” you ask... Well, for one the results are simply too good to ignore. But more importantly, the GPB/USD pair does seem to have its own personality, and in particular it tends to have larger than normal moves both within a session as well as with the overall trend. In this section, you will learn which indicator I use to trade the GBP/USD Trend System, as well as how to calculate the buys and sells by quickly looking at the chart. You’ll learn all the details, including: • WHEN to know it’s time to enter a trade… • WHERE to place your stop losses to limit your risk as much as possible, and… • WHEN to exit a trade at just the right time to lock in your profits… This technique is simple and straightforward, and you will be able to use it whether you are trading long or selling short. The first section will cover the indicator that I use to trade this system (and why it works as well as it does). The second section will cover the setup for both long and short trades. The third section will cover the entry for both a long and a short trade. The fourth section will cover the stop loss and the fifth section will cover the exit. So, with that brief introduction out of the way, let’s get started…
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The Forex Trading Formula Triad Trading Formula - Training Manual
by Jason Fielder
Indicators In the following section, we will cover how to use the price channel indicator to trade the GBP/USD trend trading system. You should have received the price channel indicator with the Triad Trading System, but I will still show you how to create the indicator by hand so you do not need the indicator itself to trade this system.
Price Channel Indicator The famous Turtle Traders used the price channel indicator to determine breakouts of the last fifty-five and twenty days. We are going to use the same theory of the price channel only on a shorter time frame. We are going to use the high and low of the past five sessions. This price channel will determine our setup and entry. The example below shows a five period price channel indicator.
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Upper Band of the Price Channel Indicator The upper band of the price channel tracks the highest high of the previous X number of days. In our case we are going to track the highest high of the previous 5 sessions. This indicator does lag by one column, but if it did not lag you would not be able to distinguish when a breakout to the upside occurs. A breakout of five sessions or more was chosen because it allows us to catch the strong up trends while staying out of the chop.
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Lower Band of the Price Channel Indicator The lower band of the price channel indicator tracks the lowest low of the previous X number of days. We will be using sessions or days and the number of sessions/days that you will want to track is 5. The lower band lags one session just like the upper band, but this allows us to see when a breakout to the downside.
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The Setup The setup for a Long Price Channel trade occurs when the price moves up to the highest high of the previous five sessions/days. The easiest way to calculate the highest high of the previous five sessions is to ignore the most current session, then draw a horizontal trend line from the highest high starting with the fifth session moving forward to the present session.
Example of a Long Price Channel Setup:
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Example of a Short Price Channel Setup: The setup for a Short Price Channel trade occurs when the price moves down to the lowest low of the previous five sessions/days. The easiest way to calculate the lowest low of the previous five sessions is to ignore the most current session, then draw a horizontal trend line from the lowest low starting with the fifth session moving forward to the present session.
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The Entry Long Price Channel Entry The entry occurs when the price moves higher by one pip than the highest high of the previous five sessions/days.
Example of a Long Price Channel Entry:
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Short Price Channel Entry The entry occurs when the price moves lower by one pip than the lowest low of the previous five sessions/days.
Example of a Short Price Channel Entry:
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The Stop Loss Example of a Long Price Channel Stop Loss: The placement of the stop loss is 30 pips below the entry as shown below…
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Example of a Short Price Channel Stop Loss: The placement of the stop loss is 30 pips above the entry as shown below…
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The Exit The exit that we used is a 3 period high/low channel cross. The best way to visualize this is to plot two simple moving averages (SMA). For a long trade, plot a simple moving average of the high of the past 3 periods/days. For a short trade, plot a simple moving average of the low of the past 3 periods/days.
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Long Exit Example of a Long Price Channel Exit: The exit for the five session price channel long breakout occurs when the high is lower than the SMA of the high of the past 3 sessions.
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Short Exit Example of a Short Price Channel Exit: The exit for the five session price channel short breakout occurs when the low is higher than the SMA of the low of the past 3 sessions.
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GPB/USD Trend System Trading Rules Long Trades Long Setup: We are looking for price to move right up to the upper band of the 5 period price channel indicator.
Long Entry: Buy one pip above the upper band of the 5 period price channel.
Long Stop Loss: Place a hard stop below the entry: 30 pips
Long Exit:
Sell at the close of the bar if the high falls below the 3 period SMA of the high.
Short Trades Short Setup: We are looking for price to move right down to the lower band of the 5 period price channel indicator.
Short Entry: Sell short one pip below the lower band of the 5 period price channel.
Short Stop Loss: Place a hard stop below the entry: 30 pips
Short Exit: Buy to cover at the close of the bar if the low is above the 3 period SMA of the low.
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Trading GPB/USD Trend System: Long Example Long Setup We are looking for the price to move up to the 5 period upper band price channel for a long setup. The upper band is blue on the chart below.
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Long Entry Once you have established that the setup has occurred, buy one pip above the 5 period upper band price channel.
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Long Stop Loss Place a hard stop below the entry: 30 pips. The black line below the entry indicates the placement of our 30 pip stop loss.
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Long Exit Sell at the close or open of next bar when the high is lower than the 3 period simple moving average of the high. The chart shows our setup, entry, stop loss, and the exit of the trade. In the example below the trade was closed at the next bars open, after the criteria for exiting was met. The 3 period SMA is shown in red on the chart below.
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Trading GPB/USD Trend System: Short Example Short Setup We are looking for the price to move down to the 5 period lower band price channel for a short setup. The lower band is blue on the chart below.
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Short Entry Once you have established that the setup has occurred, sell one pip below the 5 period lower band price channel.
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Short Stop Loss Place a hard stop above the entry: 30 pips. The black line below the entry indicates the placement of our 30 pip stop loss.
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Short Exit Buy to cover at the close or open of next bar when the low is higher than the 3 period simple moving average of the low. The chart shows our setup, entry, stop loss, and the exit of the trade. In the example below the trade was closed at the next bars open, after the criteria for exiting was met. The 3 period SMA is shown in red on the chart below.
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Final Thoughts The GBP/USD Trend Trading System uses the large moves that occur in the GBP/USD, both within individual sessions and long term trends to allow you to profit. It also uses a time tested breakout entry system used by the Turtle Traders, the Price Channel Breakout, so the fundamental theory of the system is sound. This system uses a tight stop loss to preserve capital. The tight stop loss also allows you to use a smaller amount of money in your account. Or, you may choose to trade this with a non-correlated system using the same amount of money. Basically the stop loss gives you options with your money management. The exit is a quick trigger exit to preserve gains and get you out of the market if the direction changes so that you can be ready for another trade. The accuracy of this system is lower than other trend systems which I’m sure will stop newer traders from trading this system. However, I would challenge you to trade this system in a demo-account or micro-account until you have the confidence that I have in this system. I believe that through trading this system you will become a better and more profitable trader, because it will force you to rely on a system that, while it isn’t always the prettiest, is still HIGHLY PROFITABLE. I hope you’ve enjoyed this report, and I sincerely hope you put the system you’ve just learned into action.
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The Forex Trading Formula Triad Trading Formula - Training Manual Introduction
Carry Trade
by Jason Fielder
Carry Trade Explained What Is the Carry Trade? The carry trade is a trading strategy in which you simultaneously borrow and then sell a currency with a relatively low interest rate, and then use the funds to purchase a different currency yielding a higher interest rate. By doing this, you are able to capture the interest rate “carry” or rollover. For example, if you were to buy the AUD/JPY pair, you would be selling Japanese Yen and buying Australian Dollars. To sell something you have to possess it, so when you go to sell the Japanese Yen, you first have to borrow it. When you borrow the Japanese Yen you are charged (currently) 0.50% interest on that money. After you sell the Japanese Yen, you take that money and buy Australian Dollars. By holding the Australian Dollars you are paid 6.75% interest on that money. And it’s the spread, or “interest rate differential”, between these two interest rates where you make your money! Here’s how it works: When positioning a carry trade you want the interest rate differential to ALWAYS be in your favor. To obtain the interest rate differential, all you have to do is subtract the interest rate of the currency you sold by the interest rate of the currency you bought. In our example:
AUD 6.75% - JPY 0.50% = 5.75% interest rate differential
This interest rate carry or rollover is all done on an overnight basis, so you are paying the overnight interest rate on the borrowed currency and at the same time earning the overnight rate on the currency being held. In other words, you are either paying out or receiving interest on the position, depending on whether the interest rate differential is for or against you. Trades are done on a trading day basis and so they are technically closed out at the end of each day. If you are holding your position longer than that, however, your broker simply rolls you forward into a new position for the next trading day. Typically this process is
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transparent, but it does mean that you will either pay or receive the interest differential on your position at the end of each day.
Criteria for a Successful Carry Trade There are several elements that make up a successful carry trade: •
There is a minimum interest rate differential for optimal performance (which I will be covering)…
•
You must know the right way to build a “basket” of pairs when trading this method, and…
•
As always you must put good money management principles into practice or you could give back all your profits on just one bad trade.
There are also different issues that could make your carry trade unwind and become unprofitable that you need to keep an eye on. In the following section, we will be learning how to create, adjust, and exit (if needed) a successful carry trade.
Minimum Interest Rate Differential Before we go any farther, the minimum interest rate differential that you want is 3% on the majors and 6% on the exotics (assuming you plan to trade exotics in which case you need to exercise extreme caution). You want a high enough yield so that the flow of capital from the lower yielding interest rate pair will flow to the higher yielding interest rate pair. This will only occur if the investors and traders are rewarded with a high yield. If you do use exotic pairs, you should limit it to pairs with spreads less than 20 pips. (Any larger spreads than this and it eats into your profits.)
Inflation Rate Another major issue that you need to take into consideration is the inflation rate of the currencies in your basket. High inflation can counteract the currency appreciation that would normally occur in a high interest bearing currency.
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I consider anything over 4% inflation to be high, though it’s possible this number could change over time. You will need to keep up with what is considered “high” inflation and adjust your stratagy accordingly.
NOTE: The Consumer Price Index is a news announcement that monitors and measures inflation.
Two Ways To Profit with the Carry Trade One of the oldest rules in finance is: “The flow of money will always move towards the higher rate of return.” Therefore, the currency with the highest interest rate should attract more money causing it to increase in value. The opposite is also true: The currency with the lowest interest rate should attract the least amount of money, causing its value to drop. With this in mind, it should come as no surprise to you that the majority of money that is made within a carry trade – about 75% – is from the capital appreciation that occurs due to investors and traders valuing the higher interest bearing currency over the lower interest bearing currency. The other 25% of the profit made in a carry trade is from the interest gained daily due to the interest rate differential. So just like a blue chip stock that both increases in value and pays a healthy quarterly dividend, the carry trade provides two ways for traders to make a profit: 1. Capital appreciation, and… 2. Interest rate differential
What is a Carry Trade Basket? The carry trade is rarely if ever traded using a single pair. Rather, you should always diversify your efforts by trading a “basket” or grouping of currency pairs. It’s sort of like building your own mini-Forex mutual fund! While trading a basket will lower your overall return, the diversification helps reduce overall
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risk and limit massive drawdowns in your account that could occur when trading just a single pair. So how many pairs should you place in your basket? Simple: As many pairs as possible…as long as they qualify. And just to review, a qualifying pair is one in which the: 1. Interest rate differential is GREATER THAN 3% for the major pairs and 6% for the exotics… 2. Inflation for either currency in the pair is LESS THAN 4%, and... 3. The spread when you trade the pair is LESS THAN 20 pips (only an issue when trading exotic pairs)… So in the examples below, all the currencies would qualify:
Currency Interest Rate Inflation Rate NZD 8.25% 3.50% AUD 6.75% 3.30% GBP 5.50% 2.80% USD 4.25% 2.41% CAD 4.25% 2.40% EUR 4.00% 2.56% CHF 2.75% 2.00% JPY 0.50% 0.40%
Currency Pairs Interest Rate Differential NZD/JPY 7.75% AUD/JPY 6.25% GBP/JPY 5.00% USD/JPY 3.75% CAD/JPY 3.75% EUR/JPY 3.50%
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Money Management and the Carry Trade As with any trading system, long-term profit or loss always comes back to money management. When you are setting up your carry trade, you only want to risk a maximum of 15% of your account at any one time. Of course this will be spread over several pairs. You should also limit the overall exposure per pair to no more than 0.05%. The 0.05% per pair rule will make sure that you are not overly invested into one pair (as this would defeat the purpose of the “basket” entirely). For example: If you have $20,000 in your account and you are risking 15%, then you have $3,000 at risk in your carry trade. If you have 10 pairs in your carry basket with an emergency stop loss placed at 300 pips per pair, then you are risking your $3,000 or 15% of your account (10 pairs * 300 pips). This is the maximum that you would want to trade for this example. This brings us to a second aspect of money management which is the stop loss. This type of trade is a long term trade that is measured in months and even years. Not days and certainly not hours or minutes! Therefore, your stop loss must have enough “room” in it to allow the market to move. Believe it or not, I know very experienced money managers who don’t use a stop at all when trading their carry trade. I personally want a stop loss in the market as it helps me sleep better at night, but for this system it is NOT essential. If you choose to use a stop loss, it should be 250 to 400 pips away from the market (depending on the volatility of the pair you are trading). For the most part, I use a 300 pip stop loss. But just because the carry trade is a long-term play, that doesn’t mean that you just “set it and forget it”. You do need to adjust and monitor the account at least once a week. • Whether you are up or down at the close of the week, you will need to adjust your positions to maintain your 15% exposure. If you have made money then you will need to buy additional lots or mini-lots. If you have lost money you will need to sell some lots or mini-lots.
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• You also need to monitor the currency pairs that are in your basket for any interest rate or inflation changes. Most if not all of the currencies post well in advance when an interest rate decision will be made. If a rate decision causes one of your pairs to fall out of qualification, then you will need to adjust your positions immediately. Do not wait until the end of the week. Remember that most of the movement you see after an economic news announcement is directly related to how the news might affect the interest rate. In the long term, if the news is good for interest rates then the price of the currency should go up. The opposite is also true in that if the news is bad for interest rates, the price of the currency should go down. The most apparent risk of the carry trade is that the foreign exchange rates will change, and the trader will have to pay back a more expensive currency with less valuable currency. This is why you should have stops in the market and why you MUST monitor your trade weekly. If a pair is disqualified either due to interest rates change or inflation increases, simply exit the position and readjust your overall position so that you are risking only 15% of your account at any one time. If you want to trade this system a little more conservatively, risk only 10% of your account.
Why Should You Have a “Carry Trade” in Your Forex Account? There are several good reasons to have a carry trade in your Forex portfolio, not the least of which is that it just flat out works. The fundamentals backing the carry trade are sound and proven, and they should continue to work into the future. Next, this trade is easy to learn and can be quickly implemented and monitored, so even casual traders can make time for it. With that said, you do need to understand that this is a long term trade and you could see draw downs as large as 50%. But if you trade in a basket and monitor your trades, this risk can be mitigated. Now that you understand how the Carry Trade works and why you need to add it to your trading portfolio, let’s look at some sample trades so you can see how it works in the “real world”…
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The Setup The currency pair has an interest rate differential of 3% or greater on the majors and 6% or greater on the exotics. The spread is less than 20 pips. The currencies need to have low to moderate inflation. If the inflation is high the pair does not qualify.
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The Entry We are looking for a pair that has an interest rate differential, spread, and inflation rate that qualify. If this occurs, then we are going to sell the lower interest rate currency and buy the higher interest rate currency.
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The Stop Loss Place the stop loss 300 pips below the entry if you are going long, and 300 pips above if you are going short. In the example below, we placed our stop loss 300 pips below the entry. If your stop loss is hit but the currency pair still qualifies, then re-enter the position the following week. You would do this when you are adjusting your carry basket.
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The Exit You will need to exit your position if the interest rate differential drops below 3% for majors and 6% for exotics. You would also exit if the inflation rate of the currency you bought becomes high. Remember, the carry trade is a long term trade. The example below lasted nearly three years.
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Carry Trade Trading Rules Entry: If the interest rate differential is 3% or greater on the majors and 6% or greater on the exotics, then sell the lower interest rate currency and buy the higher interest rate. The inflation rate of the two currencies must be low to moderate. If either of the two currencies inflation rates are high, do not enter the trade. If the spread is larger than 20 pips for the currency pair you are looking at, then do not use that currency pair.
Stop Loss: The stop loss is placed 250 – 400 pips below the weekly close, depending on the volatility of the pair. If you want a set standard stop loss, place it at 300 pips. If you are stopped out but the pair remains qualified, you should then re-enter the position when you adjust your basket.
Adjustment: At the end of the week you need to adjust your carry basket. You also need to evaluate your carry basket to see what percentage of risk you have in the market. If the account went up you need to buy more lots or mini-lots to bring your account to 15% exposure. If you account went down you need to sell lots or mini-lots to bring your account to 15% exposure. Next you need to adjust your stop loss.
Note: I prefer mini-lots because it allows you to adjust your account to a more precise level.
Exit: If a currency pair in your carry basket falls out of qualification, then exit the trade where it is and adjust you carry basket with the remaining pairs to 15% exposure of your overall account size. To fall out of qualification the currency pairs’ interest rate differential has to fall below 3% on majors and 6% on exotics or the inflation rate of one or both of the currencies in a pair has to become high.
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Trading the Carry Trade: Example #1 This is probably the best known carry trade out there: the USD/JPY. The first week that the USD/JPY qualified to be placed in the carry basket has been marked on the chart. This was the week that the US rates changed and a 3% differential was obtained. A 3%+ differential still stands, so the USD/JPY would remain in the carry basket until it no longer qualified.
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Trading the Carry Trade: Example #2 The chart below shows an example of when the GBP/USD first qualified and then later disqualified. When a pair no longer qualifies, exit the trade and re-adjust your basket.
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Trading the Carry Trade: Example #3 The NZD/JPY has been a very profitable pair to have in the carry basket. This is due to the large interest rate differential.
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Final Thoughts on the carry trade No matter your trading style or preferences, everyone should make room in their trading portfolio for the Carry Trade. Not only is this trade simple to learn and easy to execute, it’s also based on strong fundamentals so you can be confident that it will return solid profits for years to come. So take a minute or two and STOP looking at the charts. Instead, look at the currencies themselves (and their interest rates in particular) and see if they qualify using the standards I just gave you. If they do, start building your own Carry Trade Basket so you can enjoy the same profit opportunities that the money managers of the world enjoy. Go ahead, give it a shot. I’m confident you won’t regret it!
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