Binary Options Profit Pipeline
T estimonials
Mara Here are my results for today! $12,340! for European-US session. The loss was because I placed the trade too late and didn’t review rules. But I only hope to do 1-2 High trades per day. I have just seen a friend of mind lose 20K in a couple of minutes. It was a wake up call. One of the things I have learnt is that you have to be very patient to seek for the trade. Mara Sorm
Robert Last night I made what I thought was a mistaken trade, I wanted to place a trade for $37 but instead didn’t clear the $100 that was in the entry box and ended up making a $1037 trade. I followed the entry rules and signals sent yesterday and ended up making a lot for the day. More than what I wanted to make. Slowly and surely my confidetx:e is rising. Robert Mashilo Kligoeng
Amanda I just also wanted to let you know I really received major help from the videos in the member area and thought it was great you guys shared the one that Curtis did. I took myself back to my college days... I sat myself down, focused, hand wrote the trade entry rules, reviewed them, reviewed the videos, and I am on track. Imagine that, studying works haha. It is like you said, it’s up to us to take responsibility for where we want to be. Amanda Harman
Lee I have been a member for less than one month and I can already see the benefits of being a member! The signals I have received have been VERY beneficial! The win rate is ASTOUNDING and I can hardly believe this is real.The signals are delivered in a MORE THAN timely manner to your email inbox. The signals are very accurate as well. They are very clear to read and understand as well as easy to implement. Lee Woodsum
Chris Since starting 3 months ago my account has more than trebled, on just placing trades on the indices. Imagine what my account would look like if I was to trade the forex as well? Signals that are sent out are clear & easy to understand even for someone like myself who has very little trading knowledge. I can’t thank The Binary Options Experts enough. Chris Smith
Antwan My name is Antwan and I’ve been with The Binary Options Experts for some time now and what I have found out about The Binary Options Experts is that they are on your side one hundred percent. The support is the best ever. You will be glad you chose The Binary Options Experts to help you become money-worry free. I’m really happy right now that I picked The Binary Options Experts, you should too. Antwan Carty
Anita Just wanted to say thank you for all your help. You should be proud that you are doing what so many other companies claim to do, genuinely help and educate others so they are able to produce real and proven results. Thanks again. Anita K
Dan The profits I am seeing daily are by far and away the most immediate ard lucrative I have ever experienced. I would recommend The Binary Options Experts to anyone looking for exceptional trading programs, cutting edge education, practical and timely support and SCREAMING PROFITS. Dan Andrews
Jane Just wanted to drop you a line and tell you that the profits from our last 4 days trading has paid off my Binary Options Experts investment for the month, my weekly mortgage repayment AND I had $100 to spare PROFIT! Awesome work guys, can’t thank you enough! Jane Button
Liz On every occasion they have treated me with patience and understanding, answering all my questions and concerns promptly and concisely. I could not recommend their business strongly enough and look forward to working with them in the future as they help me build my growing pottfolio. Liz P
Dominic I have lost over $250,000 of my own funds attempting to trade for myself ! The Binary Options Experts have given me the opportunity to trade profitably without the risk or losses I experienced trading previously. Trading with The Binary Options Experts has given me a rewarding income with limited time investment allowing me the lifestyle of having both money and the time to enjoy it. Dominic M
Risk Disclosure Binary Options carries a risk to your capital and you may lose all, but not more than, your initial stake. This may not be suitable for everyone. Ensure that you fully understand the risks involved prior to trading and seek independent financial advice if you have any doubt in the suitability of any type of speculation. Only ever speculate with money you can afford to lose. The Binary Options Experts (a division of Profit Pipeline Systems Corp.), its products and representatives do not provide individual investment advice. Therefore any information provided by the company’s products or representatives or publicity material are not to be read or taken as any form of trading advice nor a solicitation to trade and is designed for educational purposes only. No guarantee or warranty of future profitability can or has been made. The use of this product is purely at the member’s own risk. Past performance is not necessarily a guide to future profitability. All rights reserved. No part of this publication may be reproduced in any form or by any means without the prior permission in writing of The Binary Options Experts. Please note it is our intention to be as accurate in fact, detail and comment as possible. However, the publishers and their representatives cannot be held responsible for any error in detail, accuracy or judgement whatsoever. The book is sold on this understanding.
C ontents Chapter 1:
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Chapter 2:
Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Chapter 3:
Introduction to the Markets . . . . . . . . . . . . . . . . . . . . . 19
Chapter 4:
Introduction to Bet On Markets . . . . . . . . . . . . . . . . . . 27
Chapter 5:
Introducing MetaTrader . . . . . . . . . . . . . . . . . . . . . . . . 35
Chapter 6:
Introduction to Charting . . . . . . . . . . . . . . . . . . . . . . . . 45
Chapter 7:
Market Direction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Chapter 8a: Introducing Divergence . . . . . . . . . . . . . . . . . . . . . . . . . 55 Chapter 8b: Regular Divergence . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Chapter 8c: Hidden Divergence . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Chapter 8d: Confirming Divergences . . . . . . . . . . . . . . . . . . . . . . . . 85 Chapter 9:
Introducing Support and Resistance . . . . . . . . . . . . . . . 95
Chapter 9a: Previous Market “Swing Zones” . . . . . . . . . . . . . . . . . 101 Chapter 9b: Trend Lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 Chapter 9c: Moving Averages . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 Chapter 9d: Pivot Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 Chapter 9e: Fibonacci Retracements . . . . . . . . . . . . . . . . . . . . . . . 125 Chapter 9f: Fibonacci Extensions . . . . . . . . . . . . . . . . . . . . . . . . . 137 Chapter 10: Putting it all Together . . . . . . . . . . . . . . . . . . . . . . . . . 143 Chapter 11: Using the Flowcharts . . . . . . . . . . . . . . . . . . . . . . . . . 153 Chapter 12: Support/Resistance Confluences . . . . . . . . . . . . . . . . . 163 Chapter 13: Placing No-touch Barriers . . . . . . . . . . . . . . . . . . . . . 171
Chapter 14: Money Management . . . . . . . . . . . . . . . . . . . . . . . . . . 179 Chapter 15: When Not to Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . 185 Chapter 16: Trading Psychology . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 Chapter 17: SharpReader . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 Chapter 18: Keeping a Trade Log . . . . . . . . . . . . . . . . . . . . . . . . . . 199 Chapter 19: Final Thoughts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
C hapter 1
Introduction
W
hat we are aiming to introduce to you in this book is a successful methodology for making regular profits from the financial markets, with as little as a few minutes per day of market analysis. As you progress through the book, we will guide you through everything you need to know in order to become a successful Binary Options trader. Even if you have never traded before and you feel as though you may not know the first thing about how to make money from the financial markets, we are confident that by the end of this book you will be ready to do just that! You may never have heard of Binary Options before, or you may only have heard of it in relation to vanilla options. It’s definitely one of the newest investment and/or trading vehicles in existence. When most people think of the financial markets, they view it in terms of perhaps investing in the stock market, or possibly arbitrage, which is also becoming a very popular method of getting involved in the markets. Both of those approaches require a great deal of time if you are to be successful. Many people, who have regular jobs, simply can’t commit the hours that are necessary in order to study and learn the correct methods and trading styles, or to do the research that’s necessary for making good investment decisions. Binary Options, and the methods of approaching it that we will teach you, are different. With the methods you will learn in this book, you will be able to analyse the markets very quickly each day; in the mornings before you go to work and even on your lunch break. We will be teaching you a trading method which means you don’t have to be at the screen every minute of the day waiting for an opportunity to come along. 11
Introduction
Naturally, the more time you spend with the markets the better, but one of the main reasons we created this trading book was to give people an opportunity to enter the world of the financial markets without it interfering in their everyday lives. The other great advantage of binary options trading is the ability to be in complete control of the risk element. With every binary options trade, you will know before you even get into the trade exactly how much you will make if you’re correct, and exactly how much you stand to lose if you’re wrong. With that information you can plan your risk management strategy accordingly. You’ll never be overexposed to the market and there is absolutely no danger at all of your account being decimated by a sudden sharp move. This means that anyone, with any level of capital, can get started. We trade professionally using the exact methods you will learn in this book, and we are aiming to give you the knowledge you need to one day enjoy a professional trading career of your own. On that note, we’d like to tell you a bit about ourselves, why we do what we do, and what we are now offering to you through this book. We trade professionally, and have been actively trading for many years. Trading professionally for yourself is, as far as we’re concerned, absolutely the best job in the world. There are no bosses; there are no clients; and there are very few overheads. As a professional trader you have complete freedom and flexibility. We come from a professional trading background. We learned some of the most effective trading techniques in the world while working in this environment, but after even just a few years the long hours and stress began to take their toll on us and we decided to strike out on our own. We are fortunate to live in an era when this is even possible. Throughout much of the history of financial trading, the only way to make it a profession was to work for a bank or a major financial institution, or failing that, at least have access to vast amounts of capital beyond the reach of most ordinary people. All this has changed over the last decade or so. With the rise of faster internet connections and new technologies, it’s now possible for anyone to trade the financial markets using just their home computer. When we realised this was possible, it was, for us, the obvious next step. 12
Binary Options Profit Pipeline
It’s no secret that there are advantages to the city trader lifestyle that you don’t get working for yourself—the main one of course being the bonuses! But, we thought, what good is a city trader’s income if you never have the time or the freedom to enjoy it? We saw some of our friends in the city reach “burnout” point in their early 30s, and decided that that wasn’t what we wanted for ourselves. As soon as we got ourselves set up at home and began applying some of the methods we knew from our City experience, we never looked back. We now have a job which we can do from a laptop; from our living room, from the garden, even abroad. Anywhere in the world in fact! We truly believe that the methods you will learn in this book have the potential to give you the lifestyle we currently enjoy ourselves. Not right away of course—as with virtually everything in life it’s best that you take things slowly and become truly comfortable and confident in what you’re doing before you even begin to think about making a career of it—but that’s where the great advantage of this method is to be found. You can learn everything in this book around your existing commitments. Before you move on and begin learning, there are a few points to be made… First of all, we emphasise that you should take things slowly when you’re learning. Don’t skip ahead or be in a rush, because that’s where things will go wrong. This book is arranged in a very logical way—we introduce you to the different “pieces of the puzzle” as we go through the chapters, and then towards the end of the book we show you how to put those pieces together into a complete approach to trading. If you skip ahead you’ll find you may well struggle when you get to some of the later chapters. Go through each chapter one by one and make sure you understand completely before moving on. In conclusion, we look fmward to helping you understand the concepts that are contained in this book, and using those concepts to start taking profits out of the fmancial markets!
13
C hapter 2
Risk
S
peculating on the movement of the financial markets is something that contains inherent risk. There are plenty of opportunities to make money if you can make correct judgements, but there are just as many opportunities to lose money if you get it wrong. It’s important to understand that there are no guarantees in any form of financial trading! The first thing you need to be absolutely clear on is that you should NEVER ever be trading with money that you cannot afford to lose! Not only is it simple common sense not to risk money you need for other purposes, but doing so can also adversely affect your trading performance by impacting on your psychological approach to trading. It creates fear of loss, which in turn causes you to make poor trading decisions based on emotion rather than on information. As long as you understand that risk of loss is part of the trading game, and that as long as you manage your money accordingly and don’t over-extend yourself, then you’re on your way to becoming a successful trader. The second aspect of risk that you need to understand is the idea of risk/reward ratios. A risk/reward ratio, for those that are very new to this, is simply the amount of money that you risk on an individual trade, compared to the amount that you could potentially gain on it. One of the key rules of “traditional” types of trading, such as through a broker account or spread betting, is that you should never risk more on a trade than you stand to gain, and this is very good advice. In one of these “traditional” types of trade, the amount of money you can win or lose depends entirely on the amount that the market moves against you or in your favour, so in order to be successful you have to always position yourself in the market at a point where the odds 15
Risk
are that the market will move further in your favour than it could move against you. This is something that’s very difficult to achieve consistently. With Binary Options trading however, we are not actually particularly interested in how far the market moves in our favour or against us. Naturally, we always prefer to see the market move in our favour, but it’s not an essential part of successful binary options trading. We’re going to be doing a type of trading where we can win even when the market moves against us. With binary options trading, we are purely interested in the probability of a particular event occurring, or not occurring. Because we are thinking purely about probabilities, this allows us to think about risk in a different way. In the type of trading we’ll be showing you as you go through this book, you’ll find that in the vast majority of trades we’ll be taking, we risk more than we stand to gain. This means that if a trade loses, we will lose more money than we stood to gain had the trade been successful. That might sound slightly strange to you at this stage, but read on and things will become clearer! Take a look at this semi-hypothetical example from the field of sports: FA Cup 4th Round Liverpool vs. Havant & Waterlooville (H&W) This match actually occurred in 2008. The fixture pitted the multiple English and European Champions, a team made up of some of the top players in the World, against a part-time team from five divisions below, made up of plumbers, postmen, taxi drivers and more. Not only that, but the game was to be played at Liverpool’s home ground, giving them even more of an advantage. The chances of H&W winning this game were tiny. But what if you could have gone into a bookmaker’s and placed a bet that paid out a profit as long as H&W didn’t win? If Liverpool won, you’d make money. Even if the match ended in a draw, you’d make money. They only way you’d lose money would be if the rank outsiders actually managed to win the match! It’s unlikely you would have been able to find a bookmaker willing to offer you this bet, because the odds would be so stacked in your favour! 16
Binary Options Profit Pipeline
Now here’s the hypothetical aspect: Imagine if this fixture was played 100 Saturdays in a row, and every Saturday, before the match, you could place a bet that says “H&W won’t win”. It’s likely that even if you found a bookmaker willing to offer you this bet, they would have offered you incredibly short odds, perhaps around “1/15”, which means that for every $15 you staked on H&W not winning, you’d earn a profit of $1 if they did indeed fail to win. Conversely, if H&W did manage to win, you’d lose your $15 stake. So imagine if the game was played 100 times in a row, and every time, you staked $1,500 that H&W would not win the match at odds of 1/15. This means that every time the match ended as either a draw or a Liverpool win, you’d get your $1,500 stake back, plus a profit of $100. But if H&W managed to win, you’d lose your $1,500 stake. It’s entirely possible, highly likely even, that the match could be played 100 times in a row and H&W wouldn’t win a single one, such is the difference in ability between the two teams. But imagine the following: Ninety-eight times out of 100 the match ends as either a Liverpool win or a draw. Two times out of 100 H&W manage to win. With the bets you would have been making, this means that on 98 occasions, you’d make a profit of $100, while on two occasions you’d lose your $1,500 stake. Do the maths: 98 x $100 = $9,800 2 x$-1,500 = $-3,000 Net Profit after 100 matches = $6,800!!! Even though you were risking more than you stood to gain on each bet, they were still good bets because the odds were so strongly in your favour. Sadly, these opportunities simply don’t exist in sports. For one thing matches with such a bias in the probable outcome don’t come around too often, and when they do they’re never played 100 times in a row! Even if they were, there’s no bookmaker on Earth who would let you bet this way, because the odds would be too stacked in the favour of those placing the bet. 17
Risk
But opportunities with this kind of bias not only exist in the financial markets, they occur over and over again! We’re going to be teaching you to find the financial equivalents of this kind of trade—opportunities where the odds are so strongly in our favour that it’s acceptable to risk more than our potential gain. The reason why Binary Options brokers will let you place these high-probability trades while sporting bookmakers won’t is actually quite simple. With the sporting example above, it would have been very easy for anyone to figure out that H&W would have very little chance of beating Liverpool. Even if you didn’t know the first thing about football you could have learned all you needed to know just by picking up a newspaper. Therefore, to offer bets that any member of the general public can easily profit from is quite simply bad business for sporting bookmakers. On the financial markets though, you do need specific knowledge in order to profit from the high-probability trades, and indeed to even spot them in the first place. The vast majority of people don’t have this knowledge, and never will, so the brokers are taking acceptable risks by offering the high-probability trades, because only a small minority of their clients will be able to spot them. In this book our aim is to teach you to identify these highprobability trades that aren’t necessarily obvious to others who don’t have the correct training. While on the surface this approach to trading may look risky, the truth is that if you study all the materials in this book and apply them correctly, you will be putting the odds massively in your favour on each trade while taking negligible risks, just as you would have been had you been able to place bets on 100 consecutive Liverpool v H&W games. That’s the key to this style of trading.
18
C hapter 3
Introduction to the Markets
A
financial market is like any other marketplace. It is a place where buyers and sellers convene to set the value of a particular
item. Within a financial market, prices fluctuate constantly, and these fluctuations are caused by changes in the balance of supply and demand—meaning of the weight of buying at any given moment versus the weight of selling at any given moment. When supply and demand are in equal measure, things are in absolute equilibrium, and market prices stand still. This rarely lasts for very long however, and sooner or later, one will start to outstrip the other. Let’s take a look at an example of supply and demand. Imagine that a new University study announces that oranges are the “new super-fruit”. This results in a sudden buying frenzy of oranges, an increase in demand, to the point where the supply can’t keep up. With oranges getting more and more scarce, the demand is greater than the supply. As a result of this, oranges become more valuable, and the price of an orange rises. It continues to do so, as long as people still believe they’re worth buying at the increased prices. Eventually, the price of oranges gets so high that people think they’re no longer good value. People who bought oranges as an investment and hoarded hundreds of thousands of them might start to think that now is the time to cash in, to sell their oranges for a massive profit at this price because it seems they’re not going any higher. The problem is that nobody wants to buy at the moment. There’s now plenty of supply of oranges but no demand, because the price has gone too high. 19
Introduction to the Markets
This means that in order for demand to come back in to the market, the prices have to come down again to the point where people once again think they’re good value. This means that the price of oranges starts to fall again, and it will continue to do so as long as there is more supply than demand. Eventually it will get to a point where people think oranges are once again good value, and they start buying again, and the whole process repeats itself again. The market is a constant battle between supply and demand— sellers and buyers. The key to being successful in the financial markets is to be able to identify, either ahead of time, or right at the time, the point at which the market changes from being a selling market to a buying market, or vice versa. As you go through this book, you will learn how to accurately identify these points. So, what kinds of things are traded in financial markets? First of all, the ones you are probably most familiar with are company shares. Company shares are traded on what is known as the stock market and their prices tend to rise and fall depending on the company’s performance. When a company is doing well, demand for its shares increases, and so does their value, as the supply diminishes. When a company is doing badly, its share price falls because the demand for the shares is lessened, while supply increases. Company shares are also grouped together in what are known as stock indices—such as the FTSE 100 (London), or the Dow Jones Index (New York). Stock indices are effectively a combination of all share prices listed within the index, and as a result they give an overall view of how a country’s economy is faring. Usable items such as gold, oil, copper, rubber, orange juice, coffee and many more, are known as commodities. There is no single commodity market however—rather, each item has its price set on its own market. This means that there is a market to set the price of gold, another to set the price of oil, and so on. The next major group of markets is known as the Currency Market, or Foreign Exchange Market, which can be shortened to either the FOREX Market, or just the FX Market. 20
Binary Options Profit Pipeline
The term “currency market” is, like the term “commodity market”, actually an umbrella term for a group of markets. The currency market includes hundreds of separate markets, because each individual market is used to define the value of one currency against one other currency. This means that there’s a separate market for setting the value of pounds against Dollars, another to set the value of pounds against euros, another to set the value of euros against yen, and so on. There are hundreds of currency markets in total, but as we go through this book we’re going to be focusing on just a few of them. We’re going to focus on most of the bigger, more active currency markets. Why do we choose to trade the currency market? Firstly, and this may come as a surprise to you, the currency market is the world’s biggest financial market by a long, long way. It absolutely dwarfs the stock market or the commodity market. The average DAILY turnover in the currency markets is over four trillion dollars. This means that four trillion dollars of money is traded every single day across the many currency markets. The sheer amount of activity in the currency market means that is a very liquid market. The term ‘liquidity’ means that the market functions smoothly. In any transaction in any financial market, you need someone to take the “other side of your trade”. This means that if I’m buying, then someone else is selling to me, and if I’m selling, someone else is buying from me. There is so much activity in the currency market that you can almost always find someone else to take the “other side” of your trade, which results in a smooth and well-functioning market. When there’s very little liquidity in a financial market, you tend to find that long periods of inactivity are punctuated by sudden, sharp price movements, which can make good trading somewhat difficult. This is not a problem in the currency market. The next great advantage to trading the currency market is that it runs for 24 hours, five days a week. From Sunday night through until Friday night, the market is constantly open. The main advantage of this, for us as traders, is that it means that you can, to a certain extent, pick and choose your trading hours. If you are studying this book around another job, you might find that you want to get into the markets when you get home from work, and this is possible with the currency market because it will still be open. 21
Introduction to the Markets
Some other markets have opening and closing hours during the week. For example, the FTSE 100 Stock Index is open only between 8.30am and 4.30pm every day. This obviously creates a problem if you are unable to trade until the evening as you can’t trade on a market when it is closed. Again, this is not a problem with the currency market.
Understanding currency quotes When trading the currency market, the most basic piece of information available is the current market rate—also known as the quote. You need to be able to quickly and easily read currency quotes and interpret what they mean. In any currency quote, you’ll see six letters to start with. The first three letters represent the first currency that makes up the quote, and the second three letters represent the second currency involved. Remember—each individual currency market defines the value of one currency against one other currency. This means that they often get referred to as “currency pairs” which is another term you’ll be hearing regularly. Each currency has its own specific three-letter “symbol”, so you can always know which currencies are involved in the quote you are looking at. The major currencies of the world—the ones we will be trading— have their three-letter symbols listed in the table below. Currency Australian Dollar Canadian Dollar Swiss Franc Euro British Pound Japanese Yen New Zealand Dollar Swedish Kronor US Dollar 22
Symbol AUD CAD CHF EUR GBP JPY NZD SEK USD
Binary Options Profit Pipeline
Look at these examples of currency pairs: 1) GBP/USD = British Pounds against US Dollars 2) EUR/JPY = Euros against Japanese Yen 3) USD/CHF= US Dollars against Swiss Francs Now look at these examples of currency quotes: 1) GBP/USD = 1.8755 2) EUR/JPY = 161.25 3) USD/CHF= 1.0877 The next key concept in understanding currency quotes is to be able to determine what these numbers mean. The currency listed on the left of the quote is referred to as the “base currency”, and in any currency quote the base currency is always equal to 1. The currency on the right of the quote is the currency that’s being compared to the base currency. So, in those three examples shown above, what the numbers are telling us is: 1) It takes 1.8755 US Dollars to equal 1 British Pound 2) It takes 161.25 Japanese Yen to equal 1 Euro 3) It takes 1.0877 Swiss Francs to equal 1 US Dollar It may take a while to commit to memory both the symbol abbreviations and the way in which the quotes are structured, but keep practising and before long you’ll be able to read a whole list of currency quotes at a glance and get a full picture of what the markets are doing! The next thing to learn is how the movement of a currency is represented in its quotes. Currency quotes change almost constantly, in incremental values. During the busier European and US trading hours, the quotes change almost every second! The movement of a currency pair can be described in increments called either “pips” or “points”—these two terms are interchangeable and mean the same thing—which one you use comes down to personal preference, and you’ll no doubt hear both as you learn more. 23
Introduction to the Markets
(Note—We will use the term “points” throughout the rest of this guide) Let’s have a look at some basic examples of how movement in points is shown within currency quotes: If GBP/USD moves from 1.8750 to 1.8751, that is a move of 1 point If GBP/USD moves from 1.8750 to 1.8760, that is a move of 10 points If GBP/USD moves from 1.8750 to 1.8850, that is a move of 100 points If GBP/USD moves from 1.8750 to 1.9750, that is a move of 1000 points The simple rule to understanding what equates to a point’s worth of movement is this: In nearly all currency pairs, the final digit of the quote equates to one point. Most currencies are quoted in four decimal places, but some, such as EUR/JPY or USD/JPY are quoted in two decimal places; but regardless, the final decimal place corresponds to one point. One increment of that digit corresponds to one point of market movement.
Some key trading terms As you proceed through the book, you are likely to hear a few terms that have specific meanings within the context of financial trading. These terms are: Bull and Bear (or Bullish/Bearish) + Long or Short What do these terms mean? “Bull/bear” or “bullish/bearish” effectively describes your view of the market. If you are bullish on a market, that means you expect the market to rise. If you’re bearish, you expect the market to move down. This means that depending on your view of the market, you can be described as either a bull or a bear. 24
Binary Options Profit Pipeline
Similarly, “long” and “short” describe your actual positions. These terms actually apply more to traditional types of trading than they do to Binary Options, but they are still worth knowing. If a trader enters a long position that means he or she has “bought” that market in the expectation of it moving up. But if a trader takes a short position that means that they have “sold” the market in the expectation that it will move down.
25
C hapter 4
Introduction to Bet On Markets
T
his chapter will be your introduction to the Bet On Markets (BOM), and by extension of that, it’s also going to serve as an introduction to Binary Options trading, and what it’s all about. That’s where we’re going to start in fact—by explaining the concepts behind Binary Options, how it works and how it differs from more traditional types of trading. We’ll then move on to looking at the Bet On Markets website itself, we’ll go through all the features of that and explain some of the different types of trades that are available. First of all, there’s one thing we need to make clear. We are not actually trading directly on the markets ourselves, we’re simply trading on the movements that are caused by the millions of banks, institutions and individuals worldwide who are actually trading. When you’re taking positions with BOM you’re not actually physically buying and selling any currencies, or shares or commodities. You’re not directly involved in the market—you’re just speculating on its price movements. If you want to think of it again in terms of a sports analogy—when you bet on a horse race, you’re simply betting on the outcome of the race, you’re not participating in it directly. You’re just wagering on what might happen, against the odds of certain outcomes given to you by a bookmaker. That’s what we’re doing. But this is no bad thing! Binary Options trading, has a number of advantages. The main one that you’ll be interested in is of course the fact that under current legislation, it’s possible that the profits earned from Binary Options trading are tax free! You may pay absolutely no tax on the profits you earn from Bet On Markets, even if you get to the point 27
Introduction to Bet On Markets
where you’re doing it for a living. This could change in the future so please consult a tax advisor in this regard. The second great advantage of binary options trading is the flexibility it gives you to take different types of views on the markets that are simply not possible with more traditional trading methods. In a more traditional type of trade, you can make money in just two ways. You can buy a market, and if it goes up, you make money. Or you can sell a market, and if it goes down, you make money. But that’s it— they are the only ways you can profit in a traditional type of trade. But as we covered in Chapter 2, the profits that you can make in either of those situations depend entirely on how far the market moves, because in a traditional type of trade, you make a certain amount of money for each point that the market moves in your favour. This means that in order to be really successful, you have to find the trades where the market is likely to move a long way in your favour, and trades like that can be quite hard to find. With Binary Options trading, you can take all sorts of different views on the market. You place a trade which states “I want to make money if the market touches a certain level in the next week”; you can also place a trade which states “I want to make money if the market doesn’t touch a certain level in the next 2 weeks”. With Binary Options trading, there is a lot more variety in the types of positions you can take on the markets. It is a generally accepted statistic that financial markets spend roughly 70% of the time trading in small, awkward ranges, and only 30% of the time moving in strong directional trends. With traditional types of trading it’s very difficult to make good profits in small range markets, but with Binary Options trading, you can make money in any market condition because there’s a type of trade to suit your viewpoint. When you place a Binary Options trade, it costs a certain amount to place. This, effectively, is your margin. If the trade loses—if your prediction doesn’t come true—you lose your margin. But if the trade wins, you get your margin back plus the agreed profits on top of that. We use the term “agreed profits” because before you even commit to the trade, the BetOnMarkets website will tell you what size your margin has to be to achieve a certain level of profit, providing your prediction does come true. These figures vary depending on how likely the trade is to be successful. An example binary options trade: 28
Binary Options Profit Pipeline
• • • •
“I wish to profit $1,000 if GBP/USD is higher than 1.9500 in 10 days time.” The trade costs $650. If the trade loses, you lose your $650 stake. If the trade wins, you win $1,000, which is your $650 stake returned, plus $350 profit.
The ability to set all the parameters before committing to the trade is a great advantage of Binary Options trading. If you wanted to risk less than $650 on the above trade, you could have halved the potential profit, therefore halving the margin that you would have had to put up. You can adjust all the parameters to suit your risk level, and your capital level. Before you even place the trade, you know exactly the maximum you can stand to gain or lose. This helps in planning your money management strategies and gives you the peace of mind of knowing that even if a trade goes wrong, you cannot lose any more than you’ve placed, which takes a lot of the fear element out of your trading.
The Bet On Markets Website
29
Introduction to Bet On Markets
First of all, let’s take a look at some background information about Bet On Markets, as it’s important to know about the company who will be holding your account when you move on to trading live money. Bet On Markets is owned by Regent Markets, a very large, international financial group with offices in numerous locations around the world and a turnover of over $100m per year. Regent Markets is based on the Isle of Man, and is fully authorised and regulated by the Isle of Man Gambling Supervision Commission. You can actually view their gambling licence on the Bet On Markets website itself. We have personally been trading with Bet On Markets for over four years and we’ve never found them to be anything less than fair in their dealings, helpful in their approach and very prompt when it comes to the subject of withdrawing profits back into one’s bank account. Bet On Markets are the leading financial bookmaker in the world at the moment, and you can have as much confidence in betting through them as you would with any of the more traditional brokers such as FXCM or FOREX.COM.
The different types of trades
When you begin looking at the trades available at the Bet On Markets website, you’ll see that there are a number of different types. There are trades which are classed as “double” trades, trades which are classed as “expiry” trades and a third category called “boundary” trades.
Rise/Fall trades Rise/Fall trades are so-called because in every single one of these trades, the payout is twice the amount of the investment. If the stake is $50, the payout is $100*. That means that the final profit on a successful trade is $50*. Remember—the final profit is the payout minus the initial investment. * 30
Less broker commissions.
Binary Options Profit Pipeline
Higher/Lower trades An higher/lower trade allows you to specify, depending on the type of trade, certain levels or areas in the market where you would expect the market to be in a given time period. It’s not important what the market does while the trade is running—the only thing that counts is whether or not the market is within the parameters you set at the time the trade expires. The investment required for an expiry trade, and the potential profit, vary depending on how likely the trade is to succeed—the higher the probability of success on a trade, the costlier it is to place, and the lower the return.
Touch/No Touch trades A touch/no touch trade allows you to specify, depending on the type of trade, certain levels that the market must either touch, or not touch at all while the trade is running. With the expiry trade, it doesn’t matter what the market does while the trade is running, as long as it expires within the set parameters. With boundary trade however, we’re specifying what the market must do, or not do while the trade is running. The type of trade we will be focusing on throughout this course is the “No-Touch” trade.
The No-Touch trade
This is the type of trade that we will be focusing on in this book, so let’s take a more detailed look at it. It’s fairly self-explanatory, but with a 31
Introduction to Bet On Markets
no-touch bet we are specifying a certain level in the market and a certain time period. If the market doesn’t touch that level within the specified time period, the bet will be a winner. If it does touch while the bet is running, then the trade will be a loser. This is our favourite type of trade at Bet On Markets. We have been extremely successful with it, and we’re going to teach you to be successful with it too! Just as with the higher/lower trades, the investment required for a no-touch trade, and the potential profit, vary depending on how likely the trade is to succeed. The further from the current market level you place your barrier, or the shorter the duration of the trade, the more likely the trade is to succeed—therefore the investment required increases and the payout decreases.
Placing a trade and using the portfolio page Once you have entered the parameters for your trade, actually placing it on your account is a very simple one-click process—just press the “buy this bet” button over on the right-hand side of the screen:
Once you have placed a trade on your account, you can monitor it using the “portfolio” page. This is the section of the website where you can look at your current open trades, manage them, and keep up to date with how your account is faring. 32
Binary Options Profit Pipeline
The portfolio allows you to see the details of each trade you currently have running—the price at which you bought the trade (your investment), and the current price at which Bet On Markets will let you sell the trade back if you no longer wish to keep it. This is quite an important concept. You can sell your trade back to Bet On Markets at any point; there’s no need to be tied to a position you no longer want and although we normally run our trades until the expiry date in order to claim the maximum payout, it is possible to exit a trade whenever you like. This is handy in rare cases where a sudden unforeseen event might make you reassess the chances of the trade being successful. The sale price of a trade fluctuates constantly. If the market on which you’ve placed your trade starts to move in your favour, further and further away from the no-touch barrier you specified, your sale price will increase, and if the market moves against you, towards your no-touch barrier, your sale price will drop. At the bottom is the “portfolio information” section. These details include your current account balance and your current level of exposure to the market—how much capital you have tied up in currently active trades. This information is useful when you come to determining how much capital to use on an individual trade, which we will be covering in detail in a later chapter. 33
C hapter 5
Introducing MetaTrader
M
etaTrader is a software tool we can use to analyse financial markets. This is because it allows us to create “charts” of the markets so we can get a visual representation of how the market is moving now, and how it moved in the past. It is an absolutely fantastic and totally free program—there are no installation fees, no subscription fees, and no hidden costs. MetaTrader is a complete financial program, in that it provides us with all the tools we need to both analyse and trade the markets if you wish. We’re not going to be using it for actual trading, because we’ll be doing our trading through Binary Options platforms such as Bet On Markets, but what we will be using are the analysis tools that come with the program. MetaTrader gives us access to up-to-the-second live data feeds from the world’s financial markets. Through MetaTrader we have access to exactly the same live market data that all the major banks, institutions and professionals do, so we can analyse the markets in real-time as they’re moving.
How to install and set up MetaTrader This trading platform offers one of the best opportunities for forex forecasting that include: all standard indicators, custom indicators, trading tools allowing you to create and add your own trading indicators.
Installation Instructions MT First of all, download the trading platform. You can do that with any broker. 35
Introducing MetaTrader
Install trading platform with clicking the “Install button”. Continue to step by step. Choose installation language.
36
Binary Options Profit Pipeline
37
Introducing MetaTrader
Please closely read the license agreement. Do you accept all the terms of the following license agreement? Click “YES”
Then you should select the destination folder where you want to install Metatrader. If you want to install to a different location, click Browse and select another folder.
38
Binary Options Profit Pipeline
39
Introducing MetaTrader
When installation is finished, click the “Launch Metatrader4” button to start using Metatrader! The application window should appear automatically.
Now, open an account for practice.
40
Binary Options Profit Pipeline
Look for “File” at the top and click “Open an account”. The “Personal detail” window should appear. Fill out all the following fields: Name, Country, State, City, Address, Phone, email, select Account type, Currency, and you select sum of deposit and leverage as well. And Click “I agree to subscribe to your newsletters”
Now, select a more suitable trading server. Click Scan.
41
Introducing MetaTrader
That’s all. Registration is complete. Now you have an account for trading practice. Your user ID and password will automatically be saved in the platform.
Any Problems? If you ran into problems during install, click the ‘Download’ button to start the install process again. In the Market Watch window, select “Symbols”. In the following box, expand the list marked “FOREX” and select the following markets: AUDJPY AUDUSD EURCHF EURGBP EURJPY EURSEK EURUSD GBPJPY GBPUSD NZDUSD USDCAD USDCHF USDJPY 42
Binary Options Profit Pipeline
This will load the 13 currency markets that we will be trading into the market watch window. You are now ready to start creating charts of the markets! Go to the “File” menu, and select “New Chart”. Open a chart of the currency pair of your choice. Repeat the process twice more, then go to the “Window” menu and select “Tile Vertically”. Right-click on each chart and select “Template” followed by the blank template in the colour of your choice.
MetaTrader basics To load a different currency into an existing chart, simply click and drag your chosen currency’s symbol from the “Market Watch” window on to the chart. You can zoom in and out of each chart using the magnifying glass icons located on the toolbar at the top. Auto scroll makes sure the chart always snaps to the current area whenever a market makes a point of movement. If you wish to turn this feature off, allowing you to review past data, you can turn Auto scroll off by de-selecting the green arrow button on the toolbar at the top. Chart shift creates some space on the chart to the right of the live market. You can turn this feature on by selecting the red arrow button on the toolbar at the top.
43
C hapter 6
Introduction to Charting Fundamental analysis—to use it or not?
F
inancial market analysis can be broken down into two broad “fields”. The first is fundamental analysis, and the second is technical analysis. Fundamental analysis is concerned with the study of economic fundamentals in order to predict where market rates might be going. For example, if you’re looking to invest in a certain company’s stock, you might well look at the company’s underlying fundamentals. How are their sales doing? Are they expanding into new markets? Do they have new products? Are the directors buying or selling shares? Similarly, with currencies, you might look to certain economic factors to determine whether or not a currency is likely to rise or fall. You might examine the interest rate outlook, look at how the retail sector is faring, whether unemployment is going up or down, or if consumer confidence is rising or falling. There are many different fundamental factors you can study in order to figure out how a country’s economy is doing and how it might fare in the future, and what resultant effect that would have on the country’s currency. There’s no doubt that fundamental analysis is a valid approach to the markets. Major banks and financial institutions employ hundreds of analysts on substantial salaries to figure out these economic factors, and that’s why when you switch on a financial channel such as Bloomberg, it’s often a continuous stream of “talking heads” discussing various economic factors and what they might mean for certain markets. The problem with fundamental analysis is that it’s such an enormous field of study, and there are so many different economic factors to consider, that it can be very confusing and difficult to accurately figure things out. A certain piece of economic data might appear to mean one 45
Introduction to Charting
thing on the surface but once you dig into the numbers, it can often mean something completely different. This means that you might end up taking a trade based on one view of the market, which can very quickly go against you if the market changes its interpretation of the fundamental data. It’s our view that fundamental analysis is something that’s best left to the banks and institutions of the world! That said, however, later on in the book you will learn about a small computer program you can use in order to have lots of fundamental analysis headlines and stories streamed directly into your computer for free. That’s as far as we recommend you go with the subject of fundamental analysis for now. While it’s handy to keep up with market fundamentals, it’s not actually necessary to too much of a degree because we can use the other main school of thought on how to predict markets—and that’s what we’re going to be focusing on for the most part in this book.
Technical analysis—our preferred method Technical analysis is the study of market movement, and more specifically, previous market movement. What so-called “technical analysts” are searching for are certain repeating patterns of market behaviour, which lead to predictable outcomes. For example, you might search back across five years of historical market data looking for a pattern which leads to a large bullish move more often than not. That’s technical analysis in one of its most basic forms. There are many different types of technical analysis. One method is to simply look at a chart with your eyes and try to pick out certain patterns in the market movement. Another field of technical analysis involves the use of what we call “technical indicators”, which are mathematical tools that perform certain calculations on the market’s movement and then present that information as a visual overlay on the chart. The basic premise of technical indicators is that they may be able to spot patterns in the markets which aren’t necessarily visible to the human eye. For the most part, however, all forms of technical analysis are based on the use of charts. A chart is simply a way of visualising the movement of a financial market, rather than looking at dry statistics. With a chart you can actually see what the market is doing now and what it was doing 46
Binary Options Profit Pipeline
at any point in history—you can see when it was rising and when it was falling, you can see when it was moving strongly, and you can see when it didn’t really have the strength to do much at all. By having a visual overview of the market’s behaviour we can start to look for certain patterns which might give us a clue as to the future behaviour of the market.
Charts explained Take a look at this example chart. As you can see, it has two axes. There is a time axis along the bottom and a price axis running down the righthand side.
The current, live market is always over at the right-hand edge of the chart. Everything to the left of that is what came before—past data. By cross-referencing these two axes, you can tell what the market rate was at any point in time. 47
Introduction to Charting
Introducing “candlestick charts” There are a number of different “styles” of charts we can use, but our favourite, and what we believe to be the most effective in terms of clearly presenting information, is what’s known as “candlestick” charting. Candlestick charts have their origins in 18th century Japan, where they are said to have been invented by a trader who was trading one of the world’s earliest financial markets—the Japanese Rice futures market. Since then they have come in and out of popularity, until becoming widely-used in the computer-trading age that began in the 1980s. A candlestick chart gives us several pieces of information about how a financial market moved within a given time period. The “main body” of the candle tells us the market rate at the beginning of the time period, and at the end of the time period, while the two extremes (also known as the “wicks”) tell us the highest and lowest levels the market reached within that time period. The colour of the candle also tells us whether the market rose or fell between the open and the close of the time period. If the candle is green, we know that the open price is represented by the bottom of the main body, and the close is represented by the top of the main body. If the candle is red, we know that the open price is represented by the top of the main body and the close price is represented by the bottom of the main body. Take a look at these examples. Each of these candles represents one day in the market.
48
Binary Options Profit Pipeline
The candle on the left is green. Therefore we know that the opening level of the day was at the bottom of the main body, and the closing level was at its top. In-between the open and the close, however, the market reached extreme high and low levels as marked out by the “wicks”. The candle on the right is red. Therefore we know that the opening level of the day was at the top of the main body, and the closing level was at its bottom. And again, in-between the open and the close, the market reached extreme high and low levels as marked out by the “wicks”. When looking at a chart within MetaTrader, you can hold the mouse over any of the candles and MetaTrader will show the Open level of that bar, and the High, the Low and the Close in a series of information boxes at the bottom of the screen, as shown below:
On the chart in the picture above, each candle represents one day’s action in the market. It’s what’s known as a “daily chart”. Within MetaTrader however, you can change the time frame of the chart so that each candle represents another time period, such as one hour, or even one minute. You can do this by clicking on any of the time frame buttons in the toolbar at the top: 49
Introduction to Charting
The available time frames are: 1 minute, 5 minutes, 15 minutes, 30 minutes, 1 hour, 4 hours, 1 day, 1 week and 1 month. This is handy because as you go through this book, you will see that we use a ‘’triple screen” method to simultaneously analyse each market from three different time frames.
50
C hapter 7
Market Direction
T
here are three main “cornerstones” to the trading method you will learn in this book. The first of those cornerstones is the concept of trends within a financial market. There’s a very old saying in trading circles which states “the trend is your friend”. The best opportunities in financial markets come when the markets are trending, either trending upwards or trending downwards. That’s not to say you can’t make money by trading against the trend, there are opportunities to do so and occasionally we will be taking counter-trend trades, but in general the majority of safer, higherprobability trades always come when you trade in the direction of a prevailing trend. That means taking bullish positions when the market is trending upwards, and taking bearish positions when the market is trending downwards. Put simply, a trend within a financial market is a sustained directional move, either a sustained upward move or a sustained downward move. Trends occur because of an imbalance in the supply and demand (see Chapter 3 for reference). As long as traders perceive value in a market, they will buy, pushing the price ever higher, and as long as they feel that a market is too “expensive”, they will sell, pushing the price ever lower. There are a number of different ways to determine the trend within a financial market. Some traders look at the sequence of highs and lows to determine the trend, while others use technical indicators. The Market Direction tool is a technical indicator based on our own proprietary method of determining the trend within a financial market. For every candlestick bar on a chart, the Market Direction indicator will display a corresponding dot. The colour of this dot tells us the trend on that chart at that moment. The Market Direction indicator can show 51
Market Direction
four different colours of dots depending on what it calculates the trend to be at that point. A dark green dot represents a strong uptrend. A light green dot represents a weak uptrend. A red dot represents a strong downtrend. A pink dot represents a weak downtrend. Take a look at this screenshot showing how the Market Direction indicator appears on a chart.
Starting at the left-hand edge of the chart, we can see each candle with a corresponding pink dot. This shows a weak downtrend. But the market accelerates lower, and at the bar marked (1), the Market Direction dots change to red, showing a strong downtrend. Several bars later, the market begins to rally again, and by point (2) it has moved high enough for Market Direction to calculate that the downtrend is weakening. By the next bar, marked (3), the market is in a strong uptrend. This uptrend continues for some time, occasionally weakening as the market puts in occasional “retracements” against the trend, such as at point (4). At point (5), a downward move in the market weakens the 52
Binary Options Profit Pipeline
uptrend again, and by the next bar (6), Market Direction has calculated that the market’s trend has changed to a strong downtrend. This downtrend doesn’t last, however. The market begins to rally again, weakening the downtrend at point (7) and changing back into a strong uptrend at point (8). Using Market Direction There is one very important rule that applies to the Market Direction indicator and how to use it. That rule is, that the trend on any chart determines the signals you look for on the time frame below. For example, if the Market Direction dot on the daily chart is dark green, therefore showing that that chart is currently in a strong uptrend, this means that you would then drop down to the 4-hour chart to find any trading signals in the direction of that trend. We do understand that that might seem slightly difficulty to understand at this point but all will become clear as you move on to the later chapters and start to piece together all the different concepts you’re going to be learning about, but for now, all you need to remember is that rule. The trend on any chart determines the signals you look for on the time frame below. We’ve provided you with a set of flow charts to guide you in the decision-making process to help you figure out which trades to look for, when you should be trading with trends and when you should be trading against them. By looking over those you’ll begin to understand how it all fits together. The next part of the process is looking for the specific technical patterns which give you the trade signals themselves, and we’re going to start looking at those in the next chapter. And that’s how the Market Direction indicator works! It’s a very simple tool for determining the trend of a market at a glance, with no ambiguity and no confusion, which is a great advantage because it allows you to analyse a market in a matter of seconds to determine whether or not there might be a potential trading opportunity.
53
C hapter 8 a
Introducing Divergence
T
here are three main “cornerstones” to our trading approach. The first, as you saw in the previous chapter, is the concept of trends within financial markets, and how to spot them using our Market Direction tool. The second main cornerstone is the concept of “divergence”. Before moving on, let’s look at the dictionary definition of divergence: “The act of moving away in different directions from a common point.” In the context of the markets, what we are looking for are divergences between the movement of the market, and the movement of certain technical indicators. A technical indicator (indicator for short) is simply a mathematical tool which performs certain calculations on the movement of the markets, and then presents that information, usually as a visual overlay on the chart. A moving average is a simple example of an indicator: it’s a mathematical tool which works out the average market level over a given number of preceding bars on a chart, and then presents that in visual form as a line, so you can see how the average market level changed over time. As we’ve already discussed in this book, the practice of technical analysis is effectively all about spotting certain repeating patterns of market movement that lead to predictable outcomes. Most technical indicators are designed to help with this. The basic premise of technical indicators is that by performing certain calculations on the market movement, they can spot certain patterns, or give certain information, that may not be visible to the human eye. There are literally hundreds, if not thousands, of indicators which can be applied to financial market charts, and they are nearly all designed 55
Introducing Divergence
to interpret the market movement and then give trading signals—either bullish signals or bearish signals. Unfortunately, the problem with almost all indicators is that they suffer from lag; that is, they lag behind the market. You can see a good example of a lagging indicator by looking at a moving average. If a market is falling, and then starts rising, it will take a while before the average starts to rise as well. By the time the moving average has started to slope upwards, you’ve already missed a lot of the move in the market, as you can see in the image:
All indicators have the same problem. They lag behind the market, and they’ll only really tell you what’s happening after it has already happened. What this means is that most indicators are effectively useless when they are used in the way they were originally intended. Indicators that are designed to generate bullish or bearish signals simply do not work because they lag too far behind the market. The signals come too late to give effective trading signals. The only way to overcome this problem is to use indicators in a manner for which they were not originally intended, and that is by using them to spot divergences. By using them in this way, you can turn lagging indicators into what we call “leading” indicators. This means that 56
Binary Options Profit Pipeline
the indicators tell us what’s going on right now rather than telling you what’s already happened. When the movement of an indicator diverges from the movement of the market, it effectively gives you an early warning that the market may be about to change direction. It gives you the warning before the move happens rather than after, and this is what makes divergence such a powerful trading tool. We are going to be teaching you about two types of divergence in this book. The first type of divergence we’re going to be introducing to you is what’s known as regular divergence. Regular divergence is a signal that tells you when a trend may be about to reverse. The second type of divergence is called hidden divergence. Hidden divergence is a signal that tells you when a trend might be about to resume. Take a look at the diagram below. The black line in this diagram represents a market that is trending upwards. As you can see it’s making higher highs and higher lows. Four turning points are highlighted in this trend.
The two that are marked with red arrows are reversal points, where the upward movement ended, and a period of downward movement began. These turning points are the kind that could be signalled by a regular divergence. Remember, regular divergence is a trend reversal signal. 57
Introducing Divergence
The turning points that are marked with blue arrows are the points at which the prevailing uptrend resumed. These are the turning points that could be signalled by hidden divergence. Remember, hidden divergence is a trend re-entry signal. We use two popular technical indicators in conjunction with our charts in order to spot divergences. These indicators are known as the MACD and the OSMA. We use two indicators to spot divergences to establish a “consensus” about each set-up. It’s entirely possible to trade divergence signals using just one indicator, but we feel it is much safer to use two. We only trade divergence signals which set up on both indicators simultaneously. If a divergence sets up on one indicator but not on the other, then we ignore it. If you only use one indicator you’re likely to get false signals from time to time, divergence signals that fail, but this is much less likely if you confirm the divergence signal by checking whether or not it is present on a second indicator as well. A divergence set-up that is present on two indicators is a higherprobability set-up than one that is only present on one indicator, and since we’re striving to put the probabilities as much as possible in our favour, we always use two indicators.
58
C hapTer 8 b
Regular Divergence
R
egular divergence is a signal which tells us when a trend might potentially reverse. What this means is that it can be used to generate counter-trend trading signals. Let’s start off by taking a look at the definition of a bullish regular divergence: A bullish regular divergence occurs when the market makes a LOWER LOW, but over the corresponding time period, our indicators make a HIGHER LOW. Now take a look at the diagram:
We’ve got a downward move in the market, as it makes an initial low, rises slightly then falls again to a lower low. But at the same time, we’ve got an upward move in our indicator. While the market is making a lower low, our indicator is making a higher low! This is the definition of a bullish regular divergence. Now let’s take a look at the definition of a bearish regular divergence: A bearish regular divergence occurs when the market makes a HIGHER HIGH, but over the corresponding time period, our indicators make a LOWER HIGH. 59
Regular Divergence
This time, we’ve got an upward move in the market, as it makes an initial high, falls slightly, then rises again to a higher high. But at the same time, we’ve got a downward move in our indicator. While the market is making a higher high, our indicator is making a lower high! This is the definition of a bearish regular divergence. Let’s now look at some examples ofthese regular divergence patterns in the actual charts ofthe markets, using our MACD and OSMA indicators.
60
Binary Options Profit Pipeline
61
Regular Divergence
62
Binary Options Profit Pipeline
Different types of regular divergence The concept of divergence can be broken down into two main typesregular divergence and hidden divergence. From there however, it’s possible to break down regular divergence further, as there are several different types of regular divergence that appear on our charts. The first is what we call “same peak” regular divergence, or “same trough” regular divergence, depending on whether it is a bearish signal or bullish signal respectively. The indicators we use—the MACD and OSMA—are known as “oscillators”. This is because they “oscillate” between positive and negative values around a central “zero line”. A “same peak” regular divergence is a bearish signal which occurs when the divergence on a particular indicator plays out entirely within one peak above the zero line. Similarly, a “same trough” regular divergence is a bullish signal which occurs when the divergence on a particular indicator plays out entirely within one trough below the zero line. You can see examples below:
63
Regular Divergence
The next type of regular divergence is known either as “separate peak” regular divergence or “separate trough” regular divergence— again, this depends on whether or not it is a bearish or a bullish signal respectively. A “separate peak” regular divergence is a bearish signal which occurs when the divergence begins on one peak of the indicator above the zero line and ends on another, with a move below the zero line in-between. A “separate trough” regular divergence is a bullish signal which occurs when the divergence begins on one trough of the indicator below the zero line and ends on another, with a move above the zero line inbetween.
64
Binary Options Profit Pipeline
You can see examples below:
65
Regular Divergence
The third different type of regular divergence is known as “sequential regular divergence”. A sequential regular divergence occurs when there are a number of peaks or troughs in-between the start point of the divergence and the end point, which don’t quite fit the pattern. There is nonetheless an overall pattern of divergence. Sequential regular divergence is a little bit harder to spot than the other types, the same peak/trough and separate peak/trough divergence, but by knowing the difference between all three types you shouldn’t have any trouble in being able to spot them and then start applying that when you come to look for signals in the markets. You can see examples below:
66
Binary Options Profit Pipeline
Knowing the differences between these types of regular divergence is important in this approach to trading. This is because there are some divergence signals that we choose not to trade, even if there is divergence on both of the indicators. As you have already learned, we use two different indicators to spot divergences and we are only interested in divergence signals which set up on both indicators simultaneously. If the divergence is only present on one indicator, we ignore it. The combination of divergence types on the two indicators is not hugely important. You might, for example, see a bearish signal with separate peak divergence on both indicators—which is a perfectly tradeable setup. As another example, you might see separate peak divergence on one indicator and same peak on the other. That too is a tradeable set-up. There is, however, one exception, and that is when you find same peak (or same trough) divergence on both indicators. That is not a strong enough signal to trade.
67
Regular Divergence
Some divergences are harder to spot than others One general rule with regular divergence signals is that the steeper the angle of the divergence, the stronger the potential move. Sometimes, some divergences occur at such a steep angle, that the second peak or trough on the indicator doesn’t even make it back through the zero line! These types of signals do take a little extra practice to spot, but it’s worth taking the time to get used to them because they can often be very powerful signals. A number of examples screenshots below.
68
Binary Options Profit Pipeline
“Filtering” regular divergence signals with “Bollinger Bands” The fact is that the vast majority of divergence setups actually fail to produce a trend reversal. Regular divergence is still a great trend reversal signal, but only when it’s used in the right way. We are not going to be trading every single regular divergence setup we see—far from it, in fact. We’re going to be extremely choosy in terms of the divergence setups we will actually be trading. As well as only trading divergence signals that are pointing us in the right direction, as per the prevailing trend of the market, we will also only be trading divergence signals that are “backed up” by a strong area of support or resistance levels (which you’ll learn about in Chapter 9). There is, however, one more step we take to filter out weaker divergence signals, and that’s by using another indicator, overlaid on the market action on our charts. The name of this indicator is “Bollinger bands”, and this is how they appear on the charts:
69
Regular Divergence
As you can see, Bollinger bands effectively create a “channel” in the market. There’s an upper band and a lower band, and most of the time, you will see that the market stays within the channel. What we are interested in, however, are the points at which the market goes outside of that channel. When analysing a regular divergence signal, we are looking for at least one of the peaks or troughs of the market to go outside the longterm Bollinger band channel. Effectively, the market must go outside the Bollinger band channel at either the start point of the divergence, or the end point, or both. If we do not see this occur, then the signal is not valid, and we would not trade it. The reason we use this rule is because when a market goes outside the Bollinger band channel, it is considered to be “overstretched” and therefore more likely to reverse. You can think of the market as being almost like a rubber band, in that the more overstretched it gets, the more likely it is to “snap” back. It therefore follows that if you see a regular divergence signal at the same time the market is overstretched, then the likelihood of that signal being successful is increased. When divergence signals are combined with Bollinger bands, you effectively have a confluence of factors that indicate a potential reversal in the market. The regular divergence is a signal that indicates a potential 70
Binary Options Profit Pipeline
trend reversal based on the fact that strength of the trend is beginning to weaken. Additionally, when the market goes outside the Bollinger bands, it’s also an indication of a potential trend reversal, based on the fact that the market is in an overstretched condition. Below you can see several examples of regular divergences, and whether they are considered valid or invalid as a result of their interaction with the Bollinger bands.
71
Regular Divergence
Remember—we are only interested in trading regular divergence signals that are accompanied by the market trading outside the Bollinger band channels, and in turn becoming overstretched. It’s all about putting the probabilities in our favour! As you move forward through this book, you need to be clear on what we mean by the phrase “regular divergence signal”, as it’s something you will hear regularly. When we use the phrase “regular divergence signal”, we mean a complete signal. This means that regular divergence is present on both our indicators, and that the market has gone outside the long-term Bollinger band at either the start point, or end point of the divergence, or both. If any of those factors are missing, then it’s not a complete signal. If the divergence is only present on one indicator, it’s not a signal. If the market does not move outside the Bollinger bands, then it’s not a signal. But if it all “checks out”, then that’s what we mean by a “regular divergence signal”. Make sure you are comfortable with this concept before moving on.
72
Binary Options Profit Pipeline
Key points of this chapter Before moving on, these are the key points you need to understand from Chapter 8b—Regular Divergence: • You must understand the definitions of both bullish and bearish regular divergence and how to spot them. • You must understand the three types of regular divergence (separate peak/trough, same peak/trough and sequential). • You must be aware that there are some divergences where the second peak/trough doesn’t cross the zero line. • You must remember that we are only interested in regular divergence signals where the market trades outside the longterm Bollinger band on at least one peak/trough—either at the start point, the end point, or both.
73
C hapTer 8 C
Hidden Divergence
I
n the previous section we took an in-depth look at the concept of regular divergence and how it can be used to signal trend reversals. This is useful because even when trading in the direction of longer-term trends, we will often be trading against shorter-term trends, and on some rare occasions we will even be trading against long-term trends as well. The vast majority of trades we will be taking, however, will be in the direction of longer-term trends. Most of the time, when we get into a trade, it will be a trend-following trade. With that in mind, we need to not only be able to spot trend reversals, we also need to find optimum entry points into existing trends. We need to find the points at which trends resume, because that’s where the best trend-following trades are to be found. Hidden divergence is the method we can use to find the points at which trends resume following counter-trend retracements. It is used to spot the points at which trends might resume. We therefore class it as a trend re-entry signal. First of all, as we did in the previous section, let’s look at the definitions of both bullish and bearish hidden divergence, and take a look at some diagrams. A bullish hidden divergence occurs when the market makes a HIGHER LOW, but at the same time our indicators make a LOWER LOW, as shown below:
75
Hidden Divergence
We’ve got an upward move in the market, as it makes an initial high. It then retraces slightly lower, but makes a higher low than its starting point. At the same time, however, we’ve got a downward move in our indicator. While the market is making a higher low, our indicator is making a lower low! This is the definition of a bullish hidden divergence. A bearish hidden divergence occurs when the market makes a LOWER HIGH low, but at the same time our indicators make a HIGHER HIGH, as shown below:
We’ve got a downward move in the market, as it makes an initial low. It then retraces slightly higher, but makes a lower high than its starting point. At the same time, however, we’ve got an upward move in our indicator. While the market is making a lower high, our indicator is making a higher high! This is the definition of a bearish hidden divergence. Now let’s look at some actual chart examples:
76
Binary Options Profit Pipeline
77
Hidden Divergence
Some divergences are harder to spot than others (again!) In the last section when we were looking at regular divergence, we saw that some regular divergences are slightly harder to spot than others, because the second peak or trough doesn’t cross back through the zero line. As you might expect, similar concepts apply to hidden divergence signals as well. You will often find signals which have one peak or trough which doesn’t cross through the zero line. Unlike with regular divergence however, with hidden divergence it’s usually the first peak or trough of the setup, ie: the start point of the divergence rather than the end point, which you will see not crossing through the zero line. It’s also possible for a hidden divergence to form completely the opposite side of the zero line to where you would expect. Just as with regular divergence, this means that it does take some practice in order to be able to spot these signals quickly and easily, but it’s important to do so because the signals are just as valid as the more “obvious” hidden divergences. 78
Binary Options Profit Pipeline
You can see a number of clearly-explained examples shown below.
79
Hidden Divergence
80
Binary Options Profit Pipeline
Filtering hidden divergences with Bollinger B ands In the last section we demonstrated the method we use to “filter out” low-probability regular divergence signals. This was achieved with the use of a separate indicator called “Bollinger bands”. We look for the market to trade outside the “channel” created by the Bollinger bands in order to be valid. If this does not occur, we consider the signal invalid and do not trade it. We use a similar filter with hidden divergence signals. The shortterm Bollinger band indicator is the one we use with hidden divergence signals.
You may also notice that it creates a much narrower “channel” than the longer-term indicator, but despite that, the market still stays within the channel most of the time. Once again, however, what we’re interested in is when the market trades outside the Bollinger band channel. The rule we have for filtering hidden divergence signals is this: In order for a hidden divergence signal to be valid, the market must trade outside the short-term Bollinger band channel at some 81
Hidden Divergence
point during the retracement which produced the hidden divergence setup. This concept is clear. Some examples are provided for reference below.
Defining some terms You may remember that in the previous section we emphasised that it was important to understand the term “regular divergence signal”. This is the term we use for a trading setup containing regular divergence on both our OSMA and MACD indicators at the same time, with the market also trading outside the long-term Bollinger band. There are two further terms you need to memorise and understand that relate to the concept of hidden divergence. These two terms are: Standard hidden divergence re-entry signal and hybrid hidden divergence re-entry signal. Let’s take a look at them individually. A standard hidden divergence re-entry signal is used when trading in the direction of a strong trend (as per the Market Direction indicator) and it has the following attributes: 82
Binary Options Profit Pipeline
1) Hidden divergence on both the MACD and the OSMA indicators 2) The market trades outside the short-term Bollinger band channel during the retracement which produces the signal You can see examples of standard hidden divergence re-entry signals on the previous page. A hybrid hidden divergence re-entry signal is used when trading in the direction of a weak trend (as per the Market Direction indicator) and it has the following attributes: 1) Hidden divergence on the MACD indicator 2) Regular divergence (of any kind) on the OSMA indicator 3) The market trades outside the long-term Bollinger band channel during the retracement which produces the signal The hybrid signal takes some elements of the standard hidden divergence re-entry signal and some elements of the regular divergence reversal signal. This gives us the extra confirmation we need when trading in the direction of a weaker trend. You can see some examples of a hybrid hidden divergence reentry signal below:
83
Hidden Divergence
Key points of this chapter Before moving on, these are the key points you need to understand from Chapter 8c—Hidden Divergence: • You need to understand that hidden divergence is a signal that a trend is about to resume following a retracement. • You need to know the definitions of both a bullish hidden divergence and a bearish hidden divergence. • You need to understand that hidden divergence setups can occur on both sides of the “zero line”. • You need to understand how and why we use short-term Bollinger bands to filter our divergence signals. • You need to understand the difference between a standard reentry signal and a hybrid re-entry signal and the different situations in which they are used.
84
C hapter 8 d
Confirming Divergences
I
n the previous two chapters you’ve seen both how regular divergence works and how hidden divergence works, and how they can both be used to generate very effective trading signals. We have three specific trading signals based on divergence and involving Bollinger bands: the regular divergence reversal setup, the standard hidden divergence re-entry setup, and the hybrid re-entry setup. They are the three actual signals we look for to get us into trades. But finding the trade signals is only the first step. The next step is understanding when to act on a trade signal. In this chapter you will learn about the specific “trigger” we use to turn potential trading setups into confirmed trades. We have a specific trigger that we look for to actually get us in to trades. When we see a valid trading setup, what we are looking for is a trigger that is based on the movement of the market itself. Quite simply, we wait for the market to begin moving in the direction suggested by our trade signal. We don’t act on the signal the moment it sets up; we wait for more confirmation, and the confirmation we look for is to see the market beginning to move in the direction our trade signal is pointing. We have a specific rule which dictates how far a market must move in the right direction before it triggers our entry in to the trade, and it’s called:
The 50% rule The 50% rule governs how far we need to see a market move before we actually commit to the trade. What we are looking for is to see the market retrace a minimum of 50% of a specific previous move. The 85
Confirming Divergences
specific previous move we are interested in differs depending on whether you’re trading a reversal signal or a re-entry signal. As in the previous sections, let’s firstly take a look at some diagrams to introduce the concept of the 50% rule.
When a bullish re-entry signal (either a standard signal or a hybrid signal) sets up, the confirmation we look for is for the market to move 50% of the way back towards its previous high. In the diagram above, you can see that the market rises up to an initial high, before retracing lower. This produces a bullish hidden divergence, with the higher low in the market accompanied by a lower low in the indicator. However, we would not act on the signal at this point. Following on from the appearance of the hidden divergence signal, we need to see the market move 50% of the way back towards the previous high. At that point, the signal is confirmed, and we can act upon it.
When a bearish re-entry signal (either a standard signal or a hybrid signal) sets up, the confirmation we look for is for the market to move 50% of the way back towards its previous low. 86
Binary Options Profit Pipeline
In the diagram above, you can see that the market falls to an initial low, before retracing higher. This produces a bearish hidden divergence, with the lower high in the market accompanied by a higher high in the indicator. However, we would not act on the signal at this point. Following on from the appearance of the hidden divergence signal, we need to see the market move 50% of the way back towards the previous low. At that point, the signal is confirmed, and we can act upon it.
When a bullish regular divergence reversal signal sets up, the confirmation we look for is for the market to move 50% of the way back towards the highest point in-between the start of the divergence and the end of the divergence. In the diagram above, you can see that the market falls to an initial low, before retracing higher. It then falls again and creates a lower low. At this point we see a bullish regular divergence, with the lower low in the market accompanied by a higher low in the indicator. The regular divergence begins at the initial low, and ends at the lower low. We need to find the highest point in-between. We then need to see the market move 50% of the way back towards that level. At that point, the signal is confirmed, and we can act upon it.
87
Confirming Divergences
When a bearish regular divergence reversal signal sets up, the confirmation we look for is for the market to move 50% of the way back towards the lowest point in-between the start of the divergence and the end of the divergence. In the diagram above, you can see that the market rises to an initial high, before retracing lower. It then rises again and creates a higher high. At this point we see a bearish regular divergence, with the higher high in the market accompanied by a lower high in the indicator. The regular divergence begins at the initial high, and ends at the higher high. We need to find the lowest point in-between. We then need to see the market move 50% of the way back towards that level. At that point, the signal is confirmed, and we can act upon it.
The Fibonacci tool There is a very handy tool within the MetaTrader software which allows us to see whether or not a particular divergence has hit its 50% confirmation level, without the need for any time-consuming calculations. It’s called the Fibonacci tool and it’s something you’re going to become very familiar with as you progress through the book! We can use the Fibonacci tool to see how far a market has retraced a specific previous move, with a simple click-and-drag operation. It is located on the main toolbar.
88
Binary Options Profit Pipeline
The Fibonacci tool is mainly used for measuring Fibonacci retracements and Fibonacci extensions, which you will be learning much more about in chapter 9. However, we can also use it to see whether or not a market has hit its 50% confirmation level. On this screenshot below is a chart of GBP/USD. As you can see, the market hit a high at point X, and a low at point Y. From there, it has moved back upwards again.
If we wanted to measure how much of the move from point X down to point Y has been retraced, we would use the Fibonacci tool. After selecting the tool from the toolbar, we would click at point X, and drag the mouse down to point Y. After releasing the mouse button we would see this:
89
Confirming Divergences
As you can see, the Fibonacci retracement tool produces certain lines across the chart that correspond to retracements of a certain percentage, such as 23.6% and 38.2%. You’ll learn why we use these specific percentages in chapter 9, but for now, let’s just focus on the 50% level. As you can see in the image above, the market has not yet retraced 50% of the move from point X to point Y. The Fibonacci tool allows us to see at a glance whether or not a market has retraced 50% of a certain move. In turn, this allows us to quickly and easily see whether or not a signal has been confirmed. It’s a great time-saver!
90
Binary Options Profit Pipeline
Why we use this rule You can see a number of clearly explained examples of why we use this particular rule, and how it can keep us out of bad trades below:
91
Confirming Divergences
92
Binary Options Profit Pipeline
Key points of this chapter Before moving on, these are the key points you need to understand from Chapter 8d—Confirming Divergences: • We use the 50% rule to confirm the divergence signals we see on the charts. It keeps us away from divergence signals which fail. • We use the “Fibonacci Retracement” tool in MetaTrader to quickly and easily spot if the market has hit a key 50% level. • Once a trade signal is confirmed by the 50% rule, we act on it, but not before! Even if the market misses the 50% level by one pip/point, the signal is not confirmed.
93
C hapter 9
Introducing Support and Resistance
I
n this chapter we will be introducing you to the third and final main “cornerstone” of our trading approach. In the preceding chapters we’ve introduced you to the concept of trend, and how the Market Direction indicator shows us the trend of the market, and therefore which direction we should be looking to trade in. We then looked at the concept of indicator divergence, and how it can be used to figure out when a market is ready to change direction. From there however, there’s one more piece of the puzzle that we need to learn about before we have a complete trading approach. It’s ‘all well and good’ knowing the direction the market wants to trade in, and even having signals that the market’s ready to trade in that direction, but what we also need to know is if the market is trading at a level where it is likely to change direction, and to determine this we use the concept of support and resistance. The concept of support and resistance is closely related to the ideas of supply and demand that we spoke about earlier in this book. Support and resistance concepts are used so that we might determine certain levels in the market where the demand will begin to outweigh the supply and vice versa. Once we combine this with the other two cornerstones, we have the ability to consistently find high-probability trades. If the market is trading at a level where support/resistance concepts tell us that the market may well change direction, and that view is backed up by a divergence signal, and that divergence signal is pointing the market in the direction of a prevailing trend (as determined by the Market Direction tool), then all the factors are there to suggest that 95
Introducing Support and Resistance
the market will indeed move that way, and therefore give us a highprobability trading opportunity. First of all, let’s take a look at what the individual terms mean. Support levels are areas where we expect demand to begin to outweigh supply, meaning buyers will come into the market, the buying pressure will begin to outweigh the selling pressure, and market prices will stop falling and begin rising. Resistance levels are areas where we expect supply to begin to outweigh demand, meaning sellers will come into the market, the selling pressure will begin to outweigh the buying pressure, and market prices stop rising and begin falling. You’ll remember that when we were discussing supply and demand earlier on in this book, we talked about how markets move in one direction until the market participants, (ie: the traders that are trading that market), begin to change their perceptions of the market. What this means is that markets will move higher until traders think they’ve got too high, or too expensive, and that’s where they’ll start selling, or that markets will move lower until traders begin to think that they’ve got too low, that prices have got too cheap, which is when they’ll start buying. Traders don’t make these decisions about markets being too cheap or too expensive at random levels. Instead, they look to certain key levels in the market to help them decide, and these levels are determined using support and resistance concepts. There are many different methods of determining support and resistance levels in the markets, and below is a list of the different methods we will be using to determine these levels: Previous market “swing zones” Trend lines Moving averages Pivot points Fibonacci “retracements” Fibonacci “extensions” The reason we use so many different methods of finding support/ resistance levels is because we want to find areas of what we call “confluence”. What we mean by confluence is that we want to find certain areas in the market where several different types of support or resistance converge 96
Binary Options Profit Pipeline
in approximately the same place. Not every trader in the world uses all these different methods to determine support or resistance. In fact, very few do. However, lots of people on the trading floors and private trading offices of the world look at one of them, or two of them. Some will look at just moving averages and pivot points, while some might look at just Fibonacci retracements and trend lines. If you can find an area of “confluence”—where you know people who only look at pivot points will be trading, because there’s a pivot there, and people who only look at moving averages will be trading, because there is a moving average there, and people who only look at Fibonacci will be trading, because there’s a Fibonacci level there—then that means that when the market touches that level, there will be a much bigger shift in the supply/demand ratio than there would be if there was only one type of support or resistance there. If, for example there’s a level in the market where there’s only a pivot point, and only the pivot point traders trade there, then that may not be enough to produce a significant enough shift in the supply/demand ratio to produce a change of direction in the market. But if, for example, the pivot point traders, the moving average traders, the trend line traders and the Fibonacci traders are all perceiving the same area in the market as holding support or resistance, then they’ll all take the same action there, and that’s when the big moves and the best trades occur, because of a sudden big rush which alters the ratio of supply to demand or vice versa. Just before we go further and take an in-depth look at all these different types of support and resistance levels, there is one thing we need to point out about support/resistance levels that you may find quite funny at first, but once you “get your head around it”, it soon makes sense. The fact of the matter is that with many of these support/resistance methods, there’s actually no real logical reason why they should work. There’s no real logical reason why a market should bounce from a pivot level, or from a Fibonacci line. The only reason they work is because everyone thinks they work! These support/resistance methods have become what we call a “selffulfilling prophecy” As mentioned above, there’s no real physical or logical reason why a market should be supported by, for example, a certain pivot point. But, if 20 million traders around the world are viewing that 97
Introducing Support and Resistance
pivot point as support, and they all buy when the market touches it, then the sudden rush of demand will outweigh the supply, which means the market will indeed bounce upwards from the pivot point. There’s no real reason why it worked, other than the fact that everyone thought it would work, and as a result they all took the same action, everyone “bought the market”, or “went long”, or took a “bullish position”, and the resultant effect was to actually make the pivot point work as a support level. The truth of the matter is that it doesn’t really matter why a support or resistance level works—it’s just important that they do actually work—and they do. Therefore, the best and highest-probability trades occur when the market trades into a “confluence area” where multiple different types of support or resistance converge in approximately the same place. As a final part of this introduction to the concept of support and resistance, let’s just take a look at the different ways that markets can react to these levels.
The best way a support or resistance level can work is if it bounces straight off it, as you can see in the top two diagrams. In the top-left diagram, we see how the market traded lower and lower, and then traded all the way down to the support level and bounced up. In the top-right diagram, we can see how the market rallied higher until it touched the resistance level, and from there, the selling pressure was enough to push the market lower again. 98
Binary Options Profit Pipeline
Sometimes however, markets do trade past support/resistance levels for a while before bouncing back. However, as long as a market never closes below a support level, or above a resistance level, then we can still consider it to have held. This is one of the reasons we use candlestick charts, so that we can see how a bar closes in relation to the support/ resistance levels it trades to. You can see in the bottom-left diagram that the market traded below the support level on three consecutive bars, but never once managed to close below it. Therefore, we can say that the support level held on a closing basis. And in the bottom-right diagram, we can see that although the market traded above the resistance level, it again never closed above it, so again we can say that the resistance held on a closing basis. You have to stay aware of this concept, especially when it comes to placing your no-touch levels. We will generally place our no-touch barriers below important support areas or above important resistance areas, but you do have to always include some extra margin for error just in case the market does trade through the support or resistance temporarily, before closing back the other side. In the next section we’ll take a look at the first of the different types of support and resistance levels we study: Previous market “swing zones”.
99
C hapter 9 a
Previous Market “Swing Zones”
T
here are two basic ways in which these “swing zones” work. The first is simply that an area which previously held support might potentially do so again if the market returns to it (or that an area which previously held resistance might potentially do so again if the market returns to it). The second is that an area which previously held support might potentially act as resistance once broken (or that an area which previously held resistance might potentially act as support once broken). When you look back across any chart, you’ll see that markets move in one direction for a while then they stop and move off in the other direction for a while, then back again, and so on. Each one of the areas where the market made a significant change of direction can be described as a “swing point”. And at these swing points, we can identify what we like to call specific “swing zones”. When we see a swing point in a market, what we’re looking for is the area between the most extreme point of any candle around that swing point, and the most extreme part of any candle’s main body around that swing point. That’s our “swing zone”.
Previous resistance as future resistance and previous support as future support What this means is that if we’re looking to identify a resistance swing zone, we’d find a swing point where the market found resistance, and we would mark on the highest high of any candle at that swing point, and 101
Previous Market “Swing Zones”
the highest part of a candle’s main body at that swing point. You can see an example below:
On this example, from a EUR/CHF weekly chart, we see a “swing point”, which is marked by the pink shaded circle. Quite simply, at that point, the market found resistance, stopped moving higher, and began to fall lower. We don’t necessarily need to know why the market found resistance in that area, but we do know that it was a swing point, where enough sellers came into the market to prevent it from going any higher, and to make it begin to move lower. At this swing point, our resistance zone—our “swing zone”—is the area between the most extreme point of any candle, and the most extreme point of any candle’s main body. The most extreme part of any candle at this swing point is marked by the upper of the two blue horizontal lines—it corresponds to the highest high around the swing point. The highest part of any candle’s main body around this swing zone is marked out by the lower of the two blue horizontal lines. The area between the two blue horizontal lines is our “swing zone”—an area of potential resistance if the market ever gets back there. And as you can see, the market did eventually trade back into the “swing zone” before selling off again and moving lower. 102
Binary Options Profit Pipeline
Let’s now take a look at how we would go about identifying a support swing zone. If we’re looking to identify a support swing zone, we’d find a swing point where the market found support, and we would mark on the lowest low of any candle at that swing point, and the lowest part of a candle’s main body at that swing point. You can see an example below:
This is a weekly chart of NZD/USD. The pink shaded area marks out a “swing point”, where the market found support. We don’t need to know why the market found support there—but it is clearly an area where enough buyers came into the market to produce a change of direction. The specific “swing zone” which accompanies this swing point is again marked out by the two blue horizontal lines. The lower line represents the lowest low (the most extreme point) of any candle at that swing point, while the upper line represents the lowest part of any candle’s main body at that swing point. The area inbetween the two lines is our “swing zone”. We would potentially expect the market to find support within this zone if it ever trades back into it. 103
Previous Market “Swing Zones”
And as you can see, the market does trade back into the swing zone a number of weeks later, before bouncing back out and rallying considerably higher. Once again, we’ve identified a swing zone which has had the same effect as before once the market returns to it.
Previous support as future resistance and vice versa You’ll remember that at the beginning of this section we said that there are in fact two ways that these swing zones can work. We’ve seen the concept of a previous resistance area again providing resistance, and of a previous support area again providing support, but when these areas get broken, they can in fact then act the opposite way if the market trades in to them again. An area which previously provided resistance may, if broken, subsequently provide support, and similarly, an area of support, if broken, may subsequently provide resistance. Let’s take a look at a couple of examples of how this works:
On this daily chart of GBP/USD, the pink shaded area marks out a “swing point” where the market has found support, stopped falling, and 104
Binary Options Profit Pipeline
rallied higher. We don’t necessarily need to know why it found support there—we just know that it did. The two blue horizontal lines mark out our “swing zone”. The lower line represents the lowest low (most extreme point) of any candle around the swing zone while the upper line represents the lowest main body of a candle around the swing zone. The area in-between is the swing zone. In this case, when the market re-entered the swing zone, it failed to provide support. The market broke straight through it. However, when the market again re-entered the swing zone, from the opposite side, it provided resistance. The previous support area became an area of resistance once it was broken. The concept of previous support becoming resistance (and vice versa) is very common throughout all the different types of support and resistance we study, and you will see it as a recurring theme as you progress through the book. Here’s another example:
On this daily chart of USD/CHF, the pink shaded area marks out a “swing point” where the market has found resistance, stopped rising, 105
Previous Market “Swing Zones”
and fallen lower. Again, we don’t necessarily need to know why it found resistance there—we just know that it did. The two blue horizontal lines mark out our “swing zone”. The upper line represents the highest high (most extreme point) of any candle around the swing zone while the lower line represents the highest main body of a candle around the swing zone. The area in-between is the swing zone. In this case, when the market re-entered the swing zone, it failed to provide resistance. The market broke straight through it. However, when the market again re-entered the swing zone, from the opposite side, it provided support. The previous resistance area became an area of support once it was broken.
Key points of this chapter Before moving on, these are the key points you need to understand from Chapter 9a—Previous market “swing zones”: • “Swing zones” are found at the major turning points in the market—you can identify these turning points simply by looking for the changes of direction on a chart. • At a turning point where the market stops moving higher and begins moving lower, the “swing zone” is the area between the highest high of any candle around the turning point and the highest main body of any candle at around the turning point. • At a turning point where the market stops moving lower and begins moving higher, the “swing zone” is the area between the lowest low of any candle around the turning point and the lowest main body of any candle at around the turning point. • Swing zones drawn on at an area where the market previously found support have the potential to act as support again if the market gets back there. If the market breaks through one of these zones, however, it may then act as resistance if the market trades back into it from below. • Swing zones drawn on at an area where the market previously found resistance have the potential to act as resistance again if the market gets back there. If the market breaks through one of 106
Binary Options Profit Pipeline
• • • •
these zones, however, it may then act as support if the market trades back into it from above. Swing zones are an effective method of plotting future support/ resistance areas because they are based on the most reliable indicator available—the market movement itself ! It makes sense that areas of previous support will provide support again and that areas of previous resistance will provide resistance again. Similarly, it makes sense that after breaking through a swing zone, the market will “re-test” the zone to confirm the break. The area between the highest/lowest point and the highest/ lowest main body is the area where the market was considered too expensive/too cheap.
107
C hapter 9 b
Trend Lines
I
n this section we’re going to be discussing how you can use the concept of trend lines to establish potential future areas of support or resistance. The trend line tool in MetaTrader can be used to connect certain points on the chart. If we can connect two or more points with a trend line, that line will then extend into the future—out to the right-hand side of the chart—and may act as support or resistance in the future. In an upwardly trending market we would look to connect the rising lows of the uptrend with a trend line, whilst in a downwardly trending market we would look to connect the falling highs of the downtrend. We do this using the “diagonal line” tool in MetaTrader, which is found on the toolbar at the top:
It’s a very simple concept, and the best way to illustrate it is with some examples. Let’s look at a bullish example first, where a trend line can be used to identify potential support areas. 109
Trend Lines
In the example on the previous page, on a USD/CAD weekly chart, we have drawn a trend line connecting the rising lows of an uptrend. We drew the start of the trend line at the start of the uptrend, which is shown by the left-hand pink shaded area. We then connected this trend line to a higher low, as shown by the next pink shaded area. MetaTrader then automatically produced a trend line pointing out towards the right of the chart. Many bars later, the market fell back towards this trend line, but bounced strongly away from it again, as shown in the area with blue shading. By connecting the two pink shaded areas (the start of the trend and a higher low) with a trend line, we were able to predict a potential area of support many weeks before the market got there! Let’s now take a look at a bearish example, where a trend line can be used to identify potential resistance areas:
110
Binary Options Profit Pipeline
In the example above, on a NZD/USD daily chart, we have drawn a trend line connecting the falling highs of an uptrend. We drew the start of the trend line at the start of the downtrend, which again is shown by the left-hand pink shaded area. We then connected this trend line to a lower high, as shown by the next pink shaded area. MetaTrader then automatically produced a trend line pointing out towards the right of the chart. Many bars later, the market rose back towards this trend line, but bounced strongly away from it again, as shown in the area with blue shading. By connecting the two pink shaded areas (the start of the trend and a lower high) with a trend line, we were able to predict a potential area of resistance many weeks before the market got there! Trend lines are one of the oldest and most popular forms of support/ resistance analysis, which means a lot of traders are looking at them, and that you do usually get a good reaction whenever the market touches a trend line. Because a lot of traders are looking at them, they do become the kind of “self-fulfilling prophecy” we spoke about earlier, and as you can see in the above example, it’s obvious that many traders were watching 111
Trend Lines
that falling trend line because as soon as the market touched it, a wave of selling pressure came in and pushed the market lower.
Previous resistance becoming support (and vice versa!) Just as with the previous market swing points that we discussed in the previous section, you do also find that trend lines can act the “opposite” way if broken, meaning that if a trend line has been acting as resistance, it may then act as support once it’s been broken. If a trend line has been providing support, it may well act as resistance once it’s been broken. Once again let’s take a look at an example. We’ll start off by expanding upon our previous NZD/USD example, which featured a falling trend line acting as resistance.
We’ve already seen how we connected the two pink shaded areas with a trend line, which then produced resistance when the market met the trend line again at the blue shaded area. After this however, the market reversed and broke through, above the trend line. It then fell towards the trend line again, where it found support, as you can see in the green shaded area. 112
Binary Options Profit Pipeline
The previous resistance, once broken, became an area of support. You’ll find that this is a common theme with support/resistance concepts, that once a support level is broken, it becomes resistance, and once a resistance level is broken, it becomes support.
Where to draw your trend lines The best place to draw trend lines is by connecting the start point of a trend with its first lower high or higher low, depending on the direction of the trend. However what you can also do is connect the first lower high (or higher low) of the trend with the second. This produces another trend line, usually pointing off at a different angle to the one drawn from the start point of the trend. These trend lines can be just as valid, and we’ll take a look at a couple of examples now:
In the example above, on a USD/CHF weekly chart, we drew a trend line connecting the start of the trend with its first lower high. This is shown by the two leftmost pink shaded areas and the grey line. The problem here is that the resulting trend line was of such a shallow angle that the market was unlikely to hit it for an extremely long time. 113
Trend Lines
We then connected the first lower high of the trend with the second, shown by the two rightmost pink shaded areas and the magenta line. This produced a steeper trend line, one which followed the market more closely and was more likely to become relevant to the market within a reasonable space of time. And as you can see, when the market did touch the trend line again, shown by the blue shaded area, there was a good reaction. Many traders “sold” at that point, pushing the market lower. That was the trend line that the majority of traders were interested in. Here’s another example:
In the example above, on a EUR/CHF 4-hour chart, we drew a trend line connecting the start of the trend with its first higher low. This is shown by the two leftmost pink shaded areas and the grey line. Again, the problem here is that the resulting trend line was of such a shallow angle that the market was unlikely to hit it for an extremely long time. We then connected the first higher low of the trend with the second, shown by the two rightmost pink shaded areas and the magenta line. This again produced a steeper trend line. And as you can see, when the market did touch the trend line again, at the blue shaded area, there was 114
Binary Options Profit Pipeline
a good reaction, many traders “bought” at that point, pushing the market higher. In fact, you can draw multiple trend lines on each trend you’re studying, connecting the first higher low to the second, the second to the third, the third to the fourth and so on, but you tend to find that the further you go into the trend to draw the start of your trend line, the less effective that trend line will be, so generally we recommend that the best places to draw trend lines are from either the start point of the trend to the first higher low/lower high, or from the first higher low/lower high to the second. Those are the trend lines which tend to be the most effective.
Key points of this chapter Before moving on, these are the key points you need to understand from Chapter 9b—Trend Lines: • Trend lines are created using the “diagonal line” tool in MetaTrader. • The best place to draw them is by connecting the start point of a trend with its first higher low (if in an uptrend) or its first lower high (if in a downtrend). • You can also connect the first higher low with the second higher low (if in an uptrend) or the first lower high with the second lower high (if in a downtrend). • As with swing zones, trend lines can work the opposite way once broken, meaning previous resistance becomes support or previous support becomes resistance.
115
C hapter 9 c
Moving Averages
I
n this section of the chapter we will be looking at “moving averages”, and how they can be used to identify support and resistance levels in the markets. Moving averages often act as support or resistance because of the concept of “mean reversion”. The idea of mean reversion suggests that markets will always have highs and lows, but from time to time, they will always return to the mean—i.e. the average. For example, a market will put in a high in an uptrend, return to the average, and from there the market will decide if it wants to resume the upward trend, or break the trend and move the other way. Moving averages often provide a “tipping point” in the market, and that’s why they are important as a method of plotting potential support or resistance. We will be using four moving averages, which you can load on to your chart by double-clicking on “Moving Average” from within the “Indicators” list, located in your “Navigator” window on the left-hand side of the screen:
117
Moving Averages
The first one we’ll look at is the 200-bar simple moving average (200 SMA), which is shown as a purple colour on our main template:
118
Binary Options Profit Pipeline
The 200 SMA is one of the most popular and widely-used moving averages around. Therefore because many traders are looking at it, it once again does become something of a self-fulfilling prophecy. It’s a very useful line to have on the chart and when it does form part of a “confluence” area, that confluence usually turns into a very strong support or resistance. You can see in the example above that the market often reacts strongly when it comes into contact with the 200 SMA. The other three moving averages we’ll be using are built using a slightly different calculation. They’re called “exponential” moving averages. These differ from simple moving averages in that they place more emphasis on more recent bars, and less emphasis on more distant bars. This means that an exponential moving average tends to be more reactive, and follow the market more closely than a simple moving average, even if calculated on the same number of bars. The three exponential moving averages (EMAs) we will be using are 21-bar (yellow), 34-bar (red) and 55-bar (green). 21, 34 and 55 are Fibonacci numbers, which may not mean much to you at this stage, but as you go through the book you will learn why this is important!
What these moving averages do is create a thick “band” of support or resistance. We can treat each of our three EMAs as potential support 119
Moving Averages
or resistance in their own right, but we can also think of this as one big support/resistance zone extending from whichever of the three EMAs is at the top to whichever is at the bottom, and you can see, both in the example above (look at the pink shaded areas) just how effective they can be. These moving averages tend to work best in strongly trending markets and not as well in choppy markets, but since we’ll be trading into trends most of the time anyway, that suits us just fine! Moving averages should not be used on their own as a support/ resistance area, but when they form part of a strong confluence area they can be very powerful.
Key points of this chapter Before moving on, these are the key points you need to understand from Chapter 9c—Moving Averages: • Moving averages are an effective method of finding support/ resistance in a market because of the concept of “mean reversion”, which states that markets will always eventually return to their average after moving away from it. • Moving averages work best as support/resistance in a trending market, but since most of the trades we will be entering will be trend-following, that suits us. • Moving averages can be thought of as support/resistance levels on their own, but the 21, 34 and 55 EMAs can also be thought of as one large “band” of support or resistance.
120
C hapter 9 d
Pivot Points
I
n this section of the chapter we will be introducing you to one of the most widely-used methods of finding support and resistance in the markets—perhaps the most widely used of all—they are “Pivot points”. Pivot points are a set of horizontal lines drawn at certain levels across a chart, which are based on a calculation made on the previous bar. More specifically, the calculations are made using the previous bars open, high, low and close levels. For example, you can have “daily” pivots, which create a set of support and resistance lines—pivots—which last for one day, based on calculations made on the previous day’s open, high, low and close. At the end of the day, these pivots are then recalculated for the next day. We won’t actually be using daily pivots, however. What we’ll be using are “weekly” pivots, which give us a new set of pivot points every Monday, based on calculations made on the previous week’s open, high low and close. These pivots last for one week, until we get a new week. They are then are recalculated. We will also be using “monthly” pivots, which are updated on the first day of every month, using calculations based on the previous months open, high, low and close. The formulas behind pivot points are relatively simple but it’s not really necessary to know them if you don’t feel you need to! If you are interested you can find out about them from just a simple Google search—they’re no secret—but really, all we’re interested in is where the pivot points are on the chart, and the fact that they can potentially provide support/resistance, especially as part of a “confluence”. Once again, there really is no physical, technical or even logical reason why a market should bounce from a pivot point, but the fact is that they are extremely popular—millions and millions of traders around 121
Pivot Points
the world use them—and therefore it’s important to keep an eye on them, because markets do often react when they hit a pivot point. Let’s take a look at how pivot points appear when loaded on to a chart. You can access them from the “Custom Indicators” within the “Navigator” window. There are two indicators—“Weekly Pivots” and “Monthly Pivots”. Just drag them onto a chart to load them.
You can see that the pivot indicators create various lines across the chart, in different colours and with different types of labels, such as R1, S3, H4, M2 and so on. These are all different types of pivot lines based on slightly different calculations. Again, however, it’s not really important to know the differences between these lines. We treat all pivots in the same way. In our experience, any pivot point is as strong as any other. Remember—we don’t use pivot points on their own—we’re only interested in them if they occur at a “confluence” area along with other types of support or resistance. You can see in the example above that markets do indeed often react to pivot points. In the example above, we can see six clear reactions at pivot levels during the course of approximately one day’s trading.
122
Binary Options Profit Pipeline
Key points of this chapter Before moving on, these are the key points you need to understand from Chapter 9d—Pivot Points: • Pivot Points are calculated using the open, high, low and close of the previous bar—calculations on the previous week gives us a set of weekly pivots, while calculations on the previous month give us monthly pivots. • There are different types of pivots, given different designations such as R1, S2, L3, M0, etc. These are all created using slightly different calculations but all pivots are as strong as each other in our experience. • Pivots are probably the weakest form of support/resistance that we use; but it is still useful to know where they are to see if they form part of a confluence.
123
C hapter 9 e
Fibonacci Retracements
I
n this section of the chapter we’ll be introducing you to “Fibonacci” levels and how they can be used to identify potential areas of support or resistance. You’ve already seen in the headings list for this chapter that there are two types of Fibonacci levels—“retracements” and “extensions”, and we’ll be looking at both of those in separate sections. You’ve also already encountered Fibonacci numbers in the section of this chapter where we discussed moving averages—we use the exponential moving averages—21, 34 and 55-bar—which are based on Fibonacci numbers. Therefore, before we go on its best that we go in to a bit more depth about Fibonacci numbers and what they’re all about! Fibonacci numbers are an amazing marvel of mathematics. Put simply, Fibonacci numbers arise from a simple sequence. The first number in the sequence is 0, the second number is 1, and each subsequent number is found by adding the two previous numbers together, and you can see how that sequence works below: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377
Although this number sequence is believed to have been first observed by Indian mathematicians as long ago as 450BC, it is generally accepted that it didn’t appear in the western world until Leonardo of Pisa, aka Fibonacci, introduced them in the 13th century. It is said that he actually discovered the sequence by imagining an idealised version of the breeding patterns of rabbits, but it’s not known whether or not that is the truth. 125
Fibonacci Retracements
Fibonacci numbers and their related phenomena are simply amazing and they occur everywhere. For example, the florets in the centre of a sunflower are always arranged in Fibonacci numbers. The flowering patterns of artichokes are arranged in Fibonacci numbers. The arrangement of pine-cones occurs according to Fibonacci numbers. Music can be arranged according to Fibonacci numbers, and there is even a famous painting by Debussy which is partly arranged by Fibonacci numbers. There is a building at the “Eden Project” in Cornwall, England, which has its structure based on Fibonacci numbers. These are only a few of many examples! You can find out all sorts of fascinating Fibonacci information with a simple Google search. In addition to Fibonacci numbers, the Fibonacci phenomenon also includes what we call Fibonacci “ratios”, and these are what you get when you divide certain numbers in the Fibonacci sequence with certain other numbers from the sequence. For example, if you divide each number in the sequence by the number that follows it, you’ll get a number in the region of 62, and the further you go into the sequence you’ll find that that number always hovers around the 61.8 mark. Therefore 61.8% is approximately the ratio of each Fibonacci number to the next. Similarly, if you divide each Fibonacci number by the one after the next number, you usually end up with a ratio of in the region of 38.2%! There are other such calculations, involving dividing by the number that comes two places after a certain number in the sequence, or three places after. By performing calculations like this you end up with certain important ratios, which are listed below: 23.6%, 38.2%, 61.8% and 76.4% These percentages, along with 50% (which is not a Fibonacci number, but is simply a key common sense ratio) are then applied to the markets. This means that you might, for example, look for resistance when a market re-traces 38.2% of a previous down-move, or perhaps you might look for support when the market retraces 61.8% of its last up-move. 126
Binary Options Profit Pipeline
Again, it’s not really known exactly why Fibonacci numbers should work this way in relation to the financial markets. There’s no logical reason why these numbers should apply to the markets in the way that they do, but the fact is that quite simply, they do! Fibonacci analysis of the markets is extremely popular and therefore once again, you find that the Fibonacci levels work as a self-fulfilling prophecy because so many traders around the world are acting on them. So let’s take a closer look at Fibonacci retracements and how they work… Before starting out, you need to add in the 76.4% retracement to MetaTrader’s settings, as this is not included by default. To do this, you must first click on the “Fibonacci” tool in MetaTrader, which you already encountered back in Chapter 8d—Confirming Divergences:
Once the tool has been selected, simply click and drag across any region of a chart, and let go of the mouse. This will produce a “Fibonacci grid” like the one on the next page:
127
Fibonacci Retracements
Next, select the grid by double-clicking on the dotted diagonal line which connects the “0.0” and “100.0” lines. Then right-click on the same diagonal line and click on “Fibo Properties” to bring up the “Fibo properties” dialog box. In the “Fibo Properties” dialog box, click on the “Fibo Levels” tab, and you should see this:
128
Binary Options Profit Pipeline
Click the “Add” button. This gives you the ability to add in a new Fibonacci level. In the “Level” field, type 0.764. In the “Description” field, type 76.4. Click “OK” and the 76.4% Fibonacci retracement will be added to your grid. This will now become part of the default MetaTrader setting so you won’t have to repeat this process again.
Using the Fibonacci grids With Fibonacci retracements, what we are looking for is to see how far a market has retraced a certain previous move. The first thing you need to do therefore is find the move that you wish to study:
In the example above, on a GBP/JPY weekly chart, we are looking to study the move from the high at point (1) down to the low at point (2). As you can see, after point (2) the market has begun rising—it has begun re-tracing the previous down-move. This is where we can use Fibonacci retracements, to see how much of that previous move has been re-traced. To do this, we select the Fibonacci tool, and click on the start point of the move we wish to study, which in this case is point (1). We drag the mouse to the end point of the move—point (2), and let go. This produces a Fibonacci grid based on that move: 129
Fibonacci Retracements
With the chart scrolled forwards slightly, you can see in the pink shaded area that the market retraced almost exactly 38.2% of the previous down-move, before stopping and continuing lower! And that’s how Fibonacci retracements work—simply find the move you wish to study, draw the grid on from the start point to the end point, and see how the market reacted to the different levels. Let’s look at another example:
130
Binary Options Profit Pipeline
In the above example, you can see in the pink shaded area that the market retraced almost exactly 76.4% of the previous up-move (from point (1) up to point (2)) before stopping and continuing higher!
Where to draw your Fibonacci grids Quite simply, what we are looking for with Fibonacci retracements is to see how far the market retraces specific moves. It does take a little practice to figure out exactly where you need to be drawing your retracements. We’ve found that once people learn to draw Fibonacci retracement grids they start drawing them on everywhere and that usually leads to problems! Our general rule is this: You should draw Fibonacci retracement grids in two key places: 1) On entire trends 2) On the most recent move within a trend which has not yet been fully retraced.
Let’s have a look at some examples of what that means:
In the example above, on a USD/JPY weekly chart, an upward trend has been highlighted. It starts at point (1) and extends up to point (6). 131
Fibonacci Retracements
The points in between are the higher highs and higher lows of the uptrend, which are also marked with the pink shaded zigzag lines. Following on from point (6), the market has retraced lower. If we wanted to find out where the Fibonacci support might lie, we need to study the upward movement and draw on some Fibonacci grids. The first place to draw a Fibonacci grid is on the entire trend— which in this case is from point (1) to point (6). The second place to draw a Fibonacci grid is on the most recent move within the trend which has not yet been fully re-traced. In this case that is from point (5) to point (6):
The blue lines are a Fibonacci grid drawn on the entire trend (points (1) to (6)). The red lines are a Fibonacci grid drawn on the most recent leg of the trend which has not yet been fully retraced (points (5) to (6)). As you can see in the pink shaded area, the market found support on a double confluence of Fibonacci retracement levels—38.2% of the entire trend, and 50% of the most recent leg of the trend. It then bounced considerably higher!
132
Binary Options Profit Pipeline
Let’s look at another example:
On this monthly chart of GBP/USD, an uptrend has been highlighted from points (1) to (10). Following on from point (10)), the market has re-traced lower. If we wanted to find out where the Fibonacci support might lie, we again need to study the upward movement and draw on some Fibonacci grids. The first place to draw a Fibonacci grid is on the entire trend— which in this case is from point (1) to point (10). The second place to draw a Fibonacci grid is on the most recent move within the trend which has not yet been fully re-traced. In this case that is from point (7) to point (10)—because the market has already fully retraced the move from point (9) to point (10). The move from point (7) to point (10) is therefore the most recent leg of the trend which has not yet been fully retraced. When we draw those Fibonacci grids we see this:
133
Fibonacci Retracements
The blue lines are a Fibonacci grid drawn on the entire trend (points (1) to (10)). The red lines are a Fibonacci grid drawn on the most recent leg of the trend which has not yet been fully retraced (points (7) to (10)). As you can see in the pink shaded area, the market found support on a double confluence of Fibonacci retracement levels—38.2% of the entire trend, and 61.8% of the most recent leg of the trend. It then bounced considerably higher! There’s no need to draw Fibonacci grids connecting every single high and low in a trend. Focus on the significant ones. Our experience has taught us that these are the significant points where you need to be drawing Fibonacci grids—on the entire trend, and also the most recent move of the trend.
Key points of this chapter Before moving on, these are the key points you need to understand from Chapter 9e—Fibonacci retracements: • Fibonacci retracements are used to see how far a market has retraced a previous move—the popular levels to look for are 23.6%, 38.2%, 50%, 61.7% and 76.4%. 134
Binary Options Profit Pipeline
• When used correctly, Fibonacci retracements are a very powerful method of finding support/resistance levels in the markets. • The best way to use them is to draw a Fibonacci grid on an entire trend from beginning to end, and also on the most recent leg of the trend which has not yet been fully retraced.
135
C hapter 9 f
Fibonacci Extensions
I
n this section we’ll be taking a look at the final support/resistance concept that we will be using: Fibonacci extensions. The main difference between Fibonacci retracements and Fibonacci extensions is this: We use retracements to see how far a market retraces a previous move, from 0-100%. With extensions we are looking to judge support/resistance levels that come into play once a market has retraced more than 100% of a previous move. Specifically, what we’ll be looking for is when a market retraces a previous move entirely and continues, to the extents you can see below: 123.6%, 161.8%, 200%, 261.8%, 423.6% Fibonacci extensions are handy when looking at trending markets, as they allow us to plot potential support/resistance levels in places where the trend hasn’t yet reached. For example, in an upwardly trending market, we can use Fibonacci extensions to find resistance levels that are above the current market level, i.e. areas that the market has yet to reach in this trend, and in a downwardly trending market we can plot support levels below the market, where the trend has yet to reach. There are two different situations in which Fibonacci extensions can be used. The first is on the final leg of the preceding trend. The second is on the most recent counter-trend retracement within the current trend. Before we take a look at what that means, we need to go through a similar process as with the Fibonacci retracements chapter, in order to 137
Fibonacci Extensions
add certain lines on to our Fibonacci grid that aren’t already there by default. Just as before, draw a Fibonacci grid on a chart, select it, right click and select “Fibo properties”. Select the “Fibo levels” tab, and then click on “Add”. You need to add the two levels and their descriptions as highlighted in the picture below: Once you’ve done that, these levels will stay as part of the default Fibonacci grid.
How to use Fibonacci extensions
In the example above, on a EUR/GBP weekly chart, we see a market that is trending downwards—making a pattern of lower lows and lower 138
Binary Options Profit Pipeline
highs—up until point (7). From there, the trend reverses, and we see an upward trend of higher highs and higher lows. Following a small downward retracement from point (10) to point (11), the upward trend resumes. If we wanted to find out where this upward move might potentially find resistance, we can use Fibonacci extensions. If we want to find out where this upward trend might find resistance from Fibonacci extensions, the first place to draw on a Fibonacci grid is on the final leg of the preceding trend. In this case, that is from point (6) to point (7)—which is the final leg of the downtrend which preceded the current uptrend. The second place to draw on a Fibonacci grid is on the most recent counter-trend retracement within the current trend—which in this case is from point (10) to point (11)—the last downward retracement within the upward trend. Let’s look at what happens when we do that:
The red Fibonacci levels are from a grid drawn between points (6) and (7)—the final leg of the preceding trend. The blue Fibonacci levels are from a grid drawn between points (10) and (11)—the most recent counter-trend retracement within the current uptrend. 139
Fibonacci Extensions
As you can see in the pink shaded area, the market found resistance on a double confluence of Fibonacci extension levels—200% of the final leg of the preceding trend, and 123.6% of the last counter-trend retracement within the uptrend. It then dropped considerably lower! Let’s look at some more examples:
On this weekly chart of USD/JPY, the market has found resistance from a double confluence of Fibonacci extension levels. The red Fibonacci lines relate to a grid drawn on the final leg of the preceding downtrend. The blue Fibonacci levels relate to a grid drawn on the most recent counter-trend retracement within the uptrend.
140
Binary Options Profit Pipeline
On this daily chart of GBP/USD, the market has found support from a double confluence of Fibonacci extension levels. The blue Fibonacci lines relate to a grid drawn on the final leg of the preceding uptrend. The red Fibonacci levels relate to a grid drawn on the most recent countertrend retracement within the downtrend.
Key points of this chapter Before moving on, these are the key points you need to understand from Chapter 9e—Fibonacci extensions: • Fibonacci extensions are used to judge support/resistance levels once a market has retraced more than 100% of a previous move. • We use Fibonacci extensions in two places. • The first is the final leg of the preceding trend. • The reason for this is because we need to judge the strength of the current trend against the last time that traders trading in the opposite direction were in full control of the market. • The second is the most recent counter-trend retracement within the current trend. • This is because we need to judge the strength of the current trend against the last time that traders trading in the opposite direction were in partial control ofthe market.
141
C hapter 10
Putting it all Together
N
ow that you’ve learned the main cornerstones, or building blocks of this approach to trading, we move on to what is really the third section of the book. In the first section we introduced you to the basics: we introduced you to the markets themselves, to the Bet On Markets website, and to the MetaTrader charting software. In the second section we moved on and showed you the actual concepts we use to analyse the markets and to help us make trading decisions. We introduced those concepts to you one by one as a separate sections, and what we’re going to be doing now, in this third section, is show you how all the different concepts we have showed you so far fit together to create a complete approach to making money on the markets. First of all, let’s recap on the three cornerstones of our trading approach. Trend, divergence, and support/resistance. Trend is effectively the prevailing direction of the market. Most of the time, we will be looking to trade in the direction of prevailing trends, and we establish the trend by using the Market Direction indicator. Divergence is a specific pattern which shows up on technical indicators and indicates that a change of direction may be coming. There are two types of divergences. First of all there’s “regular” divergence, which is a type of divergence which shows us that a trend may be coming to an end. Then there’s “hidden” divergence, which shows when a trend may be about to resume following a retracement. Finally, there’s support and resistance. The study of support and resistance leads us to the identification of certain levels in the market where a change of direction may occur. This change of direction occurs because sellers come into the market at resistance levels, and buyers come into the market at support levels. This causes a change in the weight of 143
Putting it all Together
buying and selling, altering the ratio of supply to demand in the market and, as a result, prices change direction. What we are looking for is for all these factors to come together to produce a high-probability trade. What we are effectively looking for is this: “Divergence signals which occur at strong confluences of support or resistance, and which indicate that the prevailing trend may be about to resume or reverse.” In a situation like that, you have all the cornerstones of the system working together. A divergence signal is a sign that the market may change direction. If that signal occurs at a level where we can expect a shift in the supply/demand ratio, that then adds to the probability of the signal. And if that signal is pointing us in the right direction as per the prevailing trend of the market, then the probability is even higher. What we can then do is go to Bet On Markets and place a trade that will pay out a profit provided the market doesn’t do the exact opposite to what the signal is telling us it will do. This is the fantastic edge afforded to us by fixed-odds trading, and means the probability of success in our trading is extremely high. Let’s actually take a look at an example of how one of our trades might come about: • • • • • •
Monthly trend is strongly down according to Market Direction indicator. Weekly trend is also strongly down according to Market Direction indicator. Daily chart shows a bearish hidden divergence re-entry signal. The signal occurs at an area containing a swing zone, a trend line, a Fibonacci retracement and two moving averages. All the indications are that the market will go LOWER, but… We can actually make money from a trade that the market won’t touch a level much HIGHER!
In the example above, the monthly and weekly charts are both in a strong downtrend, as per the Market Direction indicator. From that, we therefore know that the longer-term trend is down. 144
Binary Options Profit Pipeline
We then cross over to our shorter-term charts and look for signals in the direction of that longer-term trend. We then see a bearish hidden divergence signal on the daily chart, which is setting up in an area where a swing zone, a trend line, a Fibonacci retracement, and two moving averages are all converging on approximately the same place to form a “confluence” of resistance. That means the market is trading at a level where we can expect a significant number of sellers to come in, and for the supply to outweigh demand, which will push the market lower. This is accompanied by a bearish divergence signal on the daily chart, which also indicates that the market wants to move lower. We already know we are trading in a longer-term downtrend, so we have the trend on our side too! At this point, all three cornerstones of our approach indicate that a downward move is coming in the market. If the signal then gives us the extra confirmation by moving low enough to hit its 50% confirmation line, we can then trade the signal with complete confidence, knowing that the market has already started doing what the signal suggests it will do. This is therefore a high-probability trading opportunity. Even if you were trading in a more traditional way, you would be looking to “sell” here, meaning you would take a bearish position in the anticipation that the market will fall. The great thing is that we can actually go one step further than that to put the odds even more in our favour. We have all the indications that the market will move lower. But we can then go to Bet On Markets and actually place a trade which will pay out a profit provided the market doesn’t move considerably higher! We can go to Bet On Markets and place what’s called a no-touch trade, which you should already be familiar with from the Bet On Markets chapter (Ch4). The no-touch trade is our speciality and that’s what we will be using going forwards. In this example, we have all the indications that the market will go lower, but we can then place a trade that the market won’t touch a level much higher than where it is now. We’ll make a profit if the market moves a long way lower. We’ll make a profit if the market only moves a little way lower. We’ll make a profit if the market goes nowhere. We’ll even make a profit if the market 145
Putting it all Together
moves a little higher! As long as the market doesn’t put in a very strong upward move, when all the indications are that it will put in a strong down-move, we will make a profit! Now let’s just think about that for a moment… All the indications are there that the market is ready to move lower. The trend says so. The divergence signal says so. And the resistance levels say so. The chances of this market going lower are therefore pretty high. But the chances of this market making a strong move higher are extremely slim. Tiny even! But at Bet On Markets we can place a trade that following on from this strong bearish signal, the market will not rise strongly. That’s what the no-touch trade allows us to do. It’s an extremely high-probability trade. It’s just the same as walking into a sporting bookmaker and saying I want to make money if Havant and Waterlooville don’t beat Liverpool! Remember that from chapter 2? You may also remember that we discussed how it was quite likely that the sporting bookmakers might not have even let you place that trade because the odds are simply too much in your favour. It would be “financial suicide” for a bookmaker, because they’d have tens of thousands of people all over the country coming in and wagering on a near-certainty. It would be obvious to anyone that Havant & Waterlooville would have very little chance of beating Liverpool. The same kind of near-certainty trades exist in the financial markets—we’ve been just been looking at an example. However, they’re not obvious to everyone. You can only spot them with special training, therefore Bet On Markets are happy to let us place them. They’ll let us find high-probability situations such as the one in the example we’ve just been looking at and profit from them. In the example we’ve just been looking at, all the indications are that the market wants to go down. And we can then make money provided it doesn’t go up strongly. Just because all the indications are there that the market wants to go down, however, that doesn’t mean for sure that it will. You can never predict with 100% accuracy what the market will do, and that’s what makes more traditional trading methods difficult. In more traditional trading methods you have to be right about the direction of the market to make any money. 146
Binary Options Profit Pipeline
The thing is, you can predict with an extremely high degree of accuracy what the market will not do, which is the great advantage of this style of fixed-odds trading. That’s what we’re going to be looking to do as we go forwards.
Our trading approach We have a very specific, very methodical way of finding our trades. There is a systematic process to go through which involves starting off by looking at the bigger time frames, to determine the longer-term trends, and then scaling back through the shorter time frames. What we’re trying to do is identify shorter-term signals in the direction of longer-term trends. Sometimes we will trade against the trend, but usually we will be following the prevailing trend. In our experience, the more systematic and methodical you can be about finding trades, the better. With more “discretionary” approaches to trading, there is more of a “human element”, which inevitably brings more of the psychological aspect of trading in to play, and that can have a number of negative effects on your overall probability (which is something we’ll be covering in greater depth in a later chapter). We’ve provided you with a set of decision-making “flowcharts”. Each time you come to analyse a market to see if there is a potential trade, you simply go through the process on the flowcharts and they will lead to a conclusion of either “no trade” or “you have a trade”. Eventually, the processes on the flowcharts will become second nature to you, but until then keep them nearby and refer to them as you go through analysing each market one by one. With the processes on these flowcharts, you can analyse all of the markets that we trade in a matter of a few minutes. That’s why we only work an hour a day—we spend a few minutes checking over the charts once every hour, or every couple of hours, to see how the markets are developing and whether or not there are any potential trades. We have 10 specific types of trade that we look for: 10 different combinations of trend and divergence, which present us with tradeable opportunities. When you come to analyse a market, follow the process on the flowcharts through and it may lead you to one of these 10 types of trade. 147
Putting it all Together
The 10 specific types of trade that we are looking for come under two categories. There are seven trend-following trade types, and three counter-trend trade types. Let’s look at the trade types in more detail. First of all, let’s look at the seven trend-following trade types, but before you read on, please make sure you understand what we mean by the terms “reversal signal” and re-entry signal”. If you don’t, please go back and review Chapter 8— Divergence. • • • • • • •
1A) A 4-hour re-entry signal in the direction of the daily, weekly and monthly trend. 1B) A 1-hour reversal signal against the 4-hour trend, confirming a 4-hour re-entry signal in the direction of the daily, weekly and monthly trend. 2) A 4-hour reversal signal against the daily trend, confirming a daily re-entry signal in direction of the weekly and monthly trend 3) A 4-hour reversal signal against the daily trend, confirming a daily reversal signal against the weekly trend, confirming a weekly re-entry signal in the direction of the monthly trend. 4) A daily re-entry signal in the direction of the weekly and monthly trend, with no signal on the 4-hour chart which would allow us to refine the entry. 5) A daily reversal signal, confirming a weekly re-entry signal, in the direction of the monthly trend, with no signal on the 4-hour chart which would allow us to refine the entry. 6) A weekly re-entry signal in the direction of the monthly trend, with no signal on the Daily or 4-hour charts which would allow us to refine the entry.
It may seem at first that there’s a lot to memorise here, but this is where the flowcharts will help you out! When you come to analyse a market, all you need to do is follow the process on the flowcharts and it will either lead you to a conclusion of “no trade”, or it will lead you to one of the 10 trade types we look for. After a week or two it will all become second nature to you.
148
Binary Options Profit Pipeline
Moving on, there are three more trade types that we look for and those are the counter-trend trades, so let’s take a look at them: • • •
7) A 4-hour reversal signal against the daily trend, confirming a daily reversal signal against the weekly trend, confirming a weekly reversal signal against the monthly trend. 8) A Daily reversal signal against the weekly trend, confirming a weekly reversal signal against the monthly trend. 9) A Weekly reversal signal against the Monthly trend.
The seven trend-following trade types, and the three counter-trend trade types, are the 10 specific trade types we look for. These are the 10 combinations of trend and divergence signals which present us with tradeable opportunities. The flowcharts will guide you through the process of finding these trades. Every time you come to analyse a market, just go through the process on the flowcharts and if one of these trade signals is present, you will find it, and if not, the flowcharts will tell you that there’s no trade, so you can move on to analysing the next market. In the coming chapters you’re going to be learning all about how we put all the different elements we’ve covered so far together, to create a complete trading approach. You’re going to learn how the flowcharts work and how they find the trade signals we are looking for. You’re also going to learn how to find the “confluences” of support and resistance that occur in the markets, where exactly you should place your no-touch barriers, and also how to manage your trading capital effectively. By the end of this section of the book you’re going to be a highlyskilled trader, capable of profiting regularly from the markets! Before we go on to all that, however, there’s one thing you need to do, and that’s to set up your charts with the main trading template, so you can begin looking for the trades. To do this, first of all open up your copy of the MetaTrader software, which should still be looking something like this:
149
Putting it all Together
If not, you need to open three charts: a 4-hour chart, a daily chart, and a weekly chart. Apply the “blank” template to each one. Then, click the “Window” menu at the top, followed by “Tile Vertically”. Next, right-click on each individual chart. In the menu that appears, select “Template”, then apply the “Main” template (in the colour of your choice). Your MetaTrader window should now look like this:
150
Binary Options Profit Pipeline
This is our main template. As you can see in the main panel of each chart, we have the candlestick chart of the market we are looking at, and we also have our four moving averages and our two Bollinger band indicators. Hopefully, it won’t look too cluttered to you, even though we’ve gone from a blank chart to a chart containing a number of indicators. Going forwards through the book, you will learn to focus on what you need to be looking at—you’ll learn to look at the Bollinger bands when you need to and ignore the moving averages, and vice versa. It’s a skill that you will pick up in the same way that even when you’re in a noisy room, you can pick one particular voice or sound to focus on. From here there’s one final step. In addition to our three main charts, we also need to be able to see the Market Direction indicator on a monthly chart. Open up a new chart (click File > New Chart), and set the time frame to monthly. Apply the main template to the chart. Using your mouse, re-size the chart and re-position it so that it completely covers the weekly chart—taking up the exact same area of the screen. 151
Putting it all Together
At the bottom, where the individual “tabs” for each chart are shown, click on the tab for the weekly chart. This brings the weekly chart back to the front, and hides the monthly chart. Finally, drag the bottom of the weekly chart up, just far enough so that you can see the Market Direction indicator on the monthly chart. Your MetaTrader window should now look like this (note the pink shaded area):
This is now our complete trading profile. We have a 4-hour chart, a daily chart, a weekly chart, and just in the bottom right-hand corner, we have the Market Direction indicator which shows us the current monthly trend. The current monthly trend is the starting point of the flowchart process. You are now completely set up to begin analysing the markets using our flowcharts!
152
C hapter 11
Using the Flowcharts
I
n this chapter we’re going to be introducing you to the Flowcharts that we have provided you with as part of the book. These unique decision-making aids guide you through the process of finding trade setups in the markets. As we discussed in the previous chapter, we have a very systematic and methodical way of finding our trades. There is a certain checklist— all the cornerstones of our trading system must be present in order for us to take a trade, and the Flowcharts guide you through the process of figuring out if all the cornerstones of our trading system are present on the particular market that you’re looking at. Eventually, the aim is that you won’t need the flowcharts. Ultimately, we want the process of looking for and finding trades to be completely second nature to you. The process of finding these trades does take some learning at first however, and that’s why we’ve created these flowcharts, so that even right at the beginning of your fixed-odds trading career—while you’re still learning—you can analyse the markets in exactly the same way that we do, and find the same trades. What we’re going to do in this chapter is discuss the flowcharts, describe how to use them and define some of the terms that you will see on the flowcharts. We’re not actually going to look at practical examples of using the flowcharts, because that’s going to come later—we’ve provided you with some live trading examples later on in the book that you can follow along with, using the flowcharts to see how we arrived at the conclusions we did and found the trades that we did. For now however, this chapter will serve as an introduction to, and explanation of the flowcharts themselves. 153
Using the Flowcharts
You’ll notice that we’ve provided you with three flowcharts. Two of them look similar, and then there’s a third one, which looks slightly different.
Flowcharts #1 and #2—finding the trade signals
First of all, let’s look at the two similar-looking flowcharts, which you’ll notice are called decision-making flowchart #1 and decision-making flowchart #’2. You can see one pictured above, but ideally you’ll have the flowcharts to hand and will be looking at them in front of you on paper. These two flowcharts guide you through the process of actually spotting the trade signals themselves. The third flowchart—the one that looks different to the other two—is the flowchart that “filters” the trade signals. Just finding a trade signal on these charts is not enough. From there, there are a number of other criteria that must be fulfilled before we consider it to be safe enough to actually commit the trade to our account, and that’s what the third flowchart does. For now, however, let’s focus on the other two. Why are there two of these flowcharts? Quite simply, one of them is used for finding trades in a bullish market, and one of them is used for 154
Binary Options Profit Pipeline
finding trades in a bearish market. FlowChart #1 is for bullish markets, and flowchart #2 is for bearish markets. The next thing you’re probably wondering is “how do you figure out whether we’re in a bullish market or a bearish market?” For that, take a look at the very start point of each flowchart. Notice that each flowchart starts off from the monthly Market Direction indicator. That’s the very first thing you look at when you come to analyse a market. In the previous chapter you set up your charts so you have a 4-hour chart on the left, a daily chart in the middle, a weekly chart on the right and then just in the bottom right-hand corner of the screen you’ve got the monthly Market Direction indicator. That’s your starting point, and that’s how you determine whether we’re in a bullish market or a bearish market. Quite simply, if the monthly Market Direction indicator is showing a green dot (either light green or dark green), then you’re in a bullish market. You would therefore use flowchart #1 (you’ll see that the start point of flowchart #1 is “monthly Market Direction indicates uptrend”. If the monthly Market Direction indicator is the opposite, and showing either a red dot or a pink dot, then we’re in a bearish market, which means you would use flowchart #2. Remember, the key to the trading approach we’re teaching you is to determine the longer-term trend, and then find trade signals on the shorter-term term charts that are either in the direction of that trend, or in some rare cases against that trend. We achieve this by starting out looking at the monthly trend, and then scaling back through the shorter time frames to find our actual trade signals. From the start point, move on to the first question. This question determines whether or not you are looking for a trend-following trade or a counter-trend trade. In the previous chapter we saw that there are seven trend-following trade types and three counter-trend trade types. Most of the time, your answer to this question will be “no”. If the answer to the first question is no, then you’re looking for trend-following trades. If the answer is “yes”, then you’re looking for counter-trend trades. Now, cast your mind back to Chapter 7—Market Direction… In that chapter we introduced our rule, which dictates how to use the Market Direction indicator: That the trend on any chart determines the trade signals you look for on the time frame below. 155
Using the Flowcharts
This means that the trend on the monthly chart determines the signals we look for on the weekly chart. With the example flowchart above (which is flowchart #1) you’ll see that the first question is: “Is there a bearish regular divergence signal on the weekly chart?” We know in this example that the monthly chart is in an uptrend because the monthly MarketDirection dot is green. But if there is a bearish reversal signal on the weekly chart, then that means that the monthly uptrend may be coming to an end. Therefore, we want to look for counter-trend trades. If the answer to this question is “no”, meaning that there is no indication on the weekly chart that the monthly uptrend is about to end, then that obviously means that the monthly trend is likely to continue, and therefore we want to be looking for trend-following trades. Remember—please make sure you understand the terms “regular divergence signal” and “re-entry signal” before continuing! Rather than go through each and every question on the flowcharts, what we will do in this chapter is point out some relevant details, explain the meaning of some of the questions and define some of the terms you will see on the FlowCharts. This will allow you to understand the flowcharts clearly before moving on. Firstly, take a look at this question: Is there a bullish re-entry signal appropriate to the weekly trend on the daily chart?
You may be wondering what this means. Referring again back to Chapter 7, when we introduced you to the Market Direction indicator, you’ll remember that a trend can be either “strong” or “weak”. A strong uptrend is represented by a dark green dot, while a strong downtrend is represented by a red dot. The weaker up and downtrends are represented by light green and pink dots respectively. Now, cast your mind back to Chapter 8c—Hidden Divergence. You’ll remember that we defined two types of signals. First of all, there was the standard hidden divergence re-entry signal. Secondly, there was the hybrid hidden divergence re-entry signal. 156
Binary Options Profit Pipeline
The standard signal is used when trading in the direction of a strong trend, while the hybrid signal is used when trading in the direction of a weak trend. So looking again at the question above—if the weekly trend was strong, the appropriate signal on the daily would be a standard hidden divergence re-entry signal. If the weekly trend was weak, the appropriate signal would be a hybrid hidden divergence re-entry signal. That’s what we mean by “appropriate to the trend”.
“Refining” the entry to a trade We’ve already emphasised (many times!) that the key with this trading system, and with these flowcharts, is to find longer-term trends and then find shorter-term entries either into or against those trends. With each trade signal, we aim to scale down to the shortest time frame—the 4-hour chart—to find our signals. You will notice that all the way through this flowchart, we are constantly trying to “refine” the entry to our trade. If there’s a re-entry signal on the daily chart, for example, we would look to see if we can refine the entry further by looking across at the 4-hour chart to see if there is a reversal signal. The reason we do this is because a reversal signal on the 4-hour chart will hit its 50% confirmation line long before the daily re-entry signal will. Take a look at this example:
157
Using the Flowcharts
This is an actual trade setup which occurred in GBP/USD in September 2008. On the right-hand side of the screen we have a daily chart, while on the left-hand side of the screen we have a 4-hour chart. The daily chart is showing a bearish standard hidden divergence reentry signal, while the 4-hour chart is showing a bearish regular divergence reversal signal. The high of the market occurred on 25th September. In order to see the bearish hidden divergence signal on the daily chart become confirmed, we would need to see the market fall 50% of the way back towards its previous low. This did not occur until 29th September. However, we can refine the entry by using the 4-hour signal as our trigger. In order to see that signal confirmed, we need to see the market trade down 50% of the way towards the lowest point in-between the start of the divergence and the end. This occurred on 25th September— the same day as the high, and four days before the daily signal was confirmed! Not only were we able to get in to the trade sooner, we were also able to get a much safer no-touch level, because the market had not fallen too far yet, allowing us to position our no-touch barrier much higher than we would have been able to if we were trading just the daily chart setup. In that example, the 4-hour chart is our short-term time frame. That’s the chart that we ideally want to use as our trigger for the trades. Generally, it’s not a good idea to refine the entry any more than that, because once you get into the even shorter time frames, the signals exert less influence over the longer-term direction of the market. For example, you wouldn’t use a 5 minute chart to predict what’s going to happen over the next week—so generally, we stick to the 4-hour chart as our shortestterm time frame, our trigger chart. The eagle-eyed amongst you will have noticed there is one exception to that rule. With Trade Type #1B we do drop down to the 1-hour chart to look for our trigger. Trade Type #1B is an extension of trade type #1A. What separates these two trade types from the others is the strength of the trend that we are trading into. These are the only two trades that occur when the market is in an extremely strong trend—when the same trend is present on the daily chart, the weekly chart and the monthly chart. 158
Binary Options Profit Pipeline
Most of the time, a 1-hour chart is not strong enough to predict what the market will or won’t do over the next seven days—the probability is not high enough. It might be perfectly OK for predicting over 2-3 days, but when it comes to predicting a whole week, which is what we’ll be doing with this type of trading, it’s not enough. It’s too short a time frame. The one exception is when you have an extremely strong trend behind you. Trade Type #1A occurs when you find a re-entry signal on the 4-hour chart in the direction of a very strong trend that is present on the daily, weekly and monthly chart. In this case, when you’ve got those factors in your favour, it is acceptable to look for a trigger on the 1-hour chart. That’s the only situation where the probability of a trade with a trigger based on the 1-hour chart being successful is high enough. Of course, you don’t actually have to remember any of this if you don’t want to! When you come to analyse a market, just follow the process through and you will be led to the correct trade type, if there is a trade present on the market you’re looking at. Naturally though, it is just helpful to understand the background to why we do what we do, and why we take the certain trade types that we do, and when.
Flowchart #3—“Filtering” the trade signals Once you’ve found a trade signal, that doesn’t necessarily mean that that signal is actually going to become a trade. There’s another flowchart, another set of steps to go through, in order to determine if that trade signal is safe enough to take as an actual trade. These flowcharts actually do everything they can to stop you from trading! There are a number of steps to go through before you have a trade safe enough to commit to your account. Over-trading is one of the greatest pitfalls you can suffer as a trader, whether you overtrade out of boredom, or anger, or anything else, the fact is that to be successful you need to only take the safest trades—the ones that conform to your system—and that’s what these flowcharts are trying to get you to do; to filter out the unsafe trades, the not-so-good trades, the trades that have factors working against them. To do this we use flowchart #3, also known as the “trade flowchart”. 159
Using the Flowcharts
Just as before, the Flowchart above is simply there for completion. Ideally, you’ll be looking at the paper flowchart in front of you to follow along with this section. The first thing you’ll see is that there are two columns. The column on the left covers trade types lA, 4 and 6, which are trades where a hidden divergence re-entry signal is the trigger. Over on the right, you’ll see a column that deals with trade types lB, 2, 3, 5, 7, 8 and 9. These are the trade types where a regular divergence reversal signal is the trigger. Let’s start with the right-hand column: The very first question is there to determine whether or not there is a confluence of support or resistance present in the area where the trade is setting up. Remember—support/resistance is one of the three “cornerstones” of our trading approach. We’ve used the previous flowchart to determine the trend and the divergence signals, which are the other two cornerstones, but this question deals with determining whether or not the third cornerstone is present. All three cornerstones must be present otherwise we don’t have a trade. A divergence signal that occurs without support/resistance to back it up is nothing more than a pretty pattern! 160
Binary Options Profit Pipeline
You’ve already learned about the different types of support/resistance that we look for back in Chapter 9, and you should be familiar with those by now. If you’re not, please go back and review Chapter 9 again. The key is to find “confluences” of these support/resistance levels— areas where several different types of support/resistance converge on approximately the same area. In the next chapter, we’ll teach you how to find these confluences—so don’t worry if you’re a bit uncertain about that at the moment. Quite simply, if the answer to this question is “no”—if you can’t determine a clear support/resistance confluence at the point at which your trade signal sets up—then that trade is not safe enough to take; so therefore, no trade. Obviously, if the answer is yes, then you move on to the next question. The next question deals with the 50% confirmation rule. Has the trade been confirmed under this rule? At this stage in your study, you should know what this means. If you don’t know what this means—that is, if you don’t know how to find this 50% confirmation level—then you shouldn’t be studying this chapter. Please return to Chapter 8d—confirming divergences, and make sure you’re familiar with all the material in that section. If you do know what that means then great! Remember—you must wait for that 50% confirmation. Until the market touches that 50% level there is a much greater chance that the setup could fail. It doesn’t matter if it’s the most perfect-looking setup you’ve ever seen, you still have to wait for a touch of that 50% line. If the answer to this question is “no”, then the conclusion is “no trade”. But if the answer is yes, then we move on to the next question. The next question is: “Can you get a no-touch level that you are happy with?” The subject of where exactly to position your no-touch levels is something that we’re going to come on to in a later chapter, so don’t worry if you feel unsure about the answer to that, because once you’ve gone through the later sections you’ll be able to answer with confidence. Once again, if you find that the answer is “no”, if you can’t get a notouch level that happy with, then there is no trade. But if the answer is “yes” then you’ve made it! You’ve made it to the end of the flowchart process and you have a trade. 161
Using the Flowcharts
You’ve gone through the whole process; you’ve established that all the cornerstones are there, the trend, the divergence and the support/resistance. You’re happy with the no-touch level and the trade meets all the criteria— checks all the boxes—and you can now place that trade on your account. That’s the flowchart process with these types of trade signals, in which the “trigger” signal is from a regular divergence reversal signal. In the left-hand column, which as you’ll remember, deals with trades in which the “trigger” signal is a hidden divergence-based, re-entry setup, the process is exactly the same, apart from the fact that there is one extra step, which is the very first step on that side of the flowchart. With the trade types in this left-hand column, what you’re doing is re-entering existing trends. The trigger is a re-entry signal of some kind (either a standard re-entry signal or a hybrid re-entry signal). The point of this first step is to stop you from entering a trend that may be about to finish. The old saying amongst traders is that “the trend is your friend”, and that’s still very much true, but there is an extension to that which says “the trend is your friend until the end when it bends”! What that means is that if you take a trend-following trade right at the end of a trend, then there is a good chance that that trade will fail. This first step will hopefully prevent you from doing that. The question is: “Is the hidden divergence re-entry setup occurring against a CONFIRMED regular divergence reversal setup on the time frame above?” For example: If the monthly chart is in an uptrend, and the weekly chart is in an uptrend, you would probably be looking for a bullish re-entry setup on the daily chart. But—if there is a bearish regular divergence reversal signal on the weekly chart, that has confirmed under the 50% rule, then the indication is that that the uptrend is about to finish. That means you don’t want to be re-entering that uptrend at that point! If the answer this question is “no”, which means that there is no indication from the time to frame above that the trend is over, then the trade is still a possibility and you can move on to the next question. If the answer is “yes”, then once again, you have no trade. The rest of the process in the left-hand column is the same as in the right-hand column. Check for support/resistance first, then look for 50% confirmation, then make sure you can get a no-touch level you are happy with, and if you can, then you have a trade! 162
C hapter 12
Support/Resistance Confluences
I
n this chapter we’ll discuss the process of finding the support/ resistance confluence areas that make up the third cornerstone of our trading approach after trend and divergence. Just to recap a little, in this trading approach we are looking for divergence signals that either indicate a resumption of the prevailing trend or a reversal of it, but in order for us to actually trade those signals we need them to be backed up by a good confluence of support/resistance levels. Divergence signals tell us that a change of direction is potentially about to happen, but unless they are “backed up” by strong support/ resistance, divergence signals can often fail. They may indicate a potential change of direction, but without support/resistance you’ll often find that that change eventually doesn’t happen. Divergence signals really only become a truly effective trading signal when they are confirmed by analysis of support/resistance levels. Markets ultimately change direction because the ratio of supply to demand changes. When there’s more demand than supply, meaning more buyers than sellers, markets move higher, and when there’s more supply than demand, meaning more sellers than buyers, markets move lower. With support/resistance analysis, what we’re effectively looking for are the “tipping points”; the exact areas in the market where the supply/demand ratio will change enough to produce a change of direction in the market. Sometimes we’ll be looking for areas where lots of buyers will come in to the market and overpower the sellers, and sometimes we’ll be looking for the opposite—areas where enough sellers will come into the market to overpower the buyers. 163
Support/Resistance Confluences
To find the areas where enough of these buyers or sellers come in to produce these changes of direction, we need to find the support/ resistance confluence areas. Not every trader in the world uses the same approach to finding support/resistance. Some traders only use pivot points, some traders only use trend lines, some traders only use Fibonacci retracements and so on, but all these individual groups of traders are not enough to move the market on their own. What we need to find are areas in the market where several different types of traders will be buying or selling at the same time. If you can find a level in the market where pivot traders, moving average traders, Fibonacci traders and trend line traders are all going to be buying at approximately the same time, then that is naturally going to produce a much bigger change in the supply/demand ratio than a level where, for example, just the pivot traders are buying. If you can combine an area of strong support/resistance with a solid divergence signal, and you’re trading in the right direction as dictated by the current trend of the market, then the chances are that you have yourself a very good trade! Obviously, the more different types of support/resistance you can identify in a particular area, the stronger that area becomes, and therefore the greater the likelihood that any trade signal which forms there will be successful. The main point of this process is to determine whether or not the trade signal we’re looking at is occurring at a confluence of support/ resistance levels. What that means is that we will have already found an area where the market changed direction, as a result of our 50% confirmation rule. Remember—with every trade signal we always wait to see the market move a certain distance in the direction suggested by the trade signal before we consider it confirmed. What we then do is check to see if there were any support or resistance levels in the market which prompted that change of direction. If we see a trade signal but we can’t really determine any clear support or resistance levels that went along with it, then that’s potentially a “false” signal; a move in the market which has occurred without any solid reason for it, and that means the change of direction may not last, and that any trade placed there would then be at increased risk of losing. If, however, we see a trade signal and we can identify a clear confluence of support or resistance levels at the point at which the trade signal occurred, then that means the trade signal is much more likely 164
Binary Options Profit Pipeline
to succeed because there are concrete reasons why that move happened, and those reasons are related to the concept of supply and demand. That means the move is more likely to be sustained. You must have this confluence along with a trade signal. We don’t have any interest in trade signals that occur without a clearly identifiable confluence of support or resistance levels to back them up.
Defining “confluence” The first thing we need to do is clearly define what we mean by a “confluence” of support or resistance levels. As we’ve already covered, confluence is a gathering of different types of support or resistance levels in approximately the same place; however to be more specific, when we’re looking for these confluence areas we like to see: •
At least three different types of support or resistance in the same approximate area.
This is fairly self-explanatory but to be clear, this means that there must be three different groups of traders all perceiving the same area as holding support or resistance. If you can find an area like that, then generally that will produce a strong enough change in the supply/demand ratio to produce a change of direction in the market. For example, you might find an area containing a swing zone, a trend line and a moving average; or you might find an area containing a swing zone, a Fibonacci level and a pivot. If you can identify three distinct types of support or resistance in the same area, that’s enough to consider it a confluence. •
“Approximate area” generally means around 150 points or less.
It’s quite rare that you’ll find a confluence of support/resistance levels that all converge very closely together. It does happen sometimes but generally, rather than exact, pinpoint levels, we look to find a confluence of three or more support/resistance levels in an area with a range of around 150 points or less. When we come to analyse the various support/resistance levels that are in play in the market we’re looking at, there is a secondary part to the process. The main part of the process is to identify the confluence of 165
Support/Resistance Confluences
support or resistance levels that confirms the trade signal you’re looking at. The second part of the process involves looking to see if there are nearby confluences of support or resistance as well, because these will come in to play when you think about where you’re going to be placing your no-touch barrier. We’ll go into this in more detail in a later chapter, but the fact is we don’t just place our no-touch barrier arbitrarily. For example, if we have a bullish trade signal, we would look to place our no-touch barrier below the current market level. Alternatively, if we have a bearish trade signal, we would look to place our no-touch barrier above the current market level. We don’t place our barriers somewhere that sounds like a nice “round figure”, such as 200 points away or 300 points away. Nor do we place it at a level determined purely by the percentage return we wish to take from the trade, or by how much money we’re prepared to risk on it. We determine where to place our no-touch levels based on where additional areas of support or resistance lie in the market. Take a look at this example: • We have a bearish trade signal on GBP/USD, occurring at a strong “confluence” of resistance levels around 1.6500. • We identify additional “confluence” areas of resistance around 1.6650 and 1.6800. • We then look to place our “no touch” level above those additional confluences for a high-probability trade. We’ve analysed the market, using our flowcharts and we’ve determined that the GBP/USD market is in a downtrend. We’ve then followed through the flowchart process and established that there is a bearish trade signal. We’ve found one of our particular trade types that is signalling that the prevailing downtrend in this market is about to resume. We then establish that the signal is occurring at a level which contains a strong confluence of resistance areas, perhaps a swing zone, a trend line, a moving average and a Fibonacci level. Our next step would be to go to BetOnMarkets and place a no-touch trade. Remember—this is a bearish signal, so we would place a no-touch trade above the current market level. All the indications we’re getting from the charts are that the prevailing downtrend is about to resume and 166
Binary Options Profit Pipeline
that the market will move lower. Therefore we will place a trade that the market will not touch a level significantly higher than where it is now. We determine exactly where to place this no-touch barrier by looking at the additional resistance levels in the market. So looking at the example above, we have a bearish signal that is occurring at a strong confluence of resistance, centred around the 1.6500 area. Through analysis of the resistance levels nearby, we determine that there are additional confluences of resistance around the 1.6650 and 1.6800 areas. If we can then place our no-touch barrier above one, or both, of these additional confluences, and still get a return that we’re happy with, then that’s great! It means that in order for us to take a loss on the trade; an extremely unlikely set of circumstances has to occur. Not only would our confirmed bearish signal have to fail, but the market would have to break through one major confluence of resistance levels around 1.6500, and then break through another, or possibly even two more major confluences of resistance levels before it threatens our no-touch barrier. Remember—plenty of “sellers” will come in to the market at these confluences of resistance levels, so even in the unlikely event that our original, confirmed bearish signal fails, and the market begins to move higher, the selling pressure around these confluence areas should be enough to keep the market away from our no-touch barrier long enough for the trade to expire successfully. That’s what makes this such a high-probability approach to trading, and means that by studying the nearby support/resistance levels and positioning our no-touch barriers carefully based on those levels, we can actually make money even on the rare occasions when the market moves against us! Therefore, when we go over the process of plotting these support/ resistance levels on our charts, our primary focus is on the actual area where our trade signal is setting up, but as well as that, we also need to make sure that we plot nearby support/resistance levels as well, because we’ll use these later on, when it comes to actually placing the no-touch level that makes up our trade. This process isn’t as complicated as it may sound, because when you come to analyse the actual area where the trade signal itself occurs, that actually takes care of some of the work of spotting the additional support or resistance areas for you. 167
Support/Resistance Confluences
For example, when you draw a Fibonacci grid on the chart, it displays multiple Fibonacci levels, not just the one that may be relevant to the area where your trade signal is setting up. Similarly, when you load on a pivot point indicator, it displays all the pivot levels that are currently active in the market, and some of those will be above the current market rate and some will be below, so even if they’re not relevant to the area where the trade signal itself occurs, they may come into play when you think about where you’re going to place your no-touch level.
How to find support/resistance confluences •
First things first—make sure you have a trade signal!
There’s no need to do the extra work of finding all the support/ resistance levels in a market if you don’t have a trade signal to combine it with! First of all, we’re looking for a trade signal, and only after we’ve found one do we then analyse whether or not that trade signal is occurring at a confluence of support or resistance levels. •
Check your moving averages—is the market being supported or resisted by any moving averages on the 4 hour, daily, weekly or monthly charts?
The moving averages are actually located on our main template, and the reason for this is simply because moving averages change depending on the timeframe of the chart you’re looking at. If you have a 200-bar moving average on a 4-hour chart, and then you change the timeframe of that chart to daily, the moving average is going to recalculate because the average of the last 200 4-hour bars will be completely different to the average of the last 200 daily bars. In this sense, moving averages can kind of be thought of as a “dynamic” indicator, in as much that they give you a different value depending on the time frame of the chart you’re looking at. •
168
Open up a blank chart of the currency pair you are analysing, and begin adding any relevant “static” support/resistance levels on the monthly/weekly/daily time frames.
Binary Options Profit Pipeline
The other types of support/resistance—pivots, swing zones, trend lines and Fibonacci levels—don’t change if you change the time frame of the chart. For example, if you draw a trend line from point “X” to point “Y” on a 4-hour chart, that trend line will stay in the same place, because point “X” and point “Y don’t change if you change the time frame. This is handy because it means we can mark on support/resistance levels from several different time frames on the same chart. This makes it much easier to see where the confluence areas exist, because you can see monthly levels, weekly levels and daily levels all on the chart at the same time. In our experience, we’ve found that the easiest way to spot these confluences is by drawing as many types of support/resistance levels as possible on the same chart. Ideally, we’d like to be able to draw all our different types of support/resistance on the same single chart, but unfortunately that’s not possible given the nature of the moving average indicator. They are the only ones which have to remain separate, so we simply check our moving averages first, and then cross reference that with all the other types of support/resistance on a separate chart.
We recommend that when you open up this new chart, the first thing to do is change the time frame to monthly. On this monthly chart, draw on any swing zones which might be in play in the area the trade signal is setting up, or which are near enough to that area that 169
Support/Resistance Confluences
they might become important when considering where to place your no-touch barrier. Do the same with any trend lines—drawing on any that are either relevant to the trade signal itself or near enough to come into play when considering where to place your no-touch level, and then finally draw on any Fibonacci grids that are relevant. From there, drop down to the weekly chart and repeat the process, drawing on any relevant swing zones, trend lines and Fibonacci levels, and then to the daily chart and repeat the process again. The final step is then to load on your pivot indicators, both weekly and monthly. What you’re left with once you’ve gone through that process is a chart containing all the static support/resistance levels which are currently active in the market you are analysing. From there, you should be able to see where the confluences are. All you need to do is look for certain areas on the chart where several types of support/resistance are clustered together in approximately the same area, and if there are any, they should be fairly obvious to the eye. The truth is that you can’t always find every type of support/resistance on every time frame. Sometimes there simply won’t be any swing zones or trend lines close enough to be relevant to the trade on a particular time frame, but that’s why we use multiple different types of support/resistance and multiple time frames so that we can still find these confluence areas. Remember—a confluence needs to contain at least three different types of support/resistance. We have six different methods of finding support or resistance areas—swing zones, pivots, trend lines, moving averages, Fibonacci retracements, Fibonacci extensions—so even if they’re not all present, we can still find good confluence areas.
The rectangle tool One handy tool in MetaTrader is the rectangle tool, which we can use to actually highlight the confluence areas we find on the charts. First of all the tool needs to be loaded on to our toolbar at the top of the MetaTrader window. To do this, right-click on the “Line Studies” toolbar (which contains crosshair, Fibonacci grid etc). Select “Customize”. Highlight “Rectangle” in the left-hand box and press the “Insert ->” button. Press “Close”. To change the colour of a rectangle, double-click on any of the four corners on the rectangle, right-click and then select “Rectangle Properties”. The options to change colour are in the “Common” tab. 170
C hapter 13
Placing No-touch Barriers
I
n this chapter we’re going to be looking at exactly where we should be looking to place the no-touch barriers on each trade that we take. That therefore makes this one of the most important chapters in the entire course! To recap and re-emphasise, what we’re looking for, with the flowcharts, and the technical setups that occur based on trend, divergence and support/resistance, are signals that a market is about to move in one direction, either up or down. When we find one of those signals, we place a no-touch trade which effectively amounts to a trade that the market won’t move in the exact opposite direction to that which is suggested by the signal. For example, if we have a bullish trade signal, a signal that the market is about to move higher, we would place a trade that the market won’t touch a level much lower than where it is now. Similarly, if we have a bearish signal, a signal that the market is about the move lower, we would place a trade that the market won’t touch a level higher than where it is now. This allows us to have a phenomenally high success rate in our trading, because when you’re trading through more traditional methods, you can only make money if the market moves in your favour, and even then, in order to make good money on the trade, it has to move a considerable distance in the direction you predicted. With this style of trading however, we too will make money if the market moves a long way in our favour, but we’ll also make money if the market only moves a short distance in our favour. We’ll make money 171
Placing No-touch Barriers
if the market goes nowhere, and we’ll even make money if the market moves some way against us. The fact is that markets are not 100% predictable; even if you have all the indications that a market is about to move in one direction, that doesn’t necessarily mean that it will—if markets were as easy to predict as that then we’d all be rich! When you see a signal that the market is about to move in one direction, it may move in that direction, or it may just consolidate for a while, as buyers and sellers battle it out for control of the market. The key is that if you have all the indications that a market is about to move in one direction, the chances of it moving in the exact opposite direction are extremely slim. It’s much, much easier to predict what markets won’t do than it is to predict what markets will do, and that’s what makes up the core of this approach to trading, and what gives it such a high success rate. When trend, divergence and support/resistance all combine to suggest that a market is about to move in one direction, it’s extremely unlikely that the market will just ignore all that and move off the other way. In the previous chapter we explained that when we come to analyse the support/resistance levels in a market, not only do we need to look at the levels which are present in the area at which the trade signal itself set up, we also need to mark out nearby areas of support/resistance so that we can then judge where to place our no-touch barriers. The more layers of support/resistance that exist between the current market rate and the level at which we place our no-touch barrier, the safer that trade will be. Naturally, the safer the trade, the more likely it is to succeed, and that means that the return will be lower, and the capital required (the purchase price of the trade) will be higher. This is the “trade-off ” with trading. You can go for higher-risk, higher-returning trades, or you can go for lower-risk, lower returning trades. In fact, that in itself is another great advantage of this style of trading, in as much that you can adapt it to suit your own preferred personal style of trading, and your level of risk tolerance.
Differing levels of risk We have three different “classifications” of trade, based on how many layers of support/resistance exist between the current market level 172
Binary Options Profit Pipeline
and our no-touch barrier. The three classifications are “higher-risk”, “medium-risk” and “lower-risk”. • • •
For a higher-risk trade, the no-touch barrier is placed just past the confluence of support/resistance levels where the trade itself set up. For a medium-risk trade, the no-touch barrier is placed just past the first additional confluence of support/resistance levels you can identify. For a lower-risk trade, the no-touch barrier is placed just past the second additional confluence of support/resistance levels you can identify.
The names “higher-risk” and “medium-risk” are slight misnomers in the sense that these are all low-risk trades—regardless of the classification these are all trades that the market won’t move one way, when all the indications are that it will move the other. While they are all low risk trades, the difference between them is simply how low the level of risk is—how many layers of support or resistance exist between the current market and your no-touch barrier. The best way to illustrate this concept is with a simple diagram:
This diagram is a simplified representation of what you could do when a bearish trade signal sets up. While this example covers a bearish trade signal you would simply do the opposite if it were a bullish trade signal. 173
Placing No-touch Barriers
The black line represents the market itself, and the pink shaded areas represent “confluences” of resistance that we have previously identified by going through the process outlined in the previous chapter. We have three options when it comes to deciding where to place our no touch barrier. The first option would be to go for a higher-risk trade, and to do that we would place our no-touch barrier just past the confluence of resistance levels where the trade itself set up. The advantages of placing a higher-risk trade are fairly obvious, in that because the level of risk is higher, the potential returns are higher. This allows you to make more money from each trade, or to make the same amount of money as you can on the other types of trade while risking less, which is handy if you’re starting out from a fairly low capital base. The disadvantage of higher-risk trades is that the success rate is lower than the other two, because you effectively have no “insurance” against the market moving strongly against you. If the market does move away from the resistance area, the trade will be a winner, and it will also be a winner if the market consolidates around that area. But if the market does move higher, and break through the resistance level, then your trade is at risk of losing. The second option is the medium-risk trade which is, as you might expect, the best of both worlds. You can make more money on each trade than with the lower-risk option, or similar money but with less capital at risk, but you do also effectively have insurance against an unexpected move against you. Even if the market moves higher and breaks through the first confluence of resistance levels, it will then have to contend with the second. The third and final option is the lower-risk trade, which obviously is at the other end of the scale to the higher-risk trade. In order for a lower-risk trade to lose, the market would not only have to move against you in the first place, which is unlikely if you have a clear, confirmed trade signal that checks out on the flowcharts, but it would also have to break through three major confluences of resistance over the course of just five trading days—when all the indications are that it will do the opposite to that. This means that lower-risk trades have a success rate well in excess of 95%—closer to 98% historically, in fact. This means that you can go on long runs of winning trades for months and months at a time, which is obviously great, both for your account balance and for your psychology. Obviously, the disadvantage of 174
Binary Options Profit Pipeline
the lower risk trades compared to the other two types is the lower return, meaning that you have to employ more capital to get the same returns as with the other two, but that ties in with what we discussed all the way back in chapter 2 with the example of trading on a non-league football team to not beat Liverpool, in that it’s acceptable to take on that extra risk when the odds are so stacked in your favour. You will find that not every trade signal is as straightforward as this example. Sometimes, for example, you will find that you can’t do the lower risk trades, and in some rare cases you’ll find that you can’t do the medium-risk trades either. This happens when the additional confluences of support or resistance that you identify are too far away from the area where the trade signal itself is setting up. If we were unable to place a lower-risk trade on a particular trade setup, we’d look to place a medium-risk trade instead. On the rare occasions that we’re unable to place a medium-risk trade either, we’d look to place a higher-risk trade. It is, however, acceptable to take these different levels of risk when you’re trading because we’ll be employing a sensible system of money management, which means that the higher the level of risk you take with a trade, the less capital you employ, while still being able to generate good returns, and you’ll be learning all about that in the next chapter. This means that we can be very flexible in our approach and it’s very rare that we have to pass on a trading opportunity because we’re unable to get a no-touch level that we’re happy with (which, if you remember, is one of the questions on the trade flowchart). It’s very rare that we have to answer “no” to that question because by being able to take varying levels of risk depending on how the support/resistance levels are set up, we can easily adapt to the individual conditions of each trade. Each confluence of support/resistance levels between the current market rate and our no-touch barrier adds in more “insurance” against an unexpected move against you in the market, and means a greater chance of success—with the trade-off being that the more chance of success you have with a trade, the lower the potential return, and the greater the amount of capital required. This flexibility means not only can you act on virtually every trade signal you see, regardless of how the support/resistance levels are shaping up, it also means you can tailor your trading to your own personal level of preferred risk, or your own personal capital level, the amount you have in your trading account. 175
Placing No-touch Barriers
Getting the right return There’s one final consideration when it comes to placing no-touch barriers, and that’s the need to make sure that the potential return on the trade is suitable in relation to the level of risk you’re taking. The way that binary options trading works, particularly with these no-touch trades, allows us to think about risk in a different way to more traditional traders, in that we can take trades where we’re risking more than we stand to gain, but only because the odds of us being successful on the trade are extremely high. Nonetheless, it’s still important that you maintain a good balance of risk to reward, so we do have certain levels of return that we look for with each particular classification of trade. What this means is that the level of return achieved if the trade is successful must be reasonable in relation to the level of risk you are taking. These aren’t “hard and fast” rules, but more like general guidelines that we have for each classification of trade, and you can see them below: If we’re taking a higher risk trade, we would expect the return on capital invested to be 50% or more. If we’re taking a medium risk trade, we would expect the return to be between 20%-50%. If we’re taking a lower-risk trade, we would expect the return to be between 10%-20%. This relates to the question on the flow charts which asks “can you get a level of return you are happy with?” If, for example, you had a bullish trade signal, and you identified three confluences of support—one where the signal itself set up, and two more below—then the lower-risk trade would be to place your no touch barrier below the lowest of the three confluence areas. If you went to Bet On Markets and “priced up” a no-touch trade accordingly, and the return was only, say, 5%-6%, then you probably wouldn’t look to actually place that trade because the return is simply too low. If it was between 10-20% however, that would be acceptable. Similarly, if you went to price up a medium risk trade, where the notouch barrier is below two of the three confluences, and Bet On Markets were offering you a return of between 20%-50% that would be fine, but if it was less than 20% then the level of return is not worth the level of risk. 176
Binary Options Profit Pipeline
And finally, if you went to place a higher-risk trade, where your no-touch barrier is placed just below the confluence of support levels where the trade set up, you would ideally expect a return a 50% or more, otherwise the trade is again not worth the risk. As mentioned above, these aren’t hard and fast rules, but more like general guidelines in the sense that there may be a margin of a few per cent either side, but if the return being offered by BOM is markedly different from what we’d expect under these guidelines then we would avoid taking that particular trade.
177
C hapter 14
Money Management
I
n this chapter we’re going to be taking a look at the concept of “money management”, which can also be termed “risk management”, and how we can use it with this style of trading to ensure that we don’t get overexposed to the market, and that we don’t end up taking unnecessary risks with our capital. Having a good money management system, as well as having the discipline to stick to it, are two of the factors which most often separate the successful traders from the unsuccessful traders. Unsuccessful traders often have no concept of money management; it’s a recurring “rookie mistake” to go into trades focused only on the potential upside, without correctly managing the potential downside—although the recent turmoil in the financial markets and institutions of the world have shown that even the so-called “professionals” could do with greater understanding of risk management! That in itself just shows how important risk management is—some of the biggest names in financial circles have gone under because they failed to correctly control the risk element in their dealings. With that in mind, it is obviously very important that you understand the concepts in this chapter, because if you fail to control your risk correctly, you won’t last very long in the markets no matter how well you’ve learned the other lessons in this course. The simple fact is that when you are trading or trading on the financial markets, what you’re essentially doing is wagering on uncertain outcomes. The very nature of financial markets precludes certainty, as we discussed back in chapter 2, if there was such a thing as a sure thing in the markets then they would actually stop functioning properly. What we’re doing with this approach is stacking the odds massively in our favour, by waiting until we have all the indications that a market 179
Money Management
is going to do one thing, and then trading that it won’t do the complete opposite, and this allows us to have an extremely high success rate. However, it doesn’t matter how good a trader you are; it doesn’t matter how good your approach to the market is; it doesn’t matter how high your success rate is; none of that will matter if you don’t have good money management. As well as potential rewards, we are dealing with potential risks, and our first job, the first job of any trader, even ahead of making money, is to keep the risks under control. A trader is nothing without capital. You could be the best trader the world has ever seen, but if you’ve got no capital to back up your ideas, you won’t be able to make any money. Therefore, the first thing we have to do, before we even think of making profits, is make sure that we have the risks under control, so that even the most out-of-the-blue, crazy, unforeseen market conditions won’t worry us. The way that we do this is by making sure that we never have too much of our capital at stake on any one trade, and to do that we devised a system of risk control which ties in with the different types of trade classification we discussed in the previous chapter. The capital we risk on any one trade is kept to a strict maximum level, and the maximum level is determined by the classification of trade we’re taking: • • •
If we’re taking a higher-risk trade, we risk an absolute maximum of 5% of our account balance. If we’re taking a medium-risk trade, we risk an absolute maximum of 10% of our account balance. If we’re taking a lower-risk trade, we risk an absolute maximum of 15% of our account balance.
The lower the risk on a trade, the lower the return, so more capital must be employed to achieve a similar result. The advantage of going with lower-risk trades is the success rate, which we can expect to be over 95%, which is why it’s acceptable to risk a little more, up to 15% of your capital. You may wish to set your own risk levels as you gain more experience and learn what suits your trading personality best, but we do have to stress that you should never risk more than these recommended amounts. Adjust the risk levels down if you wish, but never up. These are the 180
Binary Options Profit Pipeline
maximum levels you should risk—these are the levels of risk we use— and in our experience they are suited perfectly to the probabilities and success rates of the different types of trade. The next step is to demonstrate firstly what is meant by the term “account balance” and then to show how to determine what equates to 5% of that figure, or 10%, or 15%. For that, we use the “portfolio” page on the Bet On Markets website.
Using the Bet On Markets portfolio page
To determine our current available capital we always look at the figure highlighted in the pink shaded area—the “total value of your account”. The total value of your account is a calculation which takes into account your unused account balance, plus any capital you may have tied up in open positions, then adds or subtracts any profit or loss which may be currently showing on those open positions. What’s left is the current total account balance, and it’s this figure that we use when determining how much money to risk on an individual trade. 181
Money Management
Once you have this figure it’s a case of simple mathematics to then determine how much of that account balance equates to either 5%, 10% or 15%. Simply divide your total account balance by 100, then multiply the result by either 5, 10 or 15.
Keeping your discipline One thing that must be stressed is that the concept of money and risk management is closely tied in with personal discipline. We’re going to be covering the subject of discipline in greater depth when we go in to the “trading psychology” chapter, but for now we must stress that it’s very important that you stick to this system of money management. It’s simply amazing how many people fall into the trap of greed when trading, particularly with this approach, where it’s entirely possible to go months and months at a time without losing a single trade. In that situation it’s very easy to fall into the trap of believing that nothing will ever go wrong. We have personally seen some people start out risking 5, 10%, or 15% of their account per trade but after nine or 10 winning trades in a row, they suddenly think they’ve “cracked it”, after which they start increasing their level of risk in pursuit of greater and greater rewards. Keeping control of greed is a very important way of controlling. Referring back to the crisis in the financial sector in recent times, a large number of banks were undone because those in charge saw good profits, got greedy for more and decided to effectively “turn a blind eye” to the ever-increasing risks they were taking until, it all finally came crashing down around them! A similar thing can happen with fixed-odds trading—we have personally seen this with some people we’ve known in the past. One trader we were in contact with had a run of 24 consecutive winning trades, but he got greedy, got overconfident and got to the point where he was risking up to three quarters of his capital on each trade! When the losing trade did eventually come for this trader it wiped out months and months of profits. He was a good trader, he was calling the market correctly, but even the best traders lose from time to time, and eventually when that losing trade did sneak up on him, he got well and truly floored. He’d focused solely on the upside potential of his trading while failing to control the potential downside and that’s the lesson of this chapter. 182
Binary Options Profit Pipeline
You must control the risk side of your trading otherwise you’re never going to get anywhere. We’ve given you a tried and tested money management plan in this chapter and we can’t recommend strongly enough that you stick to it. Good money management is the basis of every single successful trading career that has ever been, and it’s something you have to incorporate as you begin to go into the markets for yourself. Quite simply, every time you come to put a trade on, you need to perform the calculation we’ve shown you in this chapter in order to figure out how much you have to spend on each trade, and to ensure that you are never risking more than you should on any single trade. That’s good money management, and that will be one ofthe building blocks of your future success.
183
C hapter 15
When Not to Trade
I
n this chapter we’re going to be looking at the way in which you need to stay aware of forthcoming market events and how they might affect your trading decisions. What this means is that sometimes we make a decision to stay out of a trade even if the signal checks out completely on the flowcharts. We’ll get all the way to the end of the flowchart process, but there is still one additional factor which could stop us from taking that particular trade. This happens when one or both of the currencies that make up the currency pair you are trading might potentially be affected by the release of major “economic data”. Economic data releases happen all the time. Almost every day, one or more countries will be releasing economic figures, which are essentially statistics about that nation’s economy. Every country does it, and these economic data releases can include employment figures, inflation figures, retail sales, manufacturing output, consumer confidence and many others. Every country releases broadly similar sets of statistics, at regularlytimed intervals. For example, US employment figures are usually released out on the first Friday of every month, while UK interest rates tend to be announced on the first Thursday of every month. These data releases can have a strong impact on the movement and direction of currencies. Remember, a lot of traders out there use these pieces of economic data to make trading decisions. Not all traders rely on charts like we do—this is the difference, as discussed earlier in the book, between technical analysis and fundamental analysis. Technical traders use charts to make trading decisions, while fundamental traders use realworld economic information to make trading decisions. When a new piece of economic information is released, that can potentially cause the fundamental traders to reassess how bullish or 185
When Not to Trade
bearish they are on a particular market, in light of what that new information is telling them. For example, if employment figures are released in the UK which show that unemployment is increasing at a faster rate than previously thought, that’s bad economic news, and that might make some fundamental traders decide to be bearish on the pound and begin selling. Similarly, traders who are bullish on the pound might change their minds and either close out their bullish positions, or go further and initiate new bearish positions themselves. If enough traders make the same decision, that will affect the balance of supply and demand, and the pound will begin to move lower as a result. Therefore, it’s very important that you stay informed about when these key pieces of economic data are being released, so that you can avoid the pitfall of entering a trade which goes against you as a result of some surprise economic data. Fortunately for us, taking care of this aspect of our trading and keeping abreast of these economic events is not nearly as complicated as it may sound. The main reason for this is because there are really only a few data releases that we’re actually interested in. The vast majority of these economic data releases are minor; they don’t have enough impact on the markets to move them significantly enough so that it might affect one of our trades. Most of the time we will enter a trade and not worry about the economic figures. We only need to stay aware of a handful of major data releases. Another advantage we have is that we can access a very handy online calendar tool, which helps us keep track of these events. The only economic data releases that might affect our decisionmaking processes are: • US employment figures (also called Non-Farm Payrolls) • Interest rate decisions (from either country involved in the currency pair that we are looking to trade) These are the major economic data releases which might make us think twice about entering a particular trade. When these particular pieces of economic data are released, we prefer not to have a trade running that involves a currency which could be affected. For example, when US employment figures are released, we prefer not to have any 186
Binary Options Profit Pipeline
trades running that involve the US dollar as part of the currency pair, such as EUR/USD or USD/JPY. Similarly, when an interest rate decision is due from a particular country, we avoid having a trade running which involves the currency of that particular country. For example, if Canadian interest rates are due on Wednesday, we would not enter a USD/CAD trade on Monday, because that trade has to run through to the following Monday. But two days into the trade, the market might suddenly move against us as a result of a surprise interest rate decision. The US employment figures and the interest rate decisions from individual countries are the only pieces of economic data which have the potential to affect a market significantly enough to make us avoid trading.
The DailyFX.com calendar As mentioned above, it’s very easy to keep up with which economic events are happening and when, and thanks to a very handy tool: the calendar tool at DailyFX.com:
187
When Not to Trade
The calendar page at DailyFX.com shows you the economic data release calendar for the whole of the current week. It shows you the release time of the data, the country it relates to and the name of the data release. In addition to this, DailyFX.com provide, for each data release, an estimate of the importance of the data, as well as information on the consensus forecast and previous reading. The “commentary” feature provides you with a background to what each piece of data actually means, which is a great learning tool. There are a couple of handy additional features on the DailyFX.com calendar. As well as viewing the current week, you also have the ability to look at both the previous week’s calendar and the following week’s calendar by clicking these buttons at the top of the screen. The ability to look at the following week’s calendar is particularly handy because, as our no-touch trades run over seven days, they always run into the following week regardless of when we enter them—so we always need to see the following week’s economic data calendar to make sure that we aren’t trading over any of the major events listed earlier in this chapter. The other main feature of the calendar is the “filter”, which is in the top right-hand corner of the calendar. When you move your mouse over this, it opens up an additional menu whereby you can filter out all the economic data releases except for those which directly affect the currency pair you’re looking to trade. You can also filter the data releases by importance. For example, if you were looking to put a trade USD/ JPY, you could choose to see only the high-importance and mediumimportance economic data releases from the USA and Japan. The high number of economic data releases every week mean that the calendar can sometimes look a little cluttered, so the filter feature is a great way of “zeroing in” on the information that’s relevant to your potential trade, and to get rid of all the extra information which isn’t important to you at the time. Every time you’re looking at a potential trade you must, before you actually commit that trade to your account, use the calendar at dailyfx. com to check whether or not either of the currencies involved in the currency pair you wish to trade could be affected by a major piece of economic data over the next week.
188
C hapter 16
Trading Psychology
I
n this chapter we will be focusing on trader psychology—the psychological factors that can have an effect on your success or failure in the markets. Psychology is hugely important in trading, but new traders totally underestimate it. It’s just as important, if not more so, than the actual technical method you use to find your trades. That may sound surprising to you at first but it is absolutely true. You can take a group of a hundred people and give them a proven, profitable trading system to follow, but it’s absolutely certain that the majority of those people will lose money—and that’s because of their psychology. Financial markets are ruled by emotions. It sounds strange but it’s true. There are two main emotions which control financial markets, and they are fear and greed. You get “bubbles” in markets where prices surge ever higher, usually without any real justification, and that’s down to greed. Look at the “dotcom” boom, or the recent run up to nearly $150 for the price of a barrel of oil. The moves shouldn’t really have happened, but there was a speculative boom, driven by greed, and that’s why they happened. Similarly, when markets crash, it’s usually down to fear. Look at any stock market collapse in recent times; if the market participants had kept their heads and looked at the situation rationally, then those crashes would probably not have been so dramatic. But people panic, and they make trading decisions based on fear. Greed and fear are two emotions that are always present in the markets. In order to become a successful trader you have to master your emotions. It’s a simple fact. You’ll never be a successful, professional trader 189
Trading Psychology
if you trade on emotion. The best traders are those who can effectively switch their emotions off, and not allow their trading decisions to be affected by them. The first main emotion that you have to contend with as a trader is fear. There’s fear of losing a trade, fear of losing money and fear of being wrong. With greed, you’ll often find that inexperienced or unsuccessful traders make poor decisions based on greed for money and greed for success. It’s so easy to jump in to a bad trade because you were greedy for money. You have to learn to control these emotions if you are to be successful. This book would simply not be complete without teaching you about these psychological aspects of trading and how to deal with them. They really are just as important as the technical factors in determining your success or failure. The truth of the matter is that you’ll never understand psychology and how it affects you until you actually have a live position in the markets, and your money is at stake. When you’re trading on a “virtual money” demo account, you can’t really gain an understanding of how these factors affect you, but you can prepare yourself for it as much as possible and that’s what this book, and this chapter, are all about. There are various factors which make this book, and this type of trading, different from others you might have seen, and should help you to overcome these psychological hurdles more easily.
Fear When it comes to making a live trading decision, there are a number of things that can cause you to feel fear. Fear of being wrong is one. Fear of losing money is another. The best way to overcome the fear of being wrong is to be sure about the trade that you are putting on. Obviously, if you’re uncertain about the trade, then you’re going to hesitate, and you’re going to be fearful about taking the trade, and fearful about the potential outcome. That’s one of the reasons why we provided you with the flowcharts. Quite simply, if you get to the end of the flowchart process, where it says “you have a trade”, then you can put that trade on without fear. That’s not to say that that trade is absolutely guaranteed to be a winner—there are no cast-iron guarantees of success in trading—but if you get to that point then you 190
Binary Options Profit Pipeline
at least know that the trade checks out, and that it meets the criteria of a proven, successful trading system. You can then put the trade on without fear, knowing that you’ve done your job correctly in identifying the trade. Another aspect of fear comes from the fear of losing money. Unfortunately, losing trades do happen from time to time, even if you follow the rules exactly. The simple fact is that financial markets are not 100% predictable. The only way you can keep the fear of losing money under control is by having good money management. We’ve already outlined a proven, successful money management plan for you, and quite simply, you should stick to it. The biggest mistake that bad traders, novice traders—losing traders—make is to use a poor approach to money management. If you’re risking 5% of your account on a trade, you’re going be a lot less fearful than someone who is risking 50% of his or her account. First of all, you’re going to have less hesitation about entering the trade because there’s less money at risk even if the trade goes wrong. Secondly, your psychology while the trade is actually running is less likely to be negatively affected. Let’s say, for example, the trade begins to move against you. In that situation, a trader with too much of his/her account at risk might make a decision to exit the trade there and then, based purely on the fear of the potential loss, even though there was no logical or technical reason for exiting the trade. Of course you know what will happen then—the market will move back the right way and produce what would have been a winning trade! If you only have a smaller amount of your account at risk, you’re much less likely to make these sudden, irrational decisions that are based on fear. When it comes to dealing with the emotion of fear, there are a couple of great advantages that are built in to binary options trading. As we’ve previously discussed, when you’re trading in a more traditional way, you are putting yourself in a situation where the amount of money you can make or lose depends entirely on how far the market moves, either in your favour or against you. But with binary options, you’re effectively trading on a “binary” outcome—1 or 0—win or loss. The size, and even the direction of the market movement, is not important. Let’s say, for example, a trader who is trading in a more traditional way has a trade on, which starts to move into profit. Every time the market moves another point in his favour, he/she makes more money. But let’s say that trade 191
Trading Psychology
doesn’t quite hit its target, and then starts moving off in the other direction, and back towards the trade entry point. The trader might think, “I don’t really want to end up taking a loss on a trade that was nicely in profit, so I’ll take break-even if I get it”. Again, you know what will happen! The trader will take break-even purely because of the fear of taking a loss, and inevitably as soon as he/she does that the market will start trading the right way again and go on to hit the target. With this style of binary options trading however, it’s not important if the market moves in our favour, or against us, or goes nowhere at all. All we’re interested in is whether or not the market hits our no-touch barrier. We are unconcerned with what the market actually does over the running period of the bet, provided of course that it doesn’t touch our barrier. And since we’re not concerned by the market’s movement, we are far less likely to make irrational, fearful decisions because of it. Also—with binary options trading, you know the maximum risk you stand to take before you ever place the trade, so you can risk an amount that you’re comfortable with. And being comfortable with the monetary risk involved in trading is what takes away the fear.
Greed What do we trade for? The simple answer is that we trade to make money. In the end, we’re here to make money. Although there are many other benefits to the trader lifestyle, no-one would trade if there was no money to be made. And because money is involved, greed is also inevitably involved. There is a lot of money to be made from trading the financial markets. If you can trade the markets successfully, then they effectively become your ATM! That creates greed. You want more winning trades, more success and more money. It’s human nature, but you have to keep it under control. The main mistake that unsuccessful traders make when they’re being influenced by greed is to take too many trades. They always want to be involved in the market, they always want to be making money, and they think, therefore, that they always have to be trading. But that is a recipe for failure. If you overtrade, you’ll end up taking bad trades as well as good trades, and over time, you won’t make any money, in fact you’ll most probably lose money. 192
Binary Options Profit Pipeline
Again, this is where our flowcharts come in handy, and should keep you away from the overtrading trap that a lot of people fall into. If you can get to the end of the flowcharts process, then you’ve got a trade, if you can’t, you haven’t. That should be enough on its own to keep you from overtrading. It’s tempting to always be in the market, and it can be frustrating to not be in the market, but patience, discipline and following your system will prevent you from over-trading, which is the main symptom of greed. Once again, Binary Options trading has an advantage in this area over other types of trading. Let’s say a trader puts on a trade at $10 per point, aiming for a profit of 100 points. The market hits the target, but the trader thinks the market might go further, and that he/she might make more money—so even though their system tells them to take the 100 point profit, he/she doesn’t close the trade. The trade then moves against them, back to only 50 points of profit. At this point the trader might think, “I had 100 points, I should have taken it when I had the chance, but I’m not going to just settle for 50 points. Inevitably, the market will continue lower and lower, eventually forcing the trader to take breakeven on the trade—he/she could have had a healthy profit, but got greedy and ended up making nothing! We won’t suffer from this problem, because with binary options trading we are not concerned about the market’s movement. We’ll make the same amount of money whether the market moves 10 points in our favour, as we will if it moves 100 points in our favour. When your potential profit/loss is not directly tied to the market’s movement, neither will your emotions be. That is a great advantage.
Anger and revenge There are two more emotions which can come into play when you’re trading which can also be very dangerous and destructive, and they are anger and revenge. When you’ve lost a trade, it’s extremely easy to just jump straight back in to the market in an attempt to recoup the losses, and usually that just ends up creating more losses. Inexperienced and unsuccessful traders will be angry about the loss, and simply jump on the first possible hint of a trade signal they see after—almost as if to attempt to “show the market who’s the boss”. 193
Trading Psychology
That just creates more problems. Even though it’s part of the successful trader’s mindset to accept that losses do happen sometimes even if you’ve done everything right, the fact is that losing a trade can be a difficult thing to deal with, and obviously the best remedy is to follow that up with a winning trade, which is why people often look to trade again straight away—to put the losing trade out of their minds. But that’s another big pitfall of trading psychology. Once you have a plan, once you have a system, you should not deviate from it. Even if you’ve just lost a trade, in fact especially if you’ve just lost a trade; wait until the next clear trade signal that meets your criteria. Even if you have to wait a few days or a week for it, in the long run that will do you good, because if you trade half-formed signals in the meantime—trying to “get your own back” on the market—you’ll just end up losing more money. Once again, this is where the flowcharts come in to play. Follow the flowchart process every time, and you won’t end up taking these revenge trades. The fact of the matter is that you simply can’t get revenge on the market. The market doesn’t care about you. It doesn’t care if you’re happy, sad or angry. It will do what it wants to do regardless of you and how you feel, so ultimately to project these emotions into your trading and to try and get your own back on the market is nothing more than a selfdefeating exercise, and it will make you feel worse and worse.
Patience and discipline Successful trading boils down to having patience and discipline. Having the patience and discipline to wait for the quality trade signals, the ones that get you to the end of the flowchart, and not succumbing to revenge trading, or boredom trading, which can be just as bad. That’s the difference between profitable traders and losing traders. The profitable traders have the right mindset. A successful trader’s mindset will be to be patient and disciplined. The successful trader will wait as long as it takes for the right trading setup, without succumbing to boredom or revenge trading. And when that setup comes along, the successful trader will trade it without fear or hesitation. They won’t worry about the monetary risk, because the money management plan has that under control, and they won’t worry about 194
Binary Options Profit Pipeline
being wrong either. If you follow your trading system and follow your plan, there’s no such thing as a bad trade. There will be winning trades and losing trades, but if you follow the system, there are no bad trades. The bad trades come when you do things incorrectly, and don’t follow your system. The most successful traders are those who wait for the market to come to them, rather than chasing trades. What we are presenting you with in this book is a proven approach to trading that makes money. Follow the system and over time you will make money. It’s tempting in trading to try to make as much money as possible, in as short a space of time as possible, but ultimately that’s not going to get you anywhere. Patience and discipline are the keys to solid, consistent profits in the markets. It may not sound as glamorous as you’d like, but “slow and steady wins the race” when it comes to trading. There’s an old saying that says you haven’t truly made it as a successful trader until trading is boring. If trading is getting your heart racing and pushing you to highs and lows of emotion then you’re not doing it properly! If you can effectively behave like a computer, acting on inputs from the market without getting swayed by emotion, that’s when you’re going to be a success. That’s what separates the winners from the losers in this game.
195
C hapter 17
SharpReader
I
n this chapter we’ll be introducing you to a small program you can use to have regular updates and analysis of the currency markets downloaded automatically on to your computer. The program is called Sharp Reader. Using it is optional, although we’ve tended to find that it is handy in terms of keeping up with the fundamental factors that are affecting the markets—it’s useful for staying in the picture. Sharp Reader is what is known as an RSS aggregator. With many modern websites, the content is published to a separate feed, called an “RSS feed”, and from there it can be taken and published elsewhere. RSS stands for “Real Simple Syndication” and that’s basically what it is—taking the content from a website and using it, and publishing it, in other forms and programs. With Sharp Reader you can connect to the RSS feeds of major financial news and analysis sites, and every time they publish a new article on their site the headline will pop up in the corner of your screen and you can then read the article from within the Sharp Reader program, without actually having to navigate to the website itself. You can get SharpReader from the website at www.sharpreader.net It’s a fairly standard installation process, so just follow through the steps as they’re presented to you. It’s a small program so it installs very quickly, and when it’s done you can just click “finish” to launch the program.
197
SharpReader
Using Sharp Reader Once in the Sharp Reader program, you need to access the specific news feeds we use by typing their addresses into the address bar at the top, which is highlighted in the screenshot below:
The addresses of the four news feeds we use are: http://www.actionforex.com/option,com_rd_rss/id,2/ http://www.actionforex.com/option,com_rd_rss/id,3/ http://www.actionforex.com/option,com_rd_rss/id,4/ http://www.dailyfx.com/feeds/rss_all.xml To subscribe to each news feed, simply type the address of the feed in the address bar and press enter. This loads the articles from the news feed. Next, click the “Subscribe” button next to the address bar, and that will save your “subscription” to the news feed. You may also wish to “unsubscribe” from the news feeds that are included with Sharp Reader by default, as they are not related to trading. You can also change the settings within Sharp Reader to determine how regularly it will check your subscribed feeds for new articles. You can do this by clicking Tools > Options > Feed Properties, and changing the “Refresh Rate” setting: Using the program is very simple. If there’s a headline that catches your interest in the upper panel, you can click on it once to get a brief preview of the article in the lower panel. If you want to read the full story, just double-click on the headline and the relevant article loads up. 198
C hapter 18
Keeping a Trade Log
T
his is going to be a very brief chapter—what we’re going to talk about is recording your trades in a log. Keeping a record of your trades is extremely important. Most people don’t realise it but it can be a great help in terms of improving your trading, especially if, in the rare cases where you do get a trade wrong, you can look back, check your trade log and possibly find out why that trade went wrong when others didn’t. Trading is a money-making exercise, and as such it should be treated as a business. Whether you’re doing it full-time, or whether it’s just a part-time thing where you’re trying to make a little extra money, it’s important to be as professional as possible about it and without doubt, one part of that is keeping a record of your trades. Every time you place a trade you should be making a new entry in your trading log. Sometimes, in fact, it’s good to fill out the entry in your trading log before you actually commit the trade to your account, just so you can get a slightly more objective view of the trade setup before you actually get into the market. For example, particularly early on in your trading career, it’s very easy to spot a pattern on the charts that looks great in terms of Market Direction trends, and the divergence setups. You might see that setup, rush to Bet On Markets, place the trade and then think “oh yeah, I forgot to check the support/resistance that was involved!” By filling out your trading log before you place the trade it’s a way of making sure you’ve made the right decision, and that all the “tick boxes” are ticked. It’s a way of minimizing your trading mistakes by making sure the trade meets all the criteria before you place it.
199
Keeping a Trade Log
The trade log
Above is a trade log spread-sheet file. The first two fields are fairly self-explanatory—the date you entered the trade and the market it was on, just for ease of reference if you ever need to go back over the charts and look at your previous trades. By keeping a record of the date and market you’ll be able to find them quickly and easily. The next field is trade type, and it is useful to keep a record of this because as you build up a more extensive trading history, you can start to generate statistics on your trading career, particularly if you are using a spread-sheet program like Excel. By keeping a record of which particular type each trade was, you can, over time, find out which trade type you took the most, which you took the least, and of course which trade types you had the most or least success with, so you can possibly then refine your trading approach in the future. Similarly, the next field is there for you to fill in the risk level you took on the trade—whether it was a lower-risk, medium-risk or higherrisk trade. Again, over time, you can generate statistics on the levels of success you have with each type. The next field is simply there for you to list all the support or resistance levels that went along with the trade. The most common reason for a trade to fail is if the support/resistance confluence backing it up was either unclear, or not there at all. If you’ve learned the lessons of this book properly then you shouldn’t ever end up taking a trade without a clear support/resistance confluence to back it up, but just in case you do, keeping a record in this field will allow you to identify if that was the reason a particular trade failed. 200
Binary Options Profit Pipeline
In the “notes” field, you can include any extra information you feel may be relevant at the time you get into the trade. The final three columns are there to record the monetary aspect of the trade: Firstly, the percentage of your account risked, which as you know by now varies depending on the level of risk taken on the trade. Next is a section to keep a record of the return produced on each trade, and the final field, which again is fairly self-explanatory, is there for you to record the actual profit or loss the trade achieved. What these fields produce is a clear, concise record of all the information that is relevant to a particular trade; there’s no need to go into any more detail than this. This is all the information you will ever need to look back and analyse your trading performance over a given amount of trades.
201
C hapter 19
Final Thoughts
T
his is the very last chapter of the book, and it exists just to go over some final thoughts relating to the book, and also relating to where we go from here; how we proceed now that you’ve completed the book and learned all about the methods we use to spot binary options trades on the financial markets. Firstly, we must stress in this chapter is that learning the materials in the book is really only the first stage—the first part of the process. You can think of it in similar terms to learning to drive—when you’re taking driving lessons, that’s when you’re learning the skills you need to pass your driving test, but it’s not really until you get out on the roads on your own and begin applying what you’ve learned that you truly “learn to drive”. It’s similar with trading, although obviously there’s no “trading test” that you have to pass before you’re allowed to trade for yourself ! What we mean is that up to now you’ve been learning the skills you need in order to be able to trade or bet on the financial markets successfully, but it’s not until you get out there for yourself and begin looking at the markets, and finding trades for yourself that you’ll truly start to absorb the things you’ve learned. At this stage it’s still all theory, and it’s not until you put the concepts of this book into practice that they really become second nature to you. The great advantage that you have is that you’re not on your own. While it’s good to be as independent as possible, both in your study and in then applying what you’ve learned, the difference is that you can always call on us for help. Don’t be afraid to get in touch with us if you have any questions or queries about any of the material, or any of the concepts in this book, and we will do our best to respond as quickly as possible. 203
Final Thoughts
We didn’t create this book as a simple information product that you buy and then are left to figure out on your own. As well as providing the book materials to you, we are here to provide ongoing support to you and to develop a two-way relationship as you learn the ropes and learn to become a successful financial trader. Ultimately, what we’ve provided you with in this book is both a trading model and a proven approach to using that trading model. The trading model itself covers all the things like trend, support/resistance, divergence and so on, and the particular approach to using it that we’ve detailed in this book is essentially going to Bet On Markets and placing no-touch trades whenever the system produces a valid signal. We like to use the Bet On Markets approach for a number of reasons, and just to reiterate those, the main one is simply time. Once you learn the flowchart processes off by heart you can analyse all 13 of the currency pairs we trade in a matter of minutes, and you only need to do that a few times a day to be able to spot potential trades, so it does give us a lot of free time which is one of the reasons many people look to get into trading in the first place. The second reason we like this style of trading is the flexibility, in as much that you don’t have to get into a trade the moment it sets up. You can be a few hours or even sometimes a day late getting into trades, and they can still be just as good, so again, when it comes to your time and your freedom, trading need not interfere at all with any of your existing commitments or anything you want to do. You can, to a certain extent, trade as and when you want. The third reason we like this style of trading is, of course, the tax aspect. Remember—what we’re doing is technically classed as “gambling”, even though in reality it’s much more along the lines of “informed decision-making”, but nonetheless in the eyes of the government this is technically gambling, and therefore no tax is payable on any profits earned, which is a fantastic advantage. Once you’ve learned it inside out, this trading model can, if you wish, be applied to other styles of trading as well. You can use it to day trade, or you can use it to swing trade. It works on the futures markets and on stock indices as well as it does on Forex. You can also explore other alternatives for trading through Bet On Markets with it. It’s very flexible in terms of how you apply it, and we actively encourage all the users of this trading system to explore different avenues with it once they’ve 204
Binary Options Profit Pipeline
learned it. If you are interested in learning how to apply this trading model to different styles of trading we’d be more than happy to advise you on that as well, just drop us an email! Just by way of a final conclusion, we’ll say again that we really do thank you for purchasing this book and for taking the time to listen to what we have to say and what we have to offer in terms of trading education. We really do appreciate it, and we very much look forward to working with you in the weeks and months ahead to spot these profitable opportunities in the markets! Without wanting to sound like we’re bigheaded, we really do believe in the methods we’ve outlined in this book. In our many years of trading we’re yet to come across a more accurate and effective trading model than this one, and we’re very confident that you’ll feel the same way once you start looking around the markets and seeing this approach in action. We appreciate that some of the concepts in this book are a little bit technical, particularly if you’re coming into this as a newcomer to the markets, and that’s why we have the support structure in place, but we genuinely believe that it’s worth putting in the time and effort to really understand this approach to trading. Once you’ve learned the methods within this book inside out you will be able to look at any market on any timeframe and instantly be able to spot profitable opportunities and make predictions about what that market is going to do. It’s a great feeling to be able to do that and we look forward to getting you to that point. So once again, thank you for your interest in our trading approach, and all we can say is enjoy your study, enjoy your trading, and hopefully we’ll be speaking to each other on a one-on-one basis very soon. We look forward to that and we look forward to trading the markets successfully together!
205
Monthly Market Direction Indicates Down Trend.
Monthly Market Direction Indicates Up Trend.
For more information Contact The Binary Options Experts
www.binaryoptionsexperts.com
New York: Ph+1 888 994 5550 Hong Kong: Ph+852 8191 2024 Australia: Ph+61 1300 852 024
[email protected]
