Many traders and investors are searching in vain for the Holy Grail—the perfect trading system. Does the Holy Grail really exist? Yes, it does, however, you will not find it “outside “by looking for a long-hidden set of secret trading rules. The key to successful trading is to trade systems that really fit you, your lifestyle, your beliefs, and most of all…they need to be fun to trade.
The Systems I Trade in the Forex Market
First, why do I trade Forex? When you compare different markets (mainly Forex, Futures, Crypto and Stocks), trading Forex offers me more flexibility and trade opportunities than any other. In what ways? There are many currency pairs to trade, I can choose from a wide range of time frames, and the Forex market makes all of this available in a fully flexible 24-hour market allowing me to trade during any time of the day. Flexibility makes Forex a great market to trade full-time or part-time, for small or big trading accounts, for day-traders and for long-term investors alike (see Top 10 Reasons to Trade Forex).
I trade three trend-following systems that capitalize on specific price patterns. Being visual pattern recognition systems that are based on a strong fundamental of psychological beliefs, typical human biases can be exploited to the trader’s benefit. The patterns can easily be detected as “psychological footprints” in the chart.
All three systems are rule-based discretionary (according to Van this is the best trading style). The rules are embedded within a multiple time frame logic, therefore, different rules need to match in different time frames to be fulfilled. All systems offer a clear set of rules with a precise entry-level, initial stop, and an easy-to-follow exit algorithm. The rules allow you to enter preset orders into the market without necessarily having to wait for the exact moment of trade entry. And an automated exit algorithm can then take care of the position while you are away from your screens — even at night. This kind of trading fits many traders’ lifestyles as automated exits free up time for a greater quality of life.
Systems 1 and 2 are based on multi-bar consolidation patterns for which a strong build-up of pressure in trend direction is important Once “price and time” are well aligned, the well-protected and tight stops might allow you to capture a nice and impressive R-multiple trade. System 3 is a single-bar entry signal with an even tighter stop. It has the greatest number of trade opportunities and the rules enable very profitable trade pyramiding.
Let’s have a quick look at each of the systems.
System 1: Busted Breakout – Hunt for Other Peoples’ Stops!
This system is the most rule-based and, with a 65% win rate, the most reliable one. It trades against counter-trend traders looking for a way out of the market trap they have fallen into (panic coverage).
We all know the feeling of having our stops run over by the market. Being quickly taken out with a loss, then, shortly thereafter watching how the market heads in the direction of your trade can be very frustrating—not fun at all. Just imagine how much fun you could have taking the trade in the other direction, experiencing the same stop runs except this time to your benefit. This breakout failure system catches many traders on the wrong foot. You could use such a system as a great money generator.
When you know how to make Market Traps work in your favor, these trades all happen in a very relaxed way. When the first trapped traders have to exit, you are well-positioned to run the stops of the remaining traders (panic coverage) as the price continues to move. This action typically generates an initial price surge, allowing a break-even trade early on, which then usually finds additional follow-through in trend direction.
This system works best in aging trends and trends that just turned (early reversal mode). Then, counter-trend traders are easily lured into the Market Trap against the primary trend. These traders have a high chance to get their stops run, so you should position yourself on the other side of that trade. This system seems counter-intuitive at first, which is why it works so well.
System 2: Flat-Level Break – Sometimes the Crowd is Right in a Big Way!
While System 1 (Busted Breakout) takes a counter-intuitive approach to a visual price pattern, some traders prefer this System (Flat-Level Breakout or FLB). It has a straightforward logic and is easy to spot and execute.
This multi-bar pattern requires a specific breakout and, although 80% of standard-type of breakouts fail, this specific price pattern has a high chance of being successful. Once in a while, the crowd gets to win in a big and cheerful way which excites this group of traders and keeps motivating them (but in a consistently losing fashion over the long term). This system trades WITH the crowd, only after a setup fulfills all rules and thus has all edges that are on your side. The rules make this system fairly reliable with an average win rate of around 55% as most trades occur during a well-established trend.
Trading with the crowd and experiencing everybody’s excitement as they celebrate an overdue winner can be fun! Typically, these chart situations can be seen as “spiky exhaustion moves” which cause many people to jump on the trend but just too late. By this point, most experienced traders (and traders following this system’s rules) will have already exited with profits.
You can talk about trades from this kind of system at cocktail parties and watch how the trade stories impress people. Winning trades in a full-blown trend, especially a trend everybody knows and talks about, indicates how clever, determined and tough you are. Yes, trading can be easy and fun, but only if you know what you are doing. At times the crowd needs to be right so why should you ignore these great winning opportunities? It would be a pity to miss trading them and making money. Wouldn’t it?
System 3: 3TMA – Trade Small When the Light Is Green
This system works quite differently from the other two. It has a more technical approach based on a single-bar entry signal. It uses a market scanner that detects the trade opportunities—a multi-timeframe filtering technique based on self-developed indicators. A wide universe of potential trades can easily be scanned in various time frames of the currency pairs. Once the filtering technique gives you a “green light mode”, then you can be sure to have a special market type—a very strong and very smooth trend.
This system offers the most consistent money and should be followed closely. Why is this so? Well, once the river is flowing well, it doesn’t really matter where you jump in. The current will nicely bring you along without effort. A strong and smooth trend can be very scary, too, as many people believe that such a trend looks like it has gone much too far for too long. As a result, the market keeps drawing in counter-trend traders trying to short. System 3 allows you to enter where they have to exit with a loss. In the markets’ unfortunate logic, a strong trend does not provide clear entry signals. As the trend continues, however, FOMO (Fear-Of-Missing-Out) builds up compelling novices to chase the market entering late. By this point, you should have already exited with a nice profit. Going with the flow in trading is not only easy but the most gratifying too. Taking one trade after the other until the trend ends can be a very enjoyable activity.
While System 1 and System 2 are fascinating through their unique “psychological footprints”, this kind of system excites many traders. This system requires some discretion to pinpoint the exact entry into the trade. With lots of trading opportunities and a very tight stop, however, you can make good money in a very short time because it allows you to pyramid a big position, fully reaping the trend edge. As with a two-sided sword, however, you can get losses quickly, too, if you do not have a good mental state. This system requires more trading experience than the other two in order to achieve consistent profitability.
I use this system regularly during good trends or increased volatility (such as during major news events). One such volatile day happened on October 15th, 2014, when a major news announcement caused “panic in the streets”. This happened to occur during my Forex Live Trading workshop and the market provided ideal conditions for this system. Actually, trading those two days at the workshop generated remarkable results—19 trades in total, +22R, and a win rate of just under 90% (see article Rich Man’s Panic). This type of market condition does not happen every day, but it is also not that unusual.
My Holy Grail – Relaxed, Plentiful Opportunities and Fun
The three systems allow me to find a wide range of trading opportunities at any given time during the 24th day. The same rules apply to trading the patterns short-term, medium-term, or for building long-term positions.
I have found that being relaxed and having fun while trading is my personal Holy Grail. Look for passion and fun in your trading so you find your personal Holy Grail.