Copyright © 2019 by James Eaton. All rights reserved.

No part of this publication may be reproduced, distributed, or transmitted in any form or

by any means, including photographing, recording, or other electronic or mechanical
methods, without the prior written permission of the author, except in the case of brief
quotations embodied in critical reviews and certain other non-commercial uses permitted
by copyright law.
Requests for permission should be made to the author by email addressed “Book
Request” at james@profitpod.co.uk

Limit of Liability/Risk Disclosure: While the author has used their best efforts in
preparing this book, in no event should the content of this correspondence be construed
as an implied promise or guarantee.
Any content within Trading: From A to eZ should not be relied upon as advice or as
providing trading recommendations of any kind. It is your responsibility to confirm and
decide which trades to make.
You should not engage in trading unless you fully understand the nature of the
transactions you are entering into and the extent of your exposure to loss. If you do not
fully understand these risks, you must seek further education and advice until you do.
All the trading strategies and methods in this book are used at your own risk.
The Author shall not be liable for any financial losses or any other damages, including
but not limited to special, incidental, consequential or other damages incurred as a result
of using the trading strategies outlined in this book.
Information provided in this correspondence is intended solely for informational
purposes.
 Index

Introduction 1

Terms and Definitions 6

Chapter 1: What is Financial Trading?

Why Trading? 8
The Benefit of Being Small 9
A Market to Suit You 10
Being a Trader is Simple, What’s Difficult is Getting There 15
“So, When Are You Going to Get a Real Job?!” 18
Shorting: How it Works 19
Trader Action Points 20

Chapter 2: Brokers & Charting

Brokerages 21
Charts, Tools, Alerts 22
Executing the Trade 24
Trader Action Points 25

Chapter 3: Technical Analysis, Market Structure & Price Action

Technical Analysis Vs Fundamental Analysis 27
TA 1.0 Vs TA 2.0 28
The Holy Grail to a Deep Understanding of Market Behaviour: Market Structure
and Price Action 32
Multiple Time Frame Analysis: The Market Matrix 58
Trader Action Points 69

Chapter 4: Risk Management

Why Risk Management is King 71
Initial Risk and Position Sizing 72
Overall Portfolio Risk 76
The Mathematical Realities of Drawdown 77
Correlation 78
Trader Action Points 80

Chapter 5: Entry
Two is Better Than One 83
Basic Candlestick Patterns 87
News 89
Trader Action Points 92

Chapter 6: Trade Management

Placing the Initial Stop 93
Management Methods and Discretion 95
Maximizing Profitability: Scaling-in and Risk Pyramiding 99
A Review So Far 102
Trader Action Points 103

Chapter 7: The Setups

Valid Doesn’t Mean High-Quality 105
Entering the Market: Common Problems 108
5 Actionable Trading Opportunities 110
Bear Flag 111
Bull Flag 117
The Retrace 122
Structural Breakout 128
CounterPattern 132
Checklists 137
Trader Action Points 140

Chapter 8: Journaling
What to Journal 142
Trader Action Points 146

Chapter 9: Quantitative Analysis

Analysis Tool 147
Using Data to Improve Future Performance 150
Trader Action Points 152

Chapter 10: Routines & Processes

Processes:
Back-testing 154
Forecasting 157
Routines:
Weekend Analysis 159
Daily Routine 160
Bi-Weekly Self-Review 162
Monthly Money Management 164
Trader Action Points 169

Chapter 11: Practical Psychology

Why is Good, How is Better 171
The 5 Pillars
Pillar 1: Dealing With Losses 174
Pillar 2: Removing The Concept of Money 176
Pillar 3: Thinking in Probabilities 178
Pillar 4: Setting Process Driven Goals 181
Pillar 5: Remaining Relentlessly Positive 182
Trader Action Points 185

Chapter 12: Your Trading Plan

The Components of a Winning Plan 187
Trader Action Points 192
Conclusion 193

Acknowledgments 195

Bonus Chapter: Most Frequent Q&A’s 196

Resources 200

Recommended Reading 202

To all the developing, aspiring traders who have had the courage to embark on
the this most exciting journey. This book is for you. My only hope is that it helps
you break through to consistency and profitability.
 Introduction

Trading: From A to eZ is a complete and comprehensive trading education,

distilling the best and most practical lessons on technical analysis, risk
management and trading psychology. This book will help you become a better,
more profitable and confident trader. In the following 12 chapters, my aim is to
take you from having a rudimentary understanding of trading to a level that will
give you the confidence and knowledge you need to consistently make money
from the markets. But before we get to that, let me just rewind slightly and take
you back to a not-so-distant time, back to 2016, which from a trading perspective,
may as well be a lifetime ago.

I was 22 at the time, working as freelance Personal Trainer in London, longing for
more but feeling ever-more boxed by the inherent limitations of my craft. By all
traditional standards, I was doing well. I had an established client base, I was
working hours equivalent to that of a part time job, yet earning that of most
peoples' full-time wages, saving thousands of pounds and all the while doing
something that I was supposed to love. But I wanted more.

There was a growing disconnect between my physical reality and my true life's
mission: to achieve freedom. Financial freedom. Physical freedom. Time freedom.
Just freedom. The truth is, as a Personal Trainer, I was following a path that simply
wasn't serving me in achieving my goals. I was geographically locked into where I
could perform my work and I was limited in regard to financial possibilities; there's
only so much you can charge for a personal training session and only so many
clients you can train, after all. In short, there was no congruence between where I
was and where I wanted to be. That was until I discovered a whole new world of
financial possibility. A world where I could work with nothing more than a laptop
with no geographical constraints and without having to answer to clients: the
world of financial trading.

I was about 10 months into my move to London when I decided to do something

with the amount that I had managed to save up to this point: a grand total of
£5000. I knew enough about personal finance to know that it seemed inept
leaving that money sitting in an account getting chipped away at by inflation. For
some reason, it felt like more of an insult putting it into a savings account so it
could earn the pitiful interest rates that most high street banks offer these days. So,
I decided I would do what most enterprising early 20 something guys do when
they get their hands on a few grand: invest it in the stock market.

I always laugh when people ask me how, a former Personal Trainer got into
equities and currencies trading because it seems so facetious to respond with
"Well, one day I tapped 'How to Make Money in The Stock Market' into Google".
But that's exactly what I did. I sought to find the investing answers I needed to put
my money to work and give me more than the 0.5% my bank was offering me.
About 4 clicks into my Google search, I had stumbled on a website about short-
term stock trading where positions would last from a few days to a couple of

1
weeks, a methodology called swing trading. In truth, I didn't even really know that
there was a difference between investing and trading but when I learnt about the
potential for more superior percentage returns, the shorter holding times of
positions, the higher volume of transactions, as well as the possibility of replacing
my normal income, I was hooked....and hungry.

Over the next 2 years, I read every single trading book I could get my hands on,
amassing a wealth of trading, investing and financial literature that still sits on my
bookshelves today. I completed numerous online trading courses, watched
hundreds of hours of online video content, subscribed to so called trading signal
providers and educators in addition to making and losing thousands of pounds of
my own money in trading accounts. Over the next and third year into my trading
journey, I back-tested enormous amounts of historical trading data against what I
had learned. I refined, tweaked, discarded and expanded the mass of sometimes
conflicting information I had accumulated until I moulded together a methodology
and strategy that allowed me to trade the markets with confidence and
profitability. And that's what this book is all about; passing my knowledge on to
you so you can save yourself years of sifting through the bullshit and outdated
theory and learning the practical knowledge you need to trade the markets
profitably. This book is about breaking the inexhaustibly rich field of study that is
technical analysis into a series of actionable setups, which you can tailor to your
personality so that you can trade with edge. This book is about cultivating the
necessary risk management framework so that you can operate in this potential
financial minefield with confidence. It's about the bridging the gap between your
current mode of thinking and that of a professional trader's, one that is neutral,
firmly grounded in the understanding of probabilities. It's about developing
routines and processes that are congruent with your lifestyle so that you're always
prepared for the swings and roundabouts of the market's movement. But above
all, this book is about something much bigger than any of that. This book is about
you. It's about you and your freedom and having the skillset so that you can take
control of your life and steer it in the direction you want it to go, wherever that may
be, just like I have done with mine.

The structure of Trading: From A to eZ is simple. There are 12 chapters, moving

sequentially through the ideas and concepts as to allow the reader to
progressively build upon his knowledge in a logical manner. Chapters 1 and 2
introduces the reader to the financial markets, giving an overview of the various
financial products available to the self-directed, individual trader and explores
some of the characteristics of these different markets. Here, we also briefly cover
the role of brokers and some of the key points to consider when selecting one. If
you're already familiar with these topics, perhaps coming from a trading
background of 6 months or more, then please feel free to skip these introductory
chapters and move straight to chapter 3. Chapters 3 to 7, discuss the individual
elements of the proposed trading strategy from market structure to price patterns
and risk management. It's in these chapters where you will find the real meat of the
book, learning 5 trading setups that will expose and leverage multiple trading
opportunities. Chapters 9 and 10 are devoted to the topic of journaling and trade

2
analysis where you'll learn the important role of trade reviews and quantitative
analysis in your continued development as a trader. Chapter 10 is dedicated to the
cultivation of routines and processes to give your trading day, week and month
structure. Chapter 11 is a master class in practical trading psychology, where we
cover the mental framework needed to establish a professional trader's mindset. I
introduce what I call the 5 pillars – the successful implementation of which will help
you master emotional management. The final chapter shows you how to create a
professional trading plan so that you can bring this body of knowledge together
into an operating manual that will guide you to consistent profitability. The section
that concludes each chapter, Trader Action Points, gives an overview of the
chapter's core ideas with suggestions on how to fully exploit them.

A couple of quick side notes: -

I don't know what level of experience you; the reader currently has. You may be
just starting out on your journey or already have a couple of years under your belt,
looking to refine and tweak your current strategy. I am, however assuming that by
the very fact that this book is in your hands (or on your screen) that you:

• Have an interest in financial trading

• Are not achieving the returns you would like to make as a trader
• Are open to learning new concepts and ideas

Expanding on that previous point; I ask you that you surrender any judgement you
may have. Whether that judgement is about me, my methods, trading as a whole
or even judgments you may have regarding what is possible within the financial
markets. I ask you to absorb these ideas with an open mind and to let go of any
resistance you may have to learning new concepts. I invite you to instead,
experiment with everything that you learn in this book, and to objectively observe
the results for yourself.

The material we are about to cover in this book is complex, covering a range of
different topics from technical analysis and market structure to quantitative
analysis and psychology. It is therefore important you consider the following
suggestions, designed to help you extract as much value as possible:

• Read the book in its entirety, making note of any specific ideas and
concepts you feel will need revisiting and revising.
• After the initial read, carefully revisit the sections and chapters that you feel
need development or further elaboration. This step helps personalise the
learning process as much as possible, allowing you to better assimilate the
content that is most appropriate to your individual level of knowledge and
competence.
• Keep revisiting and revising important ideas until they have become as
much a part of your consciousness as they are of mine.

3
One final point; the overwhelming majority of traders of whom I have studied and
personally met are men. I am, however, aware that increasing amounts of women
are venturing into this most rewarding world and I have had the pleasure of
meeting some of them myself. However, for phrasing to remain consistent
throughout the book, I have simply described traders as "he”, but this does
certainly not reflect any prejudice on my part.

With that said, I sincerely hope that you enjoy reading this book as much as I have
enjoyed writing it.

It is my privilege to present to you, Trading From A to eZ.

James Eaton

4
 Terms and Definitions

Throughout this book, I will repeatedly use certain terms. Even readers with
minimum trading experience will have come across some of these terms before.
Previous trading educational literature could have multiple ways of defining these
phrases and so I have complied a list enabling the reader to have a common
understanding of the term in the context of how it's used in this text. It is advised
you study these definitions carefully before proceeding with the rest of the book.

Nature: The characteristics within which price is moving. Nature can either be
impulsive or corrective.

Impulse: Aggressive price movements with a clear directional bias fuelled by

heavy momentum and volume, generally driven by institutional involvement.

Correction: Low volume, choppy price movements. Corrections create structures

which can signal a probable directional bias.

Technical analysis: The study of historical price data via charts to help make
trading decisions.

Structure: The drawing of trendlines, price patterns and support and resistance
levels through the use of multiple time frame analysis.

Bullish market: A market in which the predominant direction is up.

Bearish market: A market in which the predominant direction is down.

Type 1 entry: The more common of the 2 entry types. This entry is set on the
break of the structure.

Type 2 entry: This entry is taken at the top or bottom of a particular structure,
anticipating a reversal at this price point.

Natural progression: Refers to the tendency for markets to create a series of

impulses followed by corrective, continuation patterns.

Momentum: The dominant, directional price movements on the higher time

frame.

Spread: The difference between the bid and the ask price.

Bias: Holding a belief as to the likely direction of price movement based of the
current market structure and price action.

Time frame: A period of time in which the candles within a candlestick chart are
measured. For example, when on the hourly time frame, each candle represents
one hour of price data.

5
Higher time frame: The 4-hour and daily time frames. These are used to draw
structure and identify momentum in order to generate a directional bias.

Lower time frame: The 1-hour and 15-minute charts. These are used to locate
specific entry and exit points in the market after having formulated our directional
bias from the higher time frames.

Stop loss order: A type of order which is set when initially placing a trade that will
automatically close a position if the predefined price level is reached. Stop losses
allow us to define our risk before entering a trade. I will refer to these as both
stops and stop losses throughout this text.

Take profit order: A type of order which is set when initially placing a trade that
will automatically close a position for a profit if the predefined price level is
reached.

Support: A horizontal price zone in which a market may be met with sustained
buying pressure, sufficient enough to reverse price to the upside. Support levels
can be thought of as a 'floor' that helps support price from falling further.

Resistance: A horizontal price zone in which a market may be met with sustained
selling pressure, sufficient enough to reverse price to the downside. Resistance
levels can be thought of as a 'ceiling' that stops price from rising further.

Inflection point: An area of interest on the price chart of an asset. Areas where
price may respond by either losing momentum or completely reversing.

Volatility: The range within which price is moving.

Scale-in: Adding a second position to a previous trade, providing the risk of the
initial trade is removed.

Pyramiding: An aggressive scale-in where locked in profits from the initial trade
are used to size the scale-in beyond the 1% risk threshold. This technique allows a
trader to potentially amplify his returns if the trade idea is validated while still
never exposing his account to more than the 1% risk level.

Edge: An exploitable statistical advantage based on market behaviour that is likely

to repeat itself in the future.

Long: A trade that is executed in anticipation of profiting by closing at higher

prices.

Short: A trade that is executed in anticipation of profiting by closing at lower

prices.

6
Liquidity: Refers to how active a market is, determined by the total amount of
active traders and the total volume of their trades. I will use liquidity and volume
interchangeably throughout this book.

Volume: The amount of shares or units traded of a financial security in a given

period of time.

7
 What is Financial Trading?

CHAPTER 1 – WHAT IS FINANCIAL TRADING?

“You can be free. You can live and work anywhere in the world. You can be
independent from routine and not answer to anybody.” - Dr Alexander Elder

In its simplest sense, financial trading is the process whereby we buy and sell
financial assets in order to make a profit. The product being traded may be a share
of a publicly traded company, a foreign currency, a global commodity like oil or
gold or a more complex derivative product like an options contract. The
aforementioned markets allow the trader to speculate and profit from both rising
and falling prices. Going "long" or buying in anticipation of selling at a higher
price is the better understood of the two directional trades. We buy an asset at
one price, selling it at a higher price allowing us to profit on the difference. Most
people understand this process, if even on an intuitive level. Going "short" or
'shorting' however, is rarely understood by those outside of the financial world.
However, shorting allows the financial trader to profit in down-trending markets,
maximizing financial opportunity in a wide range of market conditions. We will
briefly cover the mechanics of a short trade at the end of this chapter.

Why Trading?

Rather than individually explain all the reasons as to why trading is such a
potentially attractive and lucrative endeavour, please consider the following
situation. If you were to ask someone to describe their ideal, perfect job, most
people would respond and suggest the following:

Physical freedom. The ability to work when and where they want.
Uncapped financial potential. Being able to significantly amplify their earnings at
an accelerated rate without needing to wait years or decades for promotions or
pay rises.
Flexibility. Being able to work in a way that suits them and their lifestyle for no
more than a couple of hours a day.

After hearing these criteria, you'd probably very well agree that it sounds like an
incredible job - if it so existed....and it does! Financial trading meets all these
criteria and is the main reason why more and more people are considering a
trading career as a profession and as the gateway to achieve their life's financial
goals and aspirations.

Of course, trading does have some other considerations:

It's hard. Whilst it's easy being a successful trader, what's difficult is getting there.
Learning the core skills and competencies needed to trade requires a
relentlessness work ethic that most newcomers simply don't recognise.
It can be lonely. If you're one that thrives or is used to working in a team
environment, you may struggle transitioning into retail trading which can be quite
a solitary profession.

8
 What is Financial Trading?

The lack of contribution trading has on society. There have been a couple of
occasions where people have personally challenged me commenting that traders
don't contribute anything of value to an orderly, well-functioning society. In almost
every other profession, the end result is something that contributes to the
functioning of that society, whether you're a doctor who treats the sick, a postman
who delivers peoples' mail or the lady who scans your shopping in the local
supermarket. Take even, the self-employed business owner or entrepreneur.
These enterprising individuals, while largely motivated by profit and financial
incentive, provide the public with products and services which in some way, add
value by addressing the needs and wants of the individual. The basic argument
being that all these roles contribute in some way, while trading, does not. Traders
use technology to connect to global exchanges to buy and sell financial products
for the sole purpose of personal gain. However, before concluding that traders are
nothing more than self-serving, esurient individuals motivated by nothing more
than profits, please allow me to counteract this completely misguided observation.
Whilst trading as an activity does little to benefit society, most successful traders
are better financially compensated than they would be if were employed in a more
traditional environment. By earning more money, they spend more money and
thus more money is flowing into the economy because of their being traders. Take
also, the trader who has also taken the step into professional money management,
trading both his personal capital and that of investors. These traders help their
clients achieve far superior returns to what they would receive through more
traditional investment portals, directly improving the quality of and enriching their
investors' lives.
Trading can also be the catalyst that frees up someone's time to focus on the
value-producing things they're truly passionate about. Trading can free someone
of the need to 'work' for a living, giving them the time to build valuable
businesses, contribute to causes and get involved in the things that really ignite
their true passion. Trading may not be of benefit to society but being a trader is.

The Benefit of Being Small

Many people hold the idea that trading for a living is an incredibly difficult and
perhaps futile endeavour. The basis of their argument lies in the fact that even
many large, professionally managed funds struggle to make returns superior to
that of the market as a whole - so what hope does a self-taught, individual retail
trader have? They might as well ask "Why do you, who has no informational,
technological, intellectual, financial or competitive advantage over some of the
best financial brains on the planet think you even have a chance at matching them,
let alone outperforming them?". In a field as competitive as financial trading,
attracting some of the brightest, most innovative and competitive minds in the
world, it's unlikely we're going to be the smartest person operating in the markets.
With the trillions of dollars under management, we're also not going to be the
best capitalized. With the development of high frequency trading algorithms and
advanced technology reserved for only the biggest players, we're also not going
to be the best equipped, instead relying solely on our chart providers and an
execution-only broker. So, to be fair to the person asking the original question:

9
 What is Financial Trading?

what room is there for the small, individual, self-directed trader? The answer's
significance lies in its simplicity: we can trade and make money because quite
simply, we are playing an entirely different game to these other operators. The
main reason why so many large hedge and mutual funds fail to achieve returns
superior to the basic benchmark indexes is because of that very reason: they are
so large. These guys are responsible for the management of so much money,
sometimes in the 10's of billions that these guys lose a significant advantage that
the small trader possesses: speed and agility. Most of these firms and funds would
boast about an annual return that many small professional traders could hit in a
month. Their size means they are forced to move into and out of positions slowly
and carefully, ensuring their buying or selling activity doesn't adversely affect
prices. They are forced to speculate in only the most liquid markets. Many of these
funds may also be limited in the direction in which they can trade, normally to the
long side, immediately restricting their operational effectiveness in different
market conditions. This is probably not the way you intend to trade the markets.
You are not bound to the same restrictions that these players are. You are free to
trade whichever markets you please, dipping into and out of trading positions as
often as you like. It's unlikely you're going to experience liquidity issues, as even a
small trader with a large account (say 1 million or more) is going to have an almost
minimal effect in liquid markets. You're free to trade across currencies, stocks,
bonds, commodities and options as you see fit, utilizing time frames from as little
as a few hours to as long as a couple of months if that is appropriate to your
specific trading thesis. You can go long if you have a bullish bias and short if you
have a bearish bias, maximizing your opportunity in all market conditions. You
could be shorting the GBP/USD on the back of a technical flag pattern, the next
day scanning potential long stock opportunities in the US equities market. The
large funds and financial institutions simply do not enjoy these same freedoms.
Their size forces them to enter and exit trades over multiple days, sometimes
weeks, while us, the small traders can be in and out of various trades in the same
time frame, extracting percentage and making money, and without so much as
leaving a trace that we were even there. In short, it pays big to be small.

A Market to Suit You

As we discussed in the previous section, there are many different financial

products which trade across various global exchanges. What markets you decide
to trade is critically important. Just like people, different markets exhibit different
personalities and characteristics. It is important that the market(s) you decide to
trade are consistent with your trading style and personality. The following section
provides a straightforward guide to the main markets available to the trader. It
would not be beneficial to dive into every component of these markets or to
attempt to explore how all these markets are correlated and influence each other
on a global macro level. While that would be particularly beneficial for longer-term
position traders and investors, it has no real practical benefit to the short-term
trader. Giving you a dissertation on different options strategies or on the
theoretical implications of cryptocurrencies will also not prepare you for actually
trading these markets. Instead, we will simply look at the basic mechanics of each

10
 What is Financial Trading?

market from a trading perspective.

Regardless of which markets you decide to trade after reading this section, it is
important you expand upon the information presented here so you understand
your markets intimately. A common theme among the most profitable traders is
this: they trade markets they know very well. Let's now explore some of these
markets starting with the most common:

The Stock Market

Stock markets exist to facilitate the buying and selling of individual company
shares, playing a vital role in various economies around the world, allowing
people to invest in some of the planet's biggest, most innovate companies and
corporations.
Stock markets predominately trade stocks and shares (these terms are used
interchangeably and will so throughout the entirety of this book). Shares are
securities that represent a small unit of ownership in the underlying company. By
buying a share, you are effectively becoming a part-owner of that company and
will subsequently be entitled to a share in its profits though dividends. Dividends
are payments sent out to shareholders, determined by the total amount of stock
ownership the individual holds.
Another attractive feature of owning stock is the potential to experience capital
gain. Share prices are not static, fixed things. They are dynamic, ever-changing
values that will fluctuate in accordance to the underlying supply and demand that
stock is subject to. Just like buying a property, shareholders can benefit from a
favourable increase in the value of the asset.
It's important, at this point, to make a distinction between the 2 primary public
operators: investors and traders. Investors may hold their positions for many years
(sometimes decades), motivated by long-term capital gain and regular dividend
payments. A trader on the other hand, is largely motivated by short-term profits,
capitalising on price movements that may last anywhere from a few hours to a
couple of weeks. Traders largely base their decisions using technical analysis,
anticipating likely short-term market moves through the study of historical price
movements while an investor is more likely to make assumptions of value in the
underlying stock or security based off fundamental analysis. We will look at both
forms of analysis more closely in chapter 3.

Foreign Exchange Market

The foreign exchange market, also known as the forex, FX or currencies market
facilitates the conversion of one currency into another. It is the largest of all the
major financial markets, with daily trading volumes exceeding 5 trillion dollars.
Traders, again have the option to go both long and short, enabling them to profit
from both rising and falling exchange rates. Transactions in the FX market must
include 2 currencies - the base currency and the counter currency, adeptly known
as a currency pair. Each currency is abbreviated a 3-letter code unique to that
currency i.e. United States Dollar = USD, Great British Pound = GBP, Canadian
Dollar = CAD, Japanese Yen = JPY etc.

11
 What is Financial Trading?

Currency rates are expressed as values which tell you how much of the counter
currency you need in order to obtain 1 unit of the base currency. Let's break this
down with an example. Imagine the quote for the GBP/USD exchange rate is
displayed as 1.3015. This means that for every £1 you want to obtain; you're going
to need $1.3015.
I have included a few examples using real rates (at the time of this writing) to help
solidify your understanding.

• EUR/USD = 1.12197. This is telling us that in order to acquire 1 full Euro,

you're going to need 1.12197 US dollars.
• GBP/USD = 1.24836. For every 1.24836 US dollars you have, you'll be able
to acquire 1 full Great British Pound.
• USD/JPY = 107.873. 1 US dollar is the equivalent of 107.873 Japanese
Yen.

Now that you understand how rates are expressed, let’s turn our attention to some
of the most common pairs themselves. The combination of multiple different
global currencies creates hundreds of potential pairs to trade but the 3 largest are
EUR/USD, USD/JPY and GBP/USD. These pairs are the most typically used
barometers of the overall FX market. Let's take a quick look at each one in turn.

EUR/USD: Consisting of the currencies belonging to the 2 largest global

economies, this is the largest currency pair accounting for approximately 2/3 of all
daily trading volume in the currency market. The US dollar is the most important
currency and the Euro has become the primary tool traders use to speculate on
the overall direction of the dollar. Any serious trader should be keeping an eye on
this pair as it can consistently set up good trading opportunities with tight spreads
and massive liquidity.

USD/JPY: Used to ascertain the value of the dollar against the Japanese Yen,
traders can use this pair as an indicator of Japan’s economy and as a benchmark
for the economic health of Asia as a whole. USD/JPY is a major currency pair and
often has high liquidity and tight bid-ask spreads. It can also be extremely volatile
which can set up a range of trading opportunities in both rising and falling
markets.

GBP/USD: Often referred to as ‘Cable’, this is one of the oldest currency pairs in
the word. Pairing the Great British Pound and the US dollar, this is the third largest
currency pair in the world. Again, tight spreads and high trading volumes make
this a natural choice for traders wishing to speculate on both the pound and the
dollar.

Most of the volume in the FX market is provided by banks and large financial
institutions. However, the forex market can be significantly advantageous to the
individual retail trader. Unlike the stock market, in which trading is only permitted
during certain exchange hours, the forex market trades 24 hours a day, 5 days a
week allowing the trader to personalise his trading routine to his lifestyle,

12
 What is Financial Trading?

regardless of geographic location or time zones. Because of the sheer size and
liquidity of the FX market, it can easily accommodate large trading accounts, an
important consideration for traders as they begin to scale their account or add
investor capital. Additionally, most forex brokers don't have executional fees when
placing trades. Instead, the forex trader incurs only the 'spread' when placing a
trade, which in most cases is a tiny percentage of the overall cost of the trade and
almost goes unnoticed. However, it is important to note that that forex is traded
via leverage. Trading using leverage can potentially amplify risk if the trader
doesn't know how to use it properly. Providing a trader uses the appropriate risk
sizing strategies, as outlined in Chapter 4, then we can greatly diminish the
enhanced risk that comes from trading with leverage, capping our risk in any one
trade to 1% of the account balance.

Commodities Market

The trading of commodities is an old profession, dating back hundreds of years

before the first stocks even existed. Commodities come in different forms from
precious metals like gold and silver, to crude oil and natural gas, to live cattle and
pork bellies and from corn to coffee. They are traded through futures contracts
which, like an option, is an agreement to buy or sell a specific quantity of the
commodity at a set price at a later date. When a trader buys a futures contract to
trade a commodity, they are not buying the physical commodity itself. If the price
of the underlying commodity goes up, the owner of the futures contact will make a
profit by buying the commodity at the contract price and reselling it at the higher
price, making a profit. Inversely, if the price goes down, the seller of the futures
contract will make money, at the expense of the trader.
You can also facilitate the trading of commodities through a commodity exchange
traded fund or ETF. These are funds which mimic an individual or basket of
commodities, traded on a stock exchange.

From a trading perspective, commodities tend to stage strong technical trends on

the lower time frames offering multiple trading opportunities with simple
continuation patterns. Some markets like gold and oil, will offer sufficient liquidity
for even large accounts while smaller products like cotton will not, potentially
exposing the trader to the risk of high slippage. Volume and open interest tell the
trader the total number of contacts that trade in the market and the total number
of long and short positions in the market. The more volume and open interest, the
less prone the market will be to large spreads and slippage. You can find these
figures for each of the commodity markets on the websites of various futures
exchanges like The Chicago Mercantile Exchange and The Intercontinental
Exchange. Conduct your own research before trading any of these markets. For as
I mentioned before, the best traders are the ones who know their markets and
know them well.

Options Market

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 What is Financial Trading?

Options trading is a complex, yet fascinating form of trading, allowing the trader
to express multiple different potential trading ideas to profit in almost any form of
market movement. There are 2 different options contracts: calls and puts. A call
option gives the owner the right to buy a specified amount of stock at a specific
price, known as the strike price at some point up to or on the day of the option
expiration date. Whereas a put option gives the owner the right to sell a specified
amount of stock at a specific price, known as the strike price at some point up to or
on the day of the option expiration date. Options are derivate products meaning
that their value is derived from other variables and factors than just the underlying
stock value. This makes trading these products advanced and only for traders
experienced in their use.

Becoming an effective options trader requires learning a whole new language –

puts, calls, strikes, premiums, the Greeks, bull call spreads, iron condors and
butterfly spreads (yes, really) are just some of the jargon you’ll need to become
familiar with if you’re to trade these products. Options traders typically use a
handful of strategies that allow them to profit from multiple possible situations,
from protecting their downside risk in an individual stock they own, profiting in a
sideways market to capitalising on volatility.

Whilst options can be a perfect compliment to your trading repertoire, particularly

if you’re interested in trading equities, they are not for beginning and developing
traders. Only after a trader has proven profitable through directional trading for
many years should he consider adding options to his portfolio. Because this book
is aimed at the developing trader, there is no need to expend energy into this area
any more than the basic definitions and terminology.

Cryptocurrencies Market

Chances are, if you've not been living under a rock for the past couple of years,
you've probably heard about cryptocurrencies. Cryptocurrencies are electronic,
virtual currencies. One of the main attractions is that cryptos are not issued or
controlled by any central authority, rendering them immune from government
manipulation or interference. The most popular blockchain cryptocurrency at the
time of this writing is Bitcoin. However, there are thousands of other similar coins
which exist. Like all financial markets, prices are determined based off supply and
demand and so the rate at which a cryptocurrency can be exchanged into another
currency can fluctuate rapidly. These dramatic price swings have made
cryptocurrencies popular trading vehicles for many short-term traders and longer-
term position holders alike. In 2017 Bitcoin staged a colossal price surge reaching
a high of over $19,000 per bitcoin before plummeting to around the $7000 mark
in the following months.
Opinions over the general utility and implementation of cryptocurrencies remain
largely widespread with some believing they are nothing more than a short-lived
fad, others a speculative bubble with potentially disastrous financial consequences
and others yet as the future of money, with the real possibility of one day replacing
currency as we know it today. Because this is a trading book, I'll refrain from

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 What is Financial Trading?

discussing any further theoretical potentialities of cryptocurrencies and instead

focus on its utility as a trading vehicle. Crypto markets trade 24 hours a day, 7 days
a week, can stage strong technical trends and respond well to common technical
trading patterns. However, as I mentioned previously, they can be prone to
volatility and sometimes erratic price movements, as we saw in the 2017 surge.
However, if you are a trader that thrives off choppy markets and large price
swings, then this market may have something to offer you. Whilst I have traded
Bitcoin and other cryptos before, at this time of this writing, I do not currently trade
any of these markets. As before, should you decide to give trading these products
a go, conduct your own research first.

This is not an exhaustive list and is only an introduction to the main markets
available to traders. Listing every type of financial market and the available trading
products would be a book in and of itself and it is not my goal to explore the
intricacies and nuances of all these markets. It is rare for many traders to trade
across such a wide range of markets as most traders will focus almost exclusively
on 1 or 2 markets as their main trading vehicles. I personally focus around 70% of
my trading to the foreign exchange market and around 30% to the stock market. I
do not trade highly leveraged derivative products like options, cryptocurrencies,
bonds or commodities (although I do occasionally trade gold and oil). It is not that
these markets do not present viable trading opportunities, simply that I have
found the stock and FX markets best suited to my own personality, lifestyle and
trading methodology. Because the goal of this book is to help develop individual,
self-directed traders it is not in my interest to simply recommend you follow the
same markets as me. Instead, I would recommend you start with just one market
(FX is good because of 24-hour access and low costs) and after having refined,
your basic technical trading skills, to then explore other markets and find the ones
that best suit your personality, lifestyle and that are most complementary with your
trading style. The stock market was always a natural choice for me as it was stocks
that first piqued my interest in trading. Currencies, however, was more of a
pragmatic choice because of the large liquidity, tight spreads and 24-hour trading.
One final point, it has been my experience that the forex market adheres very well
to the trading strategy outlined here and would thus be a good starting point for
beginning traders. The trading examples outlined will be predominately forex
related and it would be wise to remain cognizant that I will largely be referencing
these markets throughout this book.

Being a Trader Is Simple. What's Difficult is Getting There

When I laid out the framework for this book and the chapter planning, the purpose
of this chapter was to "introduce the reader to the financial markets, exploring
some common trading themes, solidifying a broad range of trading-related
knowledge". That's why I feel I would be doing you, a developing trader a
disservice if I didn’t include this section.

Trading is hard. There's no way around it, becoming a consistently profitable

trader is one of the hardest things you will set out to do, not so much because of

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 What is Financial Trading?

the intellectual knowledge but because successful trading requires us to go

against the very emotions that make us human. In the early stages, taking losses is
hard. Developing an edge is hard. Letting profitable positions run is hard. In fact,
in thinking back to my early stages in my trading journey, I struggle to think of
anything that wasn’t hard – even logging onto my demo trading platform for the
first few times was enough to make my head spin.
Recently, European regulations required trading brokers to display the
percentage of their clients that lose money on any of their advertising material –
“76% of retail trading accounts lose money when trading with this provider” has
become an all-too familiar reminder of aspiring traders. It’s not uncommon for
people to read these low success rates and erroneously assume that making a
living from trading is pretty much impossible unless you’re in the small minority of
intellectually or numerically gifted. They reason that the high number of losing
accounts is evidence that trading is not a venture worth pursing as the odds are so
drastically stacked against the individual trader. An example that perfectly relates
to this goes back to my days as a Personal Trainer.

One of the chains of gym in which I worked as a Personal Trainer decided to

submit a survey to their tens of thousands of active members, asking for
information about their reasons for joining, their personal fitness goals and their
progress since joining the club. Turns out, that around 75% of members had not
only not achieved their goals but were actually in a worse physical state than when
they joined the gym! Imagine that - taking the often-times daunting steps of
joining a new health club and dedicating the time and effort to work out only to
end up in a worse physical condition to when you started! Many people who sign
up to a health club mostly have similar goals; to reduce their levels of body fat and
to improve their levels of physical fitness. So why such a discrepancy in results?
Why do only a handful of people make progress while the overwhelming majority
of people not only fail to progress towards their health goals but actually regress
over time? Is attaining health and fitness so inherently hard? Is it that only the
genetically gifted 25% have any chance of making physical changes? No and no.
Much like trading, the reason most people fail isn't because of the activity, it's
down to the individual. The absolute, cold hard reality is that the main reason why
people don't make progress with their health is because they simply don't commit
themselves to it. They may join a gym but they've no logical structure to their
workout routine. They aimlessly drift from machine to machine with no solid plan
personalized to their goals, much like the trader operating in the markets with no
methodology or clear trading plan. They cheat their diet plan, much like the trader
who cheats his risk management plan. And when their futile attempts to get into
shape ultimately fail, they blame bad genetics, poor instruction and busy gyms for
their lack of results, in much the same way the failed trader blames his broker, the
markets or his trading platform for his financial ruin. From this perspective, there's
a lot of similarities between these two groups but the main thing that unifies them
is that their failure isn't a by-product of the activity, whether that's trading the
financial markets or trying to lose body fat. It's them. It's their lack of discipline in
sticking to a tried and tested plan. It's their failure to do the everyday things that

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 What is Financial Trading?

are essential to their success. It's them not having the commitment to learning and
implementing the very things that bring successful results.

Now suppose that a new law was passed that required gyms, in much the same
way they require brokers, to state the amount of people who don't achieve results.
Assuming the statistics were around the same percentage threshold, do you think
you, upon walking into the gym and hearing from the salesperson that around
75% of members don't achieve their goals would be any more discouraged about
joining? Do you think that would influence your decision in taking out a
membership? Would you feel in any way less confident about your abilities to
achieve your fitness goals? You probably wouldn’t, right? You'd probably
rationalize that while those statistics may stand true for the average person, that
you're not like everybody else, you're willing to do whatever it takes. You would
tell yourself that other peoples' shortcomings in no way affect what you're capable
of. So why then should you let the failings of so many new traders affect what you
believe is possible in trading? It's true that 75% of new traders only lose money
but that is a reflection on them and not on the markets or trading itself. Don't ever
allow the failings of others affect what you think is possible for you, you’ll only be
doing yourself a disservice if you do.
Becoming a trader is hard but achieving it will give you a sense of financial and
physical freedom that will positively change your life for the better.

This isn't me giving you a pep talk or feeding you with artificial confidence about
how you can achieve anything you want. This isn’t some ego-boosting self-help
book where I tell you that you can achieve whatever your heart desires. It's about
showing you that the results you achieve (or don't achieve) in anything you pursue,
whether that's trading or fitness or any other endeavour you choose to follow,
aren't down to the activity or the event, they're down to you. When you accept
complete and utter self-responsibility for the results you're achieving in your life,
you put yourself in an amazing position where you can objectively look at your
results and do the necessary things to grow, learn and progress. The moment you
associate your results to anything outside of yourself, you're essentially
relinquishing responsibility and starving yourself of the possibility of growth and
progression. When you blame the markets or your brokers or your brother in law
for telling you to buy a stock that plummeted what you're doing is putting any
form of responsibility outside of yourself. You're allowing your results to be
dictated by something not in your immediate control and if you believe anything
but you is responsible for your results, then what's the point?
If that's you then it'd be best to close this book now, put it back on the shelf and let
it gather dust or use it as a doorstop because that's the only way you’ll get any use
or value from it. If, however, you're motivated, committed to the process of
learning and willing to do the hard work, do the back-testing, take the losses and
learn from your mistakes, then you have a very real shot at making this a reality.
Your only regret will be not having started sooner.

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 What is Financial Trading?

“So, When Are You Going to Get a Real Job?!”

If you're reading this book, it probably means you're in the developmental stages
of your trading journey. You've probably still got another job or alternate income
source while you refine your skills and transition into trading as your means of a
living. If that's the case, you've probably already had conversations like these:

Family member: So how are things, Josh, everything okay at work?

Trader Josh: Yeah, all good thank you. I'm actually transitioning into another
career at the moment. One that will hopefully give me a lot more time and
freedom to do more of the things I love.
Family member: Oh really? That sounds exciting, what are you going into?
Josh: Oh, well I'm moving into financial trading. I'm trading a small account at the
minute while I develop my skills but I'm hoping to be trading all my funds by next
year. Maybe even take on investor...
Family member: Wait, wait, wait. You're doing what? Trading? Isn't that really
risky? Can't you lose all your money? Isn’t it just pretty much gambling?
Josh: Not quite, professional traders consistently make profits from the markets,
controlling their risk in every trade so they don't take outsized financial losses.
Family member: Hmmm....doesn't sound like a good idea. Gambling is never a
good idea. Don't you just want to do that more as a hobby and get a normal job?

I’ve been involved in conversations like these many a time and know first-hand that
one of the many struggles you’re likely to face as a beginning trader is convincing
well-intentioned friends and family that what you’re doing is a genuine and
rewarding pursuit and not something straight out of the Wolf of Wall Street. It’s
easier said than done, but it’s important that you don’t let comments and
conversations like this derail your progress to becoming the trader you’re working
hard to be. The truth is most people are not familiar with professional trading and
so aren’t in a position to give any constructive or useful feedback. Why then would
you allow misguided comments from other people affect your progress? Rather,
tell the person that while you appreciate their concern, you’re very committed to
joining the ranks of the professional traders who make a living from trading. Don’t
take their comments personally and instead realise that most people are
uncomfortable with things they don’t understand. You can’t blame them if they’re
slightly sceptical about their beloved son, friend, boyfriend or whatever going into
something like financial trading. Brush it off and focus more on the things within
your control, like your continued development as a trader. Better yet, simply don’t
engage in conversations about your trading. Don’t tell anyone what you’re doing,
don’t talk about the markets or your most recent trade, don’t attract the possibility
of getting into a dialogue about all the reasons why you should find a different job.
And if you do find yourself in a debate, move onto something else. Don’t entertain
a conversation about why you should get back into the “normal” world of dead-
end 9 to 5 jobs, a 6-week holiday package and the chance of a pay rise after years
of giving your time to an employer who couldn’t give a shit about you. Because, if
that’s the normal world, then why the fuck would you want to live there anyway?

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 What is Financial Trading?

Shorting: How it Works

As I alluded to at this start of this chapter, one of the benefits of being an

individual retail trader is having the freedom to trade a wide range of markets in a
wide range of conditions. Shorting refers to making a profit as the price of the
asset being traded declines in value. So how exactly does a short trade work?

Earlier this year I was watching a TV series (I won’t rename it) in which a cleaner
goes into stock trading, using insider information to make a series of speculative
trades. At one point in the show, she stumbles upon unfavourable information
about a certain company. Understanding that this news would likely create a steep
sell-off in the respective shares, she decides to short the company stock to profit
from this information. Her accomplice, in explaining how shorting works to a third
member of the trading team starts her explanation with “Well, imagine I’m a really
dishonest person”, before explaining, albeit rather badly the mechanics of a short
transaction. There seems to be this public conception that short selling is this
shady, dangerous and dishonest thing whereby greedy bankers and traders profit
from something else’s misfortune. This is simply not true. Short selling allows
traders and investors to profit as a security declines in value maximising our
potential to make percentage in bullish and bearish markets. If negative Brexit
news is pulling down the Pound, we can capitalise on that by finding good
technical trading opportunities to the downside.
Here’s how it works:

Suppose you believe that Company A stock (CMPA) is going to decline in price.
The shares have recently traded at £10 per share but you believe the £10 level is
an important psychological resistance level that will push price to the downside.
You’ve analysed the price chart of CMPA and have spotted a good trading setup
that is alignment with your trading plan. If you are correct, you want to profit from
this share’s drop. You short the shares at their current price, £10, setting a profit
target of £9.50 at the time of placing the trade. Rather than buying the shares in
anticipation of selling at a future higher price, as in the case of a long trade, you
have actually sold the stock despite not having owned it, in anticipation of buying
it back at a lower price and profiting from the difference. Let me elaborate. When
you place a short trade, your broker lends you the desired number of shares that
you want to short. You enter into an instant agreement with the broker that you
will, at some future point return these shares. Let’s imagine that you shorted 1000
shares of CMPA stock. You have effectively sold those 1000 shares at their current
trading value of £10 per share, receiving £10,000 in return (1000 shares x £10 per
share = £10,000). As your initial trade forecast plays out and CMPA trades to your
£9.50 price target, you buy back the 1000 shares you initially borrowed, costing
you £9500 (1000 shares x £9.50 per share = £9500). The 1000 shares you
borrowed from your broker are returned, leaving you with a net profit of £500.
You sold the borrowed shares and received £10,000, bought them back at the
lower price of £9.50 and profited from the 50p difference. Multiply that 50p by the
1000 shares and you’ve made a healthy £500 raw profit, minus executional fees
and commissions, of course.

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 What is Financial Trading?

Shorting should come as naturally to the neutral and fluid financial trader as
putting comes to a well-rounded golfer.

Trader Action Points

• There are various global financial markets, all with unique trading
characteristics and personalities. It is up to the trader to find the markets
most suitable for his personality and style.
• Trading is an incredibly rewarding and potentially lucrative career but there
are certain things an aspiring trader should consider before pursuing it
seriously: trading is a solitary profession and there is a steep learning curve
ahead for the novice trader.
• Independent traders have an inherent advantage over professionals
managing large funds. They enjoy a competitive advantage that these other
operators simply don’t: they are free to trade across various markets
quickly, can trade to both the long and short side and are not likely to
experience any liquidity issues.
• Going short, or shorting is a method whereby traders can profit from the
decline of a financial asset. While there is a public misconception that
shorting is a dangerous and shady transaction, it’s actually a very popular
tool that allows traders to make profits in both and up and down-trending
markets. Fluid, versatile traders should be as comfortable as entering short
positions as they are long positions.

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 Brokers and Charting

CHAPTER 2 – BROKERS AND CHARTING

“The technology today...that was like a wet dream for traders in the 80’s” –
Unknown

If the last chapter has piqued your interest in trading, and I’m assuming it already
was considering you purchased this book, then chapter 2 takes a closer look at the
next steps in executing our trades: brokers and charting.

Brokerages

A brokerage or trading broker is a firm that executes your trading decisions on

behalf of you, the client. Brokerages are the third party connecting you to the
various global financial exchanges. Some brokers will only facilitate the trading of
certain financial products while others accommodate for the trading of various
assets within the same platform. Today, most brokerages are electronic, allowing
the client to trade directly from an online platform. In addition to the basic trading
features, most brokerage platforms also provide you with additional tools such as
charting software, news feeds and trade alerts. They are the first step in your
trading journey.

When choosing a broker, you'll have to understand the difference between full-
service brokerages and discount brokerages. Full-service brokerages offer a wide
range of services to their clients ranging from market research, tailored investment
advice and various financial products based off their clients' goals. Discount
brokerages simply execute the buy and sell orders of their client for which they
charge a small fee or a commission. Discount brokers do not offer investment
advice, personal consultations, stock tips or the sale of financial products, only the
execution of client trades.

As a self-directed trader, you will use a discount broker. Traders will conduct their
own analysis, formulating trading decisions and entering and exiting trades as
appropriate. To us, the broker exists for one reason - to execute our orders,
nothing more, nothing less.

What’s Important in a Broker?

Here are the main considerations when choosing a broker:

Products: What you want to trade is going to be the main deciding factor for
which brokerage you choose. Some firms like Oanda only provide access to the
Forex market while others will provide access to various markets within the same
account.
Charges: You're never going to avoid fees completely but understanding your
brokerage's unique fee structure will better equip you when choosing the
provider that's right for you. Most brokers will charge small fees to execute your
orders, but they can vary dramatically so do your homework first. Also, be aware of

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 Brokers and Charting

other common fees; annual charges, platform fees, withdrawal fees and inactivity
costs.
Minimum account sizes: Many online brokers will require a minimum balance
before setting up an account. Double check your broker doesn’t require a
minimum £5000 deposit if you’re only planning on starting with a couple of
thousand.
Regulation: A good and trustworthy broker should be governed by an official
regulatory body who ensures the integrity of broker operations.
Capital protection: Regulated brokers must comply with a set of rules designed
to ensure the safeguarding of investor capital. This way, in the event that a broker
is forced to close, your money will be protected. Some brokers will even offer
government-backed deposit insurance for its regulated brokers so that clients can
recover all of their funds in the event of a broker misappropriating them.
Customer service: Trading with capital is a serious business and in the event of
platform errors, high-quality customer support should be available at any time.
Make sure your preferred broker provides a helpline in which you can speak to a
real person, rather than time-consuming email help requests. In the rare event
your orders are not executed properly, or you have problems with the trading
platform, you’re going to need to find out why…and fast.
Trading platform: Your trading platform is your unique gateway into the financial
markets. As such, the platform should be easy to use and visually aesthetic. There
should be clear ‘Buy’ and ‘Sell’ buttons for the market you’re viewing and a simple
deal ticket system that makes the execution and modification of active positions
seamless. A good trading platform will also be customisable, allowing you to
discard irrelevant information, only showing the panels you wish to be displayed. If
the live news feed only serves to distract you or the profit and loss panel for active
trades is causing you to obsess over price fluctuations, then the platform should
have the functionality to remove them from you view.

Charts, Tools, Alerts

As technical traders, our trading decisions are based off the analysis of charts.
Good quality charting software is therefore an essential element of our toolkit. As
previously stated, some brokerages will provide basic charting software within
their platform, however, from personal experience, I've found these free tools to
be quite basic and limited in terms of functionality. To develop the necessary
processes that we'll explore later in this book, processes that form the foundation
of what we do as traders, we're going to need software that allows us to rewind
price to historical data, use a range of different charting tools, build customised
watch lists and set alerts. It's for this reason that third party charting tools are
becoming increasingly popular among retail and professional traders alike.
Out of the various options out there, there is only one that I could genuinely
recommend, and I would be doing you a disservice to not do so. For that reason,
rather than list a all the different options weighing up each one, it’d be more
advantageous to introduce you to…

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 Brokers and Charting

TradingView

TradingView is the go-to choice for over 8 million traders worldwide. Its clean and
elegant charting software gives users a massive range of tools to customize and
analyse the chart as well as tons of other additional functionality. I have used
various tools and software in the past and I can't praise TradingView enough.
Users can seamlessly view the charts of any financial instrument across multiple
time frames, easily build customised watchlists, back-test using the bar replay tool,
set price alerts and much more. You can get set up with a basic account for free or
pay a small monthly fee to unlock some extra, more advanced functionality. It has
become my personal choice for my all my technical charting and analysis. Check it
out.

**REFERAL LINK**

Essential Charting Tools

Should you decide to go with a different charting provider, refer to the following
list of tools you're going to need to effectively analyse your charts in accordance
with the strategy outlined in this book.

Trendline: A basic charting tool that allows the user to draw lines on a chart used
to define market structure. For the purposes of marking out multiple probable and
possible structures, your tool will have to support you in drawing trendlines in
both thick and dotted.
Horizontal zones: These are rectangle shaped zones which help identify
probable key support and resistance areas from the higher time frames. On
TradingView, I simply use the rectangle shape tool and drag it across the area I
want to identify.
Risk to reward tool: This tool will help you weigh up the reward to risk ratio of
potential trades as well as helping you manage trades as they reach fixed
percentage targets.
Paintbrush/drawing tool: This is a simple tool that will allow you to draw onto the
chart freehand. We'll use this to draw on our forecasts as part of our daily analysis.
Ray line: A horizontal line that only extends from the point of which it's been
placed. We'll use this to identify possible inflection points.
Fibonacci tool: The tool allows you to measure the dept of a price retracement
using the popular Fibonacci numbers.
Bar replay: Essential tool for back-testing. This allows us to go back to historical
price data and replay it as if it were happening in real time. This means testing past
price data is free from any forward-looking biases.
Alerts: Allows you to set automated alerts when price reaches a certain point of
interest. Alerts should be able to come through to your phone, making on-the-go
trade management easy and stress free.

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 Brokers and Charting

Executing the Trade

Once you’re set up with a broker with a live or demo account ready to go, it’s time
to learn the mechanics to executing your trades. Again, if you’ve already been
trading for some time and you are familiar with the process of entering and exiting
trades, then please feel free to skip ahead, for there is nothing new here for you.
However, I wrote this book understanding that there could be some readers who
haven’t as of yet placed a trade so it’s important to become familiar with the
process if you fall into that group.

When you place a trade, there are different order types available to you,
depending on how you wish to enter the market. Not understanding the different
order types can be a costly mistake and I have personally met even developing
traders who have incorrectly used the wrong order types, normally to their
financial detriment. Let’s look at the 3 main order types* you can use to place your
trades. I have provided a practical example of how each of the orders would be
used below along with a brief explanation.

Market Order: An order which is executed immediately at the best available

price. A market order guarantees the order will be fulfilled but there is no
guarantee at what price it will be executed at. The strategy covered in this book
will rarely require the use of a market order, instead preferring stop orders.
Example: NFLX recently broke out of a consolidation range on the daily chart.
After breaking the range, the market is now moving quickly, trading to an all-time
high of $115.50 and I want to buy the stock for a longer-term swing trade. I want to
be in the market now and I’m not concerned with paying a slightly higher price
than what the stock is currently trading at as I’m focused on this stock’s long-term
potential. I use a market order to take me into the market immediately, buying the
shares for $115.80.

Stop/Entry Order: A conditional order which will only be executed if price

reaches the level in which it is set. These orders will remain active until it is either
executed or manually cancelled by the trader. Stop orders provide the benefit of
being able to 'set it and forget it'. A trader can identify a valid trading setup, put in
the entry order ahead of time and then go about his day, confident that if the
predefined trade entry price is hit, he will be automatically entered into the
position.
Example: GBP/USD is trading in a tight range on the 1-hour chart between 1.2700
and 1.2650, a 50-pip range. Because of the strong downside movement, I want to
short this pair and capitalise on any further downside. However, I want to see
GBP/USD break down below its range before I would want to take the trade. I
understand that should the pair break the 1.2650 level, that would be a signal that
the market is now likely to continue its downward move. I use an entry order to set
my entry 5 pips below the range at 1.2645. Should price successfully penetrate its
range, I will be triggered into the trade. If price continues to remain locked in its
current range, the trade won’t be executed.

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 Brokers and Charting

Limit Order: A limit order is an order to buy or sell an asset at either a specified
price or better. The order will either be executed at the price you specify (your
limit) or at a more advantageous price. I rarely, if ever use limit orders but they
may be a useful for certain trading scenarios when a trader cannot commit to
checking the markets over a period of time and when a potential trade which may
set up.
Example: CMPA shares are currently staging a strong technical uptrend. I am
eager to enter the market and profit from further upside, but I know I cannot
monitor this market for the rest of the day. Shares are currently trading at £8.40
per share. Rather than using a market order to enter at this price, I decide that I
only want to enter the trade if CMPA retraces to a lower price level. I use a limit
order with a £8.20 limit. Only if price pulls back to £8.20 will the trade be initiated.
The limit means I will only pay £8.20 or a better price for these shares.

*All 3 order types can be used to initiate both long and short positions.

Before Moving On

It’s essential that before moving onto the next chapter that you have a charting
package set up and ready to go. These first 2 introductory chapters have simply
been to lay the foundation for the ground we are about to cover. In chapter 3
onwards you are going to be thrown in the deep end as it were, learning the
structural foundations for the trading strategies you will learn later on. From an
educational perspective, these first two chapters have been like nursery. But rather
than a smooth and easy transition into primary and then secondary school, chapter
3 is going to be like plunging headfirst into university. But don’t worry. That’s not
to say that the material from here on in is going to be impossibly complicated, just
that it’s integral you nail down everything in these first two chapters before
pursuing with the rest of the book.

Trader Action Points

• Brokers are the third party connecting the trader with the financial
exchanges. Full-service brokers offer the client a range of services including
individual trade recommendations, investment advice and personal
consultations. Execution-only brokerages only facilitate the buying and
selling orders of the client. Individual traders will invariably use execution-
only brokerage houses.
• Because technical trading relies heavily on charts, good charting software is
essential in analysing the markets and formulating trading decisions.
• TradingView is a complete charting and analysis package. Set up a free
account at *REF LINK* and begin to familiarise yourself with the platform.
Locate each of the individual tools listed in the ‘Essential Charting Tools’
section.*
• There are 3 main order types when executing a trade: market, stop and limit
orders. Most trading strategies use stop (also known as entry) orders, but a

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 Brokers and Charting

trader should become familiar with the practical uses of all 3. The incorrect
use of order types may result in unnecessary losses.
• If you haven’t already opened an account, begin researching different
brokers, considering the list of things to look out for. When you have
conducted your investigation and are confident in your choice, open a small
live or a demo account.

*TradingView lets you favourite the tools, creating a customised toolbar containing only the ones
you select.

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 Market Structure, Price Action and Technical Analysis 2.0

CHAPTER 3 – MARKET STRUCTURE, PRICE ACTION AND

TECHNICAL ANALYIS 2.0
“I don’t look at the classical chart patterns (head and shoulders, triangles and so
on) as independent formations. Rather, I tend to look for certain combinations of
patterns, or in other words, patterns within patterns within patterns. These more
complex, multiple-pattern combinations can signal much higher probability
trades” – Al Weiss

This chapter is going to cover, in depth, the structural foundations of the trading
strategies you will learn in the coming chapters. We will explore the building
blocks that define market movement and learn the about the 2 quintessential
conditions that define all price movements: impulses and corrections. It is here,
where we will lay the foundation for understanding market movements and the
unique patterns they leave behind. We will cover, in significant detail the
importance of correctly identifying price structures, the implications and
complexities of multiple time frames and discover a simple 5-part classification
system which will catalogue every conceivable form of price movement. It is vitally
important the material presented here is assimilated on a subconscious level as it
will form the backbone of the 5 trading setups you will learn later. Therefore, I
recommend working through this chapter slowly, reviewing sections as many
times as you need to fully digest the content. There will be a direct correlation
between your internalisation of the information here and the results you achieve as
a trader, so treat it seriously and don’t rush the process.

Technical Analysis Vs Fundamental Analysis

When it comes to understanding and anticipating price movements in the financial

markets, there are two schools of thought: fundamental analysis and technical
analysis. Whilst this book and the subsequent work you will be doing will largely
concern the latter approach, let’s look at each of them in turn, starting with
fundamental analysis.

Fundamental Analysis
Fundamental analysis seeks to establish an assessment of value through the
careful scrutiny of financial statements, economic reports, marketplace
competition and earnings statements, attempting to understand all of the of the
variables that could affect the relative balance of supply and demand for a specific
stock, currency pair or commodity. Fundamental analysis focuses heavily on
mathematical models which weight the significance of these factors attempting to
project what the price of a financial asset should be at some point in the future.
Whilst sound in theory, there is one major flaw in this approach: it rarely, if ever
considers one of the most important variables which affects price movement:
other market participants. Whether these participants are hedge funds, financial
institutions or individual traders like myself, it's the people that actively buy and
sell financial assets that make prices move, not elegant mathematical models. A
fundamental assessment could correctly weigh the significance of any number of

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variables producing a logical projection and assumption of value. However, if the

traders and speculators, who are largely providing the majority of the trading
volume are buying and selling that asset based off a different expression of value,
it holds little bearing. In fact, many shorter-term traders have little concept of the
fundamental forces which supposedly affect prices, largely basing their trading
decisions off factors that are completely outside of the supposedly logical
fundamental models. This is in no way completely disregarding any form of
fundamental analysis, I simply wish to convey that it has little practical use for
short-term trading, the cornerstone of this book.

Technical Analysis
Technical analysis is the analysis of historical price movements themselves. By
shifting our attention to the actual price movements and therefore the behaviours
of the people that have created them, we can observe quantifiable patterns that
repeat themselves with a high degree of regularity and statistical reliability.
Technical analysis bypasses all the fundamental forces which 'could' move price
and focuses instead on the fact of price itself, organising the collective behaviour
of the individuals that are creating these price movements into exploitable trading
opportunities. The reality is that markets are driven by a plethora of reasons that
are almost impossible to effectively quantify. Technical analysis allows us to take a
step back and make objective trading decisions based off the result of all those
market-moving factors. Technical analysis uses charts - a graphical representation
of how price has historically moved. A chart can reveal important clues into the
underlying buying and selling pressure.
There is no one or correct way of performing technical analysis or reading a chart.
Some technical traders focus on trend trading using simple price patterns, others
rely heavily on mathematical technical indicators. By the end of this chapter, you
will have the technical framework I use and the accompanying tools that have
proven to be reliable over decades of historically tested data.

TA 1.0 Vs TA 2.0

Technical analysis (TA) has historically largely focused on simple chart patterns
and more recently, the use of sophisticated technical indicators. I call this technical
analysis 1.0. Trading based simply on where price is in relation to historical levels,
supported by the confirmation of secondary indicators misses one distinctive
piece of information: HOW it approached that particular level or formed that
specific pattern. Simple pattern identification gives you only a one-dimensional
view of the market, failing to consider the deeper intricacies of price action and
market structure. Though it is possible to trade by the simple identification of price
patterns, this approach misses a lot of the richness and depth of understanding
that comes from having a more advanced technical skill.
Consider the typical learning curve for the new trader. Most technical traders will
first start learning about various chart patterns, any number of candlestick
formations and the potentially hundreds, if not thousands of indicators available in
most modern charting packages. Yet the same trader also quickly realises that
there's an ever-widening gap between his level of knowledge and his actual

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bottom line trading results. This is the issue with TA 1.0. It focuses on one simple
thing: when to buy and when to sell. Through the myriad of indicators and
patterns it still fails to give the trader even a basic understanding of why markets
are behaving the way they are. There is no attempt made to understand the nature
of price movements. This is where TA 2.0 comes in.

Technical Analysis 2.0

Technical analysis 2.0 is the next level of technical trading. Grounded in clarity and
consistency, charts are kept as clean as possible putting the focus on where it
belongs: market structure and price action across multiple time frames.
Secondary, auxiliary indicators don't mess up the charts, causing confusing,
conflicting signals. Instead, trades are executed using price itself as the indicator,
rather than derivates of price. In the study of market structure, attention is placed
on how price created a pattern or structure and not so much on the structure itself.

Consider a typical TA 1.0 signal: those from support and resistance levels. In TA
1.0, the trader would identify support and resistance zones, levels where there is a
high probability price will reverse at. After the identification of a resistance zone,
the trader would typically go long should price break above the level, the
consensus being that the buyers have successfully overcome any overhead
resistance and is likely to rise much further. This is the flaw in TA 1.0. The emphasis
is solely on where price is, and not so much on how it got there. What if, in
breaking that same resistance level, price did it in the form on an ascending
channel, a structure we know has a high tendency to act as a reversal pattern? The
chart below demonstrates.

Image 3.1: The difference between TA 1.0 and TA 2.0 using a fundamental aspect of technical
analysis: support and resistance. The chart shows a structurally significant resistance level indicated

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by the blue zone which has multiple rejections (A, B, C and D). TA 1.0, with its emphasis on where
price is would go long as price breaks above the level to the far right of the chart. The green
dotted line shows where many systems would be buying, after multiple closes above the level,
indicating that price has successfully overcome any selling resistance the level represented and is
now ready to push higher. However, look at the ascending channel at E. We can see that whilst
price did break the resistance level, it did so in the form of a corrective ascending structure, a
reversal pattern, indicating that a drop was highly probable. Using the strategies you’ll learn later in
the book, the exact place where many technical traders, using only simple price identification
would have gone long and taken a loss is the exact point where we would have got short and
profited, using our deeper more intimate understanding of price action and market structure. The
table below examine more of the differences between TA 1.0 and TA 2.0.

TA 1.0 TA 2.0
Simple pattern identification Identification of recent & relevant
structures
Focus on where price is Focus on how price got there
Multiple technical indicators on the Clean charts, emphasising price action
chart
1-2 time frames A wholistic use of 4 time frames
Fixed entry types/trading setups Multiple setups depending on market
state
Static management methods Dynamic, hybrid management
methods
Focus on simple entry/exit points Focus on understanding the nature of
the market

Image 3.1: TA 1.0 VS TA 2.0

A Note on Indicators

Another core tenet of TA 1.0 is the use of multiple technical indicators, in addition
to volume bars and moving averages. My use of technical analysis and the strategy
that I will be showcasing requires the use of no additional indicators. It's important
to think deeply about what an indicator actually is and what it represents. An
indicator can only generate its signals from price information already displayed on
the chart. By default, every indicator is a lagging market signal that's telling you
something only after it has already occurred. Admittedly, indicators are displaying
this information in slightly different formats. Some focus on momentum, others on
where price is in relation to an average consensus of value, but their underlying
format is the same - the data that they're derived from is information already on
the chart in the form of the opening, closing, high and low prices. I can of course
only relate to my personal experience but after the careful study and application of
numerous technical trading indicators, used both as stand-alone tools and applied
as secondary tools to market structure and price action, it became increasingly
apparent to me that using indicators did not improve my trading performance.
Instead the use of such tools had the reverse effect, detracting my attention from
more important signals derived from market structure, price patterns and
momentum. Look at the differences in the charts below.

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Image 3.2: A typical trading screen using TA 1.0. The chart is cluttered with technical indicators,
moving averages and volume bars. It is hard to understand the nature of market movement when
presented with so much confusing and conflicting information.

Image 3.3: The same chart using TA 2.0. The chart is kept clean, emphasising only the most recent
and relevant price structures.

Scalping? Day Trading? Swing Trading? Position Trading?

Many technical trading systems fall into specific categories depending on the
length of time trades take to play out and the time frame in which they are
executed on. A day trading system would have all positions closed before the 24-

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hour mark while a swing trading style has trades last between 2 and 5 days. A
trend-style, however, may run into the weeks and months. So, what of the strategy
in this book? Where does it place? The answer is none of them…and all of them. I
believe this incessant need to categorise every system into a rigid box-like
framework is the work of TA 1.0. Instead, our focus is on what the market is
presenting to us in the form of high probability trading opportunities and
leveraging those opportunities for maximum profitability, not on rigid definitions
of trading styles. As you’ll learn, all trades are executed on either the 1-hour or 15-
minute chart, but position length can last anywhere from a couple of hours to 4 or
5 days in some circumstances. In other words, we trade according to our specific
setups and manage those trades using predefined parameters and let the market
take us out, regardless of how long that takes. From the study of my most recent
trades, the current average trade length is just over a day. However, it would be
wrong to conclude that I am therefore a day trader. As mentioned, there are many
occasions where positions will run longer than that.

The Holy Grail to a Deep Understanding of Market Behaviour:

Market Structure and Price Action

With a firm understanding of why technical analysis 2.0 will be our weapon of
choice in navigating and trading the financial markets, we’ll begin our journey into
TA 2.0 itself. That begins with market structure and price action.

Price action can be considered a complex and sometimes hard-to-define subject.

For the purposes of this book, price action simply refers to the movement of price.
It's that simple. It's how the market is moving over whatever time frame you're
looking at. Price action is the term I'll use to describe the market's movements in a
dynamic ever-flowing state. Market structure, however, is what is created by price
action. It's the discernible patterns and structures that are left behind; the static
records of how price has historically moved. It is market structure, the nature in
which price has moved and the patterns it has created that allows us to forecast
likely price direction.
Popular trading author Adam Grimes used the analogy of a finger tracing a
pattern in sand to exemplify the difference between price action and market
structure. Market structure is the overall pattern that's left in the sand, whilst price
action is the actual movements of the finger as it draws the pattern. The finger
could be fast or slow, smooth or volatile and logical or erratic. We can liken this
this to price action which could also be fast or slow, smooth or volatile, logical or
erratic. Is price indicating that further continuation is likely after an impulsive
upside move by maintaining these new prices or is the market retracing quickly,
indicating that sellers are likely coming in at these elevated prices? If the market is
heading to the downside, is trading impulsive or is it correctively trickling down
with low volume and back and forth movement? It's these characteristics, that
combine to help describe and define how the market is moving as well as
providing us with the short and long-term directional biases that will allow us to
place profitable trades.

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Impulses & Corrections

To understand market structure, we must first be able to differentiate between the

2 different phases of market movement; impulses and corrections for it is the
latter, corrections, which form discernible structures which we will use for our
analysis. Literally all price movements fall into one of these two categories. Price
movement can either be impulsive or it can be corrective. It is imperative you
grasp this simple principle now because everything from this point on will based
on it. Let’s further our study of each, starting with the perhaps simplest of the 2,
impulses.

Impulses

Impulses are characterised by sharp price movements with a very clear directional
bias. The market knows in what direction it wants to go and it's going there,
aggressively. Impulses are typically fuelled by the flow of institutional money.
These market operators have large pools of capital, which, when moved quickly
creates strong directional price movements. They are easily recognised on the
chart and are not subjective or open to interpretation.

Image 3.4: Examples of impulses

Corrections

Corrective market conditions are characterised by choppy, low volume price

movements. The market may be moving but it's no doing so with any real
conviction. Instead, it's just trickling around. An important note on corrections:
they can be ascending, descending or sideways, all of which will be explored
individually shortly. The differentiating factor that separates an impulse from a
correction isn't so much in what direction it's going in, but in how it's getting there.
Corrections are again, very easy to recognise. An easy way to identify a correction
is by asking the simple question “Is it an impulse?”. Remember, all market price
movements are either impulsive or corrective. By default, if it’s not an impulse, it’s
a correction.

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Image 3.5: Examples of corrections

What am I presenting to you here is not my own work and there is much to be said
about the achievements and discoveries of the market experts who have come
before me. It is not my aim to simply present the ideas of other trading educators
but to build upon their foundational understanding of market behaviour, hopefully
providing the reader with a deeper understanding of these ideas and how they
can be used for real-world trading analysis.

In chapter 7 you will learn the specific techniques we use to exploit these
structures into actionable trading ideas with specific entry and exit points as well
as tips for active trade management. You’ll learn strategies that will position you
into a trade as price rejects from the third touch of a reversal channel, one that that
takes advantage of a reversal structure’s natural proclivity to breakout, the Type 1
entry methods used to capitalise on Bull and Bear Flag continuations, as well as
CounterPatterns; a more advanced set of trades that will extract short-term profits
while price is locked in a higher time frame correction. However, at this this stage,
what’s more important is understanding the directional tendencies of these
patterns. With that said, let’s look at each of the 5 possible variations stemming
from impulsive and corrective market behaviour.

It’s as Easy as 1,2,3….4,5

As we know, the market is forever moving in one of two states: impulsively or

correctively. All price action, regardless of market or time frame can be
categorised into one of these two conditions. I stress the importance of this point
again because it forms the basis of everything we will build upon from here on out.
All market movement is either corrective or impulsive, that is, it is moving
aggressively with a clear directional bias or it is not; price is instead simply trickling
around. Impulses by default are either upwards or downwards - you can’t have a
sideways impulse. Corrections, however, can have one of three directions;
upwards, downwards or sideways.

With this understanding in place, we can now create a simplified 5-part

classification system of all possible price movements:

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Image 3.6: A simplified model of all possible price movements. Corrective price action can be
ascending, descending or sideways. Impulsive price action can be upwards or downwards. The
result is 5 categories of price movement that define all market movement.

Natural Progression

Before we begin our study into each of the movements which make up this system,
we must understand the logical and expected price movements that arise from
them. I call this natural progression, the tendency for the market to move in a
series of logical steps after the formation of particular price structures. Identifying
and classifying the 5 possible price movements serves one incredibly useful
function: being able to establish a directional trading bias based of the current
structure.

Let’s now explore each of the 5 price movements, applying the concept and
natural progression as well as the theoretical understanding of each one. Simply
acknowledging the presence of any of these patterns is not sufficient, for there
must be a solid theoretical premise underlying any observation in the markets.
What I'm suggesting is that it's not enough to simply observe and acknowledge
that particular price patterns are present in the market but to actually be able to
articulate why it's happening. Understanding why something is occurring rather
than simple observation leads to enhanced confidence in our trading.
Our study begins with the 2 simplest yet most fundamental patterns that defines
market movements: upwards and downwards impulses; powerful price moves
which play out over any market on any time frame.

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Impulsively Upwards

Image 3.7: 2 clear directional impulses to the upside, separated by a small correction. The
impulses are easy to spot; the market has moved up aggressively relative to all previous price
action. There is strong buying pressure driving the market to the upside.

Natural progression
Impulses are usually driven by strong institutional interest. Deep, liquid markets
don’t make impulsive moves without the commitment from large pools of capital.
The natural progression after an upwards impulsive move is a small corrective
pattern, before another upwards impulsive move. Consider the typical process for
large institutions when they are accumulating a large position, generally doing
their buying in chunks. As to not overwhelm the market with such a large amount
of demand, they will buy only a segment of their intended position. As this initial
buying pressures dries up, the market begins to consolidate. An equilibrium of
buying and selling pressure means to market is now trapped in a range which will
either be sideways or counter to the previous impulse. There exists many different
labels for these moves; pullbacks, corrections and consolidations, but regardless
of the exact name we tag onto price action of this nature, they are all functionally
the same: they all describe what is happening, which is a pause, consolidating the
energy of the previous impulse, likely in preparation for another impulse in the
same direction. Think deeply about what the correction is indicting. The market
has moved impulsively to the upside and price is able to hold these new prices. It
has not been met with selling pressure, telling us that there is still likely buying
pressure and interest at these levels. After having stagnated in the low momentum
correction, the institutions resume their buying activity and along with individual
retail traders jumping on for the ride up, the balance of supply and demand tips to
the latter side. The emergence of this second bout of momentum causes price to
break out of the consolidation range, signalling another impulsive move is
probable. This is the natural market progression: the initial upwards impulse (1), a
sideways or descending corrective channel (2) and then another impulsive move
up (3). This simple 3-part impulse, correction, impulse pattern occurs with such a

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high degree of statistical regularity that it becomes the basis of 2 of the setups you
will learn later in chapter 7, Bull and Bear Flags.

What's most fascinating about this simple yet profound pattern is the consistency
to which it repeats itself on any time frame. Regardless of whether you're studying
an extended trend in 2 currencies over years or an intra-day trend spanning hours,
it is easy to find examples of the same impulse-correction-impulse structure. I
often joke with other traders about the sheer regularity in which this pattern occurs
because once you have trained your eye to spot them, the “once you see it, you
can’t un-see it” adage becomes rather appropriate. You will simply not be able to
ignore the many instances of this pattern playing out when you have become
attuned to its identification. Study image 3.8 below.

Image 3.8: Multiple instances of upward impulses followed by sideways or downwards corrective
patterns. This is natural market progression. It is easy to understand why, after seeing an upside
impulsive movement and a correction, we would be anticipating further price continuation.

Consider the alternate scenario. The market moves up impulsively. However,

rather than correcting, the market quickly encounters selling pressure, as traders
who deem these newer, elevated prices simply too high become eager to enter
short, tipping the scales of supply and demand to the supply side. The pursuing
result is a quick retrace of the previous impulse as in case of image 3.9. This is not
natural progression.

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Image 3.9: The market makes a strong upwards impulse (A). However, rather than correcting
sideways, indicating further continuation is likely, price quickly retraces (B). This is not natural
progression.

Impulsively Downwards

Image 3.10: 2 clear directional impulses to the downside, separated by a small correction. The
impulses are easy to spot; the market has moved down aggressively relative to all previous price
action. There is strong selling pressure driving the market to the downside.

Natural progression
As we have just seen, one of the most repetitive and quantifiable aspects of
technical analysis is for price to make impulsive, momentum-driven movements
out of periods of contracted volatility. The exact same concept that we have just
discussed for the upwards impulse apply exactly the same for the downwards

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impulse. We will however, briefly look at the mechanics again.

Strong selling pressure has pushed the market to the downside. The move is
impulsive relative to recent trading and price action. The sell-off was most likely
driven by a strong round of institutional selling activity. However, and this is a key
lesson, what exactly caused the sell-off isn’t your concern. Don't try to understand
every market movement. Doing so will only cloud your mind with non-essentials.
Just recognise movement is present and take advantage of it by finding specific
entry points in alignment with your plan.
Regardless, the market has made a sharp downside movement. Natural
progression suggests that we first need to see a corrective pattern that is either
sideways or counter (ascending) to the first impulse. As the selling pressure
continues, a successful breakout leads to another downside impulse. It is the same
3-part impulse, correction, impulse pattern as before, simply reversed to the
downside. Refer to the image below.

Image 3.11: Multiple instances of downside impulses followed by sideways or ascending

consolidation patterns. This is natural market progression. It is easy to understand why, after seeing
a downside impulsive movement and a correction, we would be favouring further price
continuation.

The other possible alternative is after the market impulses to the downside, rather
than correcting in anticipation of another move lower, the market is quickly met
with buying pressure. Traders have collectively deemed these depressed prices
low enough to warrant a buy position. To them, these low prices give them an
opportunity to buy at a great area of value. Should enough traders and operators
have the same view, the inevitable result is a quick retrace of the previous impulse
as in case of image 3.12. This is not natural progression.

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Image 3.12: A strong downwards impulse (A) is immediately followed by an equally strong up
move which retraces all the ground covered by the impulse. This is not natural market progression.
For a downwards move like A to continue, we must first see a correction which is either sideways or
counter to the preceding impulse. This indicates the market is able to hold its’ new elevated price
levels and, upon successful break of the correction, is ready to continue its impulsive trajectory.

We now move onto corrections. Corrections are choppy price movements; price is
simply trickling around in either an ascending, descending or sideways fashion.
Corrections are inherently more complex than impulses because of the various
forms they can come in. Unlike impulses, corrections can be drawn onto the chart
to form discernible price patterns, in the form of either ascending or descending
channels. These are more complex structures than impulses because of the
number of different possible formations. However, despite all the possible slight
differences in length and shape, the directional bias, the natural progression of
these channels is very simple: they are reversal structures. A reversal pattern is a
structure in which price is likely to move in the opposite direction to how the
channel is moving. By learning how to identify these structures, we are able to
anticipate and position ourselves into the next impulse. Do not feel discouraged if
this idea at first seems confusing, as we will cover many examples of these ideas
throughout this chapter and in chapter 7 on trading setups.

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Correctively Upwards

Image 3.13: Price moving correctively to the upside, forming a large ascending channel.
Ascending channels are characterized by at least 3 clear rejection points on either the top or
bottom of the pattern. These channels typically indicate a potential reversal to the downside is in
play.

Natural Progression
An upwards or ascending correction is suggesting that the market is running out
of steam and that it is unstainable for the market to continue moving in this fashion
without a drop to the downside first. Think about what the presence of the channel
is telling you: the market is losing momentum; it doesn’t have the underlying
buying pressure to drive to market up impulsively, instead only being able to
slowly trickle price to the upside. There is no inherent buying power in a move like
this and when the small amount of buying pressure does fade out, the result is
often an impulsive down move as price drops out of the channel.

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Image 3.14: After forming an ascending corrective channel, price impulsivley breaks to the
downside. This is natural progression. Pay attention to the right side of the chart and examine how
price broke the channel; in the form of the impulse, correction, impulse pattern we have just
studied.

Now consider the alternative scenario: the formation of an ascending channel and
rather than a downside breakout, price pushes instead to the uspide, breaking
free from the reigins of its current structre. Whilst the statistical tendencies of these
patterns would suggest this is the lower-probabilty possibility, it still exists as just
that, a possibility. These patterns are not completelty infalliable, they do not have a
100% reliabilty. However, they do, more often than not provide us with vital clues
as to the likely direction of the market. When they don’t play out as expected, as
natural progression would suggest, it is simply a pattern that didn’t play out. I have
provided an example of just such a situation below.

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Image 3.15: Price impulsivley breaks out to the upside, counter to the directional forecast the
ascending channel provided. This is not natural progression.

Correctively Downwards

Image 3.16: Price moving correctively to the downside, forming a descending channel.
Descending channels are characterized by at least 3 clear rejection points on either the top
or bottom of the pattern. These channels typically indicate a potential reversal to the
upside is in play.

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Natural Progression
You can apply the same theory and rules to the descending channel as you can
the ascending correction we explored in the previous section: descending
corrections form reversal channels often driving price to the opposite direction in
which it is moving. A descending correction is suggesting that the market is
running out of steam and that it is unstainable for the market to continue moving
in this fashion.

A descending channel is showing that the market is losing momentum; it doesn’t

have the underlying selling pressure to drive the market down impulsively, instead
only being able to slowly trickle price to the downside. There is no inherent selling
power in this move and when the small amount of selling pressure does fade out,
the result is often an impulsive up move as price pushes out of the channel.

Image 3.17: After forming an descending corrective channel, price impulsivley breaks to the
upside. This is natural progression. Pay attention to the right side of the chart and examine how
price broke the channel; in the form of the impulse, correction, impulse pattern we have just
studied.

The alternate scenario is of course, a pattern failure, where price simply continues
to break down impulsivley, as in the chart below.

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Image 3.18: A decsending channel forms, but rather than confirming the directional bias of the
channel, price drops of the channel to the downside. This is not natural progression.

Correctively Sideways

Image 3.19: Price moving correctively sideways.

Natural Progression
The rules for the third and final variation of the correction are somewhat different
to its ascending and descending cousins. These sideways structures typically serve

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as a conituation pattern if the preceding move was an impulse. Extedend sideways

corrections which occur in the randomness of price action, not preceded by any
clear directional impulses are merely random price action with no practical utlity
for our trading. Image 3.19 above is an exampe of just such a channel. Whilst
sideways, it is not preceded by any clear impulse, it is simply random back and
forth movement. If however, the previous move had been a strong upside impulse
and then the formation of the sideways channel, natural progression would
suggest that further contiued upside movement is probable. In this instance, the
channel is acting a pause, consolidating before the next bout of momentum.
Review the small corrections we saw in the first 2 sections on the up and down
impulses – the small patterns which formed after the initial impulses. Sideways
corrections are very much the same, just larger.

These 5 categories of price movement provide an excellent foundation in which to

start assessing and analysing price movement. While the above examples are a
deliberately oversimplified way of looking at the markets, it does provide the
trader with a simple and consistent labelling regime, one which will provide the
necessary framework we need when we study the specific 5 trade examples in
chapter 7.
Market movements are inherently complex and can sometimes fit into more than
one of these movements, as we shall see in Multiple Time Frame Analysis where
we investigate the complexities of what I call the Matrix of the Market. However, at
this stage in your development, it is enough to simply understand the basics of
these 5 movements and the expected natural progression of each. I would
recommend before continuing, you study this framework carefully. Pull up the
charts of some of your favourite currency pairs or stocks and on whatever time
frame of your choosing, begin to identify these various classifications of market
movement – find examples of when that market was impulsive and when it was
corrective. Roughly draw in the corrections using the tools in your charting
provider. When you train your eyes at spotting the differences between these 2
phases, it will serve your trading greatly as we continue to build up and expand
your technical repertoire.

The Beginning of the Correction: Key Inflection Points

As we learnt in the previous section, ascending and descending corrections

typically lead to price reversals. However, we can’t assume that every successful
breakout will result in extended trends. Of course, this is the ideal outcome if you
have already positioned yourself into a trade on or before the breakout. But
understanding the likely termination points will better equip you in managing your
expectations of the trade and one of the first probable termination points for the
new impulse is the correction’s first defined touch point. This inflection point
should also be considered as a possible profit target or it should at least act as the
first area for where traders should be on the lookout for signs of potential failure.
The following 2 charts demonstrate.

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Image 3.20: The start of the correction is a possible inflection point when the successful breakout
of the channel occurs. As you can see in this example, after the breakout of the channel, price
reaches the level marked A before staging a significant downside reversal. On TradingView, use
the ray line tool to draw a horizontal line from the start of the correction.

Image 3.21: Another possible inflection in an ascending channel. This example shows how these
areas are only possible areas of interest, not guaranteed reversal areas. In this case, price traded
through the level as if it didn’t even exist.

Drawing Structure

I hope at this point, after having internalised some of the information so far you
have begun to have a couple of “uh-huh” moments, those epiphanies when
something really clicks, and you begin to extrapolate that knowledge to your own
circumstances. That is good. That means you have understood the practical

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implications of what I am presenting here and the ways in which it could positively
impact your trading. By this point, you understand that the market has two distinct
phases, impulsive price movements and corrective price movements. You know
that corrections typically form distinct price structures that we can identify and
draw onto the chart. The next natural and logical step in your education is in the
actual identification and drawing of these structures.

As we know, price movements are driven by people; the entities buying and
selling in the markets. The drawing in of structure and price patterns allows us to
convert this human psychology into graphical, visual representations that allow us
to quickly assess the current state of the market and the likely probable and
possible scenarios for price movement. Therefore, learning how to correctly
identify and draw relevant market structure will be one of the most important
technical skills you’ll learn as a trader.
To draw structure, we will use a ‘top down’ approach, progressively zooming
closer and closer into the market action to get a wholistic understanding of how
price is moving. We will begin with the daily and 4-hour charts, working our way
down to the 1-hour chart, sometimes using the 15-minute for extra refinement and
precision.

Identifying relevant market structure can become subjective so it's important to

have steps and a set process in place. Consistency is key. The 4 steps are simple.

Step 1: Identify Support and Resistance

Start with the daily chart and identify the relevant support and resistance zones.
These should be evidently clear reversal zones. Look for levels in which price has
reversed at least 2, ideally 3 times.
These levels are one of the simplest yet most fundamental aspects of technical
analysis. Support levels can be thought of as a price level at which a sufficient
amount of demand is able to slow down, or possibly reverse, a price decline. The
inverse definition is true for resistance levels. A perhaps easier way to understand
support and resistance levels is to imagine them as floors and ceilings,
respectively, which can potentially prevent price from rising/falling further. One of
the tenets of technical analysis is that markets have memories. Significant price
levels where price has reversed from in the past can act as significant inflection
points in the future. It’s easy to see why this would be true: traders are naturally
going to be watching levels in which price has reversed from two or more times,
perhaps even basing their buy or sell decisions at the levels themselves. Think of a
down-trending market. As price continues dropping to the downside, a support
level, one which has acted as the catalyst for multiple price reversals previously is
drawing closer. As price approaches, traders who are currently short begin
unloading their positions anticipating that further downside movement is unlikely.
Equally, traders, anticipating the reversal to the upside are patiently waiting with
their buy orders, ready to get long as price reaches the all-important level. The
pent-up liquidity at these levels will overcome the selling pressure enough to slow
down the price decline or even reverse it completely. Again, you can apply the
inverse relationship to that of a resistance level in a rising market. The theoretical

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concept is so unadorned that many traders get drawn into placing too much
emphasis on them. It’s easy for novice traders to be misled into thinking trading is
as simple as buying at support and selling at resistance. However, markets have so
many competing fundamental and technical variables that it’s easy to find many
possible instances of support and resistance levels, most of which are no more
significant than the next. We must therefore only focus on the most structurally
significant zones; the ones found on the higher time frames.

Image 3.22: Drawing structure begins on the daily chart with the identification of the most
probable support and resistance zones. Use the rectangle tool on TradingView to mark the zone
on your chart for future reference. Here, you can see defined rejections off the level at A, B and C.
Traders could have identified this zone after the first 2 touches (A & B) as a potential reversal zone
which was confirmed when price rejected the third time at C. A final note on C. B’s rejection occurs
in late April 2018, while C occurred at the start of September 2018. Despite a near 6 month wait,
the level still remained structurally significant. Markets have memories.

Step 2: Define the Current Structure

Remaining on the daily chart, find the most recent impulsive leg, connecting the
significant highs and lows immediately following. Providing you can connect 2
clear rejections on both the highs and lows, you should be able to start defining
and drawing the current structure. Remember the structure we’re looking to
identify occurs after the most recent market impulse. If it’s currently impulsive from
this higher time frame perspective and there are no discernible patterns, simply
proceed to the next step.

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Image 3.23: Still on the daily, find the most recent clear impulse leg (A) and the connect the
significant highs and lows of the structure immediately following (red circles).

Step 3: Refine on the 4-hour

Use the 4-hour chart for extra precision.

Image 3.24: Drop down to the 4-hour chart and refine the trendlines you have identified from the
daily chart. Connect them to the wicks (arrows).

Step 4: Drill Down to the 1-hour

Drill down to the 1-hour chart, locating and marking in structure not visible on the
higher time frames.

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Image 3.25: Using the 1-hour chart, draw structures hidden on the higher time frames. Use the
same rules as before: identify the most recent impulse move (A) and connect the highs and lows of
the following pattern (red circles).

Probable Vs Possible

As you begin to identify and draw in structure, the dynamic realities of price
movements mean it’s not uncommon to spot multiple potential price patterns and
possibilities – simultaneously. I call this the probable and the possible. This can be
confusing for the novice trader as the presence of different structures can signal
different directional biases causing conflicting signals. However, this needn’t be to
our detriment. In fact, remaining aware of multiple possible formations and
structures can help us manage trades and locate possible reversal points,
revealing alternative trade entries if our favoured forecast fails to play out, as the
image below demonstrates.

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Image 3.26: The probable and possible. Multiple price structures identified, each with its own
directional forecast. By using 2 different forms of lines, I can identify the higher-probability
structures (the probable) in solid lines whilst still being aware of the other scenarios (the possible)
in dotted. In this case, there is a clear corrective channel (solid lines). Price then forms a clear Bull
Flag after a strong impulse (A). Anticipating a strong break of the channel and a potential move to
the start of the correction (blue line), I go long on the break of A. As price develops, it looks like
another corrective pattern has started to form (B). Because it is still probable we will see continued
upside, I draw the new channel using dotted lines to show me the other alternative possibility.
Continued price development sees another smaller channel (C) form within the larger B channel.
With 2 other identified possibilities, I understand it is likely we could see a price reversal at the
point where the 2 possible channels intersect (red circle). Should price display signs of reversal at
the point, I can close down the original long position for a profit and begin to flip my bias and look
for entries to the short side. I remain neural because I understand that multiple scenarios for price
movement exist and I do not need to be locked into one rigid expectation in order to make profits.
This is a core trait of successful traders.

Invalidated Structures

Every structure we identify has a specific directional forecast attached to it. An

ascending correction has a bearish bias, a descending correction, a bullish one
etc. But of course, as with anything in trading, nothing works 100% of the time.
These structures are not infallible. Sometimes, they are wrong. Sometimes, the
logical and probable directional forecast doesn’t play out. How then, do we know
when a structure is still valid and when it is not? How do we determine when the
trading utility of that pattern is no longer present?
There are 3 key steps that signal a pattern has become invalidated: a break of the
pattern counter to its directional bias, a continuation pattern and another
impulsive move away confirming the initial break. Let’s cover each in more detail
before looking at a real market example.

Step One: The first prerequisite is an initial impulsive breakout of the structure in
the direction counter to the directional bias the pattern provides. Imagine an

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ascending corrective channel. Probability suggests this will at some point, break to
the downside. If price then, aggressively, impulsively pushes out of the channel to
the upside, that is your first warning sign that something has changed. Price has
penetrated the channel counter to our directional forecast.

Step Two: A continuation occurs after the initial impulse out. An impulse out of a
structure is not enough. We must see a correction before concluding that a
genuine break has occurred. Remember to look at the market in terms of natural
progression. If price impulsively breaks out of the current structure or pattern,
always ask yourself "what happens next?". Is it correcting, in which case
continuation of the move is more likely or is price immediately retracing back into
the original pattern?

Step Three: There is continuation after the correction. The fact price is again,
impulsively moving away from the correction is evidence that there is sufficient
follow-through behind the initial move which broke the structure.

Image 3.27: Price is trading within an ascending channel, suggesting a downside breakout.
However, price impulsively breaks out of the channel (A) counter to this directional bias by pushing
to the upside (step one). Price then forms a tight correction (B) suggesting there is underlying
buying pressure that could carry this move higher (step two). Finally, price continues its initial move
(C) in the form of another impulse (step three). All three conditions have been met to conclude that
the original ascending channel is now invalidated. The moment price broke out at C, it lost any
practical trading benefit or directional forecast.

At the point where all three of these conditions have occurred, there is evidence
that a structure has become invalidated. Either of these first two criteria alone is
enough evidence to suggest that there is a probable structure invalidation.
However, natural progression requires us to see the completion of all 3 steps
before we can conclude a structure is invalid. If after the initial impulse out of the
structure, price fails to complete steps 2 and 3, and instead moves back into the

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pattern, there is no progression. It could be forming a larger structure or an

entirely new one. The next step is to reassess and possibly evolve the structure.

When There's No Progression, Evolve

Structure is not a fixed static piece of market furniture. As price action develops,
market structures are likely to change. Patterns can evolve into larger versions of
themselves or even develop into entirely new price patterns. What starts off at one
point as a tight ascending channel can evolve into a much bigger channel.
Knowing when to evolve structure is an important skill as initially identifying it. So,
the question becomes: how do we know when to evolve a pattern and when it’s
simply invalidated?

Remember, we’re always looking at the market in terms of natural progression.

Let’s quickly review what natural progression means: it’s the natural movement of
markets; the tendency for markets to move in a series of impulses and corrections.
In its simplest format, the market moves impulsively in one direction, corrects and
then continues its movement in the form of another impulse. Looking at the
market from this perspective, it’s then only logical to reason that after the
impulsive break of a correction, natural progression would mean we would see a
correction before another impulse away. It’s the simple 3-step process we covered
in the previous section. But what about the alternate scenario? What about when
after the breakout, rather than seeing a correction and another impulse away
(steps 2 and 3), price simply retraces back into the original structure as in the
image below? We simply evolve the channel to encapsulate this new price action.

Image 3.28: The same channel from image 3.27. Price breaks out counter to the directional bias
(A). Price then immediately retraces back into the original structure. Steps two and three have not
been satisfied, as thus no natural progression has occurred. We can now, evolve the structure to
encapsulate the recent price action, as below.

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Image 3.29: The channel is evolved. The dotted line shows the original structure, the solid one
shows the evolved form incorporating the new price action. Structurally, despite the impulsive
breakout, nothing has changed – this is still an ascending reversal channel with a downside bias.

The above chart examples demonstrate when and how to evolve when price
breaks out counter to the correction’s directional forecast. How and when then,
do we evolve when price breaks out in the anticipated direction? The exact same
rules, using the concept of natural progression apply. Study the following
examples carefully.

The market has been moving correctively into a key resistance zone. The
correction has formed an ascending channel in which price has trickled within 2
converging trendlines. As price nears the resistance level, it impulsively breaks the
channel. Price then corrects, forming a clean small corrective pattern. This is
natural progression: the market has impulsively broken the reversal channel, the
correction has signalled that there is a sufficient amount of selling pressure at
these lower levels to prevent it from retracing back to the upside and that another
downward move is now probable. The correction has played out as anticipated
and natural progression has confirmed it.

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Image 3.30: Price has traded correctively forming an ascending channel as it approaches a key
level of higher time frame resistance (not shown). Price breaks impulsively out of the channel at A.
Price then forms a correction (B), suggesting continued downside is probable. We see further price
continuation at C. This is natural progression.

Now, let’s look at the same scenario but with an alternate possibility, one in which
natural progression doesn’t occur. As before, we have an ascending channel
moving into a key area of resistance. By default, we have a downside directional
bias. We wait for price to successfully break the reversal channel, confirming our
bias and to wait for the first continuation pattern for a trade. Price does indeed
break the channel impulsively but rather than forming a continuation pattern,
instead immediately retraces back into the original channel. Price failed to hold
the new low prices, instead meeting sustained buying pressure, pushing it back
into the initial structure. This is not natural progression. While price did break the
channel in the form of an impulse, the absence of the small correction, suggested
that there wasn’t enough selling pressure to continue this move. In other words,
there was no progression. Because price moved back into the original channel, we
can evolve the structure to include this new price action. The pattern may have
evolved slightly, but the structure still remains consistent to our initial thesis: that
this is a reversal channel to come to the downside. Therefore, it’s important not to
‘marry’ our trendlines and patterns. They are subjective tools designed for one
purpose: to help us identify the current state of the market as it appears at that
point in time.

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Image 3.31: The same channel as before. However, upon breaking out at A, price has immediately
retraced backed into the original structure. There has therefore been no market progression.

Image 3.32: The structure is evolved to encapsulate the new price action. The dotted line shows
the original structure, the solid lines show the evolvement of the pattern – a more parallel price
channel. The structural integrity of the original pattern has not changed, it is still a corrective
ascending channel with a downside reversal bias. However, the exact shape and formation of it has
changed to include recent price action.

Drawing Structure: An Assignment

That concludes your master class in market structure. You now have the tools you
need to start identifying relevant structures as well as the rules to know when they
are invalidated and when they need to be evolved to embody new price action.

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Before we move onto the final piece of the puzzle that will give us a wholistic
understanding of market structure and price action, I would encourage you to
spend some time applying the knowledge you have learned to your own charts
with an assignment of sorts. Use the rules and framework in the previous few
sections to begin identifying structures on the charts of your favourite currency
pairs or stocks. Observe price behaviour as it breaks the structure. Find instances
when you would have invalidated a structure which didn’t play out as expected
using the 3-step process and those occurrences when you would have evolved the
structure to embody new price action. The bar replay tool on TradingView will
help you, allowing you to rewind price, blocking any future price action from your
view. I recommend using the 4-hour chart to perform this exercise with an aim of
working through a year’s worth of price data over a handful of different assets. This
exercise will not only help refine your pattern recognition skills, but also deepen
your understanding of the nature of these structures on a more subconscious
level. You will experience for yourself, the sheer degree of regularity to which
these structures play out and the resulting price action associated with them. After,
and only once you feel entirely confident with all the ground we have covered thus
far, proceed onto the next section where we begin to explore the intricacies of
multiple time frames.

Multiple Time Frame Analysis: The Matrix of The Market

Financial markets are fractal by their very nature, that is, the patterns and
structures which are built on the daily chart are made up of the same patterns on
the lower time frames. Price action on the 5-minute chart combines to form
patterns on the 15-minute chart, the 15-minute chart creates patterns on the
hourly, the hourly on the 4-hour and so on and on. The end result is an endless
amount of possible variations of interwoven patterns from multiple time frames all
suggesting and indicating different possible price movements. I call this the matrix
of the market. This is an incredibly important concept for the trader to understand.
No pattern exists in isolation, the pattern being observed on one time frame is
built of similar structures on the lower time frame. The understanding of this
concept will be one of most performance-enhancing ideas a trader could learn.
Applying it to your trading could save you many frustrating, often-unnecessary
losses and will help you better capitalise on your profitable trades. Traders must
become comfortable with the idea that time frames are not one dimensional,
operating in isolation. Instead, they are inextricably intertwined. This is why
multiple time frame analysis is so important and the focus of our study in this
section.

Multiple time frame (MTF) analysis adds a layer of depth and understanding to
market analysis that would simply be impossible to ascertain without it. If I had to
summarise the significance of multiple time frame analysis using one word, my
response would be simple: context. MTF analysis places structures on one time
frame in the context of higher time frames. The skilled use of MTF analysis allows
traders to better pinpoint their entry points as well as being able to filter out and
better manage their trades. Whilst it is the 1-hour and 15-minute charts that act as

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our main entry time frames, they serve only one purpose: to locate high
probability entry and exit points. The overall analysis and directional bias,
however, is built from the higher time frames. In other words, every trade we take
is predicated off the higher time frames.
For our uses, the higher time frames are the daily and 4-hour charts. They help
provide a bigger picture perspective, showing us where the predominant
direction is. The lower time frames, the 1-hour and 15-minute charts are our entry
charts used to find precise trade entry points. Imagine them as like getting
binoculars and looking more closely into what is going on with the individual
candles on the 4-hour and daily charts.

This can be a difficult body of knowledge to learn because of 2 reasons. The first is
that developing traders seldom attempt the subject material without having first
fully understood the structures and the implications of those structures on a single
time frame. This sets up one major problem: it is impossible to comprehend the
intricacies of multiple time frames until you are competent in reading a chart in a
single time frame. The second reason why MTF analysis can be difficult for the new
trader is because it cannot be easily reduced to a simple rule set or process.
However, there are some common denominators and recurrent concepts and this
section aims to examine them and their practical trading implications.

We’ll start our study of the time frames with a top down approach starting with the
higher time frames and working our way down, detailing real examples of how
MTF analysis can improve our trading decisions.

Higher Time Frames

The higher time frames are the daily and 4-hour charts. As a general rule, they are
more significant than the lower time frames. In a practical sense, higher time frame
information can filter out lower time frames trades and add confidence to trades
by identifying the current state of the market, whether that is impulsive or
corrective, allowing us to forecast the likely directional momentum. Let’s look
through each in turn, along with actionable steps to get the most for your own
practical trading analysis.

Filtering Trades

The first use is as a filter for trades on the lower time frames which are not in
alignment with the higher time frame directional bias. Image 3.35 is an important
example which illustrates what could have been considered a good setup for a
short on the 1-hour chart. The correction after the strong downwards impulse
suggests the possibility of a breakout below the flag.

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Image 3.33: The strong downwards impulse at A and the corrective price action at B could have
many traders looking for a setup to get short this pair, anticipating further downside pressure.

From this perspective, does this look like a good short setup? If you had answered
“I am not sure, I need more context and information”, you’d be completely right.
Whilst the criteria for a short have been met from this time frame, a trader must
understand what is happening from a larger perspective before any valid trading
inferences can be made. In this case, the higher time frame (the daily chart)
provided valuable context showing that the flag was contained in what was more
likely to be a Bull Flag, a slightly descending correction with an upside bias.

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Image 3.34: The daily chart of the same pair at the same moment in time as chart above, putting a
clear bullish sentiment on an otherwise bearish hourly chart. From this perspective, we can see that
price has actually broken out of the descending channel (A) in the form of an impulse (B) and has
since formed a smaller continuation structure at C. Natural market progression would suggest it is
probable we would see a continuation of this move carrying price to at least the start of the
correction (blue line). Knowing the longer time directional forecast was bullish, you could have
filtered out the short setup on the previous chart, preferring to find setups in alingment with the
higher time frame structure and momentum. If you had decided to take the short in the first chart,
ignorant to the context being provided by the higher time frame perspective, you’d have taken a
loss as the higher time frame Bull Flag took over and propelled price to the upside.

This is a perfect example of times frames offering conflicting directional signals. In

this example, the higher time frame provides a bullish bias – a Bull Flag which
contradicts the smaller Bear Flag pattern on the hourly time frame. Of course, the
daily Bull Flag could potentially fail, breaking strongly out to the downside, but in
this instance, the probabilities favour an upwards price move. And as traders, we
always want to be alignment with what the probabilities suggest. The directional
bias provided by the higher time frame should always take precedence over the
directional bias provided by the lower time frame. That previous sentence is worth
highlighting and repeating as it may just save you many frustrating losses. With the
higher time frame directional bias established, look to position yourself on the
lower time frames in the same direction*. At the very minimum, always remain
aware of patterns on the lower time frames which contradict patterns on the
higher time frames.

* In chapter 7, you will learn an advanced trading technique allowing you to trade against the
higher time frame directional forecast, using the CounterPattern setup.

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Identifying Current Market Structure/Phase

The most important job as a technical trader is to identify whether the HTF is
currently in an impulsive or corrective state. Understanding the phase we are in
allows us to assume a probabilistic directional bias, as to find entry points on the
lower time frame in the same direction (covered shortly). Should the HTF be in the
impulsive phase, we can use the lower time frames to find simple continuation
trades. If the HTF be in a corrective condition, we can use the lower time frames to
trade within the confines of the structure. Each is covered below.

Higher Time Frame Is Impulsive

These are the conditions that traders live for. When the HTF is experiencing
significant directional price movement, these environments can set up multiple
lower time frame continuation trades which feed into the HTF momentum.
Remember what is happening on one time frame is built up of smaller structures
on the time frames lower to it. An impulsive condition on the HTF is likely made up
of lower time frame impulses and corrections. By monitoring price action on these
lower time frames, while the momentum is underway is on the HTF, we can find
simple setups which resolve in the same direction.

Image 3.35: The daily chart of AUD/USD. Point A shows one clean, clear directional impulse. In
these situations, when the HTF is impulsively moving, the lower time frames can provide simple
setups which feed into that momentum, as in the chart below.

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Image 3.36: The 1-hour time frame of the same pair. The HTF impulsive leg is actually made up of
multiple, smaller lower time frame impulses and corrections, providing multiple ways to capitalise
on the move. Each of the structures identified here would have resulted in either a profitable or
breakeven trade depending on the management methods used. You will learn how to leverage
setups like these in chapter 7.

Higher Time Frame Is Corrective

If you are reading this far, you are most likely comfortable with the idea that the
market has 2 distinct phases; impulsive and corrective, however, there is another
important consideration that can be slightly more difficult to understand: there can
be lower time frame impulsive legs within a higher time frame correction. The
irony is that what looks to be a highly corrective structure on the higher time frame
can be made of multiple tradeable impulses on the lower time frame. If this seems
confusing at first, don’t worry. We will cover chart examples shortly. Just
understand that just because price is currently locked in a HTF correction, we’re
still able to trade and extract profits while we wait for the more rewarding
impulsive conditions.
Image 3.37 shows the daily chart. After a strong impulsive upwards movement, the
market has begun to consolidate, forming a correction. Many traders could
dismiss a market trapped in a consolidation like this, preferring to get involved
upon the successful break of the correction, anticipating the beginning of the
impulsive phase. However, some of the easiest and cleanest trades occur within
higher time frame corrective structures. This really is an important, yet often
misunderstood element of market analysis so consider the following examples
carefully.

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Image 3.37: The daily chart shows the market is locked in a slightly ascending/sideways corrective
structure. Many traders prefer to dismiss markets in these corrective conditions, preferring to wait
for a break and for the market to start its impulsive phase.

Image 3.38: The lower time frame, presents a high-probability trading setup to the downside,
despite being contained within the higher time frame correction. This is of course, a deliberately
chosen clean example, but the principle remains the same: high-quality trades can set up within
HTF corrective structures, especially simple flag patterns like these (covered in chapter 7).

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Lower Time Frames

Remember the 4-time frame structure: 2 higher time frames and 2 lower time
frames. These are the 1-hour and the 15-minute charts. As you know, the higher
time frames provide invaluable information in the form of the bigger-picture
context. In contrast, the lower time frames are used for 1 sole purpose: timing
precise entries into the higher time frame patterns and structures. While I have
stated that there are 2 lower time frames, it is the 1-hour chart which is more
widely used, the 15-minute chart only providing an added layer of refinement for
what is visible on the 1-hour. To prevent confusion, we’ll cover each of the specific
jobs of the lower time frames, starting with the 1-hour chart.

The 1-hour Chart: Timing Entries

I have stated several times that the lower time frames are simply tools to find entry
points into price moves on the more structurally significant HTF’s. For instance,
imagine your analysis has revealed a corrective continuation pattern on the daily
chart. Anticipating further upside continuation, you have established a bullish
price bias. Looking at the lower time frame, a small correction presents itself, the
break of which initiates a trade to upside side. This is a powerful concept, using
the predictable momentum from the lower time frame to feed into the higher time
frame momentum. You will learn the specific entry criteria for trades like this and
others in chapter 7.

Image 3.39: The chart to the left shows the daily chart. The structure hints at further upside price
continuation as price breaks out of the correction (A) preceding the initial impulse. To the right is
the 1-hour chart. The small slightly descending correction occurred just after the HTF break,
providing a defined entry point which was otherwise unavailable on the HTF. Combining the small
pattern on the lower time frame with a bigger-picture bias from a higher time frame is an excellent
use of multiple time frame analysis.

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The 15-minute Chart: Additional Entries

The 15-minute chart is the lowest of the time frames we will use. I used to trade
solely using the 1-hour as my entry time frame but found that I could find
additional trades using the 15-minute which may be hidden or at least, obscured
in the 1-hour time frame. This is most useful when the markets are moving quickly
intraday. Study the image below.

Image 3.40: EUR/GBP is trading within a corrective channel with a downside bias. There is a
strong downwards impulse and a 2 candle pullback (A) on the hourly chart. However, there is no
entry on this time frame because there is no discernible structure or pattern with defined entry and
exit points. That’s where the 15-minute chart comes in.

Image 3.41: The 15-minute chart provides a very different story. Study the differences between

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the area marked A on both charts. What appears simply as 2 candles on the 1-hour is a clear Bear
Flag on the 15-minute. You will learn the specifics of this setup in chapter 7. Sometimes, what is
obscure on the 1-hour can sometimes be clear trading opportunities on the 15-minute.

15-Minute Chart: Refining Structures

The second way to use the 15-minute chart is to add another layer of clarity and
richness that may be absent on the 1-hour time frame. A careful and skilled
analysis of the 15-minute chart can help inform traders’ understanding of patterns
and structures on the 1-hour. Think of it as a secondary filter that can be used to
refine 1-hour structures that may seem undeveloped. Check out the example in
image 3.40 below:

Image 3.42: USD/CAD impulsively moves to the downside before correcting sideways. This chart
shows the correction as it appeared on the 1-hour time frame. The compressed price action makes
it hard to see the touches and to find precise entry and exit points

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Image 3.43: This chart shows the same pattern but from the perspective of the 15-minute chart.
This chart provides a much clearer pattern with defined touched points, allowing us to draw a
much more accurate structure. An astute trader who correctly used the 15-minute chart could have
positioned himself into an explosive trade which would have resulted in significant percentage
profits.

MTF Analysis: Summary

The effective correlation and utilization of multiple time frames is one of the most
important tools in technical trading. However, to fully understand and make best
use of the concepts we have discussed so far, they must be internalised on a
subconscious level. This is going to take repeated exposure to the learning
material and a dedicated study of it. However, when broken down on the micro
level, the core principles and takeaways of multiple time frame analysis are actually
quite simple, yet highly practical:

• Always start with the larger time frames and drill down to the smaller ones,
not the other way around.
• Structures on the higher time frames are more structurally significant than
those of the lower time frames.
• When a higher time frame is impulsively moving in a direction, we will use
lower time frame continuation patterns to find meaningful entry points that
capitalise on that movement.
• When a higher time frame is in a corrective state, our longer-term
directional bias is based off whether that correction is an ascending channel
or descending channel.
• A higher time frame correction can still present multiple trading
opportunities. In fact, there can be many lower time frame impulsive legs as
price trades within the higher time frame correction, offering simple, clean
continuation trades.

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• When price on the HTF is impulsively moving, lower time frame patterns
which suggest a directional move counter to that often abort quickly as the
higher time frame momentum takes over.
• There is more noise and volatility present on the lower time frames, so it's
important never to form a directional bias from them. All trades are
predicated off the higher time frame structure, LTF's are simply there for
entry points.
• To resolve the issue of conflicting time frames, never zoom in. Push yourself
further away and take a broader look at what is happening. Only then, use
the lower time frames to finesse your entry into the market.

The Sum is Greater Than Its Parts

In one of the earlier sections of this chapter, I said that simplistic pattern
identification is the skillset of novice traders, and when taken out of their
appropriate context have very little practical trading utility. I then introduced you
to the individual components that will give you the technical skill to transcend
above and beyond the analytical capabilities of novice traders; the study of the 2
principal price movements, impulses and corrections, an understanding of natural
progression to predict, for lack of a better term, probable price direction, the
steps to identify and draw relevant market structures and finally, the intricacies of
multiple time frame analysis. While there will never exist a holy grail for technical
analysis, this combination of historically tested technical patterns in a multiple time
frame context comes pretty close. The skilled use of these components offers an
opportunity for a trading framework in which the sum is very much greater than
the individual parts.
Reviewing everything you’ve learned in this chapter, consider the implications that
could have on your trading. How do you think your trading would be different if
you knew how to forecast market direction from the identification of simple
structures? How would your trade management change if you knew a possible
inflection point was the start of the correction? What impact would filtering out
poor-quality trades, through your understanding of multiple time frame analysis,
have on your bottom-line results? I hope this chapter has given you much to think
about.

Trader Action Points

• There are 2 schools of thought when it comes to making trading decisions;
fundamental and technical analysis.
• All price movements can be categorised as either impulsive or corrective.
• Impulses are clear, sharp price movements with a very clear directional bias
and can either be upwards or downwards.
• Corrections are typically choppy price channels characterised by back and
forth price action, which can be ascending, descending or sideways.
• This creates 5 possible price movements, upwards impulse, downwards
impulse, ascending correction, descending correction or sideways
correction.

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• Natural progression refers to the market’s tendency to move in a series of

predictable steps based off the current structure.
• The effective correlation and utilization of multiple time frames is one of the
most important tools in technical trading.

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 Risk Management

CHAPTER 4 - RISK MANAGEMENT

"I am always thinking about losing money as opposed to making money" - Paul
Tudor Jones

I debated for a long time whether I would put this chapter before the specific
trading setups. Surely, the logical place after learning about market structure and
price action would be with the trading strategies themselves? Or how about first
learning how to master trading psychology? Whilst these important, I deemed it
appropriate to progress onto what I believe to be the next most fundamental
piece of the trading puzzle. I wanted to structure the chapters in a logical order,
one in which a harmonious flow from one trading principle to another would occur
and where a progressive build-up of skills and knowledge could be attained. This
is why risk management will be come before anything else because the number
one job of a trader is to protect his capital.

This chapter takes an in-depth look at the practical and theoretical implications of
risk management and seeks to give the reader practical, applied tools for
controlling risk in various markets. Initially looking at the importance of controlling
our per-trade risk through tactical stop loss placement and position sizing tools, I
introduce what I call the 1% rule and look at how mathematically, the odds are
stacked against traders who allow their accounts to go into drawdown. The
chapter then progresses to other risk management considerations that many retail
traders often overlook. We will discuss overall portfolio risk as well as asset
correlation. Regardless of what stage you are in your journey and development as
a trader, it is imperative that we establish good risk management rules now so that
we can progress onto the latter stages of your education. This may therefore be
one of the most important chapters in this book so digest its ideas carefully.

Why Risk Management is King

If you were to examine traders who had blown their accounts, you would find that
many of their trading problems stemmed from poor risk management. Many of
these traders would have been so focused on exponentially increasing their
profits, that they failed to adequately manage the risk in their trades. They forgot
about a key truism of trading: it is not up to the trader to ‘make’ money in the
markets, it is up to the trader to manage the risk in his trades and to allow the
market to take care of the upside. As traders we can't control the markets, but we
can control the risk we choose to allocate on each trade. Providing we are
entering our trades at high-probability entry points, controlling our risk exposure
and exiting when our trade has become invalidated, the profits will take care of
themselves.

Trading with too much risk is, based off my experience with losing traders the
single most common reason for failure in trading. A trader with no appreciation for
risk management can create significant harm to their account by allowing one or
two outsized losses to erode many weeks or months’ worth of trading profits.

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Psychologists who examined participants’ responses in a series of games which

could result in financial losses or gains, found the participants’ psychological
responses were twice as strong to losses than they were to gains. This is why many
traders who take one or two losses often go on to making a string of other
dangerous trading errors, like ‘revenge trading’ normally resulting in more losses
and creating a self-fulfilling prophecy whereby the inevitable result is a blown
account and another failed trader in the poor house.
Paul Tudor Jones, whose quote opened this chapter said he is always focused on
what he could lose, rather than on the profit potential of his trades. By obsessively
focusing on his risk exposure, he was able to diligently control his risk to sustain a
long and rewarding trading career, becoming a trading legend in the process.
Consistent traders focus on risk first, in other words, they play great defence, not
offence.

Initial Risk and Position Sizing

There aren't many absolutes in trading. Most trading rules can be flexible, many
strategies, subjective. But there is one golden principle of trading that has stood
the test of time: keep your losses small. We can never know in advance which of
our trades will result in profit and which will result in losses. As we'll examine in the
later chapter on practical psychology, there can be a seemingly random
distribution between profits and losses. It's therefore imperative that we ensure
our maximum risk in any trade we execute is kept small, small enough to ensure
that we stay in the game long enough to experience the positivity expectancy of
our edge.

Risk Per Trade: The 1% Rule

Let's start with the basics, establishing the most important rule regarding risk
management: how much risk to allocate in any one trade. By risking small amounts
on each trade, we can remain relaxed and focused on executing our trading plan.
Doing this is simple. The amount of monetary risk we take in any trade is set at a
consistent percentage of the account balance: 1%. I call this 1% rule. Let me say
that again: the amount of monetary risk we take in any trade is set at a consistent
percentage of the account balance, which is 1%. Let's assume you have a trading
account funded with £10,000. The maximum amount that you will lose in any trade
is £100 or 1%. Were your account to be to the amount of £54,000, your risk would
be 1% of that: £540 per trade. It's important to note that whilst the amount of
monetary risk will change as the account balance evolves, the percentage amount
will always remain consistent.
Let’s go back to the first example with a £10,000 account. Let's assume at the end
of the month, you have achieved a healthy percentage return of 10%. Your new
account balance coming into the next month is now £11,000. Now your risk per
trade will be £110, because £110 is 1% of £11,000. You may be taking more
monetary risk, but the percentage relative to the account balance is the same.

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Many new traders can struggle to understand this essential rule, believing that
they will be limited in the size of the trades they can put on. The 1% rule does not
mean you are limited to only trading with 1% of your trading capital. It means that
no losing trade will result in more than 1% of your total account balance. I would
go as far to say that the 1% rule is one of the best rules a trader could develop. It’s
hard to blow up an account or to experience significant, emotional and financial
drawdown when you’re only risking 1% per trade. 5 consecutive losing trades
would still only result in a 5% drawdown, hardly emotionally destabilising and easy
to recover from with a couple of solid profitable trades.

Consider the 1% rule for a trader who has just experienced 3 losing trades in a
row. The account balance is down 3% - no big deal, easily recoverable when your
average reward to risk ratio per trade is 3:1. Contrast that to another trader who is
risking 5% per trade. He's experienced the same string of 3 losses, yet his account
his down a staggering 15%! Do you think he will also be able to remain neutral
when confronted with such a large drawdown? How do you think he is going to
react? In most cases, the result of such significant account damage is a string of
further costly trading errors – overtrading and failing to cut off losing positions in
the hope of a recovery are common emotional reactions. The simple reality is that
large losses distort our objective reality, colouring our perception as we become
desperate to do anything to recover what we’ve lost. Small losses ensure that we
remain neutral so that we can focus on good trading principles and perfectly
executing our trading plan.

Position Sizing

The way we ensure our trade risk is capped at 1% is through position sizing.
Position sizing simply refers to the amount of shares of stock or units of currency
we buy/short in a trade. If I execute a trade in which I buy 125 shares of Facebook
stock, my position size in that trade is 125 shares. So how do we determine exactly
what our position size should be? Calculating position size is a by-product of 3
things:

Which market you're trading

Different markets have different ways to size positions depending on the product
being traded; stock trades are measured in the number of shares you buy/short
whereas a Forex trade is measured in the units of currency that are being
bought/sold short.

How much you're risking in that trade (the 1% rule)

Before you can calculate position size, you must first know how much risk you are
willing to take on this particular position. As you know, our risk per trade should be
a fixed 1% of the account balance*. When implementing my risk pyramiding
strategy (which you’ll learn about in chapter 6) there will be occasions in which this
is increased to 2%.

*To calculate what 1% of your account capital equates to, simply divide your capital by 100 to
arrive at 1%, this is the monetary amount you will be risking in this trade.

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The distance from the entry price to the stop loss price
Calculating the distance from the trade’s entry price to the stop loss price allows
us to quantify the risk per unit. A simple example would be buying a stock at $50
per share with a stop loss at $48 per share. If we take the entry price of 50 from the
stop price of 48, we have a $2 risk per share. This is our per unit risk. To calculate
position size, simply divide the risk per unit into the overall account risk. This tells
us the total number of units (shares) we can buy without exceeding our risk limit.
Let's review a simple practice example to help clarify this. For the purposes of this
example, I will use a stock trade to exemplify the basic principles.

You are trading with a £50,000 account and you want to risk 1% of this balance on
your next trade (£500). You decide to go long on a stock that is currently trading at
£10 per share, setting your stop loss at £8. The difference between the entry price
of £10 and the stop loss price of £8 is known as your per-unit risk; the total risk
you're assuming for each unit of stock you're buying in that trade. To calculate
how many shares to buy in order to execute this trade, you divide your per-unit
risk into the total trade risk of £500. £500 divided by £2 = 250 shares. If after
having entered this trade, your stop loss price is hit and the trade is closed out,
you will lose £2 per share which multiplied by 250 shares equates to a total loss of
£500.

Trade size = 1% of account balance divided by the per unit risk

Position Sizing in Forex

It's important to note that position sizing in currency trading is slightly different to
that of equities trading. This is because Forex price movements are quantified in
what are known as ‘pips’, minuscule price changes in the exchange rates of 2
currencies. In order to position size in forex, we must first establish the value a pip
has in the trade. I'm not going to lie, it's a laborious, sometimes confusing process,
much more so than stock sizing. Thankfully, with the help of online position sizing
calculators, the process can be completed in a matter of seconds, with nothing
more than some basic information about the trade you wish to execute. Simply
input the size of your account balance, the risk percentage you wish to take in this
trade (which as you know is 1%), the size of your stop loss in pips and what
currency your account is funded in and the calculator will instantly tell you exactly
how many units of currency you will need to buy/short in order to stay within your
predefined risk parameters. Image 4.1 below shows just how simple and time-
saving these calculators are. See the resources section for website links to the
position sizing calculator I use.

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Image 4.1: Forex position sizing calculator. Simply input the currency your account is funded in,
the size of your trading account, the risk % you wish you take, the size of the stop loss in pips and
the pair being traded. The calculator will instantly tell you how many units you can buy/sell without
exceding your desired risk limit. Type the link into your broswer for direct access or go to the
Resources section at the end of the book.

Expressing Results as a Ratio of Initial Risk

Establishing our initial risk when we first enter a trade allows us to express all
accrued profits and losses as a ratio of that risk; this is called the R multiple. It will
be beneficial for many traders to start viewing all the P&L of their trades in terms of
the R multiple.
Imagine that you have entered a position and have risked 1% of the account
equity on this trade. Your £72000 account determines means that your initial risk
in this trade is £720 - this becomes R (short for risk). If your stop loss were to be
triggered, this would be a -1R loss. In other words, the loss would be an equal
amount to the initial risk you took when you placed the trade. If the trade were to
progress so that the profit in the trade was equal to 2 times the initial risk, or
£1440, this would be a +2R trade. You would have made a profit that was twice as
large as the monetary amount of risk you initially took. Operating out of R
multiples is a valuable tool for both developing and professional traders alike, as it
removes much of the emotional strain we experience when thinking about the
actual monetary amounts. One of the biggest issues I experienced as a new trader
was constantly relating my profits and losses in terms of real-money scenarios - "I
just lost 4 PT sessions' worth of money" or "I just made enough to pay my rent in 1
day". I learnt the hard way that experienced traders are much more likely to think
of their profits and losses as an expression of the initial risk rather than as cold, raw
money amounts. One trader risking £100 per trade and another risking £10,000
per trade could have enormously different psychological implications. However, if
both amounts equate to the same percentage of their individual trading balances,

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expressing these amounts in terms of the R multiple, can assist the traders in
viewing them with a certain degree of equanimity.

Overall Portfolio Risk

After establishing rules for our risk in individual trades, we'll need to consider how
much overall risk we're willing to assume at any one point over the account as a
whole. It's likely that multiple high-quality trades could present themselves while
we've already got an active 1% risk running in another position. Unfortunately, the
market doesn’t wait around to present solid trading opportunities, nor does it care
if you already have open positions. Knowing how to handle these scenarios ahead
of time and having hard rules in place will reduce hesitancy and emotional trading
decisions.
While the 1% rule protects you from disastrous losses in any one position, our
overall exposure rule protects us from any string of losses. Its enforcement ensures
that we don't financially over-commit ourselves when multiple trading
opportunities set up and naturally forces us to become more selective in choosing
and executing only the highest quality setups. The implementation of these 2 rules
will be like having your own risk manager, constantly watching over you and
keeping you safe in this potential financial minefield.

I am a conservative trader. One of the recurring themes in this book, and a

philosophy which I strongly live by is that your trading rules should reflect your
personality and style. This extends to your preference for risk. That is why I use a
3% overall portfolio risk rule in my trading. I use 3% because when I analyse a
potential trade, one of the criteria I’ll look for is the trade having at least a 3:1
reward to risk ratio. I want the potential profit in that trade to be at least 3 times the
size of the potential loss, ideally a lot more. Therefore, should I have 3 active
positions running, each one hitting their respective 1% loss points, I know that I’m
only one solid 3:1 trade away from recovering and bringing me back to me
breakeven point. This serves my psychology well. Note how the 3% rule
specifically relates to risk, not the maximum number of trades we can have at one
point. If I execute 3 trades on the same day, each with a 1% active risk then my 3%
account threshold has been reached. But if I move the stop to the BE point and
remove the risk from one of these trades, whilst I still have 3 open positions, I only
have 2% of open risk. I now have 1% of available risk that I can use should another
trade present itself.

Just like the 1% rule, the 3% portfolio risk level constantly re-calibrates based off
the ever-changing value of the account balance. If you come into the month with a
£50,000 trading equity and with no open positions from the month before, your
maximum risk per trade is £500, while the maximum overall risk is £1500.
However, if you were to place a trade which resulted in a 3R profit £1500, with
your new account balance standing at £51500, your new allowed 3% overall risk
exposure is now £1545 (3% of £51500).

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You may feel 3% is too low, too conservative, too safe. If it is within your proclivity
to assume more risk over your trades than 3%, then fine. There is no one-size-fits-
all answer here. The only right answer is the one that is right for you. I know some
traders who are comfortable with up to 6-10% worth of open risk exposure.
However, before deciding what is right for you, you must consider the worst-case
scenario. Imagine if you were to have multiple positions running so that your
maximum risk exposure is reached. Then imagine all those trades hit their
designated stop loss points at the same time. Are you going to be comfortable
having a 6% account hit in one day? What about 10%? How do you think that
would affect your psychological state going forward? I keep my overall account
risk tiny because I'm never going to be emotionally invested in the outcomes of
any series of trades. If I put 3 trades on that day and they all get stopped out, it
makes no difference to me. The 3% hit doesn't come close to registering on my
emotional radar. However, a 7% hit in one day? That's not going to sit well with
me. Risk is like the fuel you're pouring onto the fire that is your emotional state, the
more you pour on, the bigger and deadlier the fire.

The Mathematical Realities of Drawdown

By this point, you should have 2 risk management rules in place. The first is the 1%
rule which limits your risk exposure over any individual trade. The second is the
portfolio exposure rule which caps your risk over the whole account. But why?
Why should we, as traders focus on so obsessively over risk? You’ve heard the
theory behind why it’s almost impossible to become a profitable trader without an
excessive motivation to get away from excessive risk. You understand that one of
the main reasons for trader failure, is the inability to control losses, allowing a
handful of losses to do significant damage to the account. However, so far there
has been no mathematical backing behind the importance of risk management.
What I hope to achieve in the next few paragraphs is a deeper, more theoretical
understanding of risk. I am going to show you the mathematical realities of
drawdown and how for every extra percent you lose, your chances of a successful
recovery become exponentially diminished.

Imagine you lose 50% of your account balance over a string of disastrous, high risk
trades. What percentage return do you need to achieve in order to get back to
breakeven? If you're like most people, your instinctive answer will be 50%. You
would, however, be wrong. Completely wrong. In fact, it would take a 100% return
on the remaining capital to claw your way back to breakeven. In other words, after
having lost half of your account balance, you'd need to double what you had left
to get back to breakeven. And this mathematical fact becomes exponential. Study
the table below. A loss of 10% would necessitate an 11% gain to recover. Yet a
25% loss would require a 33% gain in order to get back to your pre-loss point.
Notice how with each incremental increase in drawdown, the gain required to
recover becomes increasingly larger. The difference between recovering from a
50% loss to a 60% loss is an extra 50% required gain! Just an extra 10% worth of
loss accounts for an extra 50% worth of required profit to recover. This is why risk
management is so important. By utilising the 1% rule, even a string of 5 loss will

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still only result in a 5% drawdown – hardly significant account damage. Consider

even 10 losses. You take 10 trades, each with 1% risk exposure and each one of
them hits their loss point without any profits in between. I can confidently say it is
highly unlikely by following the 5 trading setups you will learn later, you will
encounter a streak of 10 consecutive losses. But imagine that luck served you a
bad hand – a really bad hand. That 10% drawdown is likely going to ignite some
emotions, sure. But is it a financially destabilising, irreparable event? Not really. I’m
not saying it’s easy to make the 11% needed to require from the loss, just that it’s
not going to be the end of your trading career either. You know you have a solid
risk management framework in place when in the infinitesimally unlikely event you
have 10 consecutive losing trades, you need only an 11% gain to recover.

Loss % % Gain required to recover

1 1
5 5.3
10 11
25 33
50 100
60 150

Image 4.2: The mathematical realities of drawdown. The table shows the amount of % gain
required from several drawdown amounts. Notice how as the loss increases, the amount required
to get back to breakeven becomes exponential. This is why stringent risk management is so
important.

Correlation

So far, the distinctions we have made to risk all relate to one common theme –
losing capital. This is of course, the most obvious and very real risk we assume
when trading. However, before concluding this chapter, there is one last
consideration: asset correlation. Correlation simply refers to the tendency for
certain assets to move in unison. Whilst correlation is a more significant concern
for the longer-term investor when constructing a portfolio, there are still very real
implications for active trader who intends to hold multiple positions, even if those
positions are only to be held for hours or days. Traders who don’t understand the
impact of correlations may be inadvertently over-exposing their accounts
unnecessarily.

It never fails to surprise me how many traders are ignorant of the effects of
correlation and the implications it has on risk management. Many of these traders
completely ignore correlations, assuming that as a short-term trader any trades
they are currently running are driven solely by the supply and demand dynamics
unique to those markets. This assumption is wrong at best and financially
detrimental at worst. Yes, prices are driven by the buying and selling dynamics of
that market. But no market exists in a vacuum, trading completely independent of
itself. Large pools of capital will tend to move together. Consider negative Brexit
news that causes weakness in the Pound. It is very likely that we will see a sell-off in
the GBP across the board, not just in the pairings of one or two isolated

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currencies. Or consider equities. Approximately 75% of the movement in US

stocks can be attributed to the overall larger index and sector it belongs to. A
stock trader holding 5 large-capitalisation technology stocks, ignorant to the
effects of correlation may believe he is risking 5% of his account on these positions
but it’s more appropriate to think of him as risking 5% on one single trade. A 5%
risk in one trade would be considered absolutely unacceptable by most traders,
yet this is what many are doing when they inadvertently open highly correlated
positions. The image below shows correlation in action.

Image 4.3: Correlation in action. The chart to the left shows the 1-hour time frame of GBP/USD,
the one to the right the 1-hour time frame of GBP/JPY over the same time span. The charts look
nearly identical.

Consider for a moment your maximum account exposure rule and ask yourself if
you would be comfortable assuming that amount of risk in an individual trade? If
you are in 3 active trades all featuring a common currency and that currency
makes a big move, chances are that those 3 trades are going to move together.
You might think you're running trades in 3 individually moving pairs, each with 1%
risk but in reality, you've got 3% worth of risk hanging on one currency.
I once attended a trading meetup in my hometown and was chatting with some
other young traders, around the same stage of development that I was at the time.
One individual, let's call him Harry was telling me about how he wiped out his
month's worth of profit in one day in a series of losing trades. He said that whilst it
was surely frustrating to undo his month's work in one day, he felt good about the
fact that the 4 losing trades were all valid setups and that that was the most
important thing. He even mentioned how it was 'quite funny' how all the setups
looked so similar to one another. In an attempt to offer some constructive
feedback about his trading, I asked for the pairs that he had traded – AUD/USD,
USD/CAD, USD/JPY and USD/CHF. Poor Harry had put risk on 4 US dollar-
influenced pairs. Not only that, but he had also taken these trades on the day the
all-important Non-Farm Payroll numbers were scheduled to be released. The

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positions had all initially moved in his favour but before he had time to move
anything to breakeven, the numbers were announced and the USD slumped,
tagging his stops on each trade. This guy wiped out his month's worth of gains in
one day by making a rookie trading error yet felt good about it! It was only after I
said that the reason the setups looked so similar was because they were all USD
denominated pairs and that they were highly likely to move together did Harry see
the stupidity of his trading error. He had violated 2 major risk management errors.
Not only had he completely ignored correlation, but he also decided to take these
trades in the build-up to a significant high-impact, market-moving news
announcement. Had he had an effective decision-making process in place, one
that considered all the different elements of the trade (like if there were news
releases) before entering he would have avoided this completely unnecessary
trading sin. And that is the focus of the next chapter, learning the components that
constitute to a successful entry into the market.

Oh and in case, you're wondering - Harry's doing well. We stayed in contact after
the meetup and have regularly discussed trading ideas. He's yet to make the same
mistake....

Conclusion

We have just explored the concept of risk and the practical tools available to the
trader to avoid costly financial errors that could potentially destroy a trading
account. We have seen the mathematical realities of various drawdown amounts
and how implementing risk management parameters like the 1% rule and
establishing an absolute account risk exposure rule will help protect your account
from irreparable damage and drawdown. Using the guidelines and rules in this
chapter, you should now be fully equipped with a risk management framework
that will become the foundation for when we start placing trades using the
components we will learn in the coming 3 chapters.

Trader Action Points

• Controlling risk is the first and most important job of the professional trader.
Our focus should be on first limiting our exposure to risk on an individual
trade and an overall portfolio basis.
• It is the trader’s job to manage risk, not to try to make profits. By focusing on
risk first, the trader’s profits will take care of themselves providing he is
operation with a trading strategy with a statistical edge.
• Immediately start incorporating the 1% rule into your trading, never
exposing any more of your account to more than 1% risk per trade.
• Create your individual portfolio risk rule – that is the overall amount of risk
exposure you are willing to assume across all your positions at any one
time. Consider the emotional and psychological implications of your rule
being hit. How are you going to feel? How do you think that would affect
your psychological state going forward? A trader must face these questions

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head-on if an effective risk management framework is to be established.

Remember: risk is like the fuel you're pouring onto the fire that is your
emotional state, the more you pour on, the bigger and deadlier the fire.
• Asset correlation is an essential, yet often ignored factor when a trader hold
multiple trades. 5 highly correlated positions, each with 1% open risk is like
assuming 5% of risk exposure in one market. If you intend to hold multiple
positions, it’s important you understand the tendency of those markets to
move together. As a general rule of thumb, FX pairs which contain a
common currency are likely to share a certain degree of correlation, as are
equities belonging to the same industry sector.

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CHAPTER 5 – ENTRING THE MARKET

“Entry and exit points are vital parts of trading and investing. That is worth
repeating. Entry and exit points are vital parts of trading and investing. Whether
you are day trading, swing trading, or are a long-term investor, why would you
ever buy a stock at the wrong time? Unfortunately, there are many market
participants with no training that do it every day.” - Fred McAllen

At this point, it’d probably be beneficial to take a quick recap of the terrain we
have covered so far. It’s important that you understand the order of the principles
you are learning and why they are structured as they are. I can imagine many
readers are eager to jump straight into the trading setups, believing they are
ready to start leveraging actual trading opportunities, but this would be not be of
benefit. Before learning the setups, each and every component of the strategy
needs to be understood and internalised first, for they are the foundations for
which these trades are constructed from.

In this chapter we look at the individual elements of entering the market. We will
start with the 2 entry types that are utilised in the 5 trade setups and consider the
potential impact of news, briefly reviewing each of the significant events traders
should be aware of. Think of what we learn here as the warm-up in an intensive
workout. You wouldn’t jump into a high-intensity circuit training routine without
running through the necessary warm-up elements first; pulse raising, mobilisation
etc. The information in this chapter is the individual warm up elements before we
jump into the intensive workout that is trading setups.

Entries ARE Important

One of the things that always fascinated me about so many trading books was the
shared idea that entry was “the least important part of the trade”. Authors normally
go on to justify their opinion by stating that correct position sizing, risk
management and good psychology all take precedence over specific entry
criteria. Some go as far as to say that the entry method can almost be random
because good risk management will allow you to capitalise on profitable trades to
such an extent that the profits will outsize the losses.
Please don’t misinterpret my point here – all those things are incredibly important
but stating that the entry is the least important component of a trade is like saying
that pedalling is the least important part of riding a bike, as the pedalling part
certainly pales in comparison to the skilled balancing of the bike and the cognitive
awareness required to ride safely.

This misguided thought process lessens the significance of actually having a tried
and tested trading strategy. Whilst the specific entry trigger isn’t the be-all-and-
end-all of a successful trading career, it is part of the trading process. A trader can
meticulously manage his risk exposure and have a fantastic attitude towards
trading but without the technical skill, it’s unlikely he will achieve consistent results.
Think about it. If trading was as easy as simply managing risk and then letting

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profits outsize losses, would you not agree that many more traders would be
successful? I have met and coached traders who DO manage risk, who DO have
average profits which outweigh their losses and who DO have fantastic attitudes
but if their technical skill is subpar, consistent results still elude them. Most of these
traders do the breakeven dance where a month or two of profits are offset by a
month or two of losses – a frustrating cycle.
Whilst a good trading strategy doesn’t end with a good entry point, it certainly
starts with one.

Two is Better Than One

There are two entry types in which to enter the market and initiate our trades. We
will refer to these entry types as Type 1 and Type 2. We will delve more into the
two entry types in more detail shortly. But before we do that, let’s answer the
question – why two?

Most trading strategies utilise one form of entry, typically being divided into two
groups: breakouts and reversals. Nearly any trading system, regardless of the
specific technical criteria they use to identify and execute trades are based off one
of these entry types. Take the simple range trader trading the reversal as price
reaches support and resistance levels or any of the variations of the classic
breakout trading strategies, all of which use a significant price breakout as their
main entry signal. Even pullback strategies, the quintessential methods of
exploiting trending markets all use some form of reversal criteria when it comes to
the actual point of entry. These systems, focusing solely on one entry type tend to
miss many potentially lucrative trading opportunities because the market must
conform to very specific conditions before a trade can be justified. However, by
utilising two forms of entry, the market gives us several possible ways to capitalise.
Let’s demonstrate with an example.

The Breakout Trader:

The breakout trader looks for periods of price consolidation, awaiting a breakout
of the range in the direction of the higher time frame trend. He will place his entry
order above the range (or below in the case of a short), so that should price
successfully break out, he will be entered into the trade. Now consider both the
pros and cons of this type of entry method. The advantages are that by waiting for
the breakout to materialise, he has a certain amount of trade confirmation; the
follow-through of price activity outside of the range in the anticipated direction
confirms his directional bias. He also protects himself from a failure of the pattern
because if price fails to conform to his forecast and instead trades in the opposite
direction, he will have saved himself a loss as his order would have never been
executed. In other words, by placing the entry order so that price must commit
itself to the forecast direction, it is like insurance that he won't be tagged into
trades that aren't already moving in his direction. There are however drawbacks to
this type of entry. Generally, by waiting for the breakout to occur, he is almost, by
default, going to be getting into the trade late, possibly missing high-probability

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entry points in the structure preceding the breakout. The breakout entry is the
Type 1 method.

The Reversal Trader

Alternatively, the next price action-based method for entering the market is on the
reversal of price itself. Rather than waiting for price to commit to itself by moving
in our direction, we're entering a position in anticipation that this is the point price
is going to reverse. Most trading systems use this entry method at key support and
resistance levels as these provide definable points that a reversal is likely to
happen. Imagine the same structure as the first example; price has impulsively
moved in one direction, before consolidating in a corrective range. Suppose we
have clear touch points on the bottom and top of this pattern, allowing us to
define its shape. The reversal trader can finesse an entry right at the bottom of the
structure using candlestick reversal formations anticipating price will reverse at
these levels again and subsequently trade back up to the range's resistance level.
Should price then break from the structure he will have already positioned himself
into the trade by entering early. However, should price continue to remain locked
in the range, he can still make even a small profit playing the range. This is the
major benefit of the reversal method. If a reversal is executed in alignment with the
higher time frame momentum, you may be able to position into an explosive
move at a very advantageous area with fantastic reward to risk. However, while
reversal trades tend to offer better reward to risk prospects, they do also carry a
slightly lower overall strike rate, as there is no real confirmation that price is going
to move in your desired direction, as in the case of the breakout trade. The
reversal trade is our Type 2 entry method.

The Hybrid Trader

Now imagine a trader who uses a hybrid approach, one in which he can flip
between the two entry types, leveraging multiple different trades as the market
makes them available. Rather than forever waiting for the market to present just
the right conditions and criteria for one type of entry, he systematically utilises
both. A structure with 2 clearly defined touch points can be taken as a reversal
(Type 2) as price approaches for the third touch. Should price then successfully
break the structure and forms a continuation pattern, that particular setup can then
be exploited using a Type 1 breakout. Two entry types unlock opportunities that
would otherwise be obscured from other trading styles using only one.

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Image 5.1: Clean examples of both the Type 1 and Type 2 entry methods. The first entry came as a
Type 2 reversal as price rejected the third touch of the ascending channel. The trade was taken
under the assumption that it was probable price would trade down to the bottom of the channel
and potentially break. The second entry, the Type 1 came as price formed a simple flag
continuation pattern after the intial breakout. The trade would have been entered upon a complete
downside breakout of the structure. Many strategies which only use 1 entry system would be
limited in their potential to make profits. Having 2 contrasting entry methods at our disposal means
we can profit on numerous trade opportunites as the market makes them available.

Here’s an overview of the entry types:

Type 1: This entry is the more common of the two entry types. Entry occurs on the
break of the specific structure being traded. Entering the trade on the break has
two distinctive benefits. The first is that we can set our entry orders ahead of time,
relinquishing us of the need to be actively watching the markets. We can simply
enter our orders based off the specific pattern being traded and ‘set it and forget
it’. The second advantage of this entry type is the benefit of confirmation. By only
initiating the trade on the break of the structure, price would have had to already
moved in the anticipated trade direction confirming our directional bias. Type 1
entries are typically used to enter small continuation patterns like Bull and Bear
Flags but can also be used on the breakouts of larger corrective structures with
strategic stop loss placements.

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Image 5.2: Type 1 entry. The entry is placed on the break of the structure. The trade will only be
executed if price successfully breaks the pattern. The dotted line shows the level the entry order
would be set.

Type 2: This is a more aggressive entry whereby the trade is taken within the
confides of the structure itself. Rather than waiting for the pattern to break, we are
entering from within the pattern in anticipation of the breakout. Type 2's are
typically riskier as the setup being traded is only confirmed when the breakout has
occurred, and a Type 2 occurs before the anticipated breakout has materialised.
However, when in alignment with the higher time frame structure, Type 2 entries
can provide us with more rewarding trades as we can usually enter them with a
tighter stop loss, providing a higher reward to risk ratio as well as capturing more
of the move by entering earlier.

Image 5.3: Type 2 entry. The entry is taken as a reversal while price is still contained within the
structure or pattern being traded. The dotted line shows the level where the entry would occur.

It's important to note that neither of the 2 entry types are necessarily better than
the other. Both entries can be used to provide multiple opportunities to enter the
market and can be used at the trader's discretion depending on their personality

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and style. As a more conservative trader who prefers to see a certain level of price
confirmation before entering a trade, I personally take more Type 1 entries, only
taking Type 2's when the trade is alignment with the higher time frame structure
and multiple confluence factors are present.

Basic Candlestick Patterns

Type 2 entries necessitate two criteria. The first is the context in where it is in
relation to price action. You will learn where and when to take Type 2’s in the next
chapter. The second criteria is a sign that an actual reversal in this area is likely
occurring. We must confirm that price is indeed not only in a probable reversal
area but also showing signs of reversing. This is achieved through candlestick
patterns. Candlestick patterns and formations is an arguably whole subject of
study in and of itself, with an inventory of elaborately named patterns. Shooting
stars, dojis, hammers and abandoned babies are just some of the nomenclature in
the educational literature. Thankfully, we require only a couple of basic patterns
that can aid our timing into the markets and confirm that our Type 2 entry is
indeed a high-probability reversal point. There are 2 basic patterns, each of which
with a bullish or bearish sentiment, resulting in 4 possible patterns. Please note, a
Type 2 entry is only valid in the presence of one of these candlestick patterns.
Therefore, you must learn these patterns before progressing onto the actual
trading setups as these will be your triggers for any of the Type 2 setups.

High test:
A bearish candlestick that has a long upper wick and a small body which is near
the candle’s low. It indicates that while price was able to rise significantly during
the session, the sellers were able to take over and subsequently push price down
to the near the candle’s open, indicating a downside move is probable.

Image 5.4: A high-test candle.

Low test:
A bullish candlestick that has a long lower wick which is near the candle’s high. It
indicates that while price was able to drop significantly during the session, the
buyers were able to take over and subsequently push price up to near the candle’s
open, indicating an up move is probable.

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Image 5.5: A low-test candle.

Bearish engulfing:
This formation occurs when a bearish candlestick fully engulfs the smaller bullish
candlestick from the period before. The pattern indicates that the sellers were able
drive price lower than the open of the previous candle, signalling potential selling
pressure.

Image 5.6: Bearish engulfing pattern.

Bullish engulfing:
This formation occurs when a bullish candlestick fully engulfs the smaller bearish
candlestick from the period before. The pattern indicates that the buyers were
able drive price higher than the open of the previous candle, signalling potential
buying pressure.

Image 5.7: Bullish engulfing pattern.

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News

As technical traders, little fundamental information is factored in when making our

trading decisions. However, market-moving news events and scheduled economic
data releases must be considered if we are to avoid getting in caught in intraday
volatility or potentially explosive, erratic price noise. Forex traders should be
especially vigilant with high-impact news events as the currency markets are
particularly prone to erratic and unexpected price action around these releases.
Forex brokers will also typically tend to increase spreads in the build-up to these
releases, which could cause you to get tagged in and out of trades prematurely,
even if price didn’t reach your exact exit point. Image 5.8 below shows a recent
example of price volatility driven by news.

Image 5.8: EUR/CAD presents a classic Bull Flag (A) after price impulsively breaks a corrective
channel. Initially, the trade plays as out as anticipated with a strong break to the upside. However, a
statement made from a European Central Bank press conference creates significant volatility,
causing a price surge up and then immediately down, retracing all the previous move and more.
Although you can’t see on this time frame, the volatile candle at B formed within the span of about
5 minutes – a huge amount of volatility for such a short time. Traders who had taken the long on the
Flag’s break could have very well have lost more than 1R in this position. The market movement
was so fast, so volatile that the stop order may not have been able to have been executed at the
specified price. You would be wise to remain aware of news relating to any of the currencies you
intend to trade as it could save you many such a frustrating loss. A trader who isn’t aware of them is
not entering the market safely nor intelligently.

When I was studying the markets in my developmental stage, I joined a trading

community of around 1000 traders, mainly UK based guys and girls. Their strategy
relied solely on chart information. The belief was that longer-term fundamental
forces and news events were irrelevant because price would always respect and
adhere to the technical structures in which it was trading. This ignorance to
fundamental information can prove costly as was evidenced in one example I can

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recall, among others. Because the traders would share their trading ideas on a
shared portal, it would be common for many of the group to be in the same
trades. One day, their strategy identified a trade in NZD/CAD. However, the day in
which they were planning to enter the trade was on the same day as an important
interest rate decision being made by New Zealand’s central bank. I suggested to
the group that given the significance of the announcement, it would be safer to
wait until after the volatility had settled down and to then look for an entry into the
pair. I was quickly reminded that XYZ traders only trade “structure” and that news
only creates volatility and doesn’t have any real bearing on price direction. Despite
my warnings, these guys took the trade hours before the announcement. When
the rate was announced, the markets reacted…wildly. Price immediately
plummeted. Because of the volatility and the speed in which the markets moved,
by the time these traders’ stops had been hit, they were taking slippage in the
region of 160% - meaning trades which had been sized for a 1% risk, were being
closed for a 2.6% loss. Thankfully, most of these traders, like me, were also
adhering to a low risk per trade model, risking no more than 1% of the account
balance per trade. Whilst a 2.6% drawdown is not going to do irreparable damage
to an account, it’s certainly not welcomed and it’s certainly not necessary either.
Know your news.

There are literally dozens of news releases every week. Thankfully, it's not
necessary to factor in or even be aware of most of these events as many are low
impact releases which have minimal impact. It is the high-impact, market-moving
news events that we need to be cognizant of, both at the entering of our trades
and during the expected lifetime of it. I want to keep the content of this book as
technically orientated as possible as to keep the emphasis on price action and
market structure but I feel it would be incompetent to list the news events that a
trader should look out for without offering even a brief introduction as to what
they are and mean. Refer to the list below for the high-impact releases every
trader should be aware of. You can also use this as a quick reference guide when
listing the news events for the week ahead as part of your weekend routine which
we'll cover in more detail in chapter 10.

Gross Domestic Product (GDP): The GDP is by far the most important economic
indicator, providing a snapshot into the overall health of an economy. Generally
released on the last day of every quarter, it represents the aggregate or total
monetary value of all goods and services produced by the economy during the
quarter, excluding international activity.

Interest Rate Decisions: Interest rates are ultimately the driving forces behind
currency markets around the world. Generally, a rise in interest rates are bullish for
a currency, a drop, bearish.

Consumer Price Index (CPI): A widely used indicator to track and measure
inflationary levels. It is generally released mid-month for the month preceding it. It
aims to measure the change in costs of a wide range of consumer goods and

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services. If inflation is seen to be evident and moving beyond a certain threshold

then interest rate rises can be used to counter this.

Unemployment Rate: The number of people without jobs. It is measured using a

ratio of people who are able and willing to work, but currently unemployed
against the entirety of people in the nation’s workforce. Lower than expected rates
tend to be positive for the underlying currency based on the assumption that it
could lead to higher interest rates. These releases can be a telling statistic with
regards to economic performance and are considered significant by many
fundamental traders. Even small changes can impact currency prices and volatility.

Non-Farm Payroll: Measures the change in the number of people (except for
those in the farming industry) that were employed during the previous month.
Because full employment is one of the mandates of the Federal Reserve, it is very
closely watched by the investor community. If the reading is stronger than
analysts' forecasts, the USD often becomes stronger and vice versa.

FOMC: Federal Open Market Committee meetings are extremely important as the
US Dollar is the world's reserve currency. Each month the committee meets to set
rates and give its overview on current economic conditions and the effectiveness
of current monetary policy. The committee is made up of members which vote at
each meeting, with "Hawkish" members being those in favour of an interest rate
rise and "Dovish" members being those favouring a lowering of rates. The
committee's released statement is heavily scrutinised by traders looking for clues
as to how the Central Bank will behave in the future.

Speeches/Releases/Conferences by Central Banks: Central banks have a large

range of responsibilities from overseeing monetary policy, to maintaining currency
stability through quantitative easing and overseeing commercial banks. There are
eight major central banks: The US Federal Reserve, The European Central Bank,
The Bank of England, The Bank of Japan, The Swiss National Bank, The Bank of
Canada, The Reserve Bank of Australia and the Reverse Bank of New Zealand.
Forex traders often assess the language and wording of the Chairman of the Bank
to try and establish clues as to if it is likely the bank will increase or decrease
interest rates. It is therefore important that any release by a central bank is
considered if the pair being traded contains the currency of the release.

Please note these brief introductions only serve as a basic overview of the news
events traders should be aware of. A more detailed exploration and a primer in
how they affect the overall global macro-economic landscape and potentially, the
movement of individual currency pairs goes beyond the scope of this book and is
not in my interest to attempt to do so. As I have expressed throughout the entirety
of the book, it is my wish to keep things as practical as possible and to focus only
on the raw material that will positively impact the reader. A dissertation on global
macro and a deep look into currency correlation coefficient will provide no such
benefit.

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Economic Calendar

To keep track of these all-important events, an economic calendar will become

your best friend. It shows the scheduled news events and data releases relating to
the global currency markets. Economic calendars list these events as well as the
specific time of the release. Each event is given a grade depending on the
potential it has to move the markets. High-impact events are coloured red,
moderate-impact events in yellow and low-impact in green. Most calendars will
allow you to apply a filter to only show the red, high-impact releases. You can find
a link to the one I personally use in the Resources section at the end of the book.

Image 5.9: An economic calender showing the high-impact news evens relating to the currency
markets. Traders should make note of these releases on the weekend, before the start of trading
week. You can find a link to this calender in the Resoruces section at the end of the book.

Trader Action Points

• There are 2 entry methods: Type 1 and Type 2. Type 1 entries are the more
common of the 2, using a break of the structure/pattern to initiate a trade.
Type 2’s can be thought of as a reversal trade, initiating a position while it is
still contained within the price pattern or structure being traded using
candlestick reversal patterns.
• There are various high-impact news events which can create erratic price
movements, volatility and high spreads. Traders should know which events
are scheduled to be released before entering the market using an
economic calendar.
• Pull up charts of your favourite stocks or currency pairs, draw in relevant
price patterns and see how you could have applied both the Type 1 and 2
entries methods to capitalise on the ensuing moves.

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CHAPTER 6 – TRADE MANAGEMENT

“If you don’t stay with your winners, you are not going to be able to pay for the
losers.” - Jack Schwager

Trade management is the series of decisions we make after having entered a

trade. These actions are grounded in both the statistical realities of the market and
our own psychology. Finding a happy medium that incorporates both is the
backbone of successful trade management, encompassing:

• Getting out of losing trades at logical exit points.

• Trailing our stop loss as the trade progresses as to continually lock in profit
whilst still allowing price room to breathe and potentially reach further
profit levels.
• Using our discretion to blend our management styles in a way that is
appropriate to that specific trade.
• Maximising profitability by adding additional trades when the opportunity
presents itself through scale-ins and risk pyramiding.

It’s the goal of this chapter to introduce you to the two main strategies in
managing open positions and as well as the learning how to use your intuition and
discretion in managing your trades in a way that is congruent with your lifestyle.
This last point, incorporating discretion in your management style is an often-
debated subject in trading circles. One of the things you'll frequently hear in
trading literature is that it's favourable to have a completely mechanical
management system. The implication is that a robotic system relinquishes the
trader from having to make decisions themselves, resulting in less psychological
and emotional strain. However, it's been my experience that allowing room for
some discretion when it comes to your management style leads to better results
and paradoxically, less emotional strain than blindly following the same system,
trade after trade after trade.

This is the last step before you learn the trading strategies presented in the next
chapter. This does however, present a slight problem in the structing of the
material. Whilst I have presented the chapters in the most logical way, there is no
‘perfect’ order to learning the ideas. It is hard to teach management styles which
are specific to a group of trades, when you are, as of yet to learn those trades.
However, it’s also difficult to teach you the setups and the management rules
associated with them if you haven’t learnt the management techniques first.
Because of this try not to view this chapter as an entirely separate entity in and of
itself. The techniques here are closely tied to the setups we will explore in the next
chapter.

Placing the Initial Stop

The first all-important step in trade management is the location of the initial stop
loss. As covered in chapter 4, it’s the initial stop that allows us to determine our

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position size in the trade. While at this stage, this all now seems fairly intuitive, it
still leaves one important question unanswered: where do we actually place these
stops?

The placement of the stop is determined by the setup being traded but the
principle is the same – to exit the trade at the point in which the trade is
invalidated. Every trade we enter is based off an assumption that based off the
current structure and price action being displayed in the market, there is a
statistical likelihood that price will move in our desired direction. However, just as
we must identify specific criteria in which to initiate a trade, we must also be
explicitly aware of the type of price action associated with the failure of the trade.
A more succinct way to imagine a stop loss is a violation of the reason why we
entered a trade in the first place.
Imagine a stock has been trading in a range between 95 and 100 dollars,
consolidating after a strong impulsive move up. The consolidation has formed a
clear Bull Flag and you want to capitalise on a potential break of this correction.
You decide that it only make sense to enter the trade if price penetrates the $100
resistance level and so set your entry buy order at $101, triggering you into the
trade if a clear break of the level occurs. As a quick thought experiment, consider
the thesis behind this trade: The trader has identified a period a consolidation
after an impulsive move to the upside, his view is that if price successfully breaks
out of this range, it has demonstrated a sufficient amount of buying interest to
propel the stock to the upside and resume its impulsive move. Now consider what
would have to occur to invalidate this theory. Remember, his entry order is set so
that the trade will be only executed if price does in fact break out of the range by
hitting the $101 price level. It’s only logical then, to assume that if the basis of the
trade is price breaking out of the $95-$100 range, then a move back inside the
range will invalidate it - price would have failed to continue its impulsive move and
has instead traded back into the range from which it broke, thus giving the trader
a logical area in which to place his stop – at around $97-$99. Refer to 6.1 below.

Image 6.1: Stop loss placement in a simple flag breakout trade. Price has consolidated between a
range of $95 (A) and $100 (B). Trade entry is set at $101 (C), should price successfully break out of

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its current range. The red zone at D represents the $97-$99 zone, an ideal location for the stop
loss. Should price trigger the entry and subsequently trade back inside the range to the stop level,
the original trade idea would be invalidated, warranting an exit from the position.

In chapter 10, you will find many examples of stop placement in the various trade
examples. What’s important at this stage is understanding that every trade, without
exception has an exact failure point, predefined at the time of trade entry. We
always know where we will get out if we are wrong, before we enter a trade.

Management Methods and Discretion

Understanding the importance of and the mechanics of stop loss placement, we

can now learn about the management methods and the context in which they
apply.

The 1% Trailing Stop Method

This method is the most aggressive of the 2 management methods. It is a

mechanical system that is easy to implement, requiring minimal discretion. This
method aggressively locks in profit as the trade moves in our favour using fixed
1% targets as our stop loss points. It is best used when playing impulsive legs on
the lower time frames, locking in quick profits in short-term trades in a non-
emotional manner. The trade-off is that often these trades can be stopped out as
price forms larger, deeper corrections only to continue in the originally anticipated
direction. Its rules are simple: for every 1% of profit the trade moves in our favour,
the stop loss is trailed to 1% behind.

Image 6.2: The 1% stop trail in action after a simple Bear Flag. Price reached the 5% profit level,
warranting moving the stop loss to 4% which was hit shortly after. The image illustrates how the
stop was trailed until it was triggered.

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• The image shows a simple ascending structure. Trade entry is initiated on

the Retrace within the pattern with the stop loss, slightly above the
structure.
• The trade is executed and quickly moves in my favour. As price reaches the
1% profit level, I move my stop loss to my entry price, the breakeven point.
My new target now becomes the 2% profit target.
• As price reaches the 2% profit level, I move the stop loss (now at the
breakeven point) to the 1% profit level. The next target becomes 3%.
• As price reaches the 3% level, the stop loss is moved to the 2% level.
• This process continues until I am stopped out of the trade for a 4% profit.

Structure Trailing Method

The second management system is a more discretionary method, waiting for the
market to form new structures and patterns as our guides for stop loss
management. Because of the ever-changing dynamic nature of price action, it is
not possible to reduce this process into a simple set of defined rules, but consider
the following guidelines:

• Stop loss placement is determined by new structures. As these structures

develop, we wait for price to break them in the trade direction before
moving the stop.
• The trade is managed on the time frame for which the trade was entered
on. A trade executed on the 15-minute chart will be managed using 15-
minute structures and a trade entered on the 1-hour will use 1-hour
structures to manage the stop loss.

Image 6.4: Using the market structure management method, the stop loss is trailed behind new
completed structures (A,B and C) formed on the entry time frame. Price breaks the structure at C
and triggers the stop loss point (red circle).

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Take Profit Orders

Because the very nature of this trading strategy is to anticipate and capture the
market’s impulsive moves, it’s makes more intuitive sense to allow these trades to
run in our favour as far as possible rather than capping our profit potential by
using profit orders. However, there are times when closing a trade and booking
profits at fixed targets is advantageous. Generally, profit orders are best used at
structural market points in which the probability of continued movement in the
desired direction is not probable. Let’s look at the main scenarios in which using a
fixed profit target would be beneficial:

As the market approaches support or resistance

If you have identified clear HTF support and resistance levels it may be worthwhile
to consider that zone as a good place to take profits. If it’s probable that price is
going to reverse at that price level, why sacrifice active profits by waiting for the
reversal and watching price trade against us? Instead, have an order at that level
ready so when price makes contact, you can get out with maximum gain.

In CounterPattern trades
This is the most common instance in which fixed take profit orders would be used.
Consider what a CounterPattern trade really is – you’re taking a trade in the
direction against the likely higher time frame movement. In these trades, you’re
not looking for the impulsive, extended directional moves, you’re looking for a
quick profit as price is locked within a higher time frame structure. Setting a take
profit target at the tops and bottoms of these patterns means you can close out
your CounterPattern trades just as price begins to adhere to the higher time frame
structure. If this sounds confusing, carefully contemplate the following example.

Image 6.3: Price is locked within a larger suspected bear flag, giving a downwards directional
bias. However, a short-term small Bull Flag (A) has set up. This is a valid, CounterPattern trade as
we are trading against the longer-term directional forecast of the Bear Flag. Understanding that we
are not expecting price to trade higher than the flag’s upper trendline means we have a clear,
logical place in which to set our take profit order (green zone).

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When active management is not possible

There are going to be times when the management of a trade just simply isn’t
practical or possible. There’ll be occasions when you simply can’t over the coming
hours or days, be able to check your position and adjust the stop loss. A long flight
or trips away with no internet access or data connections are not everyday
occurrences for most people, but they do happen. I was in Spain recently, a quaint
town near Marbella. One day, me and my partner decided to hike into the
beautiful mountains a few miles from our apartment. Our venture turned out to be
longer than we had anticipated and safe to say, in that environment we had no
data service whatsoever. Back at the apartment, a trade I had placed that morning
had been closed out for breakeven. I checked the chart to see that it had been
running at 4% profit, before aggressively retracing back to my entry price as it met
with overhead resistance. My normal rules would have had me out at the
resistance zone for 3.7% profit, but because I couldn’t manage the trade, I banked
nothing. Had I prepared for the possibility of my not being able to manage the
trade, I would have set a take profit order and been out with a healthy profit. Take
profit orders are like your silent allies, patiently waiting in the market in those times
when you can’t, forever ready to close down a trade and lock in gains. When the
time calls for it, use them.

Discretion

All these management methods will work, some traders being more suited to one
than others. It is the trader’s job to test these techniques, subjecting them to a
battery of statistical tests to find what works best for his specific style. However, it is
possible to have a unique management style which incorporates both methods
into a bespoke management plan. Many trading systems are designed with fixed
management rules that are followed precisely the same way in each and every
trade. These are certainly valid approaches and is how I often managed trades in
my earlier, developmental stages. However, most discretionary traders prefer and
will gravitate towards an active management style that allows them to make
decisions using a combination of techniques depending on any number of
technical and emotional variables. This is one of the main advantages of being a
discretionary trader, as the question of when and how to manage a trade is often
tied into deeper questions pertaining to the trader’s circumstances at the time of
entering the trade.
For example, you might decide to use the fixed 1% trailing rule, until clearly
defined structures have formed, at which point they then become the basis of your
stop point. You may even decide to change your rules slightly depending on the
circumstances prior to the trade. For example, I am always more conservative with
my management style, more eager to capture the bigger move and more willing
to sit through the deeper pullbacks and corrections when I am up on the month by
5% or more. By having solid profits locked in, I am more comfortable to see a 3%
profit pull back and take me out for 1% etc.
If you decide to adopt a more hybrid management approach, just know in
advance that a clear plan before entering the trade will reduce your susceptibility

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to making emotional decisions under the pressures of the live market

environment.

Maximizing Profitability: Scaling-in and Risk Pyramiding

Trade management extends beyond simply knowing when to close a position, it’s
also about maximising the amounts of profit we can extract in a trading idea
through additional, multiple trade setups. In other words, trade management is
just as much about knowing when to add as it is when to close. The 2 following
techniques will show you how to effectively leverage additional trade setups to
maximise your profit in trades whilst still adhering to your 1% risk management
model.

Scaling-In

Scaling in allows a trader to fully capitalise on an impulsive move by adding

additional positions to the original trade. A scale-in can potentially double the
returns made on the original trade but it comes with a trade-off – you could
potentially end up eating into the locked in profits of the first trade if the scale-in
hits its 1% stop loss point. Therefore, scale-ins should only be taken in specific
trading conditions, where there is a high-quality setup that is in alignment with the
higher time frame momentum. Let’s look at an example.

Suppose you’ve taken a Retrace trade after the third clear rejection at the top of an
ascending reversal channel. You took the trade in anticipation that should price
break the channel, it is likely there will be an impulsive leg to the downside. Price
does indeed break the channel and has moved enough in profit to warrant
moving your stop loss to the breakeven point. Price now corrects on the 1-hour
timeframe creating a clear Bear Flag. Because the risk from the first trade is
removed, you are free to take this second opportunity. If price continues its
downside momentum, as per your original forecast, you’re going to have 2 active
positions in which to capitalise, whilst still never having exposed your account to
more than 1% risk.

When you are playing a much bigger move and the market is very impulsive, there
can sometimes even be multiple scale-ins, potentially 2 or more chances to fully
exploit an impulsive directional move. These are time when you can experience
rapid percentage gain. I will provide a real example in which I used scale-ins to
extract double digit returns in USD/CAD shortly.

Guidelines for scaling in:

• The first trade is risk free with the stop having been moved to either
breakeven or with profit locked in.
• The scale-in should be a clear, high-probability trade with higher time frame
support.
• The scale-in must be in the same direction as the first trade.

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Image 6.5: Scale-in on USD/CAD. Point A shows the original trade, a small Bear Flag which was
executed on the 15-minute chart. Although not shown, the higher time frame was giving clear signs
that the pair could be primed for big downside movement. As per my management rules for this
trade, my stop was moved to 3% profit by the time the scale-in at B presented itself. Because the
first position was now completely risk free, I was free to enter any additional scale-ins. After B was
executed, I continued managing the first trade using the 1% trailing method, placing B’s stop at the
same price level. After reaching the 11% mark, stops were moved to the 10% level for A’s trade,
which was hit shortly after. A was closed for a 10% profit, while the scale-in, B was closed out for
6.72%: a total of 16.72% over the 2 trades. The entire position lasted no longer than a week. That is
the power of scaling-in.

Risk Pyramiding

This is an advanced scale-in method. I believe this is an original idea that has
grown out of my desire to amplify percentage returns in impulsive, high-
probability conditions. Risk pyramiding involves using the locked in profit from the
original trade to assume more risk in the scale-in trade. When done correctly, this
strategy can massively amplify profits while still only ever exposing no more than
1% of the account over the entire trade idea. Here’s an example.

Imagine the trading situation is the same as the previous example. I have identified
a clear Bear Flag after heavy downside momentum. I take the trade assuming 1%
risk, as normal. A scale-in opportunity presents itself in the form of another Bear
Flag continuation pattern. At this point, the original trade has 1% profit locked in. I
take the second, scale-in trade but assume 2% worth of risk. The trade continues
to drop further, making 4R (4%) on the first trade and 3R (6%) on the second trade.

What makes this form of aggressive scaling so effective is that should the scale-in
hit its stop loss, you would still only be down -1% over the whole trading idea. You
would have lost the normal 1% risk your rules permit you to lose in the scale-in and
the 1% worth of profit you had locked in from the original trade. However,
because the trade continued to move in your favour and you utilised the standard

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1% trailing stop loss rules on both trades, you ended up being taken out for 4% on
the second trade but added an extra 6% from the second trade. That’s a 6% extra
profit differential for assuming the risk of giving 1% worth of already locked-in
profit back to the market. You risked a locked-in 1% for the benefit of an extra 6%.
It’s this asymmetrical reward to risk that makes these opportunities so effective.
The following rules should be adhered:

• You should already be positive for the month

• The scale-in needs to be a clear, high-probability trade with higher time
frame support
• The original trade must have at least 1% profit locked in before taking the
2% risk on the scale in (it’s this locked-in profit that is essentially being
pyramided onto the second trade)
• If your first trade has 2% locked in before the scale in presents itself, this
doesn’t mean you can now assume a 3% risk on the second trade. I have
tried experimented with this idea and whilst the logic of it still applies (in
that the overall risk assumed in the two trades is still 1%) you’ll only be
frustrated when you end up taking a 1% loss on a trading idea that did, at
one point, have 2% locked in.

I understand this concept may seem slightly confusing at first, especially

considering it’s an idea you’ve probably not come across before. However, the
intelligent use of this strategy, specific to only the highest-quality opportunities
can massively increase percentage returns. This is an advanced technique that
needs to be used diligently as poor trading setups which hit their stop points are
only going to wipe out the profits you’ve locked in by loading them into
secondary, low-quality trades.

Again, I have provided a real example of this technique in use below. Study it
carefully before attempting to apply Risk Pyramiding into your own strategy.

Image 6.6: Risk pyramiding on EUR/AUD. The first entry is taken on the break of the Bear Flag.

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Using the 1% trail management method, the stop loss is moved to 1% profit (level marked A) as
price reaches the 2% profit milestone. The scale-in, another Bear Flag at B is taken with a 2% risk. I
have effectively used the locked-in profit from the first trade to size the scale-in beyond the default
1% risk level. In this instance both trades are managed independently, each using the 1% trail
method. The original trades reaches a max profit of 6R, warranting a stop adjustment to the 5R (5%
at D) profit level. The scale-in reaches a max profit of 3.2R (6.4%), warranting a stop adjustment to
the 2R (4% at E) profit level. The result? 11.4% over a 6 day trade.

Conclusion

Throughout this chapter I have presented several ideas regarding trade

management, from aggressive risk pyramiding when second scale-in
opportunities present themselves to the different strategies when managing our
active positions. However, there is one common theme underlying all these ideas:
they must be adapted to your own personality and style. Simply selecting one or
two of these ideas and incorporating them into your own trading and expecting
positive results is not enough. There’s no guarantee that what you’ve chosen to
implement is indeed right for you and your trading preferences. A trader who is
more risk conservative may not harmonise with the risk pyramiding strategy while
a more aggressive trader may find it’s the perfect tweak to amplify his returns. A
trader who prefers shorter-term trades lasting a day or so will resonate with the 1%
stop trail management style well while a longer-term swing style trader who is
comfortable holding through the longer pullback for an overall higher reward may
prefer the market structure stop loss method. Alternatively, someone else might
prefer to use both methods depending on any number of variables, creating a
personalised hybrid approach. My point is that it’s up to you to do the hard,
analytical work, experimenting with these ideas and crafting together a style that
works for you.

A Review So Far

The previous 6 chapters have laid a strong educational foundation. In the previous
2 chapters specifically, we have discussed the actual entry methods, Type 1’s and
Type 2’s and begun to understand how they could be used in the context of actual
trading scenarios as well as learning how we can manage our trades for maximum
profitability. So far, everything we have covered together has been theoretical in
nature. There has, as of yet been no attempt to construct a systematic trading setup,
with precise entry and exit points. Chapter 7 will bring everything you have learnt
so far into 5 specific trading patterns. However, before moving on and dissecting
the actual trades, it would be a good idea to take stock and review everything you
have covered so far. By putting everything into a workable context, you will be able
to go into the next chapter, with a confident understanding of how everything we
have studied so far applies to the trading patterns.

The Principles of the Market

• Markets moves in one of two ways; impulsively and correctively.

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• The most important part of chart analysis is understanding whether the

market is in a corrective or impulsive phase.
• Corrections form discernible patterns and structures which provide a
directional bias, depending on whether it is an ascending or descending
structure.

Entries

• Most trade systems broadly fall into one of 2 types: breakouts and reversals.
• The Type 1 and Type 2 entry methods provide us with a means of leveraging
both.
• Other entry considerations are high-impact news events.

Risk Management

• The 1% per trade risk model and the 3% account risk rule ensure that no
individual trade, or string of trades will cause irreparable account damage.
• The placement of a technical stop allows us to define our risk and establish a
correct position size for the trade.

Trade Management

• 2 main management methods are used to systematically lock in profits in

active trades: the 1% trail and the structure trail. A trader can also blend the
two to suit his personal style and risk preferences.
• Scaling-in and risk pyramiding allows us to fully capitalise on additional
entries which may present themselves.

Trader Action Points

• Trade management refers to everything that happens after the trade has
been executed and has 2 main goals: closing positions when the market
calls for it and maximising profitability from the trading idea.
• The 2 main management styles are:
The 1% stop trail: A simple mechanical system which trails the stop by 1%
for every percent of profit the market moves in our favour.
Market structure trail: Using newly developed structures on the entry time
frame as the basis of our stop loss locations.
Take profit orders can also be used in circumstances where it is unlikely
the trade will continue moving in our favour, as in CounterPattern trades or
when there is nearby support and resistance levels.
• Should additional entries present themselves after the original trade has
been placed, we can enter these trades using 1 of 2 methods providing the
1% risk from the initial trade has been removed.
• Scaling-in means entering additional trades that are within the same price
leg as the first trade. Second or third trades, mean we can fully capitalise
when the market presents additional trade entries, whilst still never

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exposing our account to more than 1% risk. Scale-ins must be in the

direction of the first trade, taken on the continuation flags after the move is
underway.
• Risk pyramiding is an advanced scale-in method in which locked-in profits
from the first trade are used to amplify the risk in the scale-in trade. By
putting on 2% risk in the second trade, we can potentially double the
returns we would have otherwise made on that trade, whilst still never
having exposed our account to more than 1% risk over the whole trading
idea. Risk pyramiding should only be used by experienced traders when
certain criteria have been met.

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CHAPTER 7 – THE SETUPS

“The goal of a successful trader is to make the best trades. Money is secondary.” –
Alexander Elder

The aim of this chapter is to present several examples of 5 core trading setups
based off the ideas we have explored thus far in the previous chapters, applied to
real-trading scenarios. The chapter concludes with a practical trading checklist that
will make sure we have considered all variables that may influence our decision to
enter a trade. It is important to note that the following examples reflect my unique
trading style and personality. However, these setups are incredibly adaptive and
versatile, and they can be moulded to almost any trader's trading style and risk
preferences. My personal style can be summarised as follows:

• Trading in alignment with the bigger institutional money flows.

• Waiting for precisely defined patterns that indicate there is a probable edge
for the trade moving in my anticipated direction. These patterns must give
me clear risk levels (stop loss points) for each trade.
• Managing my risk exposure consistently as to never risk more than 1% of my
account in any individual trade.
• Trailing my stop loss using both mechanical and discretionary methods,
based off the evolving price action.
• Predominately trading in alignment with the higher time frame structure
and momentum. Only rarely will I attempt Type 2 entries at the top of a
reversal structure, instead preferring to wait for the first continuation of the
move after the initial reversal.
• In almost all cases, I am playing for one clean impulsive move in the market.

I think the last bullet point is particularly crucial: my style is to take money out of
one impulsive leg. It is not in my interest to hold positions through deep corrective
pullbacks, playing the much larger swing-style move. My style is one that requires
precise entry points and active trade management. I have accepted, ahead of
time, that in many occasions, I will be taken out of a trade for a profit, even though
the market will eventually continue to move in my favour. If it is your proclivity to
adopt looser management rules, playing the longer swing and are comfortable
holding through the deeper corrections, then that is fine. The ultimate goal of any
individual, self-directed trader should be to build a unique trading plan adapted
to their personality and style, not to blindly copy someone else's methods. With
that being said, I believe there are certain fundamental disciplines that should
form any trader's plan. Every trade, without question or hesitation should have a
clear, exit point that must be respected when hit and every trader, regardless of
style or personality should always keep the risk in any trade small.

Valid Doesn’t Mean High-Quality

Before I introduce you to the 5 different trading setups in detail, there is still some
ground to cover regarding entering the market. The setups you are about to learn

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could unlock a massive amount of potentially valid trading opportunities. Your

current understanding of price action and these setups will at first, turn the market
into an endless stream of possibilities to grow your trading account. Beginning
traders may struggle to process the sheer amount of opportunities the market
seems to now be generating. It will not be difficult to find multiple valid instances
of these trades setting up. However, a valid trade is not necessarily a high-quality
one. By limiting your trading to only the highest-probability setups, you will
dramatically increase your overall strike rate as well as extract higher average
profits from these trades.

Here are some points to help you differentiate between valid and high-quality
trades. Some traders may find it useful to incorporate some of these points into
their pre-trading checklists which are discussed at the end of this chapter.

Pattern Resolution
‘Clean’ patterns with clear objective touch points invariably perform better than
messy, more subjective patterns. High-quality setups should be immediately clear,
jumping out the screen at you. If you must force your eyes to identify a pattern, it
probably isn’t there. The best setups are recognised within seconds, so look for
easy trades, only amateurs look for challenges.

Image 7.1: The power of pattern resolution. The chart to the left shows a high-probability Bull Flag
setup, the image to the left a valid Bull Flag. Both are completely valid, and one could be justified
taking a long on either of these setups. However, traders who can spot the subtle clues that
differentiate high-probability trades to merely valid trades will take less losses and extract high
profits from their positions. In this case, the first clue was the preceding impulse at A. The left chart
is very strong, characterised by multiple large green candles. The right chart however, whilst still
impulsive, doesn’t show as much strength and conviction in the preceding impulse. There are
multiple pauses and small corrective structures within the impulse leg, suggesting less aggression
on the buying side. The second clue is the touches which define the flag’s structure. The left has
clearly defined multiples touches, validating the pattern. The right is much more subjective with
only 2 touches on the highs and lows. I believe many traders could dramatically improve their
results by focusing on only the highest-probability setups and eliminating, or at least reducing the

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numbers of merely valid trades. Remember, you do not need to be involved in every trade, only
the best trades.

Confluence
Many trading strategies will talk about ‘confluence’; the combination of many
technical trading signals all suggesting the same directional forecast. The idea
behind confluence is a powerful one: two entry signals are better than one, and 3
are better than 2. Having multiple signals all aligned significantly increases the
probabilities of a successful trade.
Confluence factors can come from any additional component(s) that support your
trading idea. Imagine confluence as like building a portfolio of evidence to take a
trade. Refer to the simplified illustration below to see the difference between a
valid and a high-quality trade by using the concept of confluence.

Image 7.2: The 4-hour chart of GBP/USD powerfully demonstrates how multiple confluence
factors can build a trading idea. An incredibly strong impulse down, fuelled by negative
fundamentals pushes the pair to the downside (A). Price then forms a clear Bear Flag (B). A smaller
corrective reversal channel forms within B’s structure (C). After the break of C, price then forms a
smaller Bear Flag, more visible on the hourly time frame (D), setting up a clear trading opportunity.
4 clear aligned confluence factors, all with the same directional forecast allowed me to position
myself into a powerful trade.

Where it is in Relation to the Higher Time Frame

Always know where the higher time frame structure is in relation to the setup you
are evaluating. Take a simple ascending reversal channel. You could identify 2
instances of the same pattern, however, a reversal channel leading into a
resistance level has a significantly higher chance of playing out than one that is
forming with no other structural support, one that is in ‘no man’s land’ if you like.
Refer to image 7.3 below.

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Image 7.3: 2 similar ascending channels. The channel marked A is not supported by any other
structural components. Whilst it does break the channel rather impulsively, it does not lead to any
extended downside price movement, failing to even reach the inflection point at the start of the
correction (blue line). The channel marked B however, whilst very similar from a purely pattern
perspective has one key difference – it has formed at a level of higher time frame resistance (blue
zone). Understanding where B was in relation to the higher time frame (an area of probable
downside reversal) would have indicated that B had a significantly higher probability of leading to
meaningful downside movement, which it did, leading to an extended downtrend lasting many
months.

Entering the Market: Common Problems

Many new traders come into trading with a need to control the market and instead
end up with the market controlling them. Their desperate need to be involved
with the market normally manifests itself in a series of often unnecessary losses.
Here are the 3 main challenges that traders are likely to face with practical
solutions on how to eliminate them.

Chasing every move: FOMO trading

One of the biggest problems that I initially struggled with early in my journey was
fear of missing out or FOMO trading. FOMO stems from our need to constantly be
involved in the market, chasing every price movement in every market on every
day in the hope of scraping out some incremental percentage points. FOMO leads
to a trading overzealousness, jumping into every low-quality trade that presents
itself. Pro traders on the other hand are much more selective of the trades they
enter. To them, each and every trade is an investment, and only the best deserve
their capital. They don’t get caught up in every price movement in every market.
They are willing to miss moves if there is no evidence of a high-quality trading
setup. Be like the professionals. Use the guidelines in the previous section on the
difference between valid and high-quality trades to help filter out the best from
the rest.

Traders are most likely to become susceptible to FOMO during slow market
conditions, where finding high-quality trading opportunities is like trying to find a

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needle in a haystack. Conditions like this – characterised by low volume back and
forth price movements can last from a few days to a few weeks. This is where many
people become bored. Trades which they would have previously passed upon
suddenly start looking extra attractive. It’s in these times where a trader must learn
to exercise patience. Don’t try and combat the condition by forcing trades.
Instead, think of it like this: money saved during weak trading periods is money
earned. Learn to stay out of the market when it's not acting in a way conducive to
your trading methods.

Being presented with multiple, conflicting signals

When presented with multiple, conflicting signals, always go back to the bigger
picture and review the higher time frame. This simple rule will help you see things
from a much clearer perspective than the zoomed in 1-hour chart. What can look
like a load of mess on the 1-hour or 15-minute time frame can sometimes be clear
structures on the higher time frames. Look at the chart below.

Image 7.4: The chart to the left shows the 1-hour time frame. Messy price action makes it hard to
ascertain a directional bias. It could be easy to justify both long and shorts from this perspective as
an intensive enough analysis could warrant both. However, the chart to the right paints a very
different picture. It gives the mess we see on the hourly chart much needed context. We can see
that price has actually come from a strong upwards leg. While it is far from a textbook impulse, it’s
more about what occurs next – a descending correction which hasn’t retracted too far back into the
first upwards move. From this perspective, it’s easy to understand why you’d now have a strong
long directional bias, anticipating the current messy range is the correction to take price higher to
complete the impulse-correction-impulse.
Key takeway: If you ever find yourself stressed out trying to make sense of things on the lower time
frames, it’s a sign you probably need to zoom out and look at the bigger picture. Entering the
market should not produce any stress or hesitation.

Your feelings about a trade

It’s all too easy to let your emotions come into play when evaluating potential
trades. We can let our feelings about a trade influence our decisions, taking trades
that we think are better than others. This is a mistake. Never ever filter out setups
because of how you 'feel' about them. Our feelings have nothing to do with how
the next trade will play out. Profitable traders focus on the objective realities of
market movements and not on their feelings, emotions or gut feel.

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5 Actionable Trading Opportunities

With that covered, it’s time to explore 5 practical trading setups you can begin to
add to your own trading inventory. You will notice the 5 setups you are about to
discover are varied in their approach, some trading in alignment with the trend,
others counter to it. These setups have been specifically developed and chosen to
give you a broad range of tools to capitalise in a wide range of market conditions.
Some traders recommend only trading one or two main setups believing they will
become an expert in those specific trades, intimately familiar with the unique
characteristics of the pattern. However, I believe this presents one problem: by
only focusing on one type of trade, you will forever be trying to force all market
movements into the context of that trade. A counter-trend trader is going to
forever be looking for chances to fade that trend, missing high-quality
continuation trades. If you're only a trader who trades with the trend, you're going
to miss the signals telling you the market is primed for a reversal. As the popular
saying goes - if the only tool you have is a hammer, every problem is going to look
like a nail. A handful of trade setups, however, gives us a complete tool kit ready to
capitalise on any kind of market condition.

You will find 2 examples of each of the setups, each provided with 3 charts. The
first is of the higher time frame, either a 4-hour or daily chart. This helps provide
you with the context within which the trade was taken and easier understand the
trading idea as it relates to the bigger picture.
The second chart shows the entry time frame, either the 15-minute or hourly chart,
displaying what would have been visible to the trader at the actual point of entry. It
is my recommendation you spend some time studying this chart, paying extra
attention to the structure I have drawn in and the provided annotations. Next, try
and visualize and forecast the different movements that could occur based off the
pattern. This exercise will help you better identify likely price paths and train you in
thinking in terms of the probable and possible.
The third chart shows the outcome of the trade and the following price
development. You will see how the trade played out along with notes on how I
managed the trade to completion. Another useful exercise would be to slowly go
through chart 3 as price develops and consider how you may have decided to
manage the trades and what accompanying emotions you may have felt as the
price action evolved.
In order to not overload the book with dozens of examples, the 2 examples of
each setup have been carefully chosen to help provide a good foundation for
learning these patterns. I would again like to remind you that these isolated
examples are all real trades and I have included both profitable and losing
positions. I think this is hugely important. Many books and courses solely focus on
profitable, cherry-picked examples which cleanly demonstrate the completion of
the trade. However, in order to best prepare you for the realities of trading, I deem
it appropriate to include times in which the pattern failed. You must remember
that these patterns do not play out 100% of the time. If you haven't fully accepted
the risk and anticipated the failure of a trade before executing it, you'll end up with
tunnel vision: thinking that the market must do something because of your

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identification of a specific pattern or setup. Understanding the price action

associated with the failure of patterns is crucial in building intuition and supports
your subconscious in thinking about the dynamic nature of price action. You
would be wise to study these as diligently as the cleaner examples of profitable
trades.

Finally, the annotations I have provided below each of the examples have been
filtered as to include only the most obvious and relevant elements of the trade.
Studying these patterns in intensive detail may lead you to discovering other
supporting confluence factors and/or information which could reveal another
possibility. Whilst it is advantageous for you to recognise these other pieces of
information, I ask you to heed this advice: don't over-analyse. If analysing every
single candlestick and every potential pattern/structure/trendline becomes
habitual, the unfortunate result is a trader that finds it almost impossible to enter
trades. I call this analysis paralysis, the tendency to subject a potential trade to
rigorous scrutiny and deep investigation which supports a dialogue that is
impossible to make sense of. Instead, I will (and I recommend you do the same)
focus on only the most obvious and evident factors.

One last note; these setups are the most reliable and profitable opportunities I
have used time and time again, but these are my setups and my methodologies.
For you to really become the best trader you can become, you must make them
your tools and your methodologies. By all means, use everything in this chapter
(and the rest of this book) as an inventory of ideas, from which you can cultivate
your own approach to trading the markets but don’t be misled into simply thinking
copying these setups will be enough to make you profitable. You must fit these
setups into a context that makes sense to you. For example, the first 2 patterns you
will learn are Bull and Bear Flags, common high-probability patterns with objective
criteria. However, learning the pattern isn’t enough. You’ll need to experiment with
these setups within the context of other price action considerations. You might
find that only taking the first continuation flag after an impulsive break of a
structure is your preferred way of taking these trades as second and third flags
which develop have a lower probability of playing out before a deeper correction
forms. Or you might find that the idea of taking a Retrace doesn’t resonate with
your style of trading in alignment with the overall trend. If that’s the case, then
don’t take the Retrace and instead wait for the first continuation setup after the
move. The point is: these trades can be applied in whatever way makes sense to
you and it is your job to do the necessary testing to do just that. With that in mind,
let’s get into the first of our 5 setups, my personal favourite…

Bear Flags:

Bear flags are one of the most common and my personal favourite trading setup.
They are extremely common and highly reliable patterns. Entry can either be
either a Type 1, taken on the break of the structure or within the pattern itself after
a third rejection as a Type 2 which will be covered in the Retrace setup. The term
‘flag’ includes all the possible variations of this common pattern – pennants,

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triangles and ranges, which are all functionally the same thing. Our focus isn’t on
the slight differences in the shape of the pattern, but rather the underlying thesis
behind it – that this is a continuation of the previous downside move.

Thesis:
Corrections are the most important structural feature of continued market
movements. A lower time frame, countertrend correction allows the trader to
position himself into the larger higher time frame impulsive moves at
advantageous prices. The presence of the correction and the fact that price is
holding these new lower levels by forming the flag and not immediately retracing
back is a signal that price has found a new consensus of value and the underlying
selling pressure which created the initial impulse is likely to continue on the break
of the flag.

Entry Criteria:
The market has made an impulsive move prior to the correction backed with clear
directional momentum. Flags that are preceded by strong impulses are more
likely to see continuation after the correction.
Providing this main prerequisite has been met and there are no contradictory
conditions to taking the trade, then our attention turns to the structure of the
pattern itself.
The flag should have 2 clear touch points on the top and bottom – a minimum of 2
rejections allows us to form the basis of the pattern. The price action within the
pattern will typically show reduced activity – there will be smaller range candles
and will typically not exhibit strong countertrend momentum.
The correction will either form sideways or counter to the previous impulse.
The pullback should not retrace more than 62% of the previous impulse (see the
‘Other Comments’ section for how to use the Fibonacci tool for aid).
The specific trigger that justifies an entry is a downside break of the pattern,
indicating the market is ready to continue its bearish move.

Stop Placement:
There are 2 stop placements for this trade, depending on the exact shape and
extent of the Flag and of the trader’s aggressiveness. The more conservative
approach is placing the stop underneath the flag’s lower trendline. By placing the
stop underneath the whole pattern, only a truly complete invalidation of the
pattern would take the stop out. Price would not only have to retrace back into the
pattern but actually break the lows of the structure before hitting your stop. This is
normally indicative of a failed flag. This method will allow for a certain amount of
market noise, should the market not immediately impulsively move away from the
entry, generally resulting in a lower percentage of losing trades. However, the
trade off is that the larger stop loss will decrease the overall reward to risk ratio of
the trade. The second method is placing the stop below the pattern’s upper
trendline. The idea is that should price retrace back into the original pattern, that is
evidence our trade has failed, as price has failed to continue and has instead
pulled back into the pattern, possibly developing a larger structure. This more
aggressive strategy will typically result in a higher percentage of losing trades but

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offers substantially higher profit returns on the trades which do successfully play
out. Another consideration to take into account when placing the stop is the shape
and size of the flag being traded. A very tight flag with a small range is best taken
with the stop completely outside of the pattern as a stop within the pattern itself is
simply going to be too close to the entry and could easily result in being tagged in
and out of the market very quickly.

Management:
Any good trade management plan will allow for the possibility of continuously
locking in profits as the market moves in the trader’s desired direction whilst still
allowing sufficient room for the market to breath. You are already familiar with the
2 main trade management strategies. The first would be to use percentage profit
targets as the stop loss adjustment milestones. As price reaches a profit level
equal to our initial risk, the stop loss would be moved to the breakeven point. As
price reaches the 2% profit level, the stop is moved from breakeven to 1% and so
on. This is a fine plan better suited to a more aggressive trader who doesn’t want
or isn’t willing to hold through potentially deep corrections and pullbacks. This
method is also highly mechanical, allowing the trader to set alerts at the
designated profit targets for when he will move his stops. He is then in a stress-
free position whereby he need only take action when his alerts are triggered.
However, this approach does not account for the reality of developing market
structure. The stop loss adjustments are being made merely off arbitrary levels and
not off information being provided by the market.
The second approach incorporates this evolving, dynamic information by using
significant market structural points as the basis for our stop loss placement. This is
a robust discretionary management technique that will allow a trader to capture
significant profits in impulsive environments. As new patterns and structures are
formed on the entry time frame, the stop loss will be placed just above these areas
of ‘market furniture’. As price develops new structures, the stop loss is
continuously moved behind them until the stop is triggered.

A hybrid strategy combining these 2 different techniques may also be used. For
example, the trader may use the mechanical 1% stop trail method until clear
structure has formed, before then adjusting training behind clear structural points.
This is covered in detail in the ‘Discretionary Management’ section in the previous
chapter.

A take profit order may also be considered for occasions when nearby support is
present. For example, if the Flag is taken where a higher time frame support is 100
pips below where price is currently trading, the use of a take profit just above this
level would make sense as the trader would be expecting a reversal at this level
and not a continued move below it.

Other Comments
Flags are identified using objective, fixed criteria and so there is little subjectively
in these patterns. Clear entry and stop loss points leaves little room for trading
errors.

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The depth of the correction* can often be a signal as to the selling pressure in the
market. If sellers are aggressively offloading positions, you'll typically tend to see
shallower pullbacks before the next impulsive leg to the downside. If there is real
conviction from the sellers, they will not allow the market to retrace much, willing
to continue their selling at these depressed prices. Contrast this however, to a
situation in which the sellers are less aggressive and more complacent. They are
going to want to see price reach higher levels before committing themselves to a
short. The resulting continuation impulsive is often less aggressive. In short, the
deeper the pullback, the less aggressive the impulse out.

*The Fibonacci retracement is a popular technical analysis that allows you to measure the depth of
a correction relative to its previous impulse. The tool plots specific percentage retracement points
onto the chart, using the popular Fibonacci sequence as its reference points; 38.2%, 50% and
61.8%. Please note that the 50% retracement level is not actually a Fibonacci level but is a common
reversal point for many corrections.
As a general rule, the deeper the correction, the less likely I am to consider the trade. Should a
correction exceed the 62% level, I will normally pass off the trade as pullbacks this deep don’t tend
to offer high probability trades.
By focusing on setups with shallower corrections, we can better select higher quality trading
opportunities. This filter can be applied when multiple similar setups present themselves, allowing
the trader to focus on the highest-probability setups.

TradingView lets you customise the Fib tool so that it will display only the levels you wish to be
displayed. I have my tool configured to show the 38, 50 and 62% retracement levels. These are
very close to the actual Fibonacci numbers.
You can also customise the colours for the corresponding retracement values. I have configured
my tool as below:
The area between the start of the retracement and the 38% level shaded a dark green (indicating
highest probability)
The area between 38 and 50% shaded lighter green (valid)
The area between 50 and 62% shaded as yellow (lesser probability)
Anything beyond the 62% level shaded as red (low probability)
To customise the tool on TradingView, plot the Fib onto your chart, right click and hit the ‘Settings’
tab.

Bear Flag 1: EUR/JPY, 2%

Image 7.5: We’ll begin our study of Bear Flags with a simple trade that encapsulaytes many of the

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fundamental componenets of the strategy: trading in aligment with the higher time frame structure,
using the lower time frames to locate a high-probability entry point and using simple management
rules to manage active trades, removing emotion and subjectivity. As with all of these trade
examples, anaylsis begins on the higher time frame. In this instance, we can see that price has
formed an ascending channel which it has broken impulsivley at A. Should we see a lower time
frame continuation pattern, we can capitalise on any further downside momentum. Trading can
literally be as simple as that.

Image 7.6: Zooming in on the 1-hour chart we see an excellent, textbook version of a tight Bear
Flag. Once a market makes a strong downside impulse and is able to consolidate, without
retracing deeply back, this sets ups a good continuation trade on a successful break of the pattern.
Bear Flags work best when the pattern is nested within a higher time frame momentum leg. From
the entry time frame perspective, it is simply a correction, a moment in which price has paused.
However, from the higher time frame perspective, which is showing considerable downside
momentum, this is a key entry point into this move, hidden on that time frame. The entry order was
set just below the large red candle which penetrated the flag’s structure.

Image 7.7: Shortly after entry, the market very quickly impulses in the anticipated direction. This is
of course, the ideal scenario, a sharp directional move with little or no retracement. Using the 1%
trail management method outlined in chapter 6, the stop loss was moved to the 2% profit level as
price reached the 3% profit point. A retracement took me out for 2% around 6 hours after trade
entry. I have highlighted the stop loss level with the red dotted line and pinpointed the trigger
point with the red circle and will continue to do so for all the following examples.

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Bear Flag 2: EUR/USD, -1%

Image 7.8: Analysis begins on the higher time frame, in this case, the 4-hour chart. We can see
that price has formed a corrective channel (A) to which it has broke impulsively (B). Should price
give any lower time frame continuation flags to get short, we could position ourselves into a
downside move which would likely go to the correction’s inflection point (blue line) and potentially
much further.

Image 7.9: The 1-hour time frame presents a somewhat messy Bear Flag. This examples nicely
demonstrates the difference between a valid setup and a high-probabilty one. Whilst the flag
meets our criteria; we have the impulsive move at B, and then a correction with 2 touch points on
the highs and lows, it is certainly not the cleanest version of this pattern. The touch points are not
that clear and to the trained and experienced eye, the flag could look somewhat undeveloped.

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However, with the amount of potential downside this trade presented and given the impulsive
price nature before the correction, entry was executed on the break of the Flag with a slightly
larger stop loss than normal, to account for the possibility of a prolonged correction.

Image 7.10: The trade is unsuccessful, triggering the stop loss point shortly after entry. I included
this example because it helps highlight a common trading mistake – dismissing a market after a
loss. It’s common for many traders to move on to other markets after a loss, removing that market
from consideration. However, this all-too common trading error can be costly. Diverting attention
away from a market just because you’ve taken a loss could mean you miss another high-probability
re-entry into the trade. A great rule after taking a loss is to continue monitoring the market,
understand that price may be forming a larger structure and forecast the next probable entry
location. In this example, price went on to form a larger Bear Flag. A switched-on trader could have
evolved the structure (A) and taken another entry on this more developed Flag, leading to a
sizeable profit which would have more than covered the loss of the first trade. For the purposes of
highlighting this point, I have kept the original Bear Flag drawn in in dotted lines.

Bull Flags

Like the Bear Flag, trend continuation trades offer some of the most reliable and
consistently rewarding trading patterns. Bull flags are simply the reverse of the
Bear flag, instead coming from an upwards impulsive price movement. I have
deliberately kept the breakdowns short and concise because the only
fundamental difference between this setup and the previous is the direction in
which it’s going. The exact thesis, entry and management criteria can be thought
of as being exactly the same, but inversed.

Thesis:
Trades which capitalise on the market’s tendency to trend should form the
backbone of any trader’s plan. Traders should become very familiar with these
patterns and the resulting price action as these trades alone could constitute a
comprehensive trading repertoire.

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Entry Criteria:
The market will stage an impulsive move to the upside. Price forms a corrective
consolidation pattern that is either sideways or descending. 2 clear rejections on
the pattern highs and lows are connected to form the shape of the Flag.
The flag should not retrace any more than 62% of its previous impulse.
An entry order is set slightly above the upper trendline, triggering the trade when
price breaks out of the pattern, signalling it is ready to continue its upward leg.

Stop Loss Placement:

The more conservative approach is underneath the flag’s lower trendline. A
breakdown of the flag will trigger the stop, indicating the pattern is invalid and
that a more complex structure may now be forming. The more aggressive
approach is underneath the pattern’s upper trendline. Should price retrace back
into the pattern, the stop will be triggered.

Management:
Traders can use either of the 2 management techniques already discussed or
prefer to use a tailored approach which incorporates both. The 1% and structure
trail methods will continuously capture profits as the trade moves in the trader’s
favour whilst still allowing the market the possibility of achieving higher profits.

Other Comments:
The Fibonacci tool can again be used to measure the extent of the correction’s
retracement. The same rules and guidelines as the Bear Flag apply.

An easy and effective filter to separate high-quality and sub-optimal trading

environments is to only trade flags which are preceded by sharp, strong,
directional movement. There are many techniques developed in technical analysis
which will help quantify the strength of the preceding move, however I personally
find that a visual chart inspection is just as effective. Even just the exposure to and
the experience of trading even a handful of these patterns will reveal subtle clues
as to what constitutes the most successful flag trades. Is this a move that should
see continuation? That is the all-important question.

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Bull Flag 1: GBP/USD, 3%

Image 7.11: Al Weiss whose quote opened chapter 3 said that he looks for trading opportunties
which incoprate multiple patterns, or patterns within patterns due to these setups leading to high-
probabilty trades. This example neatly illsustatres this concept. The above chart is the daily time
frame of GBP/USD. Even basic chart reading skills would allow a trader to see the impuslive
movement at A and the consolidation pattern that has occurred after: a Bull Flag. The last candle
on the chart shows how price has just penetrated the upper trendline of the structure, hinting at the
possibility of higher time frame buying pressure entering the market. A lower time frame entry on
the 1-hour or 15-minute chart could provide us with a defined entry point. Let’s take a look.

Image 7.12: The 1-hour time frame shows an almost perfect Bull Flag form just after the break of
the HTF structure. Isolate your attention to the flag. We have 3 touch points on the upper trendline
and 2 on the bottom, defining a sideways correction. A long entry order is set on the successful
upside breakout.

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Image 7.13: This simple example illustrates the potential power inherent in the Bull Flag. Note the
context provided by the higher time frame bigger picture: a strong parabolic, impulsive uptrend
adds a significant layer of confidence to the trade. Continuation patterns have a significantly higher
success rate when formed within higher time frame momentum legs. In regard to trade
management, this example perfectly demonstrates many of the techniques listed in Chapter 9: we
have a scale-in at A, in which the trader could have also used risk pyramiding if the first trade had
profit locked in. Furthermore, there were opportunities to manage this trade for a longer holding
period, stop trailing behind structures which would have seen an exit at C for 5.8%. The more
conservative play, using the 1% trail method would have seen an exit for 3% at C. Admittedly, this is
a very clean example of this pattern but I decided to use it as it nicely illustrates the sometimes,
large profit potential that even basic trading patterns can offer.

Bull Flag 2: NZD/CAD, 5%

Image 7.14: I have intentionally used this example to demonstrate the sheer versality of these

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simple price continuation trades. The first example flag appeared within the context of higher time
frame momentum. In this example, the flag appears after extended higher time frame downside
movement. Despite the contrastingly different context surrounding both examples, the criteria and
rules for trading these setups remain the same regardless. The small descending channel at A
formed at the structural lows of the much larger descending channel. Price broke through the
smaller structure and is now in correcting on the lower time frame, hinting that this breakout is
likely to see further continuation.

Image 7.15: The 1-hour chart shows the pattern more clearly. There is a clear impulsive break of
the smaller ascending structure before the slightly descending Flag. The fact price is successfully
holding these prices is the clue that there is likely strong buying pressure sustaining this move and
further upside is probable. The resulting moves out of these simple continuations should be fast.
Consolidations immediately after entry trigger is more indicative of a deeper, more complex
correction. Every trade we take comes from an assumed imbalance of buying and selling pressure
in the market. The sole reason why one would enter continuation trades such as this are under the
assumption that the pressure driving the initial impulse will continue after the corrective pause. If
this assumption turns out to be incorrect, we’ll see a market which will simply go flat or continue to
correct, evidence that the market is still in a temporary state of equilibrium and any edge the
pattern may have had is no longer present. The long entry order was set on the breakout shortly
after the second touch of the upper trendline (the second to last candle on the chart). Use the
zoom function on your desktop or laptop to achieve a much closer inspection of the pattern.

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Image 7.16: As the buying pressure continues, the market quickly pushes to the upside. Either of
the management methods would have sufficed in this example, depending on your preferences. In
this example, I used the 1% trail, locking in profit at each of the corresponding profit levels shown
by the arrows. After reaching 5%, the 2 candle pullback activated the stop sitting below at 4%.

The Retrace

The Retrace is a specific variant of a reversal trade. They are typically used to
position into a price structure which is indicating the market is likely overextended
and primed for a reversal. However, they can also be used to finesse a better entry
into continuation trades which you will see in example 2. The trade entry, by
default, is early. We are anticipating a breakout of the structure before it has
materialised.

Thesis:
The Retrace provides specific entry points into the structures before the
anticipated breakout using a Type 2 entry.

Entry Criteria:
For a short* entry, the market has formed a clearly defined corrective structure on
the entry time frame.
There are 2 clear rejection points on both the pattern highs and lows.
Price rejects off the structure as it approaches for the third touch, showing any of
the Type 2 reversal candlesticks formations mentioned in chapter 5.
The trade must be in alignment with the structure’s directional bias.
The entry order is placed slightly below the reversal candlestick.

*The inverse would be true for that of a long entry.

The best and highest-probability versions of this trade occur when the channel is
moving into a higher time frame reversal area, like a support or resistance zone or

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possible inflection point. These high value areas are monitored by many traders,
ready to enter trades in anticipation of either a breakout of the level or a reversal.
Should the channel break the level slightly, many breakout traders will enter
expecting an extended move away from the level. Often, when the reversal
channel overrides the breakout, many traders will be trapped on the wrong side of
the market providing momentum which will fuel the resulting impulse.

Stop Loss Placement:

The general rule of and usage of stops applies here: place the stop whereby the
triggering of it invalidates the very reason you entered the trade in the first place.
For that, there is only one logical stop location for the stop: just beyond the
structure where the Retrace is being taken. Any price action beyond the structural
level would violate the original pattern indicating the market may be creating a
deeper, more complex correction. One of the main reasons why I like pattern
trading so much is the ability to use defined hard stops which clearly indicate the
specific pattern or structure being traded is no longer valid, as least as it applies to
our trading idea.

Management:
To truly develop a management plan for a trade, you must understand the trading
tendencies of that trade. This means becoming aware of the type of ‘normal price
action’ associated with a trade. From a practical standpoint, a trader should be as
equally familiar with what should NOT happen. Traders will be able to create
tailored trade management plans and potentially reduce the size of losses in failed
trades if they understand what should not happen. In the case of the Retrace, the
expected price action is simple: a quick and sharp move away from the entry
point. Therefore, it makes sense to move the stop loss to breakeven after price has
cleanly moved away from the entry point, regardless of what that translates to in
terms of open profit percentage. From there, either management method will
work depending on your preferences.

Other Comments:
These are riskier trades because you're taking a trade before the anticipated
breakout has confirmed itself, instead entering while price is still contained within
the pattern or structure. However, the trade-off is that if the pattern is valid and
plays out as expected, you'll be getting in at a more advantageous price, allowing
you to capture more of the move.

The Retrace is the most technically complex and subjective of the 4 main trading
setups (not including CounterPattern trades). It would be wise for newer traders to
focus on the other setups and to find consistency with those before attempting to
incorporate the Retrace into their trading plan.

Retraces are always in alignment with the pattern’s directional bias. E.g. A retrace
within an ascending channel would only be taken on the top of the structure to the
downside, not on the bottom trying to play a potential bounce back up to the
pattern highs.

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Retraces can be used to better finesse entries into Flag continuation patterns,
creating a king of hybrid blend of the 2 setups. By taking the trade on the third
rejection of the Flag’s structure, we can position ourselves into the trade at a more
advantageous point with a tighter stop loss than we would by waiting for the
break. Example 2 demonstrates.

Retrace 1: NZD/CAD, 6.5%

Image 7.17: Let’s first turn our attention to the daily chart. This example highlights the importance
of starting with the higher time frames and progressively working our way down to the lower time
frames. From this perspective, we can see a clear significant resistance level with defined rejections
at A, B, C and D. Note that while B, C and D look rather clustered, the 4-hour time frame shows
these as independent clean rejections away from the level. To the right of the screen we can also
see the corrective price nature that is occurring as price begins to reach the resistance level.
Naturally, we would be looking for lower time frame opportunities to short this pair.

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Image 7.18: Inspection of the chart gives insight into the confluence behind this trade and is an
example of the best-case scenario for these trades – an impulsive break of the structure and an
extended trend in the desired direction. Mark this example well. The market rejected off the third
touch of the larger channel (solid line) which coincided perfectly with a third touch off the smaller
channel (dotted line). In addition, we understand that from our study of the higher time frame,
price is right at a key area of resistance (not shown on this chart). Entry was taken after the rejection
candles at point A in the chart below

.Image 7.19: After the initial consolidation around B, the market eventually impulsively moved in
the desired direction. Because the large impulsive move immediately after B occurred during time
in which I was asleep, I decided to use a slightly more discretionary management approach. Seeing
that price has been to a max profit of 8%, my standard rules would have seen me place my stop at

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7%. However, given the impulsive nature of the market and understanding it was highly likely we
would see a correction before continuing the down move, I opted to put the stop at 6.5% to
account for any retracement. After being taken out for the profit, the market did go on to create a
descending channel which failed as price impulsively broke out once again to the downside. I’ve
often had students ask me if I regret occasions like these when I am taken out of a trade only for the
market to continue moving in my direction, banking a much smaller profit than could have been
realised with a wider stop. Unequivocally, my answer is a resounding no. Whilst it’s easy to say in
hindsight what profits you could have pulled out of a trade if you had done this or that different,
the realities of live markets means as traders, we are always dealing with uncertainties. Sure, I could
have used a much wider stop, perhaps locking in only 3% and in this instance, I would have
survived the large pullback and achieved higher profits. But that’s in hindsight. You cannot sustain
a trading career in hindsight. Hindsight trading will not serve you. Eliminate it.

Retrace 2: EUR/JPY, 2%

Image 7.20: The second example of the Retrace shows how we can use it to create a tighter entry
into basic continuation flags, creating an almost hybrid trade. You can see on this 4-hour chart that
there’s not much to analyse here. We have a strong downside impulse at A before what looks like a
correction to take the move lower. Understanding that, we can begin to look for precise entry
points on the lower time frame.

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Image 7.21: A Retrace taken within a Bear Flag on EUR/JPY, taken on the third rejection of the
pattern’s upper trendline (A). The entry order was set below the rejection candle’s body, not the
wick, giving me a high-probability entry point. By utililsing the Retrace, I have been able to position
myself into a Bear Flag with a better entry location and tighter stop loss. This is an example of how
there can sometimes be an overlap between setups.

Image 7.22: Nothing overly complicated regarding management with this one: standard 1% trail
rules, moving the stop loss to 2% as it reached the 3% profit level. Stop triggered as the market
retraced aggressively. Simple entry trigger and simple management rules using price action and
market structure…trading really need not be more complicated than this.

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Structural Break

A classic pattern breakout trade that is rarely taken, instead preferring to take the
trade on the retrace within the pattern or on the first continuation flag. However,
this setup adds another tool to our trading toolkit allowing us to position ourselves
into the break of a structure if neither the Retrace or a continuation flag is possible.

Thesis:
Breakouts can lead to impulsive price movements beyond the structural breakout
point. Price breaking out of corrective structures can give rise to clear directional
movements and the anticipation of price breaking out of corrective patterns forms
the basis for most of the trades highlighted in this book. There are 3 places in
which a trader can trade a breakout; before, during and after. The 3 previous
setups capitalise on breakouts before and after: Retraces are taken within the
structure preceding the breakout and Flags are taken after the break has occurred
where the trader looks to capitalise on any further continuation. These are the
preferred ways to trade these structures. Many traders will accrue a higher
percentage of profitable trades using these methods, often achieving better entry
location and tighter stop losses. However, entering on the break itself can be a
useful tool in the trader’s toolkit for times when the Retrace has already occurred
and the trader can’t commit to monitoring the market for the next continuation.

Entry Criteria:
There must first be an established reversal pattern within which price is contained.
The pattern must be ‘confirmed’ with at least 3 touch points on the tops and
bottoms of the structure. The entry order is set slightly beyond the pattern’s
breakout point, entering the trader after a successful breakout has occurred.

Stop Loss Placement:

Stop placement is usually fairly simple with breakout trades and again, different
strategies can be used depending on individual trading preferences. The 2
locations worth consideration are just below the breakout point and beyond the
extremes of the pattern itself. The first method is certainly the more aggressive
approach, taking traders out the moment a breakout fails to materialise and
instead returns to the original structure. The second approach, placing the stop
beyond the pattern itself is the more solid reference point when taking a breakout.
It is very difficult to justify holding a trade that has not only retraced back into the
original pattern but that has also broken the pattern on the other side.

Management:
Breakouts from structurally significant patterns can lead to extended trends with
multiple impulse legs. Either of the management methods, or a hybrid blend of
them both will work for these trades.

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Other Comments:

The Bull and Bear Flags are in essence, breakout trades, waiting for a break of the
flag pattern to initiate an entry.

Breakout trades can sometimes offer exceptional entries into a higher time frame
pattern. For instance, if price breaks a clear descending channel on the entry time
frame which comes near the bottom of a higher time frame flag continuation
pattern, the breakout entry is effectively acting as an entry into the higher time
frame continuation trade. The complex relationship and interactions of multiple
time frames makes understanding these setups in isolation sometimes difficult.
However, taking the time to understand how setups could relate to one another
and the considerations of other, higher time frames could add significant
confluence to your trades and provide you with a deep understanding of market
movement that many traders will simply never possess.

Structural Break 1: NZD/CAD, 2.7%

Image 7.23: There are many imporant lessons to be learned from this example. Notably, despite a
clear downtrend, it is indeed possible to find entry points where you can effectivley “call the
bottom” as far as the trading nomenclature goes.

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Image 7.24: A clear smaller descending channel has formed at the low of the higher time frame
descending channel. Not only has price reached the key area of higher time frame value in which
we would be anticapting a price reversal but it has done so in the form of a reversal pattern. Should
price successfully break out out of this structure, it’s possible it may be the start of an extended
trend to the upside. If the thought of taking a long after such a clear and extended downtrend
discomforts you, you’re not alone. It is rare I will take an entry like this. Instead, I’d prefer to let the
market confirm where it wants to go and then take the first continuation pattern instead. However,
sometimes it is very possible to use a structural breakout to position yourself early into a dramatic
trend change.

Image 7.25: Price impulsively breaks the smaller descending channel, triggering trade entry. The
market corrects around the entry price, setting up a clear Bull Flag which was actually one of the
examples previously studied. Management was simple, using the structures as guides in which to
position the stop loss. Whilst I prefer to mechanical rules of the 1% trail system, allowing me to set
price alerts ahead of time and relinquishing my need to monitor the market, I tend to deploy the

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structural trail method when I am playing the bigger higher time frame moves. In this case, I was
anticipating an impulsive break of the higher time frame descending channel outlined in the first
chart. I was therefore more lax with the stop loss, happy to sit through some retracement if it meant
the possibility of capturing that bigger move. Whilst the market did not break the larger channel, I
was still taken out for a healthy 2.7% profit. Not bad for a trade that effectively failed.

Structural Break 2: AUD/CAD, -1%

Image 7.26: This is a great example that shows how you can build a trading thesis and use the
setups outlined in this chapter to profit from it. This chart is of the 4-hour time frame. You can see
the impulsive leg at A and the large possible Bear Flag at B. From this perspective, it’s easy to
understand why I was looking for shorts, anticipating the completion of the impulse-correction-
impulse. In chapter 3 you learned the rules to identify the moment a structure becomes invalidated
and loses any directional edge it may have had. The rules state that for us to dismiss a structure, we
must see price break out of it counter to its directional forecast, correct and then impulse away. Pay
attention to the breakout at C. Whilst the first of these conditions have been met (price breaking
out of the structure counter to its directional forecast) look at HOW it’s broken out. Let’s go to the
1-hour to see it more closely.

Image 7.27: The small ascending channel you see at the far right of the screen shows a closer up

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perspective of the breakout of the higher time frame pattern in the chart above. Price may have
broken out, but it’s broken out in the form of an ascending channel, a pattern with a downwards
bias. To really understand these slightly more complex trades, really try and understand the exact
thought process that led to the point of execution. After seeing the channel, and considering the
sheer downside momentum of the higher time frame, I was anticipating a break of the small
ascending and a move back into the original higher time frame flag, at which point the structure
would be evolved as per the rules in chapter 3. The short entry order was set just below the
ascending channel triggering me in should price break out to the downside.

Image 7.28: Point A marks the point in which I am tagged into the trade, by a couple of pips or so.
Upon being entered into the market, price moves to the upside, taking me out for the full 1% loss.
Although not shown on the chart, price pushes up slightly more before the higher time frame takes
over and plummet price to the downside. Did the loss bother me? Not in the slightest. The loss was
capped at 1% while the expected profit was at least 5%. In this instance, it didn’t work out and I
booked the loss, but that’s a trade-off I’ll take time and again.

CounterPattern

Many traders can focus their trades too heavily on impulsive, trending
environments where simple continuation trades will extract outsized profits
relative to the skill or effort that is required to trade these patterns. This is certainly
not a bad thing, as many of the easiest trades come in these conditions. However,
there are times when the market will not be impulsive or trending, where price will
be locked in a larger consolidation structure that it will need to break out of before
continuing its move. A wholistic understanding of market structure and a
comprehensive trading programme requires a good grasp on how to trade within
these HTF ranges, even if those trades are against the directional forecast
provided by that pattern. This is what CounterPattern trades achieve.

Thesis:
Higher time frame structures and patterns can sometimes take many days or
weeks before they play out. CounterPattern trades allow us to capitalise on valid
trading setups from within while the higher time frame structure is forming.

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Entry Criteria:
These trades can come in many different forms and variations but the common
dominator of these setups is that they are any valid setup taken within the confides
of a higher time frame structure that has a directional bias opposite to the trade
that is being taken. The previous description is so important that I feel it needs
reiteration: a CounterPattern trade is any valid setup taken within the confines of a
higher time frame structure or pattern that has a directional bias opposite to the
direction of the trade that is being taken.

For example, you may have identified a Bear Flag within what is a larger daily chart
reversal channel to the upside. The lower time frame flag is still valid, but because
you are contained within a clear HTF reversal channel to the upside, we are not
trading in alignment with the higher time frame directional bias. Should we take
the trade, understanding that we would not be looking to take the trade beyond
the structural levels of the HTF flag will help us identify an appropriate
management style for the trade, possibly using profit targets or an aggressive stop
loss trailing strategy.
Other examples could include a 1-hour Bull Flag within a daily chart Bear Flag, like
the example below.

Image 7.29: 2 valid Bull Flags. The left is taken in alignment with the higher time frame pattern –
price has broken out of a consolidation range, forming a pattern suggesting upside. The right
shows a Bull Flag but contained with a larger corrective pattern that has a downside bias – thus this
would be a CounterPattern trade: a trade taken against the directional bias of the larger pattern. If
you were to take this trade, understanding the difference in management will better help manage
your expectations for this trade. Because you are not expecting price to trade beyond the pattern’s
upper trendline, you would be wise to use a take profit order just below this level. It would be
wrong to use the 1% trail or the structure trail methods here, because the very nature of the trade
means you are not expecting an extended movement beyond the HTF structure. Instead the
aggressive trader would bank profits there and look for a Retrace re-entry on the third touch of the
upper trendline to the short side.

Stop Loss Placement:

Stop losses are placed as per the guidelines provided for each of the previous
trading templates. The fact it is a CounterPattern trade does in no way affect the
trading mechanics of the individual setups, only the expectations of the trade and
the way in which it is managed.

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Management:
When trading within the confines of a higher time frame structure, we need to
adapt our management style appropriately. It's in these conditions that we are
more likely to use fixed profit targets as by default, we are not looking for the
longer-term impulsive driven moves. Trades which run counter to the higher time
frame momentum can often abort quickly as the HTF establishes itself and takes
over, so always be on your management game.

Other Comments:
CounterPattern trading is a more aggressive form of trading and is not for
everyone. Perfect the setups first in alignment with the HTF before attempting
them in a CounterPattern perspective.

CounterPattern 1: GOLD, 0%

Image 7.30: Our first example comes from Gold. While I don’t trade commodities too often, I do
sometimes trade gold and oil when good trades set up. Here, looking first at the 4-hour, we can
see price has moved up quite correctively forming the ascending channel at A. Of course, my
longer-term directional forecast is to the downside. However, as with any corrective price action,
we can never know in advance exactly how long structures will develop and correct for, nor can we
anticipate when price will break out in our anticipated direction. That’s why it is still entirely
possible to trade within the structures, even if those trades are counter to the structure’s inherent
directional bias. Point B illustrates just such an example: a perfectly valid Bull Flag within the larger
reversal channel. Let’s drop down a time frame to see how we could trade it.

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Image 7.31: 3 rejections on the upper trendline and 2 rejections on the lower trendline allow us to
define the shape of the Bull Flag. All the usual criteria for the trade remain the same: entry is set on
the break of the pattern with stop placement either just slightly below the trendline or below the
structure altogether. Remember: the only difference with CounterPattern trades are the higher
time frame context within which they appear. Anticipating a reversal at the larger structure’s
trendline (red circle), I set a take profit order slightly below that at A. Should the trade hit my profit
order, I’d then be flipping my bias to the short side and looking for opportunities to capitalise on
the ensuing down move, as is the skillset of a neutral and fluid trader, either as Retrace on the third
touch at the red circle or a Bear Flag after price reverses away.

Image 7.32: Price impulses away from the entry reaching around 2% of profit. The stop was safely
at the breakeven point and the take profit order was still patiently sitting. Because the trade was

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effectivley risk free at this point, I didn’t trail the stop to lock in any profits, instead just accepting
that I’ll either take a breakeven or a 2.5% gain. As the higher time frame Bear Flag took over, price
impulsivley moved to the downside, taking me out for a breakeven and completing the higher time
frame forecast.

CounterPattern 2: GBP/CHF, 5.4%

Image 7.33: Our final trade comes from GBP/CHF. As always, we start with the higher time frame.
A descending channel gives us a longer-term upside directional bias. However, we know that it is
entirely possible we could get multiple lower time frame trade setups as the channel develops.

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Image 7.34: For the purposes of this example, I have kept the higher time frame channel trend
lines in so you can understand the context. Look at A; a strong downwards impulse, before a
textbook Bear Flag continuation pattern at B. This is the market’s clue that it is ready for another
downmove. It is successfully holding the lower price levels indicating a lack of buying pressure. As
in example 1, the criteria remain the same as any other flag: at least 2 touches on the top and
bottom of the pattern, entry on the break and a stop just above the flag. C indicates the bottom of
the higher time frame structure, the area where a reversal to the upside is probable and a logical
place for a take profit order.

Image 3.35: I would be lying if I said trades like these aren’t greatly rewarding, as percentage
profits rack up in your account without any signifcant retracement or corrections. The only
management occurred when price impulsivley moved away from the entry, warranting a stop loss
adjustment to the breakven level. Other than that, no adjustments were made until the take profit
order was executed for an easy 5.4%. I included this example because unlike the first example,
where the higher time frame structure plays out as expected, this one doesn’t. Price continued its
downards impuslive trajectory, completely invalidating any edge from the higher time frame
reversal channel. Could I have removed the take profit order, trailed the stop and extracted more
profits? Absolutley. BUT, as with any trade, you MUST consider the context of the higher time
frame. In this case, we knew it was probable we could see a reversal at the structure lows, certainly
more so than a complete breakdown below it. Trading is a game of probabilties and sucessful
trading means basing your actions off what is most likely to happen. In this instance, what was most
likely to happen simply didn’t, as is the realities of the markets.

Checklists

Through your study of market structure, chart patterns, risk management, news
and now, specific setups you have encountered many possible variables which
could all influence your decision to enter a trade. The implementation of a trading
checklist can prove to be an invaluable tool, presenting the trader with a series of
questions that must be considered before executing a trade, giving the trader

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confidence the criteria and conditions for taking a trade have been met and that
all entry variables have been considered.

Where is support and resistance?

Support and resistance zones are one of the most important aspects of effective
chart reading and technical analysis. Identifying these areas show us likely reversal
areas in which price may be hit with sustained buying or selling pressure. Use the
daily chart to identify clear horizontal zones in which price has repeatedly rejected
from in the past. These areas can sometimes be hidden when zoomed in on the
lower time frames and being aware of them beforehand means we don't trade
into probable market turning points.

Would you take this trade on an account 10 times the size of the one you
have now?
It’s easy to justify taking low-quality trades when you’re only running a small
account however, it’s a bad habit that will only lead to costly trading errors when
you’re trading a larger amount. By imagining you’re trading a much larger
account, you tap into a different perspective and can see the potential trade more
objectively, allowing you to filter out only the best setups.

Are we in the impulsive or corrective phase?

By this point, you'll understand the importance of identifying what phase we're
currently in. Using the structure and patterns you've drawn from the higher time
frames, identify if we're currently in the corrective or impulse phase and form your
directional bias accordingly.

Where is the HTF momentum?

One of the best ways to put probability on your side is to trade in alignment with
the higher time frame momentum. A Bull Flag that appears in the context of a Bear
Flag on the daily chart is less likely to play out than one that appears after a strong
impulsive break of a higher time frame corrective channel. Trade in the same
direction the big money is going, and you'll increase your chances of success.

Are there any chart patterns?

Identify both the probable and possible structures.

Is there any news scheduled?

Are there any significant news events due to come out over the next couple of
days relating to the asset you're considering trading? If it's a currency pair, double
check if there are any high-impact news events scheduled relating to either of the
currencies in the pair. If it's a stock, ensure the company isn't due to release an
important earnings announcement the next day.

What's the spread?

This one can save you many unnecessary losses as high spreads are one of the
most common reasons traders can quickly get tagged in and out of trades. If you
put an entry order to go short a currency pair that is 6 pips away and the spread is

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currently 8 pips, you're going to be taken into that trade immediately, even
though price hasn't reached the entry price you specified. Spreads are usually
quite low, typically around 1-2 pips and rarely affect trading decisions but there
are many variables which affect them so it's always worth checking with your
broker what they're currently sitting at before placing any trade. News events,
current trading volume and time of day among other things all impact spreads so
get in the habit of checking first to save yourself frustrating losses. Trust me, I've
learnt this lesson the hard way.

How will I manage the trade? Aggressively? When will I move to BE etc?
What management style are you going to utilise once the trade is active? Are you
playing the higher time frame impulsive leg, where you'll trail stops behind
structure aiming for a longer-term trade? Or are you playing a CounterPattern
trade where you'll use a profit target at the higher time frame structure? Know
these questions in advance because it'll reduce a lot of hesitation once the trade is
on. Use your discretion to decide what style this trade requires but mechanical in
the implementation of it.

Conclusion
The 5 trading patterns we have discovered in this chapter have been presented to
give the reader a range of tools to capitalise regardless of the market conditions.
We first started with the more objective and simple flag patterns, progressing to
the more complex Retrace and on to the Structure break, providing the trader with
a means of taking advantage of a structure when it is not possible to wait for the
first continuation pattern or when the Retrace has been missed. Finally, we moved
onto the more contrarian set of CounterPattern trades. The order of these trades
has been presented in the order of difficulty: starting with simple, well-defined and
objective, to requiring more discretion and potentially confusing. However, in the
study of these trades it would be beneficial for the reader to think of all these
setups as being in one of two categories: breakouts and reversals. Breakouts
express the tendency for price to make impulsive movements when it breaks free
of the constraints of corrective structures, like flags and Structure breaks, while the
reversal takes advantage of the market’s tendency to offer great reward/risk trades
at significant inflection and reversal points, as per the Retrace.
I firmly believe that these 5 core trading templates provide an all-round trading
toolkit. I have used these setups to successfully extract profits from the markets
and believe them to be some of the most versatile and adaptive trading methods.
If you’re coming from a previous strategy using price action and patterns, notice
the dozens of common trades that aren’t in this list: no double tops or bottoms, no
buying at support or shorting into resistance, no selling when price breaks the
‘neckline’. I have experimented and tested all these trading concepts and have not
found them to be consistently reliable and profitable opportunities. However,
when I discovered and refined these 5 setups, it was evident that I could capitalise
on almost every major price movement through these trades. These setups aren’t

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just a randomly selected series of pattern trades, but a carefully chosen, tested set
of trading patterns for trading market structure and price action incorporating a
skilled use of multiple time frames. Don’t be fooled by the simplicity of these
patterns for they embody the trading of all price action and market structure.

Trader Action Points

• There are 5 trading setups that will leverage multiple opportunities in the
market:
• Bear Flags: Simple continuation patterns forming after an impulsive
downside move. The pattern should have at least 2 clearly defined touch
points on the top and bottom. Entry order is set on the break of the
structure with 2 stop loss locations; just back inside the Flag’s range for a
more aggressive entry or outside of the Flag’s structure.
• Bull Flags: The reverse of the Bear Flag. A continuation pattern that forms
after an impulsive downwards directional move. A minimum of 2 touch
points on the top and bottom should define the pattern. Entry is placed on
the break of the Flag, with a stop just back inside the range or on the other
side of the pattern.
• The Retrace: Initiated on the third rejection of a reversal structure,
anticipating a sharp move away and a potential breakout of the pattern.
Stop loss is placed just beyond the entry candlestick.
• Structural Breakout: A classic pattern breakout trade that is rarely taken,
instead preferring to take the trade on the Retrace within the pattern or on
the first continuation flag after the break. The market must have formed a
clear structure with defined touch points. Entry order is set slightly
above/below the pattern’s anticipated breakout point.
• CounterPattern: Short continuation patterns within a higher time frame
structure with a directional forecast opposite to the trade being taken.
Allows us to capture profit while the market is locked within a higher time
frame correction.

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CHAPTER 8 - JOURANLING

"Show me a trader with good records and I'll show you a good trader." - Dr
Alexander Elder

Good record keeping is an important discipline for the self-directed trader. A

good journal is one of the most important things in a trader's toolkit, serving as a
complete portfolio of successes and failures, complete with market analysis,
reflection on the trader's psychological state and lessons learned that can have an
immediate positive impact on results. One of the first things I do when a trader
approaches for me tutelage is to ask to see his trading records. Invariably, I find
that there’s a direct correlation between a trader’s success and the quality of their
trading journals. Traders whose records are haphazard and sporadic tend to have
similar trading results. Dr Alexander Elder, whose quote opened this chapter said
it best.

A journal allows us to review past trades, tapping back into the same feelings and
emotions we were experiencing when we placed the trade but from a more
objective viewpoint. It's easy to become highly emotionalised at the time of
entering a trade - fast moving markets, recent profits and losses and even our
levels of physical energy can all colour our recollection of the trade. Having a
record of the thoughts and feelings we experienced at the time of the trade gives
us a platform in which to review our performance. We can investigate individual
trades, discover the common denominators that lead to our best trades and seek
out the patterns which lead to common mistakes and losses. We can then replicate
what works best and eliminate, as much as is practically possible the things that
don't. As you’ll learn in Chapter 12 on routines and processes, our journal will form
the backbone of our bi-weekly self-review. We’ll use it to review our past trades
and discover the key lessons and takeaways, putting us in a state of continued
learning, whereby our previous performance acts as the gateway to improved
future performance.

Individual traders will benefit from having two specific kinds of records: a trading
journal and a trading analysis spreadsheet. A trading journal will typically tend to
include a narrative about the technical factors surrounding the trade and the self-
talk a trader may be experiencing when executing the position. Trade analysis
spreadsheets are much more data-driven records with the goal being to perform
deep analysis into the quantitative elements of a trade to better understand your
trading style and to target specific areas that may require further improvement.
The goal of the next 2 chapters is to introduce you to each of these different
records, providing you with the tools you need to start maintaining your own
professional trading records. This chapter specifically introduces you to the trade
journal while the next chapter will dig deep into your trade analysis spreadsheet.

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What to Journal

Whilst I will be showcasing my own record keeping process, it's important to keep
in mind that there are many ways to create and format these sets of records. If you
do not currently have any form of record keeping system currently in place, I
would recommend you initially implement the steps in this chapter, refining them
as you better understand your preferences. If you do currently have some form of
journal in place, then use this chapter as a cross-reference to your own methods,
using the relevant information and discarding the rest as you see fit. You may
decide to completely scrap your current record keeping routine in replacement of
the ones in this chapter or you may decide to implement one or two of these ideas
within your current framework. As with everything in trading, the goal isn't to
reinvent the wheel as such, but to make it work for your lifestyle and personality.
Whatever you decide to do with the information in this chapter, it's important to
keep in mind these considerations when developing your trading journal: the
most important is in creating a routine that you can commit to and that fits into
your schedule. Whether you fill in a detailed journal entry the moment you place
the trade or complete any entries at the end of the day is ultimately up to you.
Whatever you do has to be right for you and your lifestyle. Another consideration
is the complexity of the information you decide to record. Creating an elaborate
journal system with a plethora of questions and checklists that takes significant
time to complete is only going to get ignored in the realities of daily life.
Moreover, too simplistic a journal may miss out important information that could
prove to be very useful at the trade review stage. We'll cover the essential
information to record shortly and you'll also see my own journal templates which
are available for download. The final point worth mentioning is in deciding if your
journal will be kept on paper or electronically. I kept a physical paper journal for
about a year when I first began trading and then transitioned over to an electronic
format which I have found has significant advantages. I'll refrain from taking a
deep look into why I think electronic journals trump paper ones but will briefly list
them here: ease of use, easy to edit, can be backed up, speed of recording among
much more. But again, it's your call. With that said, let’s look at the essential
information any trader’s journal should include.

The Higher Time Frame

Our trades, whilst executed on the 1-hour and 15-minute charts are always
predicated off of the higher time frame structure. By including information about
the current state of the higher time frame, you are including vital information
about the context surrounding the trade. In the journal template I have provided
for download, you will see that I include a snapshot of the higher time frame,
either the 4-hour or daily chart. Because trading is such a visual activity, images
provide detail and a context that would be very hard to convey in just words. By
including visual images of the charts at the time the trade was taken, we are
instantly transported back to the market as we saw it at the time when reviewing
the trade, putting aside self-kicking or self-congratulations and focusing on the
facts of market action. It would also be useful to include a dialogue to accompany

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your images – a brief summary explaining the current higher time frame condition
and what it’s suggesting regarding your trading idea. I find that even just one or
two sentences can massively clarify my thinking and analysis before entering a
trade, allowing me to trade with more confidence and conviction.

Image 8.1: Screen grab from one of my journal entries showcasing the higher time frame structure
at the time of entering the trade. The short and simple overview succinctly describes the higher
time frame and gives me a record of my thoughts and analysis that I can easily cross reference to
when conducting my performance/self-review. This record shows me exactly what I was thinking
and seeing at the time of execution.

The Entry Time Frame

A journal must contain information relating to the objective realities of current

price action and market structure on the trade’s entry time frame at the time of
trade execution. This provides a distinctive benefit. By noting down the current
market conditions surrounding the trade, we can easily cross-reference the trade
to our trading plan ensuring the position was in alignment with our go-to trading
setups and not an impulsive, emotionally driven trade.

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Image 8.2: The entry time frame from the same trade as Image 8.1. Again, I have included an
image and a simple summary of my analysis and thought process going into the trade.

The Entry Time Frame (At Close)

Your journal should also provide details after the trade has been closed, enabling
you to review the position in its totality. The accompanying narrative should
include information relating to the management of the position, your emotional
dialogue and the resulting price action after the entry.

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Image 8.3: The entry time frame and accompanying written record.

Yourself

Successful trading is arguably as much a by-product of effective analysis and risk

management as it is the trader himself. Any number of variables can affect your
ability to stay true to your plan and can be a major component of your success or
failure as a trader. Your self-talk, emotional state, physical energy, the amount of
sleep you've had and even the results you've had so far this month will all have an
impact your ability to stay true to your trading plan and ultimately on your results.
A trading journal should include these things so that regular patterns which lead
to poor trading can be discovered and eliminated. One of the biggest barriers I
personally experienced when I first started trading was being overwhelmed by the
volume of potential trades. I would often forecast 4 or 5 good looking trades for
that day and end up feeling overwhelmed at the amount of opportunity that was
staring at me in the face. Wanting to stay true to my risk management rules, I’d
often decide the best way to filter the handful of potential positions was to wait for
only the highest-quality trades, defining VERY specific criteria that’d have to be
met before justifying a position. By constantly waiting for such perfect entry
signals, I’d often end up missing solid trades, leaving me frustrated that I had 4 or
5 trades which all played out to my directional bias but to which I did not capitalise
on.

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What exactly you decide to include needs to be personalised to you and what you
feel is going to be relevant. In the earlier stages, record as much detail as possible.
What may seem like a trivial point may become crucial down the line when
evaluating your performance and finding common patterns. You may not think
that recording how much sleep you've had that day is important but it's seemingly
innocent nuances like this that can have profound implications for trading
performance. You may very well find that the times in which you feel overwhelmed
and end up rushing into poor trades happen to coincide with nights where you've
had low-quality sleep, leaving you vulnerable to poor cognitive functioning and
rushed decision making. But the only way you'll know is through the recording of
such information.

Over time, the journal will become an invaluable source of information when
conducting our own market research and trading ideas. It's been my observation
that the most successful traders are the ones who are truly committed and
passionate about understanding how their markets work and how to best exploit
them. These traders are constantly looking for ways to improve and refine their
edge. Over the weeks and months of maintaining a journal, you'll be surprised at
the insights you can tease out of it. You'll learn about the individual trading
characteristics of the currency pairs and stocks you trade, what patterns and
setups work best for you as well as progressively building a portfolio of
educational material you can use to constantly refine your skills. That's worth more
than any trading book or online course!

Trader Action Points

• A journal is one of the most important tools in a trader’s toolkit. It is as a
complete portfolio of successes and failures.
• Our trading journal will be essential when conducting trade reviews and
performance evaluations, which are covered in chapter 12.
• A journal should include information relating to the higher time frame, the
market at entry and close, including your emotional and psychological state
up to and at the moment of entering the trade.
• Set up your journal in your preferred format and programme of your choice
or download my Notion template which is provided in the Resources
section.
• After setting up your journal, complete 3-5 practise entries using example
trades. Note down anything you feel is relevant about the trade including
screenshot/images.
• Whilst it is better to have too much information than too little, don’t make
the process so complex and elaborate that it becomes impractical to
maintain on a day to day basis.

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CHAPTER 9 – QUANTITATIVE ANALYSIS

When you have mastered numbers, you will in fact no longer be reading numbers
any more than you read words when reading books. You will be reading meaning.
– W.E.B. Du Bois

The next step in your education, following nicely from the topic of journaling is
quantitative analysis. Quantitative analysis is the recording of historical trading
information to make better-informed and more calculated trading decisions in the
future. It's about measuring and analysing specific trading variables (stop loss size,
average profit etc) so that we better understand our trading methodology. If even
saying those words ignites an inherent disdain for numbers and statistics, then
don’t fear. Admittedly, there is some basic arithmetic involved but nothing beyond
the scope of most people with an average mathematical comprehension. In
addition, I provide you with tools that will do most of the work for you.

There are many subjective elements in discretionary trading, but the statistical
analysis of your trading results should never be one of them - the metrics are there
in plain sight, showing you every little detail of what you've done and whether it's
actually producing results or not. Quantitative analysis aims to get to the root of
what’s working and what’s not. The effective analysis of your key trading metrics
can reveal important information - what's your best currency pair to trade? What's
your average profit when trading CounterPattern trades? Biggest profit on
EUR/USD? Average stop loss on USD/CAD? The best traders are ones that knows
the stats like the back of their hand.

Analysis Tool

It goes without saying that in order to effectively analyse and crunch our trading
data, we must have access to good infrastructure and tools. Though some brokers
will usually provide basic trading information, more resolution is usually needed.
There also various third-party software programmes and journal tools which will
provide you with more detailed information and metrics. Most of these
programmes will automatically synch to your trading account (with your
permission, of course), pulling all the relevant trading data directly from your
account. This is a massive benefit, removing the need for manual data entry.
However, upon testing these programmes, I found that not one had the
functionality I desired. Most of these platforms lacked a handful of even some of
the most useful statistics, were hard to use and generally not practical for day to
day and week to week use. A programme may provide 90% of the information you
need but if it’s missing that remaining key 10%, it’s not going to do the job it’s
designed to do – break your trading down into raw figures that you can use for
future performance. I am in no way saying these programmes are poor-quality.
However, the designers have built them with a range of different traders and
trading styles in mind and so it’s hard to find one with the specific functionality you
need as it relates to your trading. For example, consider a scale-in, a second trade
taken within the same directional leg as a previous trade. We need to be able to

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easily see exactly how many of our trades are scale-ins but a pre-built analysis
programme won’t supply this because it doesn’t even know what a scale-in is.

When I realised the need to perform a deeper, more tailored analysis, I decided to
move beyond pre-built generic third-party tools and built my own on Excel that
would cleanly display all the relevant trading statistics I needed in a structured and
aesthetic fashion. The programme* allows you to record your trades, requiring
only basic information. A separate sheet will then analyse the data, displaying all
the most important information needed for effective analysis. This tool is available
for free download to all readers – please refer to the Resources section for
download information.

*As of yet, the programme only facilitates the analysis and recording of FX trades.

Image 9.1: The FX trade analysis tool. By inputting basic trade information on a recording sheet
(not shown) this tool will provide a detailed breakdown of our trading metrics. Traders can then
take a closer look into their trading performance. You can find download information in the
Resources section at the end of the book along with an accompanying PDF

Essential Metrics

Below you will find the most important metrics for effective trade analysis. All these
metrics and more are provided in the downloadable Excel programme. I have
included a description of each and an example as to how these data could be
used in practical trading circumstances.

Average profit/loss: The average profit/loss of all your trades so far. This give us
a rough idea as to what to expect from our profitable trades and whether we're
sticking to our 1% risk model on our losing trades.
Example: Your average profit currently stands at 1.9%. You want to find a way to
increase this average and so look back on your most recent profitable trades.
Upon reviewing your journals, you find that you have been managing your trades
very aggressively often resulting in being stopped out prematurely for a small

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profit before the market has time to really move in your favour. You adjust your
management style appropriately giving the market more room to breathe,
resulting in higher average trade profits and a positive impact to your overall
bottom-line results.

Expectancy: The average R multiple of your trading system - the average amount
of money you'll make per trade, per £1 risked, over a large sample size of trades.
This is the mean of all your trades’ R Multiple.
Example: You find that your expectancy on EUR/USD is 1. This means that on
average, over a large set of trades the profits you make on this pair are equal to
the amount of risk you are taking. This might indicate that you are cutting short
your positions on this pair, perhaps being too aggressive in your management.
Knowing this, you could adopt a slightly more conservative management style to
capitalise on the bigger moves, increasing your average profits and subsequently
your R multiple.

Breakdown by setup: Reveals important metrics filtered through the individual

trading setup. It's advantageous to know what your hit rate is on just Retrace
trades or your expectancy on Bull Flags, helping reveal what your most profitable
trading opportunities are and how to best identify and exploit them in the future.
Example: You find yourself taking a lot of Bear Flags, certainly relative to the other
setups in your trading plan. You find that these trades have the highest strike rate
of your setups, along with an average profit of 2.3%. Understanding this setup is
one of your strongest trades, you are more confident and aggressive in trading
them in the future.

Breakdown by pair: Most traders will have a handful of currency pairs or stocks
they prefer trading. Analysing each one individually will help reveal what ones are
most congruent with your trading style and which ones aren't.
Example: You find that whilst EUR/AUD is your second most traded pair, your
average profit on it is much smaller than other pairs in your watchlist. You review
your recent trades on this pair and find that you are taking many CounterPattern
trades which don’t typically offer outsized profit potential. By focusing more on
continuation trades in impulsive market conditions, you are able to extract larger
average profits positively impacting your results on this pair.

Average stop: Knowing what the normal stop loss size for your most traded
currency pairs and stocks will enable you to see when you’re trying to force a trade
by being extra aggressive or conservative.
Example: Suppose after taking 50 trades on EUR/USD, you find that your average
stop loss on this pair is 25 pips. A trade sets up in which the required stop loss is
50 pips. This is twice the normal stop loss size for this pair and is indicating that
you may be trying to force an entry into an average setup by justifying it with a
much larger stop size than normal. You skip the trade, instead waiting for a more
advantageous entry point that will allow you to get in with a tighter stop and a
more favourable reward/risk ratio.

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Longest profit/loss streak: This tells you the longest consecutive streak of
profitable and losing trades.
Example: You have collected over 100 trades’ worth of data and find that whilst
you consistently capped your risk in these trades to 1% of the account, you actually
had a string of 5 losses in a row. You understand that this is the nature of
probability and are better emotionally equipped to deal with it in the future when
presented with another losing streak.

Month by month breakdown: A basic overview of your performance by month -

total trades, profits/losses, average profit and expectancy. Really useful when
reviewing your year's performance and you want to dig into particular months of
over or under performance.
Example: You break even in July and have a -2% month in August, despite
averaging a 6% return in other months. Was it just a quieter, more corrective
month that led to sub-par trading opportunities or was it that busy summer plans
and holidays kept you away from the markets? The data provides you with the
answers.

Using Data to Improve Future Performance

Sample Sizes

Before we get into the nuts and bolts of the practical uses of your trading data, we
first must become familiar with the concept of sample sizes. The concept of
sample size is a rather simple one and one you will come back to when you begin
your master class in trading psychology, where you will learn to think in terms of
probabilities. For now though, the basic idea is enough - you need a large data set
to make valid statistical inferences. With too little data, you may fall victim to the
tendency to draw unjustified conclusions from too little information.
In using your data, there really is no magic number, only that that larger the
sample, the better and the more accurate your conclusions will be. A sample of 15
trades is unlikely to produce any statistically reliable conclusions while a sample of
100 trades is significantly more likely to have predictive power. Aim for the middle
and record around 50 trades or so before you attempt to make any adjustments to
your trading.

Marrying Qualitative and Quantitative

In the next chapter, you’ll learn how to conduct periodic performance reviews that
will sharpen your trading skills and become the basis of your continued
improvement as a trader. A successful review will incorporate a rich analysis of
both the qualitative elements of your trading, provided by your journal and the
quantitative elements provided by your analysis sheet, marrying the two into a
powerful performance-enhancing tool. Qualitative information relates to the
quality of the trade itself, the setup being taken, the context of the higher time
frame and any additional confluence factors surrounding the trade. These should
all be included in your journal. The quantitative information is the specific metrics

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measured by your trade analysis sheet. The effective analysis of both can highlight
early problems, identify strengths and weaknesses and help establish a baseline of
performance to particular currency pairs.

When it comes to analysing your data, there are a handful of questions to ask:

What are my strongest setups?

Study the performance breakdown of all your go-to setups. Look at how frequently
you have traded each and their corresponding strike rate, average profit and
expectancy. It’s probable that there will be one or two setups you have traded
significantly more than others. While it is entirely normal to have preferred setups,
the key is in assessing whether your preferred trades are actually producing the
bottom-line results you want, relative to the other setups. Early in my trading
career, I was taking a disproportionate amount of Bear Flags which had a solid
strike rate and an average profit of 2%. However, when I compared the data to
Retraces, I found that the average profit on these setups was much higher. This
enabled me to better focus my attention on finding high-quality Retraces, which
boosted my returns.

What are my weakest setups?

If the data shows that your performance on CounterPatterns is poor, with a low
strike rate and a minus expectancy, it may be a sign that that setup isn’t suited to
your trading style. That’s not to suggest that you should cut it from your plan right
away, just that perhaps you may benefit from being extra selective when trading
CounterPattern trades. Perhaps you would have a higher success rate by only
taking these trades when you have multiple confluence factors present and a
stronger entry signal. What you decide to do with the data is ultimately up to you,
but whatever you do should have a positive effect on your bottom-line results.

What are my weakest pairs?

Different currency pairs have different trading tendencies and personalities, some
of which may resonate better to the trader than others. Is it possible you could
improve performance by eliminating a certain pair from your watchlist and
replacing it with something that is more congruent with your style?

What are my strongest pairs?

Alternatively, is it possible you could improve performance by trading a certain
pair more aggressively, ones you clearly trade well? If you’re consistently hitting
home runs on EUR/USD, does it not make sense to leverage your strengths on this
pair by seeking out even more high-quality trading opportunities?

Are you results dependant on one form of setup?

Traders who rely too heavily on just one setup can often find themselves forever
trying to force the market into the context of their preferred trade. Having a
signature trade isn’t a bad thing. In fact, I’m all for traders exploiting their strengths
when the market gives us the opportunity to do so. However, if your results are
heavily dependant on one form of trade, you may find yourself struggling when

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the market condition changes. A trader whose profit is derived largely from
continuation trades in trending, impulsive conditions is going to struggle making
profits with that setup when the market enters a corrective cycle. Make sure you’re
not a one-trick pony, and if you are, start refining your skill set on other types of
setups.

What other things could you start/stop doing that could improve your
performance?
Effective data analysis requires you to really dig deep and look for creative
solutions by asking the sometimes, not-so-obvious questions.

Trader Action Points

• Quantitative analysis allows you to dig deep into the individual aspects of
your trading, like average stop loss size, average profit on certain currency
pairs and a breakdown of your performance by trading setup.
• Either build your own analysis tool containing the key metrics in this chapter
or simply download a free copy of my custom-built trade analysis sheet as
part of the Trader’s Toolkit in the Resources section.
• The quantitative information you collect will be used, in addition to the
qualitative data provided in your trading journal to conduct performance
reviews, discussed in the next chapter.
• Review your 25-50 most recent trades and input the data for every trade
into the trade recording sheet. Review the ‘Performance Metrics’ sheet to
get instant insights into your current trading performance. Study your
average profits/losses, the typical stop sizes for different pairs and the
performance breakdown by individual setups. Study what you do well and
where you may be able to make tweaks to improve your future
performance. Refer to the questions in this chapter to analyse the data and
make positive changes in your trading.

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CHAPTER 10 – ROUTINES AND PROCESSES

"Becoming a successful trader isn't something that happens overnight. It's the
result of the consistent, disciplined application of routines and processes - things
that largely remain elusive to failing traders." - James Eaton

If I had to pinpoint the one thing that took me from being a novice trader doing
the breakeven dance to being consistently profitable, it would be the
implementation of particular routines and processes. Anybody's who has ever
gone to the gym and really changed their physique knows how incredibly
powerful routines are. Nobody can change their body over the course of a couple
of days or weeks, no more than a trader can transform his results over a period of
the same time. Instead, they commit to a conscious decision to start forging habits
that are going to help them see continuous improvements, week after week. They
wake up at a certain time to make sure they can hit the gym and get their workout
in. They may have set mealtimes to consume healthy nutritious foods. They might
even schedule in frequent massages and sauna sessions to help their body
recover after their arduous training schedule. Successful trading is very much like
getting into shape because it's not what we do once in a while that counts, it's the
small things we do every day compounded over time that ensures our success.

Most traders start out knowing little to nothing about the markets. Over time, they
learn about market structure, price action, candlestick formations and market
behaviour. Yet success still somehow evades them. So, they learn more, they start
learning how to incorporate additional technical indicators, desperate for any
extra edge which may tip them over into the contingent of successful traders. Most
however, see an ever-widening gap between their level of trading knowledge and
their actual bottom-line results. The more they think they know, the further away
success feels, making them feel the need to learn more and more and more. It's a
negative feedback loop that causes the downfall of many beginning traders. But
the secret to consistency and profitability is not in finding the perfect system, it's
about the consistent application of solid routines and processes.

So, what actually is a routine or a process? To me, it's something we structure into
our daily/weekly life to ensure we do the things we need to do. Intelligent trading
routines are the embodiment of ‘process over profits’. By focusing on effective
routines every day, week, fortnight and month, we build habits that serve us in our
journey to trading mastery. If you've ever read the Market Wizards series by Jack
Schwager (as any serious trader should) you'll hear these top trading experts
continuously talk about meticulous record keeping, trade reviews and lesson
learning. For these guys, their self-review and pre-trade preparation routines were
the keys to their enormous success. These masters haven't just given lip service to
continuous improvement, they've made it a commitment by cementing them into
fixed routines.

Google defines the word process by “a series of actions or steps taken in order to
achieve a particular end” and I couldn’t think of a better way to define it. As

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traders, our processes are the disciplines we perform in order to achieve

consistent profitability. They are back-testing and forecasting.

Processes: Back-testing

Back-testing is a key component of effective trading system development. It is the

process of reconstructing, with the aid of historical data, trades that would have
occurred, as defined by the rules of your given trading setups. The trades are then
managed using predefined trade management rules to produce statistics to help
gauge the effectiveness of the given setups and to build confidence in your
strategy. Back-testing is the most important step in the optimisation of your
trading strategy, allowing you to see how particular setups play out and the likely
price action surrounding them, providing statistical feedback about how to best
trade those setups in the future. It's one thing being given trading setups and told
they have a positive statistical expectancy, it's quite another to test those setups
and seeing them play out yourself. We can also test individual currency pairs or
stocks, discovering their unique personalities and characteristics so we can be
better prepared when we trade them in the future. A good trader should be
intimately aware of and come to know and respect the currency pairs and stocks
they're trading.

The following tutorial shows you the step-by-step process in conducting your own
back-tests so that you can begin to see for yourself the power of the 5 trading
setups you learnt in chapter 7. Please note, these instructions are specific to
traders using the TradingView platform. There are other paid programmes and
charting software that will allow you to stimulate historical tests, but I have
personally found that nothing competes with the functionality of TradingView. If
you’d prefer to use a different charting provider, then feel free to do so and simply
adapt these steps as they relate to your provider.

How to Back-test

1: Select the market you wish to back-test on TradingView

After opening the TradingView platform and clicking on the ‘Chart’ tab, search for
the market that you wish to test.

2: Click the bar replay tool and click where you would like to rewind price to
Select the tool in the top panel which says ‘Bar Replay’. This allows you to remind
price to a previous point in time so that you can view the market as you would
have seen it if you were trading it at that point. When you select the tool, a blue
vertical line will appear on the chart. Scroll the chart back to the point in time that
you would like to test from by clicking that point on the chart. Any price action that
occurred after that selected point will be hidden from view, showing only the data
you would have seen at that time.

3: Draw structure on the daily and 4-hour charts

When in the bar replay mode, you can seamlessly switch between the various time

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frames as you would in live market conditions. Conduct your analysis as if this was
a live market. Begin with the daily chart and identify key support and resistance
zones, draw in structure and notable price patterns, ascertaining whether the
market is in an impulsive or corrective phase. Drill down to the 4-hour chart,
refining the patterns. Establish a directional bias based off the current price action.

4: Select the 1-hour chart

Zoom in with the 1-hour time frame. This will be where you will spend most of your
time in a back-testing session. Most trades will be identified and managed on the
1-hour chart. However, for extra refinement and precision, use the 15-minute chart
as you would in a real trading environment.

5: Replay the candlesticks one at a time

The panel that appears when in bar replay allows you play price, one candle at a
time. Click through, progressively revealing the evolving price action. Treat this as
a real trading environment, just significantly sped up. Evolve patterns, draw in new
structure and delete old structure as appropriate. Keep switching between the
different time frames as and when needed to ensure you are viewing the market
from the perspective of all time frames.

6: Identify valid setups

When the specific setups that you are testing present themselves, use the risk to
reward tool to locate your entry price, stop loss and price target for that trade.
Evaluate it as if it was a real trade you were going to take. Don’t jump into low-
quality trades that you wouldn’t otherwise take just because you’re keen to collect
data. Focus on the best setups.

7: Manage these trades as you would have in real-time

As these trades materialise, manage them according to the rules in your normal
management methodology. Know where price would have to get to warrant
moving your stop loss to the breakeven point. As price moves in your favour,
progressively move the stop loss behind price to lock in profits. Be mechanical -
you won’t be able to determine the effectiveness of a specific setup or rule set if
you don’t consistently implement the objective criteria that define it.

8: Record stats, journal thoughts

Record the trade data in the Excel trade analysis programme.

9: Review
As you accumulate a large data set of ‘pretend’ trades, you’ll build a profile of that
market or setup with quantifiable metrics which determine its effectiveness and
utility in future trading scenarios. Don’t make unjustified conclusions as to the
effectiveness of something with too little data. You need to acquire a reasonable
sample set of trades before you can objectively analyse the effectiveness of a
setup or rule set. If the objective of your back-testing session is to uncover the
effectiveness of Bull Flags in USD/CAD, you’re going to need to test at least 25

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examples of that specific pattern playing before you can make any valid statistical
inferences. Ideally 50-100 trades for an even more accurate portrayal.

10. Refine
With your data collected and reviewed, the final step is to make refinements to
improve your future trading. Refer to the questions in the previous chapter under
‘Using Data to Improve Future Performance’.

Understanding its Limitations

Back-testing is an extremely important tool for skill development, and I would

encourage all traders to back-test all 5 of the trade setups before deploying them
in live market environments. However, there are some important points to keep in
mind:

The goal of a back-test

The objective is to establish confidence in your trading strategy and to build
pattern recognition skills so that you can better identify your go-to setups in the
future. No more, no less. Back-testing results should not be used as an absolute
gauge of personal trading ability or system effectiveness. Sometimes what worked
well in one point in time fails to perform as well in the present, as is the reality of
dynamic ever-changing market conditions. Past performance is not always
indicative of future results.

Both quality and quantity are key

It’s all too easy to justify taking subpar trades in a back-test, trades you wouldn’t
have otherwise taken in real market conditions for the sole sake of collecting data.
Letting poor-quality trades creep into your testing is only going to skew your
results, defeating the whole purpose.

The market condition and context in which you tested

Suppose you were testing Bear Flags in a certain market. You accurately record
the results of these trades as they occurred in the testing session. You record 50
instances of this trade, logging all the important metrics as you do. Upon
reviewing the results, you find that the strike rate of Bear Flags is only 30%.
Throughout the course of the 50 trades, you’ve taken many 1% losses, a few
breakevens and a handful of profitable trades, leaving you in the red. Is it
reasonable to now assume that Bear Flags, at least in that market, are poor setups
which don’t produce a positive return and should never be traded again?
Absolutely not. Setups are only as effective as the context within which they
appear on the higher time frame. If you tested 50 1-hour bear flags, while the daily
chart was in a colossal uptrend, it’s no wonder the data isn’t going to look too
favourable. Should you test another 50 Bear Flags but during a time in which that
market is experiencing significant downside higher time frame movement, I can
guarantee you’re going to get a completely different set of results. If you are
testing a trade setup, always remember the context of the market as a whole.
Remember the bigger picture.

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To get around this common mistake, it would make sense to not ever aim to just
trade one specific setup. Select a time period that you would like to test, for
example you may wish to test EUR/USD from 1st Jan 2016 to 1st Jan 2017. Over the
test, record the results of any of your valid setups, not just one. It’s going to take a
lot longer before you’ll collect enough data to accurately measure the utility of one
setup, but you’ll be trading in a way that is much more replicable to real life:
utilising various different setups, both long and short depending on the market
condition as it appears at that time. Don’t try and force Bull Flags into a down-
trending market. That’s like trying to force a square peg into a round hole.

Processes: Forecasting

Forecasting means anticipating various future potential price paths by utilizing the
current market structure and price action. By studying the charts and the previous
price data, we can make informed estimates in determining future price
movements.

Please note the difference between forecasting and predicting - forecasting is

about the anticipation of several probable and possible price scenarios. Predicting
is having a conviction about one fixed way in which price is going to move. This
presents a common trading problem as traders must remain neutral in their
expectations as to what the market can do. If we become too locked in one
prediction or directional bias a currency or stock must adhere to, we shut
ourselves off from any number of other valid trading opportunities - except the
one we've predicted. Therefore, as part of our forecasting routine which we'll
delve into shortly, we're going to make it a habit to forecast at least 2 or 3 possible
price development scenarios. For now, simply understanding what forecasting is
and how it is done is enough.

Forecasting allows us to identify and anticipate all these possible and probable
scenarios in terms of price movements and to rehearse, ahead of time what our
responses will be. If one of our anticipated forecasts plays out, we already know
how we're going to respond and what criteria we'll need to see to execute a
position. Rather than passively waiting for the market to move and then reacting,
we're actively forecasting these potentialities ahead of time, forever staying one
step ahead.
Top traders develop scenarios for price action and constantly revaluate those
scenarios as the market progresses. They ask themselves quality questions that
lead to a deep understanding of the market like "What could the market do next?
How am I going to respond? What trading opportunities could present
themselves? What could this structure/pattern develop into?"

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Image 10.1: Multiple forecasts on the hourly chart, anticipating both bullish and bearish
possibilities. Price had begun to form what looked like was the start of a corrective descending
channel after the recent impulses to the left of the chart. The correction indicated that it was
probable price was losing momentum. Understanding it was likely price could continue to correct
in this fashion before breaking the structure, I forecast continuation Bull Flags in which I would go
long (A). However, I have also considered the possibility of price breaking to the downside and
defined the criteria I would need to see to flip my bias and enter a short – an impulsive downside
break of the current structure and a Bear Flag (B). This is the key to effective forecasting:
anticipating multiple different probable and possible price movements and defining the criteria
ahead of time that would warrant you taking a position.

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Image 10.2: The resulting price action. You can see forecasting ahead of time allows you to be
prepared for trades, reducing hesitation when they present themselves.

Routines

A routine is a sequence of actions which are regularly followed in order to achieve

a desired outcome, whether that is to forecast the probable trades for that day or
to review our recent performance. Retail trading is a solitary profession and it can
be easy to neglect the importance of having fixed routines in place to guide our
actions and behaviour. I for one, was guilty of having an absence of routines in
place in my trading and often fell victim to feeling lost, not sure what I should be
doing. Since then, I've experimented with various trading routines over the years,
with a varied amount of success. Over time, I've refined them to only the most
effective and performance-enhancing ones which have 2 clear benefits:

Provide a regular feedback loop

Regular performance reviews and money management routines provide you with
feedback that can improve your performance and, in turn, your results. The daily
trading routine will provide you with critical information about the market’s
movements over the past 24 hours, keeping you on top of the market, enabling
you to make more informed trading calls.

Give you structure

I very much subscribe to the idea that routines should be structured into our lives
just as we would important meetings and appointments. Having them planned in
our calendar gives our trading day, week and month a structure that many traders
lack.

Routines: Weekend Analysis

The weekend is the perfect time to prepare for the following trading week.
Because most financial markets are shut during the weekend, we can perform our
analysis without being influenced by fast-moving prices which can sometimes
skew our perspective. Instead, we can view the markets objectively, forecast
several possible price scenarios for the coming week so that in the heat of the
trading day, we know what conditions we would have to see to take a trade. There
are 2 parts to the weekend analysis:

Step 1: Listing scheduled news and events

As technical traders, our trading decisions are based off market structure and
price action. But simply ignoring any fundamental information and news events
would be incompetent at best and financially damaging at worst. By filtering out
only the high-impact events, we can focus on the events which really have the
potential to impact the market. I use ForexFactory.com’s economic calendar but
there are many more available for you to try.
Make a list of all the news events coming out in the coming trading week. I list
them on a series of sticky notes, one for each day and stick them right next to my
monitor. It doesn’t really matter how you do this, in a notebook, on your phone or

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as sticky notes like myself – just get them noted down. There are going to be some
weeks with many releases, sometimes multiple events all on the same day. This is
normal as economic releases tend to fall on consistent days of the month. Other
weeks will be quiet in terms of news with only a couple of key releases that week.

Step 2: Forecasting for the week ahead

One of the many benefits of trading structure is being able to anticipate a range of
probable and possible price movements based off the current market condition.
The second step in our weekend routine is to forecast these probable and
possible price developments ahead of time, defining the criteria we would need
to see to take a trade. Unlike in the daily routine where we’re only forecasting price
developments that may occur in the next 24 hours, we’re going to consider the
likely scenarios for the following week. Try to forecast at least 2 or 3 scenarios,
anticipating both up and down moves. Review the ‘Processes: Forecasting’ if you
need a reminder about effective forecasting.

Routines: Daily Routine

You must have a daily routine and game plan for each trading day. This is a
specific daily ritual in which you’ll manage and update any active positions, review
the past day’s price action, review missed opportunities, forecast possible trades
which may set up that day, build a tailored daily watchlist and set price alerts. That
may sound like a lot of work, but you’ll find with time, you should be able to
complete this daily routine (depending on the amount of markets you follow) in
about an hour’s time. I personally like to do this first thing in the morning at around
6.30am. However, you can easily modify this time to suit your lifestyle and the
markets you trade. I like getting this done early as it means my ‘work’ for the day is
then effectively done. From a trading standpoint, it’s then just a case of executing
the trades should the scenarios I have forecasted present themselves. Let’s go
through each of the steps in order:

Step 1: Manage and update active positions

If you’re in any active trades from the previous day, the first part of your morning
routine will be dedicated to monitoring these positions, adjusting the stop as
necessary and setting new price alerts for the next milestone. If you’re doing this
process first thing in the morning and trading markets which are active when
you’re asleep, then there’s going to be around 6-10 hours’ (depending on when
you last monitored these active trades) worth of price action which has
materialised. A lot can happen on the intra-day charts in this time, so reviewing
this price action and making the necessary management adjustments to your
trades is important.
In TradingView, you can tag markets a specific colour so that you can easily
recognise them within the watchlist. At the time of entering a trade, I will tag it
green which represents that this is an active position. If I have multiple positions
running, I can then easily identify these within the watchlist. If any positions you
were in from the day before have now been closed out, you will use this time to

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update your trading journal, cataloguing all chart snapshots and trade information
accordingly.

Step 2: Review the past day’s price data

It has been a daily discipline of mine to review the past 24 hours of price data and
it has single handily been one of the most important tweaks I have made to my
daily trading routine. By reviewing the past day’s price action, you will identify
missed trading opportunities (if there were any) and be up to date on the market’s
recent movements. This process will be completed on the 1-hour time frame.
Simply mark the where price was 24 hours ago (24 candles), and then scan
everything to the right of that. Look at how the market moved and if any trading
opportunities presented themselves, which moves onto step 3.

Step 3: Review Missed Opportunities

Reviewing all the high-quality trades that you missed or didn’t take is one of the
most exciting yet equally painful parts of the daily process. Exciting because you’ll
see the sheer amount of potential percentage you could have capitalised on and
painful for the very reason that you didn’t. This is one of the most important parts
of the daily routine because you’ll be able to identify the commonalities that lead
you to missing good trades as to better recognise them in the future. The only way
you’re going to improve your future performance is by coming face to face with
your current mistakes – today! If you find that you’re missing a lot of good trades
because by the time you’ve done your afternoon market check, many positions
have already taken off, is it possible that you could make better use of alerts at key
areas? If you’re finding that you’re missing trades because you’ve only been
focusing on 2-3 markets in your daily watchlist, is it plausible that you could
increase that list to perhaps 5-6 markets instead, increasing your chances of
spotting potential trades? The key is to finding creative ways to improve rather
than just staying put and stagnating. Think of this as like a tiny daily coaching
lesson.

Step 4: Forecast possible trades that day

This step naturally follows the previous, first reviewing the previous 24 hours of
trading and then forecasting price potentialities that may materialise in the next
24. Using your new-found technical skills, you should be able to very quickly
identify if a trade could set up in that market that day. Forecast the price
possibilities and note the criteria you would have to see to take a trade. Even if you
don’t think a trade will set up that day, still anticipate the different possibilities.
Stay one step ahead of your markets. After having established your forecast, it's
important to remember that that's all it is - a forecast. You must always leave room
for chance.

Step 5: Build a customised daily watchlist

After having reviewed and forecast possible trades for each of your markets, you’ll
know exactly which markets could offer trades that day. Add these markets into a
separate watchlist that you can easily review throughout the day. TradingView
allows you to have multiple watchlists that you can easily flick between, both on

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the computer and on-the-go via their app. This allows you to create a stress-free
tailored daily watchlist that you can easily monitor throughout the day as price
action develops – separate from the other pairs or stocks you are following. I
follow 14 currency pairs* and a handful of stocks. By the time I have reviewed each
of these markets and forecast the probable and possible price movements that
day, I’ll generally have about 3-7 markets in my daily watchlist. This makes
monitoring throughout the day easy because I can focus my attention on a handful
of markets rather than flicking through up to 20 different ones.

*AUD/USD, EUR/AUD, EUR/CAD, EUR/JPY, EUR/NZD, EUR/USD, GBP/AUD, GBP/JPY, GBP/USD,

NZD/CAD, NZD/USD, USD/CAD, USD/CHF, USD/JPY.

Step 6: Set price alerts

The idea of a price alert is to notify you when the markets in your tailored daily
watchlist reach key areas in which a trade is probable. Suppose one of your
markets is currently locked within the confines of a descending channel. You know
that an upside reversal is probable should price successfully impulsively break out
of the channel to the upside. You’re interested in looking to take this market long
but not until it’s committed to itself by breaking the channel. By setting an alert on
the outside of that price channel, you’ll be notified when the channel has been
broken so you can begin to look for continuation patterns on the entry times
frames to take a long.

In my VIP channel, I post my full morning analysis, with trade updates, watchlists
and forecasts each and every day. Members can use this as an insight into my
thought process and what I’m looking at in the markets as well as compare and
cross reference their own analysis. These daily videos tend to be about 30 minutes
in length and typically include mini-lessons on all things trading related. Members
have said it’s like having a daily trading briefing so they can go into the markets
with more confidence and clarity. Contact the team at team@profitpod.co.uk to
join.

Routines: Bi-Weekly Trade/Performance Review:

Your continued performance and development as a trader rests in your discipline

of having regular, scheduled times in which you evaluate your trading
performance. I used to hold these self-reviews once a month, however, found that
the sheer workload required to evaluate the 8-12 trades I would have most likely
placed resulted in lower quality work. A fortnightly self-review is the perfect
balance between having enough trading data to analyse to make useful
corrections going forward but not conducting too frequent reviews which have
less meaningful outcomes.

These reviews need not be a complicated or painful process. In fact, these are vital
times when we can objectively review the trades we have taken and set goals to
improve our future performance away from the chaos of live market action. We will
review each individual trade we have made over the time period with an aim of
spotting any recurring technical or psychological errors. We will also review the

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trades which were in alignment with our trading plan but failed to take, for
whatever reason. The end result of this periodic evaluation should be a concrete
list of things to work on and improve before the next review. Generally, short-term
process driven goals are used to set to enforce accountability. The aim is not to
have a long list of things to improve, but rather 1-3 of the biggest issues the trader
is currently experiencing. It should be obvious at this point that there is a direct
correlation between the quality of a trader’s record keeping and the effectiveness
and ease of this review. Messy journal entries with minimal information will result
in a review that is much less effective.

An effective evaluation will incorporate the qualitative information from your

trading journal and the quantitative information provided by your trade analysis
sheet. Use the questions in chapter 9, along with the ones below for an effective
review.

Have you been taking trades in alignment with your trading plan?
Just because you have a plan laying out the specific criteria for each of your
trading setups, there’s still going to be many examples where you’ll taken
impulsive, emotionally driven trades. You can’t expect to trade perfectly all the
time. However, it’s important you know how consistently you are sticking to your
plan. Constant deviation from your go-to setups or taking setups simply not within
your plan could be a signal that deeper psychological issues may be present and
need to be corrected. At each review I’ll calculate the percentage of my trades and
my management decisions against my trading plan, aiming for 80% adherence.

What are the commonalities of your best trades?

Review your best profitable trades. Are there any commonalities or themes
present? Understanding what makes you trade at your best means you can focus
more on the opportunities that will maximise your performance and results. When
I started to really commit to regular scheduled self-reviews, I found that all my best
trades were preceded by higher time frame momentum. My best trades occurred
when the move was already under way and I was simply finding a lower time frame
continuation pattern into that move. By understanding this dynamic, I began
trading these patterns more aggressively and was able to boost my average
monthly results by a couple of percent. Some traders I know and have worked with
have found that the Retrace produces their best trades, as they have an innate
ability to locate probable reversal areas and ‘calling the top or bottom’. The point
is to find what works best and resonates most with you as they are the trades you
should naturally gravitate towards.

Have you been managing your positions correctly or closing down trades
prematurely out of fear of giving profits back to the market?
Are your stop loss adjustments being made out of your management plan or out
of an emotional, fear-based need to lock in as much profit as possible? It’s very
easy to rationalise, justify and explain away to yourself all the reasons why, this one
time, you should move the stop loss to the 2% mark, even though your plan states
that it should only be locked in at 1%. Believe me, I’ve been there. However, these

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decisions, ultimately based off emotion and not on logic will only harm your results
in the long-term. You can’t be consistent with emotions, not in the financial
markets at least. Have a management plan in place before every trade...and follow
it.

Are there any common themes among your losing trades?

What are the recurring patterns and commonalities among your losing trades? Are
you constantly getting into the move late trying to force every continuation
pattern? Perhaps most of your losses are occurring on the 15-minute chart?
Whatever it is, find it and eliminate it.

Are there any common themes about your thinking patterns when taking
profitable/losing trades?
You may observe that whenever you’ve taken low-quality trades you’ve
commented in your journal prior to taking the position, that the markets have
been slow. This is an indication that when you’re bored or frustrated with low-
momentum markets, you’re more prone to taking subpar trades that you would
have otherwise passed off in more active market environments.
In my experience in meeting and working with traders, I would estimate that
around 80% of trading issues stem from psychological problems so don’t
underestimate the power of your thinking when putting on trades.
If you have deviated from your rules or had a lapse of judgement, don’t make
excuses. Just admit you made the mistake and try and learn from it. Ask yourself
empowering questions to help discover the answers that may very well prevent
you from making a similar mistake in the future. "What caused me to deviate from
me plan? Stress? Impatience? Trying to get even?"

Routines: Monthly Money Management

None of the trading educational literature that I have studied has mentioned the
all-important subject of money management. Money management refers to what
we do after we've been successfully trading and have achieved what we initially
set out to do: make profits. Money management is about what we do with the
profits we pull out of the market - whether that's paying ourselves, distributing it to
longer term investment, putting it in a savings accounts or leaving it in the trading
account to compound. Why so many trading books and trading education
providers are ignorant of the concept of money management is incomprehensible
to me because the longevity of a trader isn't just tied to his level of technical skill
but also to his ability to distribute the fruits of his labour. I understand there may
be some traders reading this with very much the intention of never withdrawing
any profits and simply allowing the account to progressively compound over time.
In fact, I was very much of the same thought process when I started trading.
However, every trader will get to a point where knowing how to manage their
profits isn't just desirable but essential. Effective money management gives you a
clear-cut plan that maximizes the utility of the profits you make from your trading.
The following options* exist when it comes to your money: keeping it in the
account, paying yourself, saving it and investing it. Let’s cover each in their

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respective order. By the end of this chapter, you will have the knowledge and tools
you need to manage your profits, easily allocating them among these possible
avenues depending on your individual goals as a trader.

*One of the main considerations in addition to the aforementioned points is tax. It is essential
you're familiar with the laws and rules governing your specific taxation status. For the purposes of
this book, I will not be discussing tax as it would not be in the interest of any reader. Tax laws are
subject to so many different variables depending on what country you're from, which markets
you're trading and your level of income, that it would be incompetent of me to even attempt to
address this area. Consult a specialist for expert advice relating to your individual circumstances.

Keep it in the trading account:

One of the most dramatic ways to boost your monetary returns is to allow your
profits to accrue in your account so that you can experience the effects of
compound interest. Compounding is the process in which an asset's (our trading
account) earnings are reinvested so that those profits can generate additional
earnings over time. This can lead to dramatic account growth as the account will
generate earnings from both its initial principal and on the additional profits from
preceding periods. As usual, an example will help solidify your understanding.
Imagine you're trading with an initial account balance of £30,000. You already
have 6 months' worth of expenses put aside so there's no need for you to
withdraw any of the profits you make from the account. Over the first month you
make 5%. Your account now stands at £31,500. You make the same return in
month 2, again netting 5%. However, this time your profit equates to £1575 (5% of
£31,500) as opposed to the £1500 you made in month 1 (5% of £30,000). You’ve
made an extra £75 for no additional skill, effort or time. It may not sound like a lot,
but when you consider the compounded effect of that over time, month after
month, the effect becomes exponential. The same £30,000 account compounded
at 5% a month results in a £2566 profit on month 12. The percentage return is
exactly the same. There has been no extra investment of time, effort or skill yet the
monetary profit has gone from £1500 in month 1 to £2566 in month 12: an
increase of £1066. That is the beauty of compounding.

Pay yourself:
This one's a given if your primary income is derived from your trading. Unless
you've specifically put aside enough funds to cover 6 months or a year's worth of
expenses, you're going to need to pay yourself. There's a profound effect of
withdrawing a portion of our profits and seeing them in a cash account: it makes
them real. Banking profits is all well and good but there's a certain level of
disconnection when it's just a number in your online trading account. Withdrawing
some profit every month creates a sense of possession that makes you less likely
to take risky trades and possibly give hard-earned profits back to the market.

Paying yourself should be your first consideration because it's only after we've
rewarded ourselves with a percentage of our earnings should we consider what
we do with the rest. Many personal finance books peddle this idea of paying
yourself a fixed percentage of your earnings before allocating the remaining funds
to various other outlets. This approach is fine if you're income remains constant,

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month to month. However, if you're a self-employed freelancer, a business owner,

entrepreneur or indeed a trader, this approach has some major flaws. A trader’s
income is likely to fluctuate, sometimes quite drastically. If we follow the
supposedly logical idea of always paying ourselves a fixed percent of what we
earn (say 50%), the monetary amount of what we receive at the end of the month is
going to be constantly changing based off the amount we've made. If we're
managing an account of £70,000 and make a solid 10% one month, we make
£7000 of which we pay our self a healthy £3500. Let's assume we've saved the
remaining £3500 in a simple savings account and so our trading balance the next
month is still £70,000. If this month, we only achieve 1%, we've netted £700, and
based off the same 50% rule are now paying ourselves just £350, probably not
sufficient to cover our standard living expenses.
A fixed percentage rule simply doesn't work in a profession such as ours. Instead,
the solution is to take the reverse approach - decide how much you want to pay
yourself each month, remove that monetary amount from the profits earned that
month (regardless of what that is as a percentage) and then decide how you're
going to allocate the remaining funds. By prioritizing paying ourselves first, we're
ensuring we receive enough money to maintain our lifestyle and then having a
framework in place to distribute what’s left over.
Here's another example. Imagine trader John needs £3000 a month to cover his
average living expenses. He's trading a £100,000 account and makes 5% in month
1. He pulls out £3000 from his account and appropriately invests, saves and
compounds the remaining £2000. In this instance, he's paid himself 60% of his
market earnings. Month 2, he's on a roll. Markets are impulsive, he's trading well
and banks a 14% return. Because his living expenses still stand at £3000, he
withdraws that amount, again, saving, investing and compounding what's left. This
month he's paid himself around 21.4% of his monthly earnings yet has still
received the monetary amount he deemed appropriate for his lifestyle. This is the
beauty of this method, you're always paying yourself first and foremost, regardless
of what that is as a percentage. Whether it's 1, 25, or 77% of what you've made,
you’re making yourself priority and then deciding what to do with the rest.

Before you continue to the next section where we'll explore the other outlets for
your hard-earned money, it's important you complete the following exercise:
calculate all of your monthly expenses to arrive at an average figure of your
monthly spending. Make sure you include bills, rent, food, entertainment etc. This
is the amount you're going to need to live your desired lifestyle as a self-sufficient
trader. After you've calculated this figure, continue to the next section.

Save it:
Putting some money aside in a tax-effective savings account is never a bad idea.
You'll have a backlog of cash for the times when your trading income hasn't quite
covered your living expenses and will ensure you've always got a supply of capital
handy for those unexpected expenses. The only time you want to be pulling funds
out of your trading account is when you're paying yourself at the end of the
month, not because you need a few extra hundred quid to repair your car. Having

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a savings account that's easily transferable to your debit account will save you
stress down the line when unexpected expenses pop up.

Invest it:
A longer-term investment portfolio can be the perfect compliment to a trading
account, allowing you to benefit from long-term capital gain, earning more than
traditional savings accounts but without the active involvement that comes from a
trading account. For our usages, investment could include mutual funds, stock
ETF’s, property or private businesses etc. The investment portal has the same goal
regardless of the specific tool being used: to benefit from longer-term capital
appreciation. Because this is a trading book, it would not be appropriate to begin
exploring all these different investment avenues. However, we shall briefly look at
one of these products, exchange traded funds, as I feel due to the ease of use and
practicality, they are the perfect tool for the trader wishing to step into personal
investment. If you are not currently at the stage of considering longer-term
investment, preferring to compound your profits in your trading account, then
you’ll still find benefit from the next section. This short primer on ETF’s may just
give you everything you need to know about longer-term equity investing.

Exchange Traded Funds

Exchange traded funds or ETF’s are a kind of hybrid between a traditional
investment fund and an individual company stock. An investment fund in the sense
that an ETF is representative of many diversified stocks, but an individual company
stock in that these products are traded like shares on a financial exchange, hence
their name. ETF’s can be bought and sold exactly like stocks making them a
familiar and comfortable investment to the trader. Their inherent diversification
means that the risk is distributed among an entire market index or sector rather
than of an individual stock.

Exchange traded funds represent a basket of stocks, where the value and price of
the fund is derived from the prices of the underlying shares. As the individual
shares change in value, the ETF’s price will fluctuate to reflect these changes.
The most popular exchange traded funds represent a market index or sector. An
index equity ETF like the Standard and Poor’s 500 fund (SPY) represents the 500
biggest companies in the United States as ranked by market capitalisation.
Owning shares in the fund means you will have exposure to the 500 biggest, most
successful companies in the US. Rather than individually buying all 500 shares, you
get immediate exposure through one transaction.
Should you wish to invest in a more specific area of the market, ETF’s can also
provide exposure to specific sectors. If instead of owning the whole stock market
index, you’d prefer to only invest in a range of technology-specific stocks there are
multiple ETF’s which will cater to that. In fact, you can express pretty much any
investment idea solely through the use of ETF’s.

I believe ETF’s are the simplest investment product available to the individual retail
trader. Immediate diversification, low fees and ease of use make them the perfect
addition for the trader who doesn’t wish to pursue the sometimes-laborious

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process of researching individual investment prospects. Simply decide on your

investment theme, find an ETF that accommodates it and buy some shares. It really
is that easy. Just like the trades in your trading account, you will be able to see the
profit/loss of your fund in the open positions tab. You can then sell your shares in
the same way you would sell shares in a stock trade. If you are considering
branching into the realms of investment to better manage your money, then you
would be wise to become familiar with www.etf.com which provides up-to-date
information on ETF’s along with allocation breakdowns.

Tools

As part of the Trading Performance Toolkit provided with this book, there is a
money management tool that will show you the monetary breakdown of your
funds depending on the specific breakdown you allocate to these 3 portals after
you have paid yourself. Please refer to the Resources section for download
information and an accompanying PDF help sheet which will show you the easy,
step-by-step process to using the tool.

Image 10.3: The Monthly Money Management Tool. Simply input the monetary profit you have
made that month from your trading. In the grey box next to the ‘Pay’ cell, enter the ideal amount of
money you would pay yourself to satisfy your lifestyle. Using the ‘% Allocation’ box to the right,
input the % amounts you wish to allocate to each of the 3 different portals – saving, investing and
keeping (in the trading account). The tool will then tell you the exact amount you would have to
distribute to each portal by distributing the free funds (what’s left after paying yourself) depending
on the percentages you allocate to each one. You can find the download link in the Resources
section at the end of the book.

Summary

Trading can be challenging enough – fast moving markets, random price action
and the constant controlling of risk and emotional management can leave many
developing traders vulnerable to trading mistakes which are only perpetuated by
not having solid routines and processes in place. This chapter addresses the need
to have scheduled trading rituals to give structure and order to a trader’s day,
week and month. Any trader, new or experienced who is equipped with these
tools will be able to develop a system that will enhance skill development rapidly,
increase clarity and better help him along the path to profitability.

One word that nicely describes successful trading would be consistency.

Consistency not just in our interactions with the market but consistency in our

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routines. In an environment such as ours where the market is free to express itself
in any number of ways, routines hone us in, bringing us back to fundamental
trading competencies like forecasting trades, building a tailored daily watchlist
and self-reviewing, as opposed to the failing traders whose attention is shattered
by trying to keep up with all markets, at all times trying to catch all trades. For the
latter trader, this probably creates a bit of an emotional rush – and a hole in his
trading balance for one of the truisms of trading is that creating a rush often
replaces creating profits. Good trading should be predictable, scheduled and
consistent – trading routines are our key to unlocking that.

Trader Action Points

• Processes:
Back-testing – Testing a trading strategy against historical data to build
confidence and practise trade identification skills.
Forecasting – Anticipating multiple probable and possible price scenarios
based off the current market structure and price action, defining ahead of
time, what we would have to see to initiate a trade.
• Routines:
Weekend Analysis – Completed when the markets are closed, this time is
used to forecast multiple trading scenarios for the coming week. It is also
used to list the main market-moving news events that are occurring that
week.
Daily Routine – Your daily trading ritual, generally completed in the
morning. Adjust active positions, journal closed positions, review the past
24 hours’ price data, review missed trades, forecast trades which may set up
that day and set alerts for those trades. With a solid daily routine in place, it
is possible to complete all the essential trading work in about an hour. It is
then just a case of monitoring the markets and executing forecasted trades
when they present themselves.
Bi-Weekly Trade/Performance Review – The foundation of our continued
learning and development. Conducted at the end of weeks 2 and 4 in the
month, this time is focused on reviewing our past trades from that period
and evaluating our performance. We will cross reference the taken trades
against our plan and look at how we may have managed those trades for
more profitability. Performance goals are then set for the next review.
Monthly Management – Paying ourselves and appropriately allocating the
remaining funds to the 3 main avenues – investment, savings or keeping it in
the trading account for compounded growth.
• Back-test 1 year’s worth of data on your favourite stock or currency
pair. Record all data in the spreadsheet and analysis programme from the
Trader’s Toolkit. Set aside around 2 weeks for this task, aiming to test
around 1 month of data per day. Go for quality testing, not quantity. Only
then will you have an accurate portrayal of the effectiveness of the setups
being tested.
• Calculate your idea monthly income. This is the number you would need
to live your ideal lifestyle. Use your current monthly outgoings and

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expenses to estimate this figure. Input this into the Money Management
sheet from the Trader’s Toolkit. Decide how you will allocate the remaining
free funds using the programme. Use this for your monthly money
management.

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CHAPTER 11 - PRACTICAL PSYCHOLOGY

“If you can learn to create a state of mind that is not affected by the market’s
behaviour, the struggle will cease to exist.” – Mark Douglas

I've often been asked if raw intelligence is a sure sign of someone's success in
trading. Whilst I believe above-average intelligence is indeed one of the
prerequisites of a successful trader, it's not nearly enough to prevent failure.
Human emotion always gets in the way of human intelligence. Human emotions
are the killer in trading. The inability to manage these emotions is why most
traders fail. Learning the appropriate thinking strategies and attitudes to manage
these emotions is what practical psychology is all about.

Why Is Good, How Is Better

The problem with much of the current trading psychology literature is that whilst
it's great at examining old conditioning and explaining where your emotional
problems are stemming from, very few have any practical and applicable ideas
you can actually use to eliminate them. They dive deeply into how our beliefs and
mental conditioning have created habitual modes of mental behaviour that are
sabotaging our success in the markets. They examine how certain childhood
experiences are impacting our ability to confront losses and talk, in detail why the
associations we formed about money as a child are influencing every decision we
make as a trader. Rarely though, do they give the reader real actionable ideas he
can use to improve his trading going forward. I hope to break that cycle in this
chapter by distilling of all the best ideas and strategies that I've used with much
success. I will present to you the foundations for mastering nearly every
psychologically driven trading error through the implementation of what I call the
5 pillars, a unique set of trading attitudes that will allow you to remain disciplined
and confident regardless of market conditions. It's these attitudes and beliefs that
will ensure you’re not susceptible to the common trading errors most failing
traders make and creates a psychological environment whereby taking losses
does not resonate emotional discomfort.

The 5 Pillars

Whilst an inexhaustibly rich subject, most psychological trading problems can be

rectified by the mastering of a handful of simple, foundation principles. These are
the 5 pillars. Consider most non-technical trading errors: over-trading, risking too
much per trade, taking low-quality setups, not following a trading plan and failing
to cut losses short. These are all psychological, not technical or intellectual
problems. Consider the trader who is struggling to honour his maximum risk-per-
trade rule, instead preferring to overexpose his account in a series of high-risk
trades. Exactly why he falls into this pattern could be down to any number of
variables. Perhaps he has an inherent desire for risk and excitement, and he uses
his trading account as a way of satisfying that need. Maybe it’s that he’s so eager to
make a killing, that he feels obliged to risk big in order to profit big. Notice that

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whatever rationalisation we may tag on to his behaviour, they are all psychological
in nature. This isn’t an intellectual problem. The trader most likely understands on
an intellectual level why he should cap his risk in any trade. Nor is it a technical
problem – after all, the very fact he’s placing trades and operating in the market
would be evidence to assume that he knows the technical process of sizing a trade
correctly. Instead, this problem is rooted solely in his psychology, along with
virtually any other major trading issues that are the downfall of many a trader.

Exactly where these problems have arisen from is not the concern of this chapter.
It is not my objective to closely examine all of the possible reasons why a trader
may not be able to fully accept their risk in a trade or why he may be prone to
over-trading or whatever - only to give you the usable tools and strategies so that
you can learn how to manage your emotions in a way that is consistent with
successful trading. Notice the vocabulary I have decided to use here as well: the
word 'manage'. Many trading gurus talk about how the key to successful trading is
about ‘controlling’ our emotions. This presents one major problem: how do we
control the very emotions that make us human? The word ‘control’ comes from a
very negative place. It comes from a place whereby the very need of having to
control something means by default, we must be out of control of it and it's hard
to gain control over something so ingrained like human emotion. If we aim to
instead manage, we're fully accepting that certain emotions are going to be
aroused but we put ourselves in a position where we can lessen them, at least to
the extent that they don't significantly interfere with our trading.

A Thought Experiment In ‘Controlling’ Emotions

Close your eyes and imagine the following scenario: you’re sitting down in your
favourite chair or on your preferred sofa reading this book. As you’re reading, you
hear the door open. Turning around to see who it is, you observe a strange man
casually stroll in. Admittedly, you’re quite shocked to see a stranger just walk into
your property and so you ask them who they are and what they’re doing in your
house. They make their way across the room until they’re standing right in front of
where you’re sitting. Without saying a word, he stares straight into your eyes,
cocks back his head, creating the most disgusting throaty noise you’ve ever heard
and lunges forward, projecting a thick slump of mucus and phlegm right at you. It
lands right on your cheek.

Forgive me for the strong sensory image but there is a point to this rather revolting
exercise. If you’re like most people, even simply reading and visualizing that
scenario probably ignited particular emotions in you. You probably felt disgust,
your heart rate probably increased slightly, and your face may have even
grimaced at the thought of someone doing something so disgusting to you. The
point - these are entirely normal human emotional responses. You can't not
expect to feel the emotion of disgust when someone spits at you anymore than
you can't expect to feel excitement when you check a trade and it's running at 6%
profit or to feel disheartened when you've just taken your 4th consecutive losing
trade. Simply reading the previous exercise was a sufficient enough stimulus to

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evoke a reaction, a reaction you had no conscious control over. You were in no
more in control over the emotional response of disgust when you read those
words than a trader in control of his emotions when involved in the dynamic
realities of financial trading. Again, these are perfectly normal emotional
responses. Trying to control them is like trying to control a hurricane; you just
simply can't do it. But you can manage it. The key is understanding that it's not
about trying to eliminate these emotions, but to rather acknowledge that they are
a normal part of the human experience and that we can manage them to lessen
their impact and actually use them to our benefit. That is what the 5 pillars are for:

Before we explore the 5 pillars in more depth, please be cognizant that

psychological work is never a substitute for having a back-tested, proven strategy
and risk management methodology. Developing the right psychological mindset
is an unquestionably important phase in the development of a trader but only
comes after the other foundations are in place. It's what holds everything else
together; our strategy, risk management, journaling and trade reviews. Without
these foundations in place, working on our psychology is a futile exercise because
regardless of how effective our mindset, no matter how positive our attitude
towards losses, without an actual statistical edge, we will not be able to extract
profits from the markets. Unfortunately, this is the struggle that many new traders
face. They are trading strategies and methods that simply have no viable tendency
to make profits over the long run. Instead of confronting the real issue and doing
the necessary hard work to test and refine their methods, they focus on the
performance enhancing effects of trading psychology, misunderstanding one
important fact - psychology can only enhance something that is already working,
not substitute it. Time spent on trying to improve their mindset would be better
invested in understanding market structure, price action and in the development
of a strategy that will give them an edge.
For the trader that already has a methodology and a risk management framework
in place, the implications of effective psychology are somewhat different. In this
situation, regardless of how effective his methods, it can be incredibly difficult to
consistency execute that strategy without establishing an attitude and way of
thinking that is conducive to successful trading. It's been my experience in
meeting with many traders, that most errors which compromise their results
predominately stem from psychological problems. Consider the trader who
correctly identifies 2 instances of one of their go-to setups. They initiate both
trades and over the coming day both hit their designated risk point, taking two 1%
losses. Should another similar trade present itself, this trader is now likely going to
hesitate, not wanting to expose himself to another potential loss. He may even
start to question the validity of that specific trading setup. Inevitably he decides to
skip the trade and it's this position that goes on to become the 4 or 5% profit. Had
he understood the law of large numbers and the random distribution of events
over a given sample size, he would have executed this third trade without
hesitation more than mitigating the losses from the 2 previous trades. Therefore,
learning how to deal with the psychological implications of trading is one of the
most important steps for the progression of developing and experienced
discretionary traders as no trader will ever be completely immune to the errors

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stemming from psychological issues. With that said I am excited to introduce you
to the 5 pillars, the foundations for mastering personal psychology.

Pillar 1: Dealing with Losses

Taking losses is inevitable in trading, you simply can't be right on every single
trade and nor do you have to be. A boxer needn't win every single round to be the
victorious fighter no more than a trader needs to have a 100% strike rate to make
money in the markets. However, the inability to take losses is probably the number
one cause of most psychological trading issues. The sad reality is is that many
traders come into the market with a need to be right. They try to control the
markets and end up with the market controlling them. For them, a profitable trade
is validation of their intelligence and self-esteem and a loss is a hit against it. This
flawed logical has no grounding in the realities of trading. Traders who can't
accept losses are going to have a short-lived and often painful trading journey.

No matter how good you think you are, you are going to have to experience
losses in trading. Losing trades and being wrong about your analysis are absolute
inevitabilities in this game. Regardless of how advanced your technical skills, there
are simply too many variables affecting price movement for you to never be wrong
about a trade. Learning how to confront and interpret these losses could very well
mean the difference between success and failure in the markets.

So, what’s the solution? How do we learn to lose like the professionals? The
answer comes in 3 parts.

Part 1: Our Internal Representation About Losses

The first and most effective way to deal with losses comes from a fundamental shift
in our attitude about what losing means to us. To demonstrate just how powerful
this shift could be, consider 2 novice traders. Trader A is operating out of a belief
that there is no way to avoid taking a loss because he understands that losing
trades are unavoidable. He has completely accepted the risk knowing full well that
just because his analysis has indicated one thing, there exists an alternative
possibility, that price can move against him and trigger his exit point. With a belief
system like this in place, it’s unlikely he’s going to experience any negative
association with a losing trade. Because his ego is not tied into being right about
this trade, he won’t personalise the loss and see it as evidence of his not being
competent as a trader. It’s very likely that he’ll take the loss, log it, learn from it and
move onto the next trade. This is the ideal belief system and attitude towards
losses. Compare that to Trader B. He took the same trade and banked the same
loss. Instead, he hadn’t completely accepted the risk. He became so locked into
his analysis and his belief about how the trade should play out that he hadn’t
mentally, emotionally and financially prepared for the possibility of being wrong.
He understood intellectually that a loss could occur but didn’t accept it
emotionally. From this mental framework, a loss results in pain. To him, the loss
becomes validation that perhaps he isn’t quite a good a trader as he thought,
damaging his self-esteem. Trader B is now likely going to want to restore his

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bruised ego. He wants to prove to himself that he is indeed a good trader. What
trader do you think is more likely to attain long-term success? I think the answer is
obvious. Trader A takes the loss, understanding that this is nothing more than
exactly that – a natural consequence of trading. He doesn’t even really see it as a
loss, likening it to more of an expense, exactly the same as a catering business
incurring the expense of buying food. For him, losses are merely the ‘cost’ of
doing business rather than a trading mistake or error. He feels neutral, positive
even and ready to move onto the next position. Trader B however, is in a state of
emotional pain. This wasn’t just a simple loss, this was personal. This was proof
that he was wrong. Now he wants to prove himself right. He’s desperate to get
back in the game to repair his ego. Overtrading, excessive risk and taking low-
quality trades are often the outcome, leading to more losses and an even greater
need to prove himself right. It’s a vicious cycle that often spells the end for many
new traders’ careers. The right attitude could have quite literally saved him from
much emotional and financial pain.

Part 2: Full Accepting the Risk

The second way we learn to deal with and create a positive association with losses
is by fully accepting the risk. When you fully accept the risk in a trade, it has
profound implications on performance. You may be thinking that surely if a trader
is operating in the markets and putting on trades then that trader has already
accepted the risk. However, there is an important distinction between being aware
of risk and completely, with every fibre of your being accepting that risk. Most
traders are aware of their risk, but few have truly accepted it. Accepting risk means
an acceptance of a trade’s result without any emotional discomfort, fear or anxiety.
It means being able to put on a trade, look the risk in the eye and know that you’ll
be completely okay if this trade is a loser. The alternative is how many people are
engaging with the market – fraught with fear, stress and struggle, stemming from
their inability to fully accept a trade’s risk. Any level of fear or struggle with your
trading is only going to negatively diminish your trading results. Fear distorts our
subjectivity. It makes the market our enemy where its’ movements have the
potential to inflict financial and emotional damage, making it painfully hard to put
on trades where every time we do so, it’s yet another opportunity for the market to
take money from us. This is not a healthy mindset to conducive to successful
trading.

This is where the differences in professional traders really shine. By fully accepting
the risk, they are free from fear. They are free to engage in the markets because
nothing the market does can be perceived as threatening to them. They are fully
prepared to lose in a trade because they have the belief systems and attitudes in
place about what a loss is that allows them to operate this way. They can trade
successfully because they have found a place within themselves where everything
just is - a place where profits and losses are equally a place in trading, where one
does not resonate any more emotional intensity than the other.

So, what are the most practical steps to accepting the risk? The first is keeping to a
low-risk trade model. Implementing rules like the 1% rule, make it much easier to

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accept the risk when you know that any one loss can only ever, at the very worse
have a minimal effect on your account. The second step is to rehearse the loss
before it’s materialised. This may sound trivial, but you’ll be much better
emotionally equipped when a loss transpires if you’ve already visualised taking
that loss ahead of time. Successful traders quite literally rehearse the process of
losing through the powerful aid of visualisation. By rehearsing in advance, the very
real possibility of taking the full 1% loss, they minimize confusion if that situation
does develop.
Before you set the entry order, take a few minutes to imagine the trade’s stop
getting hit. Rehearse having a positive response where the loss doesn’t register
any emotional response. Over time, you’ll be able to seamlessly enter and exit
positions without any emotional baggage because when you fully accept the risk,
you will be at peace with the outcome of any trade.

Knowing When to Take A Step Back

Remaining positive in the face of one or two losses is usually pretty easy for many
traders. But what about those times when you encounter a string of losses? What
about when it’s your third, fourth or even fifth loss in a row? Losses have a
powerful way of distorting our objectivity. Sitting in a drawdown can create a
sense of urgency to recover and get back to the familiar comfort of the green
zone. It’s therefore important, that when faced with a string of losing trades you
establish whether it is just the unfortunate result of probabilities (which you’ll learn
about soon) or because of genuine trading errors.
Having a good attitude about trading losses is not a substitute for poor trading.
The first thing you need to do after a few losses is stand back for a while and
compose yourself. If you carry those emotions into your next trade, you could
easily be swayed into forcing a trade or rushing into poor positions. Instead, switch
off the charts, open your trading journal and review your last few trades. Are they
good trades in alignment with your go-to setups? If so, refocus, and get back in
game. If you’ve found that your losses have been the inevitable result of taking
low-quality or emotional trades, it’s time to take a step away from the markets until
you’re more objective. Perhaps take a few day’ rest. It’s amazing how even a short
break away from the screen can recharge your cognitive and decision-making
batteries.

Pillar 2: Removing the Concept of Money

Most people have had the experience of working a job and translating every paid
hour into a monetary amount. Three hours may have been the equivalent of dinner
with a girlfriend. A day of work may have been your monthly car payment, one full
week your required rent payment. Whilst this might be a helpful strategy to help
get you through the arduous traditional working day, it’s a cardinal sin in the
trading world. When you view your trading results through the lens of monetary
amounts, you’re going to create an emotional significance and attachment to
money, normally to your detriment. Here are 3 easy steps to remove the concept
of money.

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“Think Percentages, Not Pounds”

Successful trading requires you to learn to detach yourself from seeing your
money as money. This strategy isn’t to diminish the significance of money – a
dangerous habit in real life, but rather to remove one of the most emotionally-
charged variables from our trading day. Whether we like to admit it or not,
everyone holds a certain degree of emotional significance to money. And who can
blame us? Money gives us the means of attaining many of the things we think will
bring us contentment – so of course we’re going to hold a certain amount of
significance to it. Anybody who tells you they are no in way influenced by money
are probably lying, unless they’re Jesus or Mother Teresa. If money wasn’t
important, why do the majority of people spend nearly a third of their lives
working for it?

“Think percentages, not pounds”. This was advice given to me by a veteran trader
of more than 20 years when I asked him what he thinks is the best way to
overcoming the emotional charge money has on our trading. This advice has
probably been one of the most performance-enhancing changes I have made to
my mindset and my trading. By changing our relationship to money and making it
one that is quantified in terms of percentages and R multiples, we don't generate
the same emotional intensity as the trader who is always focused on the absolute
pound amounts of his trades. Try the following exercise to see this idea in action:
imagine you have a £100,000 trading account. You take a trade with a 1% risk and
the trade is stopped out shortly after entering. What mental dialogue generates a
less powerful emotional response – “I lost £1000 today” or “I’m down 1% today”?
For most people, it’s the latter.

Make Trading a Game

I’ve often used the analogy of trading being like a big game when people have
asked me about how I do what I do. Most people are shocked to hear me liken
something as serious as financial trading with merely being a ‘game’. But in reality,
this subtle yet significant shift in our thinking can turn trading into an enjoyable
process rather than a battle-ground where our psychology is suspect to an
onslaught of emotions which change as rapidly as our P & L. Turning trading into a
game means we can be winning even if we’re losing, providing we’re following the
rules of the game. The aim of the game is to win, and we win by perfectly
executing our trading plan.
Don’t focus on concepts like profit and loss. Don’t feel lousy because you’re on
your second loss for the week. Focus simply of flawlessly executing your trading
plan. Losing trade? Did you follow your rules? If you did, then you’re winning the
game. When we focus on the actual process of trading and not on profit or loss,
our attention is turned to the very things that invariably bring about profits in the
first place: taking high-quality trades, managing our risk and sticking to our rules.

Ignore the P£L

Most online trading platforms allow you to customise the interface to your
preferences, displaying and hiding only the information you wish to see. If your
broker allows you to close the profit & loss panel, which shows the fluctuating

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monetary amounts of your open trades, then do so. It’s hard to act irrationally
when you open your trading platform as you won’t be forced to come face-to-face
with the running profit or loss of your trades every time you log in.

Remember: when we remove the concept of profit and loss from the trade, we
won't have a problem evaluating it.

The previous 2 pillars so far have dealt with our inherent emotional attachment to
money. Pillar 1 teaches us how to interpret our trading losses so as not to create
any internal conflict, while pillar 2 gives us a practical way to hack our brain’s
emotional attachment to monetary amounts by removing the concept of profits,
losses and money in our trading by learning how to operate solely out of
‘percentages, not pounds’. Even the implementation of these 2 practices alone will
more than likely eliminate most psychological trading errors and mistakes.
However, if we are to fully cultivate a professional trader’s mindset, we need to
establish a series of thinking processes that will manage our mental state and
expectations during live trading environments, and that is where pillars 3-5 come
in…

Pillar 3: Thinking in Probabilities

What does it mean to think probabilistically and why is it so paramount in

managing our emotions and expectations as a trader? When you’ve trained your
brain to really start viewing trading as a game of probabilities, you’ll free yourself
from the need to be right in any one trade. You’ll be able to trade the uncertainty
of price action without any internal conflict or hesitation, attaching no more
meaning or significance to a trade’s outcome any more than you would incorrectly
calling the outcome of a coin flip. You’ll forever be liberated from the need for the
market to conform to what you think it ‘should’ do, instead focused on attaining a
large enough sample of trades for your edge to exploit itself. You’ll never need to
know what’s going to happen in the market ever again. Concepts like right and
wrong or profit and loss will no longer carry the same emotional significance and
you’ll never be surer of your ability to extract percentage from the market.

To some readers, the previous two sentences may have sounded contradictory in
nature: how can you consistently take profits from the market without needing to,
at least on some level know what the market is going to? This question is at the
root of what it means to think in probabilities.

I can’t think of a better place to see the power of probabilities in action than the
casino industry. A casino makes its money by facilitating a series of games which
to the average person have a seemingly random outcome. So how then, can these
companies continuously turn a profit by hosting events which are entirely random?
The answer is as simple as it is powerful: they have a small yet statistical edge over
the customer, an edge which when executed many times, guarantees a profitable
outcome for the casino.

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Consider the roulette wheel. Players can wager money on different possible
outcomes like individual numbers, groupings of numbers or whether the number
will be high or low. The most common bet, however, is on whether the ball will
land on red or black. If you don’t already know, the European roulette table has 37
numbers, 0-36. Of the numbers, half of the them from 1-36 are coloured red and
half are coloured black. The 0 is coloured green. To the average spectator, betting
on either red or black seems like a pretty even chance, 50-50, just like that of
calling a coin flip. However, that would only be true if there were 36 numbers on
the roulette wheel, 16 red and 16 black. The all-important variable that gives the
casino its edge, is the fact there are 37 numbers, including the green coloured 0.
This means you have an 18 out of 37 chance of being correct = that corresponds
to a 48.7% chance of correctly calling the colour, not the 50% it appears. It may not
seem like much, but that 1.3% discrepancy (the difference from 50% and 48.7) is
what ensures that the casino will win over the long-term. This 1.3% edge the
casino holds over the player means that over a large enough sample size, the
casino is going to make money on 51.3% of spins. Translated to monetary
amounts, the casino will generate, on average, net profits of £1.30 for every £100
wagered on the table. By day’s end, the casino ends up with around 1.3% of the
total amount wagered on the tables. The house always wins.

Casinos treat gambling like a simple numbers game – they acquire a large enough
sample set so that the edge they hold, no matter how small can work in their
favour. They understand that events which have static, probable outcomes will
over a large enough sample size, produce consistent and statistically reliable
outcomes.

Another aspect of probabilities that casinos understand is that every event is

statistically independent of any other event. In other words, each roulette wheel
spun is an independent and unique occurrence where the outcome is in no way
related to the one previous or the one that is to come after. In continuing with our
use of fixed probability events to illustrate this idea, let’s turn to a simple coin
flipping experiment to better understand and help exemplify this idea before
looking at that what this means for practical trading purposes.

What a Simple Coin Can Teach Us About Probabilities

Imagine I have a fair coin and I ask you to guess the outcome of a coin flip. You
know there are 2 potentialities, heads or tails and that there is an 50% chance that
either could land. Suppose I flip this coin 100 times, each time recording whether
the result was a head or tail. At the end of those 100 coin flips, how many of each
do you think would have materialised? If you’re like most people, your answer was
probably 50/50 and you’d be completely right. Over the course of those 100 flips,
we’re going to see around 50 heads and 50 tails.

Let’s take this further. Suppose I also recorded the distribution of those heads and
tails throughout the course of those 100 flips. If I were to now instead ask you what
the result of each individual coin flip was, how do you think your estimations would

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fare? Well, because there is an equal chance of either a head or tail appearing,
you would correctly call the result about 50% of the time. Despite how confident
you may be, the mathematical reality is that you’re only going to be right around
half the time. For those that are more statistically inclined, you may have already
established the subtle, yet all-important distinction here. The first time I asked you
what the result would be at the end of the 100 flip sample. Whilst you couldn’t
guarantee the result, you were as close to certain as you could be that there would
be roughly an equal number of heads and tails. In the second scenario, I asked
you what the result would be on the flip by flip basis. We established that you
could never be surer than 50%. So, despite the unpredictably on the individual flip
basis, you could still assume with 100% (or close enough) accuracy that over a
large number of flips, you would have 50% heads and 50% tails. This is the
paradox of probabilities – uncertain outcomes can produce repeatable, almost
guaranteed results.

Truly understanding and being able to think in probabilities requires two layers of
beliefs; a belief on the micro level that the outcome of any individual event can
only have a probable outcome at best, yet a belief on the macro level that there is
an almost guaranteed result over the course of many of these individual micro
events. Read that again if this feels complicated for a true understanding of this
principle may just revolutionise your trading. In other words, you can only predict
the result of any one individual coin flip with 50% accuracy. But if you flip that coin
enough times, you know, with a high statistical likelihood what the result will be – a
roughly equal number of heads and tails.

Probability and Trading

So far, we have looked at the power probabilities play in producing consistent

results in games like roulette and seen how the random distribution of
independent events doesn’t affect the result on the sample size basis, as in the
coin example. But what utility does this have in our trading? The best traders must
learn how to operate like the casino.

Thinking in probabilities is one of the core tenets of successful traders. Trading is

itself a game of probabilities in that any trade you take can only have a
probabilistic outcome. No trade, regardless of how good the technical setup can
make money 100% of the time. Understanding this reality frees us from the need
to be right in individual trades and allows us to focus on our results over groups of
20, 50 and 100 trades.

Following the trading templates in this book, you’re going to be deploying

methods with strike rates between 55-60%. This is like having a coin that is
weighted 55-60% on the heads side. We can now start to draw some parallels to
trading. If we flip that 55-60% weighted coin 100 times, we know we’re going to
end up with around 55-60 heads. These are the profitable trades. We also know
then, that by default, we’re going to experience around 40-45 tails. These are the
losing trades. We can now trade, confident that if we consistently execute our

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edge (that is our proven technical trading setups) we are going to end up with
more profitable than losing trades. We can’t guarantee the exact order these
trades will play out because we know that every trade we take has a unique edge
with at best, a probable outcome, statistically independent from any other trade
we take. But we can guarantee that if we place enough trades, we are going to
make money on approximately 55-60% of them. However, because we don’t know
the distribution of our profits and losses in advance, no single trade (profit OR
loss) will hold any emotional significance anymore. It’s merely one of the next 100
trades. Taking 1, 2 or even a handful of losses no longer results in any discomfort
because we know it’s simply the random distribution of our edge playing out. Why
would taking our third loss in a row register any emotional discomfort or fear,
when we know, with conviction, that we will still be profitable over many trades?
Those losses simply don’t affect the result on the macro level. This is the thinking
strategy the best traders use. They approach taking trades in much the same way
the casino approaches customers betting on their games. They first go into their
trades with an edge, that is their market analysis which increases the likelihood of
a trade moving in their desired direction. They understand that on the micro level
(the trade by trade level) they only have at best, a probable outcome. But they
know that by applying that edge over a large sample size of trades, they will yield
consistent results, must like the casino and their roulette wheel. To be successful,
you need to think in the long run, ignore the outcomes of individual trades and
think in probabilities.

Pillar 4: Setting Process-Driven Goals

As a former Personal Trainer, I have seen first-hand with countless clients the
importance of having clear, action-orientated goals. A goal gives us a destination
to reach, focusing our minds on the things we need to do to make them a reality.
Intelligent goal setting will also break the objective down into small, quantifiable
steps that we can subsequently break down into weekly and daily tasks to
constantly keep us focused on the most important activities that bring its
achievement to fruition. There are two types of goals; outcome-driven and
process-driven goals. Outcome goals are things that most people think of when
they set goals: “lose 1 stone before my holiday, make 10% in my trading account
in March or become a published author” etc. These goals are focused on
expectations. Having an expectation isn't so much a problem in and of itself. It's
how the expectation makes us act and how we respond to them that is so critical.
The issue for a lot of traders, especially newcomers is that goals can quickly
become demands. For these people, these demands can become such an internal
driving force that it leads to a narrowing of one's awareness where every action is
filtered through the desire to meet that goal. For the trader this means doing
anything he can to make that 10% month a reality, even if those actions aren't
necessarily congruent with good trading - he over-trades, overexposes his account
and starts to deviate from his go-to setups, desperate to reach the high standards
he placed on himself. The pressure to perform can quite literally inhibit the things
that make him successful. It puts him into a rigid mindset - a dangerous thing for a
trader. Traders need flexibility and patience, not rigidity.

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Outcome-driven goals are fine for keeping the bigger picture in mind and can be
great motivational aids, but they lack one key thing: actionable steps, the real
substance to actually achieving them. Setting a goal to make a 10% return this
month may feel good but it doesn't actually do anything in terms of self-
improvement. We've got the destination but no blueprint to get us there.
Process-driven goals, however, get to the root of the very things that we need to
be doing for growth and improvement, the inevitable result being the very things
we want to achieve in the first place. They can be broken down into manageable
steps that can be easily quantified, providing us with valuable feedback when
we're off track. Rather than "Make 10% this month", if a trader were to have a goal
to "Only trade the highest-quality setups this month" or "Back-test 6 months of
data on EUR/USD" he actually has clear things he can get to work on right away,
things which could improve his skill set as a trader, enabling him to have a 10%
month!

Setting Your Own Goals

A good time to set and evaluate your goals is during your bi-weekly trade review
and self-evaluation. After having reviewed your performance from the past 2
weeks, you’ll be better able to highlight the areas for improvement. Use these as
the basis of setting your goals. Make sure they are specific, zeroing you in on
actionable steps you need to take to improve your trading. And don’t make them
so bold, that they become a source of stress or frustration. Something like “Refine
my entries on Retraces by back-testing 100 trades on EUR/USD” may very well
improve your trading but attaining such a large test data set is a momentous task.
A goal should serve you, not distract you. They should help you become the trader
you were meant to be. They are the key in unlocking the daily disciplines and
actions that will elevate your results beyond what the lesser traders achieve.
Lesser traders trade not to lose. They're not hungry to become more than they are.
They want to do well but not to do their best. Successful traders, on the other hand
trade for one reason: to win. Goals help them do just that.

Pillar 5: Remaining Relentlessly Positive

Out of all the possible forces on our psychology, there is one overriding influence
– attitude. Through working with dozens of traders, it’s been my experience that
attitude is one of the attributes separating the best traders from the rest of the
pack. Christian preacher, Charles Swindoll said “I am convinced that life is 10%
what happens to you and 90% how you react to it”. What I really love about this
quote is the how it’s so applicable to successful trading – taking your third loss in a
row is not important, not if your losses are capped at 1%. What’s important is how
you interpret that event and react to it. For the novice trader an appropriate
reaction may be to view the event as a negatively charged one. Now feeling like
he has to get back at the market, he allows his emotions to colour his judgements,
oversizing his next trade to try and quickly recover his losses. The shrewd trader,

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however, reacts neutrally. He understands that losses are just as much a part of
trading as normal expenses are for the running of a small business. The losses do
not register on his emotional radar because he has a positive, winning attitude
about what this event means.

When you can trade without being encumbered by negative emotions and
thought patterns and instead trade out of a mind-set that is expectant of good
results, confident in your abilities to execute you’ll suddenly find yourself freed
from the shackles of regret, fear and self-sabotage. Understanding the
importance of a positive attitude may be just one of the most important turning
points in your trading career, because, as distressing as it may be to accept, no
amount of technical skill or market analysis will compensate for a lack of a positive
winning attitude. A technical understanding will provide you with the necessary
edge you need to place high-probability trades, but an edge will not make you
profitable if you don’t consistently apply it and the only way to do that is through
the development of a winning attitude. Your attitude is what controls your
behaviour and actions and your persistent actions and behaviour governs where
you ultimately end up in life…and in your trading.

Although the words “remaining positive” sound simple enough, the concept can
actually be extremely difficult to put into practice in your trading. We’ve all most
likely heard the words from TV, friends, parents or teachers and have been
confronted with times in our lives when being more positive would have benefited
us greatly. However, having a positive outlook isn’t just an extraneous ideal, it’s an
integral ingredient in your longevity as a trader. You must, with every fibre of your
being remain positive about the markets, your results and your level of
development.

So how do we go about cultivating a positive, winning attitude? There are 2

fundamental components. Let’s go through each in turn.

Self-confidence
Of the 2 attributes required for developing a positive mindset, self-confidence is
the most important. Please don’t misinterpret as having high self-confidence as
being arrogant. Self-confidence as it relates to trading is not expecting the best
but knowing you can handle the worst. It's the ability to look at a stop loss in the
eye and know you'll be fine if it's triggered. However, too many traders drown in a
proverbial sea of negative and self-defeating emotions: fear, regret, blame, pity,
frustration and anger. Very few ever cultivate a relentlessly positive attitude or
even attempt to. Most struggling traders instead prefer to wallow in these
destructive and all-too familiar emotions.

To really appreciate just why self-confidence is so important, think for a moment

about an activity in which you are very proficient. It could be playing an instrument
in which you are skilled, driving your car or creating art. Whatever is, notice how
when you are immersed in that activity, how confident you are in doing it. A skilled
pianist doesn’t sit down to his or her piano and begin to question whether he can

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remember the notes or whether he’s going to press the wrong key. He sits down
to that piano completely confident in his ability in creating a beautiful piece of
music. Now think about something you’re not good at. Maybe that’s playing a
certain sport or public speaking. Again, think about how you feel when you’re
performing that activity. Without doubt, you will be most confident in doing what
you’re good at and you’re naturally going to lack confidence in doing something
in which you don’t hold talent or skill. This may not sound like a revolutionary
concept at first but think for a moment the implications this has on a trader.
So many traders are operating in the markets with no genuine belief or self-
confidence in their trading abilities. They may think they are because they’ve back-
tested their setups, have a trading plan detailing those setups and they have a risk
management framework in place to prevent account blow up but in reality, these
traders are no surer of their ability to produce profits than the learner driver is of
negotiating a drive around a busy city. Many of these traders focus too heavily on
their losses and not enough on their profits. The problem with this is that by
constantly focusing their attention on the times when trading was about loss, they
are subconsciously creating a mental association of trading that is negative.
They’re so caught up in their losses, and not enough on their profits that they don’t
put themselves in a position to win. They’re not allowing themselves the potential
to be great. Their entire mental self-talk revolves around loss. How can you
possibly become a winner like that? That’s like trying to get in the best shape of
your life by only obsessing over the word ‘FAT’. You can’t win like that.
The traders who break through to consistency have an unwavering belief in their
ability to win.

Taking responsibility
The second way we develop a positive, winning attitude is by assuming complete
and utter responsibility for our trading, our results and our level of development. A
winning attitude in trading is expecting a positive attitude with an acceptance that
whatever results you get are a perfect reflection of your level of development as a
trader. It means accepting that only you, not the market or your broker are
responsible for your success. It’s about believing that any results and outcomes
are entirely self-generated. Why this is so fundamentally important is because the
alternative solution - taking anything less than 100% responsibility puts you in a
position that is detrimental to your continued development as a trader.

When conversing with other traders, I often hear things like “The broker was
hunting stops” and “The news just wiped out my short”. I normally try and do
anything I can to get away from people like this because, and this probably stems
from my work as a Personal Trainer, I cannot stand it when people try and
relinquish responsibility for something by putting blame outside of themselves.
Only losers do that. Equally curious and coincidental is that these same traders are
more than willing to take responsibility for their profitable trades. A theme occurs
where every big profit they took was because of their meticulous analytical skill
and finesse. Somehow, in these occasions, there’s no talk of volatile markets or
strange price movements. Yet, when the market serves them a cold plate of losses,
it’s the market’s fault, their broker’s fault, their computer’s, their software’s and

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their mother’s friend’s fucking cat’s fault. These are the people that are destined
for trading failure. Fuck them people. Instead, make a commitment to yourself
from this point forward, that you will assume complete and utter responsibility
over your trading. No longer will you let any external force dictate your results.
Because when you do, when you stop fighting and blaming the market or anything
else, you’ll put yourself in a position conducive to learning. You’ll quickly identify
the things that may be holding you back and will be in a neutral, open and
learning-centred position to overcome them – that is the power of taking
responsibility.

Conclusion

I have stressed my opinion on this many times throughout this text, but it is worth
emphasising again: along with risk management and solid technical skills, the
management of one’s emotional and psychological state is key in the becoming of
a consistently profitable trader. Most trading problems have their roots in
psychology, not in intelligence.
This chapter has explored the 5 pillars, the foundations for mastering personal
trading psychology and overcoming nearly any emotionally driven trading error. It
is my hope that this chapter will become the catalyst for many readers to begin
mastering their own trading psychology, using the practical ideas we have just
discussed. If you can successfully implement all the thinking strategies, tools and
attitudes in this chapter, I assure you that you will gain a major competitive
advantage over many other traders operating in the market.

Do not try and attempt to radically change your psychology by incorporating all
these ideas into your trading life immediately, for you will surely overwhelm
yourself. Instead, systematically master each pillar one at a time. Only move onto
the next principle after a complete and consistent application of the one before it
has been achieved. Mastery takes time, and the subconscious internalisation of
new ideas and concepts is not one that can be rushed. The small amount of time
and effort you invest in making these ideas an authentic part of your mental
operating system will pay dividends, disproportionate to the rewards you will
receive: an unparalleled and effortless confidence when trading. Now that is a
great trade.

Trader Action Points

• Most common trading errors and mistakes are psychological in nature, not
technical or intellectual.
• Many of these errors, whilst varied can be rectified with the mastering of a
handful of foundational principles: The 5 Pillars:
• Pillar 1: Dealing with losses. Losses are an inevitably in trading and
learning the unique belief systems and attitudes to deal with and interpret
losses will allow you to “lose like the professionals”.

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• Pillar 2: Removing the concept of money. By learning to think in terms of

R multiples and percentages, a trader is less likely to become emotionally
attached to the outcomes of individual trades.
Start monitoring your positions through your charting software and not
through your brokerage, where you’re more likely to get caught up in the
fluctuations of your P&L.
Record results in terms of their percentage amounts and not in their
absolute monetary terms.
• Pillar 3: Thinking in probabilities. Pro traders understand that trading is a
game of probabilities. They understand how probabilities work and can
therefore focus on attaining a large sample size of trades, rather than being
caught in the results of individual trades.
• Pillar 4: Setting process-driven goals. By focusing on goals which provide
daily actionable steps and not on outcomes, traders can focus more on the
things that will have a positive impact on their trading. 1-3 trading goals
should be set at the bi-weekly trade review/self-evaluation stage.
• Pillar 5: Remaining relentlessly positive. The best traders understand
that trading is a mindset game. By cultivating a positive attitude and
assuming complete responsibility for their trading results, they break free
from the shackles of negative emotions and open themselves up to learning
the things they need to develop and progress as a trader.

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CHAPTER 12 - YOUR TRADING PLAN

“Speculators without a plan are like a general without a strategy, and therefore
without an actionable battle plan. Speculators without a single clear plan can only
act and react, act and react, to the slings and arrows of stock market misfortune,
until they are defeated."- Jesse Livermore

Trading must be thought of as a business and it should always be treated as such.

Starting a business with no developed plan in which to continuously grow and
improve would be considered by most to be incompetent, yet this is exactly what
most traders are doing when they’re trading the markets without a clear trading
plan. A plan tells you exactly what you're going to do as well as when and how
you're going to do it. I have often been told by developing traders that the reason
they’ve not yet built a plan is because they’re not quite sure which setups resonate
with them the most and are still in the experimental/testing phase. That’s like
saying you’re only going to create a fitness regime after you’re in shape!
Regardless of where you are in your trading journey, you need a plan. In the early
stages this may be more focused on your development rather than on the
specifics of your trading setups. As you gain experience from real trading, it can
be modified to include your favourite trading templates and management styles.

It's unfortunate that many people view anything to do with the financial markets as
merely gambling, a form of speculation with odds no better than that of the
casino. I find this unfortunate as I really do believe that everybody, in some
capacity or another, could benefit from the inherent opportunities the world's
financial markets provide. However, I would have to agree that to the uneducated,
misinformed, unequipped and those without a clear trading plan are indeed no
better than gamblers.

If you were to study profitable and losing traders, one of the distinguishing factors
that sets them apart is that profitable traders have a trading plan which facilitates
their decision-making process by removing emotions, helping them focus on only
statistically reliable entry and management criteria, reducing hesitation and
increasing clarity. They have predefined criteria telling them where they will enter
a trade, and they know how they will manage that trade depending on the
evolving price action. Losing traders however, are engaging in the market with no
defined rules, risk management framework or trading criteria in place. They’re
meandering about, hoping that emotions, opinions, intuition and gut feel will be
enough to bring them success. Invariably, it’s not. This group of traders, if you can
call them that, slowly grind away their account into nothing.

The Components of a Winning Plan

To build an effective and professional trading plan, you’ll need to include 4 crucial
components; a mission statement, a breakdown of your setups, general trading
rules and a motivational section to pull you through the tough times. Let’s go
through each of them in turn.

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Mission Statement
Just like every great company has a guiding mission statement, so should every
great trader. Ask yourself "Why am I trading?". You may think the answers are
obvious but it's important to know exactly what's pushing you forward. You need
to know what your big ‘why’ is, the thing that's going to keep you motivated even
when you can't seem to motivate yourself. A mission statement is the guiding
principle for why you are trading, encapsulating everything about what you hope
to achieve as a trader and the values to which you will live (and trade) by. It will be
the first thing you see when you view your plan, a purposeful promise that will
carry you to your goals. Every trader will have a different reason for why they are
engaging with the market, this is your opportunity to define, in your own words,
what yours is. Is it to provide a better life for your family? To live a life of financial
freedom? Are you investing in the future of your children? Making a side income?
Whatever the answers, your statement is where you'll clearly articulate what's
motivating you and how you are going to act to achieve your goals.

Keep it short and sweet, a paragraph a most. I have provided mine so you can get
some ideas. But remember, like everything in this book, it must be adapted to
your individual circumstances:

“I am trading in order to exponentially increase my wealth whilst being engaged in

an area of which I have great interest. I am trading to allow myself to live a life of
financial abundance and freedom in which I can work from anywhere in the world,
whenever I want without having to answer to a boss. I am committed to being the
best trader I can possibly be by continuous skill development which I achieve
through periodic performance evaluations. I consistently execute my edge when
the market allows it, extracting profit from the market, dramatically improving the
quality of my life and the lives of my partners. Through the implementation of the 5
pillars, I maintain a high-level of personal psychology, grounded in probabilistic
thinking. Losses do not emotionally affect me or cause any discomfort as I
understand they are a necessary trading expense.”

Your Setups
This is really the meat of your plan, breaking down your go-to trading setups that
you're committed to executing when they develop. Every trader should have
specific setups, tailored to the markets they are trading. By isolating setups, they
can easily be tracked and quantified in terms of performance. If you've done some
of the heavy lifting already and you've back-tested the setups discussed in chapter
7, feel free to go ahead and plug some of those into your plan straight away, but
don’t feel you have to utilize them all at once. You may decide that only 2 or 3 of
them fit with your trading style and so only focus on them. Should you prefer
waiting for price confirmation after a move by waiting for a correction, that's fine,
focus on flags. If you're more aggressive and like to catch the reversal, chasing
higher reward to risk trades, then the Retrace may be more your style. Or, if you're
anything like me, you like to have an inventory of setups on hand that you can
deploy so that regardless of what the market's presenting, you can take
advantage. There really is no right or wrong answer, only what's right for you and

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your personality. In my plan, I list each of the main core setups, Bull/Bear Flags, the
Retrace, Structural Breakouts and CounterPatterns listing the criteria that must be
present for each of the relevant setups, rules for stop loss placement and the
management style most congruent with that type of trade.
Don't make your setups too complicated. The simpler your rules, the more likely
you are to follow them in the realities of the live trading environment.

Your plan should also include a screenshot of a perfect, textbook example of that
trade. This will become a useful tool when you’re considering taking a trade of the
same setup. If you’re hesitant, you can cross reference the trade with the examples
in your plan and quickly see if this is a valid, high-quality trade or a poor, impulsive
one.

Trade Management
After defining the trading setups that make most sense to you, you're going to
need to create a framework in which to manage those positions. Outline the
strategies and rules you'll implement with your trades and how you will decide
which to use. I keep things simple and have 2 main management styles: a
mechanical 1% trailing stop method and a more discretionary, structure-based
system as you learnt in chapter 6. You may choose to blend these into a more
discretionary system, perhaps modifying them slightly to your own preferences.
Regardless, make sure that you have clearly outlined your trade management and
exit rules.

General Trading Rules

Here you'll list your main trading guidelines which encompass everything you do
as a trader. These can be quite generic - "Never risk more than 1% per trade" to
much more specific action orientated things like "After a profitable month, I will
withdraw 50% of the money into a cash account". Below you'll find my personal
complete list of trading rules, pulled directly from my own trading plan. Use this as
a reference, not something to be copied word for word. For them to be effective,
they must be your own.

My top 10 trading rules:

1. Never risk more than 1% per trade.

Trading is a game of probabilities and I can never know in advance which
trades will play out and which will not. It is therefore imperative that I cap
the risk in any one trade. 1% losses ensure that I remain emotionally
unattached to any one trade.
2. Be aware of news.
News can create volatility and erratic price movements, as well as
significantly increasing spreads. Note down any significant news events
before the trading week and filter them through my decision matrix before
taking a trade.

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3. Drown out the noise

StockTwits, financial news and tips DO NOT SERVE ME. Have faith in my
own analysis.
4. Don't micromanage positions
Know how I will manage a trade (whether trailing based off structure or %
targets) before I enter a trade.
5. Focus on percent, not pounds
Getting caught up in the monetary values of a trade will only encourage
hesitancy and cloud my thinking. Always think in terms of percentages.
6. Forecast
Anticipating moves ahead of time and planning appropriate responses is
what keeps me ahead of the game. Know in advance what price has to do
to satisfy me to take a trade.
7. Know the probable and possible
Always be cognizant of the likely structures/scenarios for price. However, be
attuned to the other possible scenarios and factor these into my analysis as
well. Use straight lines to highlight probable structures, dotted for possible.
8. Don't lose track
Aim to check the markets and update structure at least 3 times a day. By
keeping on top of the markets, I will always be in tune with the most recent
price action.
9. Know your exposure
Never put risk on without knowing where I stand regarding the sum total of
risk across any open positions.
10. Keep losses in perspective
Most traders fail because they can't take the losses. Don't become so
emotionally attached to the loss(es) that you don't capitalize on the WIN.

Motivation
Like every career, trading's going to have its low points. You’re going to take
strings of losses. There's going to be slow, corrective, frustrating market cycles.
There's going to be times when people doubt you, telling you what you're doing
is stupid and that you should go and get a 'real' job. A motivational section is your
one stop shop for all your favourite trading quotes, inspirational videos, blogs and
other media designed for pulling your through these times. You can fill it with
anything you find helps you get back in the trading zone and reconnects you with
your goals. Anytime, you need to realign with your mission statement and your
long-term goals, come here, soak in all of the inspiration you need and get back to
being a successful trader.

One of the biggest advantages of creating your plan electronically is the ability to
plug in video content which you can watch directly from the page. I'm not
suggesting that reading a few quotes or watching a couple of videos is going to
be the difference between someone's success or not. What I am suggesting is that
if you've already attained a certain level of technical skill and are confident you can
make percentage in the markets, a little motivational pump can help keeps things
in perspective and pull you through some of the more challenging moments in a

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trader's career. Let's say you were trying to get in shape, and I told you I had a
special pill that would boost your results and performance by 3%, would you want
to take it? If you're like most people, you'd want to do anything that is going to
elevate your performance and help you achieve results quicker. Well, consider
your motivational, inspirational section as your 3% performance enhancing pill. I
include a couple of great trading quotes, a few videos, both trading specific and
general motivation, as well as a couple of my favourite, inspirational songs.

My Trading Plan Template

I have included, for all readers of this book a downloadable trading plan template
on the Notion website. You can download a copy and input your own information
and rules directly into it or simply use it as a guide to creating your own plan on a
programme or software of your choice. It includes all the components listed in this
chapter as well as key questions to help guide you in building a tailored plan that
is right for you. You can find it in the Resources section.

Conclusion
The difference between the trader staring at his charts all day, wandering what he
should be doing and the trader who is focused with a clear framework for how he
will identify, execute and manage trades is a trading plan. Those who draw up
effective plans, including all the elements outlined in this chapter will enjoy a
competitive advantage over those who don’t.
Once you have outlined your plan, your final challenge is in actually following it.
An operating manual, outlining the steps for the successful day-to-day running of a
business is of little use if the employees don’t follow it. Consistently following your
plan is closely tied to one of the principles in pillar 2 from the previous chapter,
turning your trading into a game. If we turn trading into a game whereby the aim
of the game is to win by flawlessly following our trading plan, we’ll have little
difficulty in doing just that. We must obtain the mindset that following the rules is
pleasurable and breaking them is painful. You can even go as far as to back-test
yourself against your plan. As per your bi-weekly self-review, you can cross
reference the trades you took against the setups in your plan to ascertain what
percentage of the time you are remaining true to your rules. I aim to diligently
follow my plan at least 80% of the time. The other 20% of the time are usually
slight lapses in my judgement regarding trade management. We can’t all be
perfect. Should you find your adherence to your rules is less than 70%, it is an
indication that some discipline issues are present, and these should be addressed
at your next bi-weekly review. If your adherence is less than 50%, you should cease
trading immediately, possibly seeking the tutelage of a coach who will help you
identify some of the obstacles you may need to overcome in your trading. Should
this be something you feel you would benefit from, you can find information about
my coaching programme in the Resources section at the end of this book.

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Trader Action Points

• A solid, well-built trading plan is the foundation of a successful trader’s
performance, defining the exact rules for each of his go-to setups as well as
a mission statement, general trading rules and motivational material.
• A plan will reduce hesitation, increase clarity
• Begin building your own trading plan. Include the elements and guidelines
in this chapter or download my Notion trading plan template from the
Resources section.

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CONCLUSION
“A journey of a thousand miles begins with a single step.” – Lao Tzu
The book you are reading contains many of the answers you seek on your journey
to becoming a consistently profitable trader. It took me thousands of trades,
thousands of hours of study and thousands of pounds of losses to write this book.
The work of articulating this knowledge into 80,000 or so words has been a
rewarding journey and has even helped me solidify some of my own trading
ideas…but it has been hard work. I am almost certain it has been hard for you too,
especially if you have committed to studying it in its totality and not just skim
reading. I feel empowered in being able to share my knowledge and ideas with
you and feel I have accomplished what I set out to do with this project. If the
material helps you become a better trader, then it has been time well spent.
I can now finally free myself from the reigns of this computer and begin to enjoy
the fruits of the very thing this book is all about: trading.
I hope, that through this writing, I have communicated ideas that will be cause for
thought and have imparted time-tested trading methodologies that will serve as
the catalyst for your success. I also hope I have conveyed my enthusiasm for using
price action and market structure as a primary indicator and not relying on
secondary, lagging tools for making your trading calls.
Another insight I hope you take-away from this book is that there is an abundance
of trading opportunities, every single week in which to capitalise. The 5 trades in
this book should help you identify these opportunities and the management
methods will help you extract maximum profits from them.
What you decide to do with the knowledge you have acquired in this book is up to
you. You’ve learnt about market structure and price action, you’ve had your master
class in trading psychology, learnt about money management, journaling and
quantitative analysis. We have covered a lot of ground together and it’s probably
going to take more than a single reading to internalise everything, so don’t
hesitate to reread and review certain sections, expounding on the ideas you feel
will help you the most. Once you’re confident with the material and if you are
serious about making this a reality, immediately start utilising what you have learnt,
not tomorrow, not next week, not when you have sized your account but from your
very next trade. Start back-testing the 5 trading setups you have recently
discovered, learning what resonates best with you and making them your own.
Take your time and master each of the setups. You have your work cut out.
Just because you have finished this book, it does not have to mean the end. In
fact, this could be just the beginning. If you would like to continue working with
me on a more personal level, then please do not hesitate to contact me to discuss
one-on-one coaching. Together, we can identify the main problems holding back
your trading and put together a tailored plan to get you on the road to
consistency. As a small thank you for purchasing this book, I would like to offer

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you your first coaching session at a 50% discounted rate. Simply go to

profitpod.co.uk/coaching and enter the discount code “EZBOOK” at checkout or
shoot me an email at james@profitpod.co.uk and I’ll walk you through the process.
Should you simply wish to expand your knowledge base even more, you can visit
my blog at profitpod.co.uk/resource-library where’ll you’ll find some of my further
writings.
Shameless self-promotion aside, I’ll now close this book just like I opened it, by
wishing you all the success and more in your journey to trading mastery.
James Eaton
September 2019

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 ACKNOWLEDGEMENTS

After having finished the initial draft of this text, a friend asked me what the
hardest part about writing a book was and I gave an answer I don't think he was
expecting - the acknowledgements section. The completion of a book is never the
sole effort of just its author, but rather the collective effort of many people who
have directly and indirectly influenced the author in its creation.

Firstly, thanks to the authors of the nearly 100 trading books I've devoured over
the past few years. This book is the distillation of everything you've taught me
through your words and timeless lessons. Thanks also, to all the not-so-genuine
trading ‘educators’ and 'gurus' out there - thanks for showing me what not to do.

I would also like to personally extend my thanks to a few other key people in my
life who have contributed to the completion of this book, in ways they may not
even know.

Thanks to my partner in crime, Megan for allowing me the space I needed to

complete this project. You didn't mind me listening to Mozart for hours on end
while I wrote and dealt with my intense writing sessions better than anybody I
could think of. Thank you also for always humouring my grand ideas and
providing the perspective I need to focus on only the few that really matter and for
never, even for a second, doubting my potential to achieve my life's biggest goals
(most of which I'm still working on!).

Thank you to my dear parents, Lynne and Geoff who taught me to be strong and
determined, fostering a self-belief that I was capable of doing whatever my heart
desired.

And of course, to Megan's Dad, Neil for igniting a spark in me at the tender age of
21, a spark that has changed the course of my life forever. You introduced me to
the 'laptop lifestyle', showed me that I didn’t have to answer anyone but myself
and opened my eyes to the realm of possibilities that are out there.

But most of all, I would like to thank you, the reader. You have honoured me with
your most precious commodity of all, your time, and for that, I cannot thank you
enough. My only hope is that the knowledge in this book serves you as well as it
has for me.

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 Most Frequent Q+A’s

BONUS CHAPTER – MOST FREQUENT Q+A’S

Developing traders are likely to have a lot of questions and so in this bonus
chapter, I have compiled the most frequent questions I get from social media and
in-person.

Q: How much money can I make each month?

A: Try to think in terms of percentage, not pounds. Remember the amount of
money you make is a by-product of two things: how much percentage you make
and how much money you have in your account. If you make 5% with a £10,000
account, you've made £500. Make 5% with a £100,000 account and you've just
netted yourself a sweet £5k profit. The question should really be: how much do
you WANT to make each month?

Q: How long does it take to learn?

A: How long does it take to get into shape? How long does it take to learn a
second language? These questions can't be answered in a generic one-size-fits-all
approach. People internalize new information and concepts at different rates.
Based off my experience, I would guess that a new trader starting with zero
experience is going to take at least a couple of years to get off the ground and
start making consistent returns. Then again, I've heard of people who have come
in and crush it within a 6-month period.

Q: Can anyone be a trader?

A: One of the main things that kept me going when I first started learning how to
trade was the belief that anyone was capable of learning and cultivating the
necessary skills to become a trader. However, the more I read about and met with
other inspiring traders, the more I came to realize that this simply wasn't the case.
Whilst the technical knowledge can be learned with enough repetition, it's the
psychological issues that hold most people back.

Q: Can't you lose all your money trading?

A: Sure, you could lose all your money trading. You could also not be a fucking
idiot, employ the risk management strategies outlined in this book and not. Stick
to the 1% risk model and you'll dramatically increase the chances that you'll stay in
the markets long enough to develop your edge and find consistency.

Q: Which markets should I trade?

A: The underlying theme of everything we've covered in this book has been that
it's imperative your trading is suited to your personality and style. The markets you
decide to trade must make sense to you. Chapter 1 briefly looks at some of the
trading mechanics of the different markets and so I would recommend re-
refreshing your memory there. From a technical perspective, I find the Forex
market adheres very well to the strategies in this book and so would recommend a
new trader to start there if I had to recommend one specific market. As you learn
more, refine your technical skills and come to understand your unique style more,

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 Most Frequent Q+A’s

you can then to look to branch out into other markets which may be a better fit for
you.

Q: I trade forex, which currency pairs are best for trading?

A: My favourite pairs are EUR/USD, NZD/CAD, USD/CAD, GBP/JPY and USD/JPY.
However, I would encourage you to, using the strategies outlined in this book,
back-test yourself as to discover what pairs are most congruent with your
individual trading style.

Q: Should I practice on a demo account?

A: Sure, but understand the limitations that come with it. Demo accounts are a
great tool to help learn the broker's platform and to practice basic trade execution
but the major drawback to trading on demo is the complete lack of emotion. My
advice? Familiarize yourself with the platform using the demo, but then make the
switch and transition over to a live account as soon as possible, regardless of how
small it is. Even risking £10 per trade will give you a more realistic emotional
response than trading "pretend" money. The key is to start small and progressively
move onto larger and larger amounts.

Q: How much time a day do I need to devote to my trading?

A: Personally, my overall dedicated trading time doesn't exceed more than an
hour a day. After running through my watchlist, forecasting and setting price
alerts, that's pretty much my working day done. I'll have a quick 15-minute review
of the markets over lunch and in the evening to stay on top of developing price
action. If I'm in a trade, it takes 30 seconds or so to log onto my trading platform
and adjust my stop to the new price level. I came into trading to have more
freedom, not less of it.

Q: What's the number one reason you think, that traders fail?
A: Curiously enough, I don't think it's a lack of technical expertise that is the
downfall of most failing traders. I think the number one reason would be poor risk
management. Anybody can develop even a basic strategy to make percentage in
the long run, but most new traders never stay in the game long enough to
experience the positive expectancy of their systems. They put on trades with too
much risk exposure and trade without stops - and it almost ends in tears.

Q: What advice would you give to new traders just starting?

A: Most traders would answer to only trade the best setups, only trade in high-
probability areas etc but most news traders don't have the technical know-how
and experience to actually know what that means. You need screen time to a
develop competency. The only way you get better at trading is by trading. So, I’d
suggest opening a small account, even if it is with only a couple of thousand
pound. Trade, journal, tweak, refine, back-test…. rinse and repeat.

Q: What broker do you use?

A: At the time of this writing I am using Oanda for my currency trading and Degiro

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 Most Frequent Q+A’s

for my stock positions. Go and revisit chapter 3 if you would like more information
on what to look for when choosing a broker.

Q: What books would you recommend for new traders?

A: Please refer to the Recommended Reading section following this chapter for
my top 5 trading books that all traders, new and experienced should read.

Q: What's your best, personal trading story?

A: Great question. I'll give you two, one for a trade which was executed perfectly
and one, well, not so much in which I think just about every major trading rule was
violated. The first was a trade in NZD/CAD. I archive this trade as one of the
examples of a Retrace trade. My trading had been a little shaky coming into the
new year and the corrective market conditions were making it hard to spot high-
probability, multiple-confluence trades. Then, as I was running through my pairs
and doing my daily forecast, I spotted this fantastic trade: ascending channel
within an ascending channel, both with 3 clear rejections moving into a key
resistance zone. I mean, this trade had everything you could possibly want. This
was like the Kate Moss of trading setups. I waited for price confirmation, set the
order and let it do its thing. As per my rules, as price hit the 1% profit level, I
moved my stop to breakeven and went about my day. Price hovers around and
literally comes within a pip (yes, 1 pip) of my stop loss. Before going to bed that
night, I check the position and see that it's still floating just below my stop, I
contemplate closing down the position but figured because the trade is already
risk free, let's just leave it open and let the market take me out. Next morning
comes around, I open the charts to see that this baby is running at 7% open profit!
I’m not going to go into the specifics of my account size but let me just say, that 7%
equated to quite a decent amount of money for me. I adjusted my stop and got
taken out for 6.5%. Not bad for a night’s worth of sleep.

The second, not so glamorous story involved me buying Bitcoin right at the peak
of its colossal 2017 bull run. I had never traded cryptos at that point and quite
frankly, I never had any real interest to do so. But with the monumental price rises
it was staging, my emotions got the better of me and I got suckered into opening
an account. I waited painstakingly for Bitcoin to give me a setup that was in
alignment with my strategies. But this thing was moving so damn quickly that no
solid setups ever really materialised – at least not the ones I wanted to see. I
eventually just said “fuck it” and bought, in the absence of any defined setup and
therefore with no logical stop level. Where did I buy? Nothing less than $19,783,
the absolute all-time high price before it all came crashing back down. With no
stop in place (sin number 1) I watched in horror as the coin dropped lower every
day. Rather than closing the position and banking the loss, I started to rely on
hope (sin number 2) as my strategy, literally praying for a bounce back so I could
get out. Eventually, I sold in the same way I entered the trade – by saying “fuck it”. I
ended up selling at around $14,000. I took the loss on the chin, chalked it up to
good trading experience and decided there and then that I would never make the
same mistake again.

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 Most Frequent Q+A’s

Q: What are the qualities/traits of successful traders?

A: Patience – in waiting for the best-quality setups.
Discipline – in staying consistent to your daily, weekly, bi-weekly and monthly
trading routines.
Confidence – in knowing you will follow your plan and control your risk.

Q: What would you say to unsupportive friends, parents, partners who don’t
understand what I’m doing?
A: I get variations of this question a lot, usually by younger aspiring traders in their
early 20’s. I know what it’s like to pursue something when it feels like the rest of the
world doesn’t understand. The most important thing to remember is that whilst it
may feel like they’re not being supportive, they probably really do have your best
interests in mind. They equally probably don’t understand the possibilities of
trading as a career. Educate them. Tell them about what it could mean for your life
if you succeed at this. If you find after your best attempts, they’re still not on your
side, then it may be best to just brush their comments aside. Don’t try and sway
them with words. Instead, work your nuts off and let the results eventually speak
for themselves. They’ll get it soon enough and hey, they might even end up
wanting to give you some money to trade!

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 RESOURCES

Throughout the course of this book, there have been numerous references of
materials provided to complement some of the ideas and concepts explored.
Please find a list of all the materials below with further information.

Forex Position Sizing Calculator:

This easy-to-use calculator will tell you the correct position size of your intended
Forex trade, relative to your risk parameters.
https://www.myfxbook.com/en/forex-calculators/position-size

Trading Performance Toolkit:

This package includes the following resources, accompanied with detailed
information sheets on how to use the tools for your own trading needs:

Trade Analysis Tool (Excel):

An eloquent trade analysis tool that provides a comprehensive snapshot of key
trading metrics and data. The tool is completely automatic, requiring minimal
manual input, deriving all its information from the accompanying trade recording
spreadsheet.

LINK

Money Management Tool:

A simple money management planner. Will show you the exact monetary
breakdown for each of the different allocation portals: savings, investment and
compounding based off the specific percentage allocations you set for the funds
remaining after paying yourself.

LINK

Notion Trading Journal Template:

A simple trading journal template using the Notion website. Easily track important
qualitative trading information, including chart screenshots and notes taken at the
time of the trade. This will become an essential resource when conducting your bi-
weekly self-review covered in chapter 13.

LINK

TradingView:
The only charting software the individual trader will need. Seamlessly view
multiple charts on the same screen, build customized watch lists, annotate your
charts and set trade alerts from the same website. They also provide a free
Smartphone app.

LINK

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Notion:
Notion is an all-round productivity tool that I use for trading plan design and trade
journaling.

LINK

My website:
Further writings on my blog and information about my other services can be found
at profitpod.co.uk.

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 RECOMMENDED READING

If you wish to further your study into the ideas explored in this book, refer to the
following books. These are the top 5 trading books that I would recommend to
any developing trader.

Tramline Trading:
Using market structure and price action, John Burford breaks down his ‘Tramline’
trading strategy. With an overlap to the methodology in this book, readers will
benefit from expanding on their knowledge of price channels. It also includes a
valuable section on his personal trading rules.

Trading in The Zone:

The best trading psychology book I have read. Douglas' writing style makes this
book an entertaining and informative read discussing the thinking strategies one
must adopt to create what he calls 'The Trader's Mindset'. Regardless of where
you are in your trading journey, read this book. Chapter 7 alone justifies the cost.

Market Wizards and The New Market Wizards:

The first two editions of Jack Schwager's classic series. Featuring interviews with
some of the most successful traders, this book is packed with timeless trading
lessons, from technical analysis to trading psychology. Don't let its publication
date fool you. These books are a must for any trader's bookshelf.

Trade Your Way to Financial Freedom:

Trading Coach Van Tharp discusses various trading concepts and the importance
of viewing your trading in terms of R multiples. Lots of little gems in this one.

Currency Trading for Dummies:

This one is a bit of on outlier. I didn't expect much, but this book is one of the most
comprehensive currency trading books I have ever read. Covering everything
from basic technical analysis and the use of multiple time frames all the way to
global fundamental forces and economic news events. It also covers a lot of the
other things that are often ignored: interest swaps, spreads, leverage etc.

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