Foreign Exchange Trading : Online Forex Master Level Trading System and Strategy

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Foreign Exchange Trading : Online Forex Master Level Trading System and Strategy

Trading Like A Master = 174.38% In One Month Live Trading – In this report, I want to introduce you to an excellent trading system that conquered the Surefire Trading Challenge version 2, in which it gained 174.38% in one month of live trading during the competition. It’s called the Forex Master Level trading system.

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This system is definitely one of my favorites from SFTC. It’s suitable for any session, so whatever free time you have to trade, you can use this system. Also, you can trade it on any currency pair, although GBPJPY is the currency pair of choice because of its volatility. To trade this system, we need to use the Daily timeframes for the initial analysis and move down to the 4 Hour to trade.

The indicators and tools we use to trade for the system are found in your MetaTrader 4. Please find the chart template for the system on the designated download page in the member’s area.

In this report, we’ll go over the different indicators and tools that are used for the system, discuss the trading techniques we need to apply, then talk about the trading rules and move on to the trading examples. Let’s get started…

 

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Indicators & Tools

The system uses the following indicators and tools: EMA 5; SMA 5, SMA 21, RSI 5, Fractals and Trendlines. Below is what our basic chart template looks like. Over it, we’ll need to add support and resistance lines, and in some cases, trendlines and a Fibonacci retracement, but more on that later.

To apply the chart template, download the file and save it into your templates folder.

Open your MT4 platform, click on the Templates icon and select the “FXMasterLevel” template.


1. Moving Averages


The Moving Average is the most common indicator used to determine the trend of the market. There are four different types of moving averages, but for this system, we’ll only concentrate on the exponential moving average (EMA 5) and some simple moving averages (SMA 5, 21, and 233).


The simple moving average (SMA) is basically the average of a set of prices or periods. Each period is given equal weight in the calculation. The exponential moving average (EMA) also computes the average of a set of prices or periods, but it gives more weight or importance to more recent data. Because of this, it is more reactive to recent price movements. Notice that the EMA 5 is closer to the candles than the SMA 5?

Basically, price is considered bullish if it is ABOVE a moving average and bearish if it’s BELOW the moving average. The biggest advantage of using more than one moving average is that it provides a stronger indication of the trend. Price is bullish when it is above a faster moving average that has crossed above a slower moving average.


To the left below is a perfect example of a bullish or uptrend. You can see that the moving averages are in the following order: 5 period EMA is above the 5 period SMA, which is also above the 21 period SMA and the 233 period SMA.

A bearish trend would follow the exact opposite. The image to the right above shows a textbook example of a bearish or downtrend. You can see that the 233 period SMA is at the top, followed by the 21 period SMA, then the 5 period SMA and at the bottom is the 5 period EMA.


There’s one more moving average that we need to use with this system, a 21 period SMA applied on another indicator called the Relative Strength Index or RSI. We’ll talk about that in the next section.


2. Relative Strength Index


The Relative Strength Index or RSI is a momentum oscillator, which measures the speed and change of price movement and plotting that on a 0 to 100 scale.


There are many ways in which to use the RSI, but for this system, we will apply a 21 period SMA on top of it so we can have a better idea of the trend. On the image below, you can see that as price moves down, the RSI 5 crosses under the SMA 21. This indicates a downtrend.

Next, the RSI 5 crosses above the SMA 21 as the price moves up to form an uptrend.


You may notice that we used the same basic principle in identifying the trend on the moving average. The RSI 5 reacts quickly to price changes unlike the SMA 21 which is slower because it is based on the value of RSI for 21 periods or candles. When RSI 5 crosses above SMA 21, it means that recent prices are much higher than usual, so we have an uptrend. The opposite is true for a downtrend.


3. Fractals & Trend Lines


The Fractals indicator is to be used on the 4 Hour chart. A Fractal is a type of pattern used in technical analysis to predict a reversal in the current trend. Fractal patterns consist of five bars.


An Up Fractal occurs when the highest bar is located in the middle of the pattern and two bars with lower highs are positioned on both sides.


A Down Fractal occurs when the lowest bar is located in the middle of the pattern and two bars with higher lows are positioned on both sides.

4. Trendlines


We’ll use trendlines to highlight the trend. A trendline is defined as a straight line that starts at the beginning of the trend and stops at the end of the trend.


We’ll draw our trend lines at significant Fractal levels that appear on the most recent bars on the 4 Hour chart.


To draw a trendline, click on the Trendline tool on your MT4 platform…

 

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5. Support & Resistance Lines


These support and resistance lines are drawn on the Daily chart, and they help determine the re-entry points as well as stop loss or exit points for our trades. To draw your support and resistance lines, go to the Daily Chart and click on the “Horizontal Line” Tool on your platform…

Next, place your line by clicking at the highest price of the previous candle (A). Place another line at the lowest price (B) of the previous candle. The image to the right shows how the support and resistance lines look like when you go back to the 4 Hour chart.

Basically, we can reenter the market if price touches the support or resistance levels only if the other rules for entering a trade are still valid.


Here’s how they are used as stop loss or exit levels. For long trades, set the stop loss at the previous day’s low, or exit manually if price touches that level.


For short trades, set the stop loss at the previous day’s high, or exit manually if price touches that level. If the support and resistance lines remain untouched or unbroken by price in the next few days, they will still be considered as “valid”.





6. Candlestick Patterns


The system also utilizes basic candlestick patterns, which are: Bullish/Bearish Engulfing Pattern, Hammer, and Inverted Hammer candlestick patterns. These can be used as additional confirmations at one’s discretion and are not essential to entering a trade.


A. Bullish engulfing pattern for long trades

B. Bearish engulfing pattern for short trades

C. Inverted Hammer candlestick pattern


The inverted Hammer most often appears as a bullish inverted candlestick and also appears in a market that opens at or near its low, creating a candle with a small real body.

7. 161.8% Fibonacci Retracement


This is an optional tool that can be used to occasionally confirm the point of exit, specifically, as a take profit target on the 4 Hour chart.


Sometimes you will find that you cannot use the high or low of the previous day as price may have already passed these levels. In these scenarios, you can use the 161.8% Fibonacci level as your target instead.


In this system, the Fibonacci retracement is not used in the conventional manner. It should be drawn from the point where the 5 EMA and 5 SMA crossed to the highest high or lowest low of the previous day.


To draw the Fibonacci retracement, click on the Fibonacci Retracement tool on your platform…

For a buy trade, start from the point where the EMA 5 and the SMA 5 crossed and end at the previous day’s low, which is indicated by a red horizontal line.

For a downtrend, start at the point where the EMA 5 and the SMA 5 crossed and end at the previous day’s high.

You have an option to remove the unused levels of the Fibonacci retracement to keep your chart clutter free. Just right click on it, go to “Fibo properties…”, and under the “Fibo Levels” tab, select the levels you want to remove and click on the “Delete” button.

So that’s it for the indicators! In the next section, we’ll take a look at the trading rules of the Forex Master Level.

 

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Buy Trade Rules





Follow the rules below for placing long trades.


A. On the Daily chart, check that the price is in an uptrend using the following criteria:

1. The 5 EMA (BLUE line) must be above the 5 SMA (RED line) and the 21 SMA (GREEN line); The 5 EMA is the most important moving average in this system.
2. The RSI 5 is above the 21 SMA.
3. The trend is up if both conditions above are met.

B. If the trend is up, determine the previous day’s High and Low and place horizontal lines to mark them on the daily chart. These will act as support (previous day’s Low) and resistance levels (previous day’s High).

C. Determine the entry on the 4 Hour chart using the criteria below. The conditions for one of the following options must be met.


Option 1: Aggressive Approach

1. The EMA 5 (BLUE Line) crosses above the SMA 5 (RED Line).
2. The RSI 5 crosses/has crossed above the 21 SMA (GREEN Line) from below.

OR Option 2: Conservative Approach

1. The EMA 5 (BLUE Line) crosses above the SMA 21 (GREEN line).
2. The RSI 5 crosses/has crossed above the 21 SMA (GREEN Line) from below. This condition is not essential.

NOTE: The conservative approach is the preferred strategy because the signals are much more reliable. There must be an RSI/SMA crossover together with either a 5 EMA/5 SMA or a 5 EMA/21 SMA crossover for a valid signal.


Below, you can find examples of the Aggressive and Conservative Approaches to finding trading signals. Take note that this needs to be done on the 4 Hour chart.

D. Look for candlestick patterns for additional confirmation. This is not a required step and candlestick patterns don’t always appear, but if they do, they can help confirm the signals identified above. Follow the guidelines below:

1. For a buy trade confirmation, either a Bullish Engulfing pattern or a Hammer pattern may appear before the EMA 5 (BLUE Line) crosses the SMA 5 (RED Line) or the SMA 21 (GREEN Line).
2. Look for candlestick patterns on the chart right before the EMA/SMA crossover occurs. If the candlestick pattern doesn’t occur, just follow the crossover and look to enter when the crossover occurs.

E. Enter a buy trade with a market order at the open of the candle following the EMA 5 crossover or the RSI 5 crossover, whichever occurs last.


F. Set the take profit level at the resistance line or at the 21 SMA. You may use the Fractals on the 4 Hour chart to draw trend lines that can be used as a target profit level or as a re-entry point.


G. You have the option to set the stop loss at the nearest support level. The support and resistance lines are determined by the previous day’s low and high respectively.





Below (left), you can see that the buy trade was placed at the close of the candle where the EMA 5 and SMA5 crossed over, the RSI also crossed over the SMA 21 simultaneously.


The stop loss was set at the previous day’s low (41 pips) and the take profit was set at the previous day’s high (64 pips). Not long after (right), price hit the take profit level and the trade was closed with 64 pips profit.

H. If you opted not to set a stop loss level, you may exit the trade when one of the following conditions are met:

1. The EMA 5 (BLUE Line) crosses back below the SMA 5 (RED Line).
2. RSI 5 crosses below the SMA 21 (GREEN Line).
3. When price stalls at major resistance, trend line, pivot point, Fibonacci projection target of 161.8 or at the SMA 21 (GREEN Line).
4. When a bearish engulfing pattern or inverted hammer candlestick pattern forms before the EMA 5 (BLUE Line) crosses below the SMA 5 (RED Line).
5. The SMA 233 (WHITE Line) may also be used as an exit point for the trade when price touches it.

 

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Sell Trade Rules





Here are the rules to follow for placing short trades.


A. On the Daily chart, check that the price is in downtrend using the following criteria:

1. The 5 EMA (BLUE line) must be below the 5 SMA (RED line) and the 21 SMA (GREEN line); The 5 EMA is the most important moving average in this system.
2. The RSI 5 is below the 21 SMA.
3. The trend is down if both conditions above are met.

B. If the trend is down, determine the previous day’s High and Low and place horizontal lines to mark them on the daily chart. These are the support and resistance levels.

C. Determine the entry on the 4 Hour chart using the criteria below. The conditions for one of the following options must be met.


Option 1: Aggressive Approach

1. The EMA 5 (BLUE Line) crosses under the SMA 5 (RED Line).
2. The RSI 5 crosses/has crossed under the moving average (SMA 21-The GREEN Line) from above.

OR Option 2: Conservative Approach

1. The EMA 5 (BLUE Line) crosses below the SMA 21 (GREEN line).
2. The RSI 5 crosses/has crossed below the SMA 21 (GREEN Line) from above. This condition is not essential.

NOTE: The conservative approach is the preferred strategy because the signals are much more reliable. There must be an RSI/SMA crossover together with either a 5 EMA/5 SMA or a 5 EMA/21 SMA crossover for a valid signal.


The example below shows a conservative approach. The aggressive approach is not applicable in this scenario because the RSI has not yet crossed over when the 5 EMA crossed under the 5 SMA. You can see that the RSI 5 has just crossed below the SMA 21 at the current candle.

D. Look for candlestick patterns for additional confirmation. This is not a required step and candlestick patterns don’t always appear, but if they do, they can help confirm the signals identified above. Follow the guidelines below:

1. For a sell trade confirmation, either a Bearish Engulfing pattern or a Hammer pattern may appear before the EMA 5 (BLUE Line) crosses the SMA 5 (RED Line) or the SMA 21 (GREEN Line).
2. Look for candlestick patterns on the chart right before the EMA/SMA crossover occurs. If the candlestick pattern doesn’t occur, just follow the crossover and look to enter when the crossover occurs.

E. Enter a sell trade with a market order at the open of the candle following the EMA 5 crossover or the RSI 5 crossover, whichever occurs last.


F. Set the take profit level at the support line or at the 21 SMA. You may use the Fractals levels on the 4 Hour chart to draw trend lines that can be used as a target profit level or as a re-entry point.


G. You have the option to set the stop loss at the nearest resistance level. The support and resistance lines are determined by the previous day’s low and high respectively.


H. If you opted not to set a stop loss level, you may exit the trade when one of the following conditions are met:

1. The EMA 5 (BLUE Line) crosses back above the SMA 5 (RED Line).
2. RSI 5 crosses above the SMA 21 (GREEN Line).
3. When price stalls at major resistance, trend line, pivot point, Fibonacci projection target of 161.8 or at the SMA 21 (GREEN Line).
4. When a bullish engulfing pattern or inverted hammer candlestick pattern forms before the EMA 5 (BLUE Line) crosses below the SMA 5 (RED Line).
5. The SMA 233 (WHITE Line) may also be used as an exit point for the trade when price touches it.

Here are some examples of exit points. Using the aggressive approach, the sell trade is entered at the close of the candle where the EMA 5 crossed under the SMA 5. The stop loss is set at the previous day’s high.


The trade can be closed by setting the stop loss at the previous day’s low or closed manually when the SMA 5 crossed below the EMA 5 or when the RSI 5 crossed above the SMA 21.

Important Notes





When using this system, it is very important to note that a crossover of the indicators is only validated after the 4 Hour candle has closed. You should wait for the signal candle to close (or the open of the next candle) before entering a trade.


Because this system is traded on the 4 hour chart, you only need to check your charts a few minutes every 4 hours, which should give you a lot of time to take care of other responsibilities you may have. This is one of the things I love about this system.


In terms of the money management, as a rule of thumb, don’t risk more than 2-5% of your account on any one trade and have only 1 trade at a time to reduce the number of losing trades that your account will incur at any one time.


As you can see in the examples, the price moved quickly in our favor. That’s because we made sure we were following the trend. This is the most important aspect of the system. Get that step right and you’re halfway to winning your trade.