Inside Trend System - A boring trading strategy for those who are bored with mergers
Hello, all friends of the forex traders.
Today, we will study a complex trading system called Inside Trend System, which is not the forex trading strategies as holy grail system, does not make 100,500% a day, often stops (which is compensated by greater profits) and which, if you have traded less than 2– 3 years, you will not understand.
But this system works. This is an old strategy based on the ideas of Larry Williams, Ralph Elliott, and Alexander Elder. We will penetrate the essence of the trend and its correction, find out WHAT is really high and low movement and, maybe you will start to see the market differently. Are you ready?
This strategy is based on the basic trend concept, first described as a trading rule by Charles Dow, which describes the direction of quotation movements in series:
Up and down - with an increase in asset prices;
Down from high to low - with downward price movements.
Charles Dow, like many of his contemporaries, traders, consider trading with a daily time frame, the division into smaller time intervals causes another argument:
The higher the time period, the lower the probability mistake of analysis the trend
Therefore, in the strategy, direction movements will be determined by the daily candlestick.
Rules for determining maximum and minimum are taken from the theory of price movement analysis by Larry Williams, as stated in the book "Long-term secrets of short-term trading."
On the daily chart, the highs and lows will be determined as movements in the formation of three candles, and market reversals - as moments when prices are consolidating:
Below, the uptrend with a low end:
Downtrend condition that ends high:
The moment of reversal and the appearance of a new directed movement is the ideal moment to enter a position. To clarify the entry point, it could use the Elder tactics, who developed the "Three Screens" strategy, from which we took the search principle on a lower time frame when signals appeared at higher time intervals.
As soon as the trend in real D1 is formed, our graph switches to the H4 time frame format, where traders are "waiting" for higher time period corrections in the form of the uptrend from smaller time intervals.
Entries to the market occur at the turning point of the upward trend from the lower time frame, this will be the closest minimum H4 details. This tactic allows traders to get benefits
From the conditions of the high and lower period trends
The entrance to the third wave.
The latter situation increases the likelihood of generating profits because of the principle found by Elliott, which illustrates the theory of the wave of price movements. According to the arguments, the fractal market, each gap can be described using the same formation. Trend development occurs in five waves, the third is the longest. In it, we will try to enter.
How to determine high and low?
The height and low of the trend are determined by the average candle or stem, with notes
- For maximum markets:
The maximum is a candle or bar on both sides of the candle with a lower height. This is also a condition needed to renew the minimum (Low point separation of the candle, which we consider maximum) by the next candle.
Example maximum - candle number 2 in all 4 pictures:
- For market minimum:
The minimum is the candle on both sides of which there is a higher minimum, and the next candle that is formed is certainly the maximum renewal (details of the point of the candle height, are considered as a minimum).
Minimum example - candle number 2 in the image is minimum:
If the current candle (3) cannot exceed the Height (in minimum) or Low (in the maximum case) before (2) - out of the "shadow" of the price range, we declare it as "internal" and ignore it.
At the same time, it doesn't have to be "internal" that there is only one candle - the idea put forward by Larry Williams is to renew extremes so that candles are "taken into account". The image below shows the situation when "internal candles" precedes the minimum and does not allow for maximum determination in a flat area:
Despite the fact that the pattern contains three candles, maximum and minimum changes are possible literally with the next candle, as shown in the image below. The first three price ranges 1, 2 and 3 forms the classic minimum, but candles 4, 5 and 6 - maximum. It turns out that the candle under double designation 2 and 4 is replaced by 5, which has been considered a local maximum for this trend.
To avoid confusion of extreme definitions, use the text label feature in MT4.
How to determine trend changes on D1?
Trend reversal is defined as a disorder:
Nearest minimum to change uptrend in a downtrend;
The closest maximum is to determine the reversal towards the uptrend in the downtrend.
Breakout occurs if the closing price of two candles is:
Above/below the level that occurs at the closing price of the "average" candle from the last high/low determined by the rules of Larry Williams.
Rules Entry Point
At a higher time frame, D1 at the highest and lowest locations determines the direction of the trend. The current trend reversal is identified by the rule of closing two candles behind the local maximum/minimum level.
The way to determine the entry point occurs on the H4 chart, where three waves must be formed (in the direction opposite to the daily trend).
At a lower time frame, the height and low of the wave are determined by the rules of Larry Williams, but to penetrate the extreme, that is enough to exceed the maximum or minimum value by the wick or the candlestick itself. Don’t need to wait until two candles are closed.
The formation of three waves serves as a signal about the need to track new minimums (to determine to sell, if there is a bearish trend on D1), or maximum (to determine to buy, if there is a bullish trend on D1) on the graph waiting for 1-2-3 pattern formation.
Selling is done after the formation of a new minimum AFTER the three wave pattern, to purchase the same conditions, we wait for a NEW maximum AFTER three waves counteract the trend with D1.
In the image below, the green line shows the pending stop order paired with a stop loss (red line). Orders are placed every time a new minimum is formed (second point of pattern 1-2-3), at the time when the previous maximum is "rewritten".
Money management strategies, stop loss and order tracking
Triggered positions are accompanied by trailing stops at local minimums and maximum trends.
On the daily chart when entering a new trend on D1:
In the case of entering a trend that has been developed on D1, on the four-hour chart.
Traders are not advised to allow a measure of loss on a single transaction, exceeding 0.5-1% of the deposit allocated to the strategy. Lot size can be calculated independently because the estimated size of the loss is known before entering the trade,
We set a stop loss for the maximum bar that updates the minimum height in terms of selling orders, or for the minimum bar that updates the maximum low, in terms of buy orders. As protection, we use 5-10 points from min/max.
Examples of strategies works
1) Consider the agreement in the direction of the current trend.
I remind you that in the case of entering an established trend, we will accompany the agreement (moving SL) to H4.
On the daily chart, we determine direction, showing minimum and maximum according to Larry Williams rules. In this case, it is clear that the EURUSD rate is growing.
Turning to the H4 time frame, we await the formation of three waves against the trend with D1, determining their minimums and maximums according to Larry Williams's rules, and trend details as usual maximum excesses - without seeing two candles. That is, we are waiting for the trend to change to bearish on H4. And only after the details of the local minimum, we start counting waves on H4.
After 3 waves of a bearish trend on H4, we await the formation of a NEW maximum, ignoring the second wave maximum.
What to do in such a case, provided that the trend on D1 does not change? Wait for the local maximum new breakdown on H4.
At the moments later, we entered the market and prices moved towards our expectations.
What we do now Move the stop loss to the positive zone, for each new minimum on H4.
As a result, the strategy gives + 144 points.
2) An example of the agreement below, after a trend reversal, has a feature to track stops on the daily chart. In this case, switching to TF H4 occurs after detection of trend changes on D1.
So, two bearish candles closed below the last lowest closing line.
Because there is a breakdown of the uptrend, we are looking for a short entry point on H4 - that is, we are waiting for a local maximum breakdown and then three waves of the bullish trend. After their formation, we place pending Sell Stop orders, below the new minimum. Stop Loss - for candles that break the minimum high.
Our order was activated and immediately opened the order, losing 37 points.
We are waiting for a new minimum to reenter, as soon as it is successful.
As a result, this strategy was closed profit 205 points
The strategy is the simplicity and clarity of a unique transaction approach. The rules clearly define trend definitions and entry algorithms, the trading system does not use indicators, and the usage period of H4 gives minimal losses for SL based on the daily candlestick.
However, the examples above show that even adherence to trading patterns (third wave, trade with trends, etc.) does not save traders from losses in the flat, accidentally spilling stops on the news and other standard Forex traps.
Even if you don't like the Inside Trend System strategy, I advise you to adopt rules to determine to stop loss