Features of the trading system
Before you take a decision about entering a trade you need to analyze the market state and receive a corresponding signal from the tools, you apply. Beginner traders may have some difficulties with choosing the appropriate timeframe. For example, if you decided to work only in 4-hour charts but suddenly discovered a familiar pattern in the hourly timeframe, you might want to alter your approaches to the selected trading system. To avoid it, you can utilize the double screen trading system. It helps you avoid switching to different timeframes to look for a better trade (that is not often better) and streamline the decision-taking process at the same time.
In one of the previous articles, I described the methodologies of analyzing the market conditions by means of indicators, to help traders find the most suitable conditions for them. I used the daily timeframe as a basic one. I’ll take it for the first screen of the trading system, I going to describe today. It will be “analytical” screen. The main aim of applying the analytical screen is to find out the market conditions, you are going to trade. The 14-day ADX indicator will suit best. Its rise from 25 towards 40 indicates a strong trend. The zone 40-50 is thought to be critical; when it is reached the price can often reverse or deeply corrected. For example, in the EUR/USD daily timeframe, the ADX rise to the needed points occurred in January, 2018 and in May,2018. Besides, at the beginning of the year, bulls were dominating; but in its middle, bears took the control.
How to work with analytical screen in the EUR/USD price chart
After you have identified the suitable currency pair by means of analytical screen, you switch to the shorter timeframe. I’ll call it “working” screen, as that is where you will be looking for a correct point to enter a trade. I suggest using hourly timeframe and the 1-2-3 pattern as tools here. It is about a reversal pattern, however, when the trend is strong it makes some sense to apply it in a way, different from common principles. You enter a trade when point 3 is broken through in the trend direction, identified in the analytical screen.
Working screen in the bullish market
You put stop loss at the swing low (around point 2 or lower). To find out the point to exit the trade you can apply different strategies, including price action. In the example of EUR/USD in January, a Three Little Indians pattern suggested traders that the situation was going to change and it was time to take the profit.
You do the same with the working screen in the bearish market. First, you identify 1-2-3 pattern; but you don’t try to catch the reversal, you wait until the quotes go back to point 3. If the support in this zone is broken out, it will be a sell signal. That is how one should have done, trading EURUSD in May. You exit the trade, based on the pattern, opposite to 1-2-3, or on any other price action pattern, you know.
Working screen in the bearish market
Charles B. Schaap was the first to describe this system; it is about the recovery of the trend that has been before, that is why I call this trading system “Schaap’s double screen trading system: trend recovery”. In my next articles, I’ll describe other tools by Schaap that would help traders identify the right strategy.
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Price chart of EURUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.