In this lesson, we look at multi time frame analysis and how it can help us to time entries based on the bigger picture. Using a higher time frame for our trade idea means the idea is generally better, as higher time frame signals are more accurate. We also cover elastic band theory, how the market expands and contracts when buyers and sellers enter the market and drive price based on exhaustion. Finally, we look at the difference between stop loss traders and position traders. How the psychology of trading with a stop loss causes most traders to fail and hop systems continuously.

Day 1 – How The Forex Market Moves & How To Measure Your Trading Success
Day 2 – Multi Time Frame Trading Analysis, Elastic Band Theory & Trading Psychology
Day 3 – Top Trading Indicators To Use For Position Trading Strategies
Day 4 – How To Position Trade, Trading Risks & Managing Your Drawdown
Day 5 – Strategies To Use as a Position Trader Explained In Detail

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Video Transcript

Okay, so position trading boot camp day two. So today we are going to cover multi-time frame analysis, elastic band theory and the difference between stop loss traders and position traders. So one thing that’s very important when you’re trading is that you know what multi-time frame analysis is and that you use it. So most traders will tend to pick a time frame and they will try and trade it. So for example, a scalper will tend to use M5 or M1 if they’re crazy, or a low timeframe basically.

And that is what they will concentrate on. They will trade on the M5 or the M1 timeframe. Swing traders will tend to use the four hours or the daily or some cases the hourly timeframe, and they tend to concentrate on that. But the best way to analyze the market is to use multiple timeframes, but they need to be used in conjunction with each other and used the right way. So we’re going to have a look at why multi-timeframe analysis is important and how we can use it to our advantage to basically extract money from the market. So with any trading platform you get, you’re going to have multiple timeframes that you can use to look at market movement. And traders quite often will suffer from what I call paralysis by analysis, which means basically they flick up and down constantly through timeframes looking for trades.

So if you look at the same instrument, like the US dollar, yen, for example, on M5, M15, the hourly, the four hourly and the daily timeframe, you’ll see lots and lots of different setups on all of those timeframes, but they won’t all necessarily agree with each other. So the problem with looking at different timeframes for trades is that you see a different picture on every timeframe that you look at.

So you’ll, for example, see a great head and shoulders pattern or a support level to take a long trade from on the M15 timeframe. And then you’ll flick up to the hourly or the daily chart, and you’ll see that the market has been crashing in a downtrend for days or weeks on end. So now that long head and shoulders pattern that you’ve seen doesn’t look so good, does it? Because the market’s coming down and you’re now gonna be taking a counter trend trade.

So basically what happens a lot of the time when traders do that is they won’t take those trades and then that trade will rocket off to the moon and you’re right on the direction, but you missed the trade because you flipped from one timeframe to the other and you scared yourself out of the trade. So on M15, it looks like a beautiful head and shoulders has formed. So it’s looking absolutely spot on.

It’s just broken that shoulder there and it looks like it’s gonna go. So it looks like a brilliant pattern, but when you look at it on the daily chart, you see the moving average is doing that. So you think, oh, we’re in a downtrend. I don’t really want to take counter-trend trades. And therefore you don’t take it. And what does it do? Bang, screams off to the upside and makes an absolute fortune for everybody that took it.

But you didn’t take it because those timeframes conflicted with each other. So basically what that does is it creates doubt in yourself as to whether you’re able to trade and whether you can do this. It creates doubt in your strategy and overall it just confuses you, which is what the paralysis by analysis is. It’s basically you’re not sure what direction to trade in because you’ve got different charts telling you different things. Another thing you’ve got to take into consideration with multiple time frame analysis is which time frames go with each other. So So you’ll tend to, when you’re taking trades, have a trend bias or a timeframe that will give you a direction to trading.

So this is kind of like your signpost, if you like. So these are timeframes that tend to work well together when you’re looking to enter trades and when you’re looking to find a bias. And this can either be a trend bias, as it’s shown on the screen here, or it could be a mean reversion bias, i.e. a bias where market has moved in one direction very far and we’re looking for it to come back in the opposite direction. But either way, you need to have a decent amount of time frames between each time frame, if that makes sense, so that you’ve got one time frame that is giving you a directional bias and another time frame that is small enough that you can get in and out multiple times in line with that directional bias.

So on the screen here, I’ve got some timeframes that work well together. And the timeframes that you select as a trader, a lot of the time are gonna depend on how long you’ve got to spend in front of your computer and how long you’ve got to spend trading. So if you’ve got a day job, for example, if you’re a full-time worker, you’re not gonna be able to have the M5 and the M15 charts up in front of you all day long waiting for signals so that you can take trades on those timeframes, are you?

Because you’re going to be at work and when you get home from work it’s likely that you’re going to be in a quiet market period where there’s not going to be many opportunities to trade. So if you’re a full-time worker you’ll probably want to consider something like the weekly and the four-hour time frame. So you might use the weekly charts as a directional bias or as a condition sort of time frame to give you ideas and then a H4 time frame to get into your positions. If you work from home, you may be able to have your computer on in front of you while you’re doing other work. So you could potentially then trade maybe the daily as your directional bias and the hourly for your entries, because you’re going to have more time to spend in front of your charts.

So you can see more signals and take more trades because you’re in front of your computer. If you’re working from home, you can also look at the four hour and the M15, same thing applies. If you’ve got a computer that can be in front of you all day long, that is waiting to signal things that are happening in the market to you, all you’ve got to do is glance at those charts at that particular time you get that signal and decide whether or not to take a trade.

So that’s the ideal, you can work on pretty much any timeframe you want. If you’re gonna be a scalper or a day trader, you’re gonna wanna be trading low timeframes like M5 and the hourly as a directional bias. So the lower down your directional bias goes, the lower down your trade entry timeframe wants to be. There’s no point in using the weekly timeframe to give you a trend direction, for example, and then entering all your trades on M5, because there’ll be a thousand signals on M5 in one candle on the weekly.

Okay, so you’re gonna have way too many signals and that directional bias is just not gonna play out. So the timeframes need to be fairly close together, but they need to be far enough apart that they work in tandem nicely with each other. And these are the ones that I found to be the most effective and you can use any of these but we’ll look at obviously the way that the market moves on different time frames and you can decide which ones are going to work best for you based on you know your own trading conditions that you have to trade in yourself. So price moves in the same way on all time frames but the lower timeframes have much more chop. So there’s much more movement up and down on the lower timeframes.

And you will always find that signals and systems are less reliable on lower timeframes. And that’s just because the market moves up and down a lot more on lower timeframes, which means that any indicator or system or strategy that you’re using will tend to give you more signals. And the more signals you get, the more false signals you’re gonna get and the lower your strike rate tends to become. And you probably know this if you’ve been trading for a while and you’ve tried lots of indicators and lots of signals, you’re gonna find that the lower timeframes are just not gonna be as effective as the higher timeframes most of the time.

But we see the same patterns playing out. However, the waves that we see appear on, however, these waves that we see, they’re going to appear on all the timeframes that we trade. So basically all the patterns that we see, heads and shoulders, bullish and bearish, engulfing candlestick patterns, whatever indicators you’re using, they play out the same on all of the timeframes. That’s basically what you just need to take away.

So the daily timeframe is the slowest we really tend to look at. You can look at the weekly and the monthly as well. If you’re a really long term sort of swing trader, those might be the timeframes you want to look at. But the daily is basically a slow timeframe and tends to be very, very steady. But trades take an awful lot of time, long time to play out on those timeframes. So if you take a trade on the daily, you may have to wait three, five, seven, 10 days, or even longer, weeks for that trade to play out.

So on daily timeframes, one trade may well take three or four weeks, in which case then you’re only taking one trade a month. The problem with that obviously is if you were to, for example, put 1% risk on that trade to make a 2% gain, you’re only ever going to be able to make one trade a month, which means you’re only going to make 2%, which is no good. The H4 timeframe has a slightly faster oscillation. We’ll look at oscillation and sort of how the market moves with time frames in a second. You’ll get more trades and it will often still offer very very reliable signals because the h4 time frame is is quite high you tend to get good quality signals out of it and indicators that run on that time frame tend to be more reliable than the lower timeframes, but they’ll be less reliable than the daily. The hourly then is faster still, and then you get less accurate entries because there’s more chop, M15 gets even faster and even choppier, et cetera, et cetera.

So the lower you go down, the more chop you get, the more signals you get, the less accurate your trading tends to become. The problem with timeframes is everybody wants to trade below time frames. Why? Because you want to take lots of trades. Why? Because you want to make lots of money and the assumption is that to make lots of money you need to take lots of trades because if you don’t take lots of trades you can’t make lots of profit which isn’t actually technically accurate. So we’re always looking for signals and strategies and indicators that work really well on low timeframes, because it allows us to get in and out of the market three or four times a day, and everybody’s trying to make a daily profit, which is fine, there’s no problem in doing that.

We looked yesterday at, we should be trying to get a daily profit in the bank, but we only need half a percent. So we don’t need to take lots and lots of trades to make half a percent a day. We can do that with one or two trades very, very, very easily. So let’s take a look at an example of this chop on some different timeframes. And I’ve put on a chart a standard zigzag indicator to help demonstrate what I mean by the choppiness of the markets.

So we’ve got on the chart here, a daily, a four hourly and an hourly chart. And you can see that we’ve got arrows drawn indicating specific dates on the chart. And those arrows are in the same place on every chart. So you can see the same time played out across, or the same move, if you like, played out across all of these charts. And as you can see on the daily, we’ve only got one move up and one move down.

So we’ve got two waves on the daily chart. So this is where we had the buyers coming in and what do those buyers then turn into? Sellers. Yeah so we’ve had one buying cycle if you like or one move of buying and one move of selling. When we drop down onto the four hour chart we have 24 waves drawn by the zigzagging indicator. So you can see within this big strong move up here we had one, two, three, four, five, six, had 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11 different moves within that one strong push on the daily chart. And then on the way back down, we had lots and lots of moves as well. And then when we drop down onto the hourly, you can see we’ve got 98 different waves.

And this is the same period of time within this one upward daily move and one downward daily move. We’ve had all of these zigzags happening. And every zigzag is potentially a trade opportunity. Yeah, so price is pushed up and it’s pulled back, pushed up, pulled back, up, back, up, back, and so on and so forth. So if you were a trend trader, for example, you could have taken a trade at every single dip and made a profit all the way up there, like one, two, three, four, five, six, seven, eight, maybe nine, 10 trades you could have made, which would have worked.

If you’re trading the daily, you could have only taken one trade. If you’d have taken the four hour, you’d have taken one, two, three, four, five, six trades. Yeah, so you get the point. So as we move down in timeframes, what it does is it gives us more opportunities to enter the market. But our overall idea can be generated by the high timeframe. So we can say, right, on the daily chart, I want to take long positions when we get a pullback.

And as we’re going up, I can take lots and lots and lots of pullback positions on a lower timeframe. So rather than taking one entry, where we have to wait three to four weeks for it to play out, we can take 11 or 12 entries and they will only last maybe a few days each. So lots of extra opportunities. So how can we take advantage of this? Okay, so just basically pretty much explain this. So we can use this to our advantage by picking our entry ideas or entry areas or ideas on a higher timeframe.

As we know signals and strategies on higher timeframes are gonna be more reliable but we use the lower time frames to get into our trades and this allows us to make more profit because we get more entries as the larger time frames idea is playing out. Also we can often profit from it over and over and over again. Okay so we’re going to look at some practical examples now. So we’re going to assume that we just are going to use an RSI, okay, and we’re going to use those same charts that we just looked at a minute ago. We’re only going to use the RSI and when price gets really extended, we’re just going to get into trades, okay? As you can see, we’ve got the arrows drawn and the RSI is down here.

And what we’re looking at here is basically when price gets extended above these areas, okay? These are opportunities for us to get in. And on these charts, I’ve only put short trades, okay? Just to demonstrate how many opportunities we would get. Yeah. So you can see obviously here, price pushed up. We had an opportunity to get in short here, okay? Then it pushed up again, and we had another opportunity to get in short up there.

So on the daily chart, we’d have had two opportunities to take a trade when the RSI was extended above the 70 level in this case. Yeah. When we switched down to the H4 chart, we get one, two, three, four, five, six opportunities. Yeah, so by dropping down one timeframe, we’ve now got many more opportunities. You can see that the RSI has given us more signals. Okay, it’s got extended more times above that level.

Okay, and I’m not saying these are good trades to take. Yeah, these, just because the RSI is extended is not a reason to take a trade. But it’s giving you more opportunities because you’ve dropped down a lower timeframe because the indicators we use on the lower timeframes will move faster, therefore giving us more signals to get into trades. And then as we move down onto the hourly, you can see we’ve got one, two, three, four, five, six, seven, eight, nine, 10, 11 opportunities to get into trades.

So there’s 11 times that the RSI got extended above those levels, right? So you can see how moving down in timeframes, you get more chop, more signals given by your indicators. They’re not necessarily good signals. They’re just more opportunities to take a trade. So you can see that on the higher timeframes, our systems and indicators are slower to react, but that gives us less chance to trade. We also know that higher timeframes give us more reliable signals.

So it makes sense that we use a higher timeframe to spot our opportunities or to gain our directional bias from. Okay. We can then execute all of our trades on the lower timeframes when we see the setups happening. And this gives us our best possible entries. So basically we just need to get in when the market conditions are right. And we’re gonna talk about market condition indicators more when we go into the indicator section of the course.

So this gives us the opportunity to get in and out of these small waves easily while we wait for the bigger, higher timeframe moves to play out. So that big move that we’re expecting to happen on that higher timeframe, we can jump in and out of that big move multiple times rather than just once. So it just gives us much more opportunity to get in and out of the market. And obviously every time we get in and out of the market, we’re extracting money and making a profit. So here is a very simple example of a position trade.

Okay, now we’re going to cover the whole strategy of position trading in more detail, but this gives you a good example of higher time frame analysis in play on two different time frames. So in this instance, we’re going to look at the four hour time frame and the M5 time frame used together. And this is a mean reversion trade, which we’re going to cover again in more detail when we go over the strategies. the price has moved a long way away from its mean and we are expecting it to come back to that level. So think of a moving average as kind of like a mean and a Bollinger band or something like that would be where you would start to look at mean reversion trades. Okay so it’s that sort of trade idea. So this is the four hour chart, okay, on the US dollar card. This is just a trade I picked at random from, this one from September.

So the higher timeframe here gave us the idea that we’re looking ready for a pullback or a reversal on this pair. As historically, we know that these buyers have to start selling. We covered buyers and sellers yesterday. So when we see a strong move in one direction, we know that all of these buyers have to hit the sell button at some point to take profit on their trades.

So the RSI in this case was our trigger to tell us that there had been a lot of buying pressure. So the higher timeframe, the four hour in this instance, was giving us our trade idea. Our idea was we want to start looking for short entries because they’ve pushed very, very hard away from the mean or from the moving average. So they’re extended. And we know that all these guys now, because they’ve been buying and buying and buying, are sellers.

So they will got to at some point shortly start to sell. So the higher timeframe signals are more reliable than lower timeframes because there’s less chop. So that is why we’re using it as our idea generator. Okay, so we’re going to get our ideas for our trade entries from our higher time frame and that you can use the daily, the four hour, the hourly, whatever you want to, whichever fits in with your particular trading style. So when we get our idea generated by the four hour RSI in this case, we drop down to our lower timeframe and we start looking for potential signs of weakness to take our trades. So looking at the N15 chart at the same time as the RSI was extended on the four hour chart, so around 20th of September, we would take our first entry when we get a market reversal alert. OK, and we’re going to cover the market reversal alert indicator as well in more detail.

But this shows a sign of potential weakness starting in market. So we took our first entry here. And at this stage, we know there’s a high chance of success because we know historically our higher timeframe is reliable. And when it gets extended on the RSI, we know typically there is gonna be a selling run starting. Yeah, so the higher time and frame is extended. So when we get in on the lower timeframe, we already know there’s a high probability of this trade working out because we’re using a higher time frame, which is more reliable as the idea generator, and we’re looking to get in on the lower time frame and getting with a very accurate entry. So in this particular case, we took an entry and the market continued to push. So as we got another alert on the entry time frame on M5 in this case, we took another trade.

We know by now the chances of a pullback are even higher. So this is why we’re taking our second entry because on the four hour chart, we were already very, very, very extended. And we knew historically that when the price gets up to these levels, we start to see a drop, we start to see some selling coming in. So we take our second entry. And as that move then starts to play out, we exit both of our positions with a profit. Okay, but this is a mean reversion trade. We don’t get greedy. We just basically bank some profit.

We’re not looking for those huge runs that you would tend to look for when you’re trading a higher timeframe. We’re just looking to get in and out with the idea that the four hour timeframe is extended and starting to come down. Okay. So does that make sense? This sense gives you an example of using two timeframes together. So one is idea generation and the other is trade entry. And that is where we’re executing our trades. But at any time we can always jump up to the higher time frame to see how our idea is playing out. Yeah. You see where we got out on that particular trade and it came crashing down further.

But in this particular case, as it pushed back up again, we could have had another opportunity to get into another trade and take a profit. And as it pushed up, we could have got into another trade and taken another profit. So instead of just taking one trade on the four-hour chart, we had an opportunity on the lower time frames to take multiple entries. So the next thing I want to discuss is elastic band theory. This is something that was kind of ties in with what we just looked at with that mean reversion trade, but it’s something that was explained to me a long time ago by a mentor that I had.

And it’s a really easy way to visualize market exhaustion and to understand mean reversion and why the market stretches when there’s lots and lots and lots of buyers coming in. And those buyers, when they’ve all bought in the market, they have to take a profit. And to take a profit, they have to become a seller, which starts the selling move. So if you think of the market like an elastic band, if it’s not stretched out and doing nothing, you’re unlikely to be able to make money from it, yeah? So if we’re sitting there, just on the table, that is equivalent to a range, yeah? So the market is just basically moving up and down, and it’s just sitting there quietly.

This does give us opportunities, obviously, to get in and out of the market in a range, but at any point at these highs, it could become a breakout, couldn’t it? Yeah. And if it does, we’re going to get into trouble because if we get into a breakout and we’re not using a stop, what could potentially happen is this thing could just keep going and going and going forever.

And obviously that wouldn’t be good. So the best way to get into the market is when it’s really, really, really stretched, okay? So when the elastic band is stretched out really hard, we know it always pings back. It has to ping back because to get stretched means there’s been a load of buyers. And those buyers have to become sellers. And that is your ping back of the elastic band. The problem is when the market is stretched and extended, we don’t know, do we, when the person is gonna let go of that elastic band.

We don’t know when it’s gonna snap back. So this is our timing issue that we discussed yesterday. Okay, we can’t time the market, but we can tell when the market is due to do something. So there are indicators out there that tell us when these pings of our elastic band are more likely to happen. We’ve looked at one of them, the RSI. There’s lots of other indicators that can tell you that, things like Bollinger bands, there’s other oscillators that you can use.

But basically I call those market condition indicators. We’ll have a look at them again a little bit later on. But they only tell us that the elastic band is stretched. Okay, they don’t tell us when the person is gonna be letting go of that elastic band. But thankfully there’s other indicators out there that will tell us that and those are your signal indicators. Okay, so we’re using a combination of timeframes and a combination of indicators to put the whole thing together to tell us when we should be starting to enter our positions and how we should be getting into those positions.

Okay, so this knowledge of knowing something is about to happen is what we can take advantage of. This basically, this is our edge. So what if we could find a way to get into the market around the time that we know either a pullback or a reversal is going to happen, i.e. the elastic band is stretched, but not worry about being 100% accurate with our entry, i.e. knowing when the elastic band will be released. And what if we could adjust our entry price after our trade was taken?

How good would that be? Yeah. So if our initial entry is wrong, we just move our entry price to a new level that makes us profitable. And that is basically what position trading is. Okay. And after we’ve looked at the indicators, we’re going to look at exactly how to execute that. But we’ve had a good look there today at some of the, an example of a position trade using exactly that strategy, that mean reversion strategy. So we know the market goes up and down, we can see it. And if we know that we’re getting around the highs and lows of the swings, we can make money. We just need a way to somehow measure the market to find out when these pullbacks and reversals are likely to happen.

And we need a strategy to take advantage of this without losing money or being wrong most of the time. And that’s basically what we do as traders when we’re using stop, isn’t it? We’re wrong most of the time because we’re trying to time our entries. So you’ve probably guessed from the slide so far that we’re going to be using multi-time frame analysis and the RSI. So we’re piecing together the pieces of our strategy and system for position trading here. But those are just two parts of the puzzle. So before we go on to the next parts of the puzzle, which is going to bring it all together with indicators and the entry strategies, we need to look at the differences between being a stop loss trader and a position trader.

And this is more to do with how it affects you psychologically and the problems that are caused by using stop loss and the way that they’re fixed by becoming a position trader instead. Okay, so this is probably you right now. This is just a trading view chart that I grabbed. And you can see obviously on this chart, we’ve got a trade taken here where they’re expecting it to go down to here. And we’ve got a stop up here with where they’re expecting to get stopped out of their position.

And you can see how the market’s moving sideways. So what do you think is going to happen here? It’s probably going to keep moving sideways, isn’t it? So there’s a high probability that’s going to take it out. So this person is trying to get that perfect entry, but they’re often going to miss it. And when you miss that perfect entry and you get stopped out, it has an effect on you psychologically. You get cross, you tend to give up, you start over-trading, and you basically just don’t make consistent money, okay? And you also don’t know where your target is whenever you’re taking these trades, because the only thing you’ve got to calculate your target when you use a stop is a risk reward ratio most of the time.

So you say, I’ve got to have a minimum of a 1.5 or a two to one risk reward ratio, okay? So you’re just basically aiming for a level, hoping and praying that the market is gonna get you to that level based on your stop. The market doesn’t care where your stop is. The market’s gonna go where it wants to go. So wherever you put your stop and that determines where your TP is going is completely irrelevant.

So hopefully you can see, and it’s becoming clear that it’s pointless trading in that way, because there’s no way that the market is gonna just respect where you’re expecting your TP to be based on where your stop loss has been placed, okay? So you’re gonna basically aim for a target, you’re gonna put a stop in, you’re gonna miss lots, you’re gonna get cross, you’re gonna start over trading and it all starts to unravel.

So this is me right now, this is how I trade obviously. So I take multiple entries and 95% of the time I hit my target as I can adjust my entry price because if my first entry is wrong, I can take another entry which adjusts my entry. And that’s what we’re gonna look at when we look at how to position trade in more detail. So I’m not worried about which individual trade is gonna be right as long as one of them is. And I know one of them is gonna be right because historically we can see the conditions playing out over and over again.

We can see the buyers becoming sellers. So we know it’s gonna happen. We just don’t know when it’s gonna happen. My target is always roughly the same, but I can change my entry as necessary. And that will move my target with price as it moves. So I can adapt to the market as it’s moving. When you place a stop in the market and a TP, that is it, it’s in stone. It’s either gonna take that out or it’s gonna get down to there or it’s gonna sit sideways for absolutely ages.

You’re gonna close it out and not make as much money as you thought. The way that I’m trading is I’m getting into the market and if that’s wrong, I’m gonna move my entry price up by taking a second position. I’m gonna wait for the market conditions to change in my favor, and then I’m gonna get out of my position, okay? So I’m adapting to the market rather than being rigidly stuck in the market with one rule for a TP and a stop loss.

I adapt and move as the market adapts and move. So if the market pushes against me, I can adapt with the market and move my position with the market and wait for that wave to play out because we know it’s coming, okay? So it’s just an adaptive way of trading. It’s more dynamic. So you basically, at the moment, if you’re using a stock, you’re trying to be right.

Yeah, you’re wanting one trade and one profit. Okay, so basically you are just trying to be right and not necessarily make money, which we kind of touched on yesterday. Position traders are trying to get the profit, not the perfect entry. Okay, so the goal of a position trader is to make money, but not always be right. So it’s a complete flip of what you’ve all been taught and what we’ve always been taught in the past, yeah?

We’ve got to get the entry right. You need the right indicators. You need to get in the right levels. You need the right risk reward ratio. What you need to do is adapt to market conditions as the market moves to make sure that you can extract money. Whether you’re right or wrong has got nothing to do with it. The market doesn’t care if you’re right or wrong. The market cares on where it needs to move to next to fulfill its market conditions.

So what we’re trying to do every time, every day basically is time our entries and it doesn’t work. So we all want the perfect entry. We want to try and pick the top, the bottom or the pullback point. We’re taught this is what we should aim for. Okay, everybody teaches us this is how you trade. We’re told to put our stops under our entries. We’re told to cut our losers and let our winners run.

The problem with these things is we get stopped out constantly by doing this. It’s time intensive and it’s hard to find the entries, okay, because we’re trying to day trade most of the time, aren’t we? Which is very time intensive. And this is part of the problem that people have when they’re trying to trade is they don’t have the time and that frustrates them. And again, it all boils down to this psychology part where we as traders find it very, very, very difficult to overcome these hurdles. We do not let our winners run. Okay. So we’re told to let our winners run and cut our losses, but we don’t let our winners run because if we’ve taken a few losses, what happens is we need to use the profits as fast as we can to pay for those losses.

What we end up doing instead of letting our winners run is breaking even. How many times have you got position that’s gone one, one and a half risk reward into profit and move to break even and it’s come back and hit break even. Yeah, the market knows this. It moves up and down in waves because it knows you’re doing this. That’s why it moves up and down because it needs to find that liquidity in the market, find those stop orders and those pending orders that we discussed yesterday.

It’s got to go and find them. It has to hunt them out. So every time you move to a break-even, you’re just telling the market to come back and get you out. So we don’t let our losers, our winners run. We get lots and lots of losing streaks when we’re using stops and we’re trying to trade in this way. And that either makes us give up or it makes us hop systems. Every time we give up, basically we stop being a trader. Every time we hop systems we reset. So every time you move from one system to another, what you’re doing is saying that doesn’t work, I’m going to start again. I started again for about five or six years before I suddenly realized that I was doing it. And you’re probably doing the same thing subconsciously. You’re here now watching this video because the last system didn’t work.

Yeah, you’ve reset, you’re starting again. And if you go on from here to another system, you’re gonna start again. Now, how many years have you spent at the moment trying to learn to trade? And now you’re saying, actually, I’m gonna go back to day one, kindergarten. Yeah, it’s crazy, but that’s what we do. It’s like psychologically, we are not programmed to trade this way as human beings.

Yeah, it beats us up and it stops us being able to accomplish what we wanna do, which is make money. And it’s very easy to extract money out of the market. You can’t do it though, if you give it to the market. So the market and our brokers benefit from us trying to master this approach, which is why we’re all told to trade this way. Every time you press that button in your MT4 or MT5 or TradingView terminal, what you’re doing is you’re either paying a commission or a spread to your broker.

And if you hold that trade overnight, you’re paying them a swap. A lot of the time they’ll be taking the other side of your trade because they know that most of you are gonna lose money. Therefore they take the other side of the trade and they make money every time you lose money. The whole thing is geared up for retail traders to not make money. But the brokers will make a profit every time we pull the trigger on a trade.

So what you should be doing every day is position trading. And here is why it works. So those issues that we had, where you all want to get that perfect entry, we don’t need to get the perfect entry. Yeah, because we’re getting into the market and if that entry is not right, we’re gonna adapt with the market and we’re gonna gain again. So the perfect entry, we don’t have to worry about that anymore.

That’s what we’re all been chasing, isn’t it? Getting that one shot, that one kill, perfect trade. We don’t need to do that. We all try to pick the top or the bottom of a range or a pullback point. We don’t need to pick those anymore. Yeah, because if we get it wrong, there’s another one coming up. If the support and resistance we took that trade at doesn’t hold and it crashes through it, it’s gonna turn around at the next support and the resistance or the next support and resistance.

But we know at some point it’s gonna, because these buyers have got to turn into sellers, these sellers have got to turn into buyers. So we don’t have to pick the top, the bottom or the perfect pullback point. We don’t need to put our stops under our entries so the market can take them out. I’ve labored this point a lot. Hopefully it’s all sinking in, but by doing that, all we’re doing is we’re saying to the market, here’s my order, come and get it because that’s what the market is programmed to do.

Go and find orders so that it can move in a different direction. So we don’t need to put our stops under our entries so the market can take them out. And we let our losers reverse and become winners. So we’re all told to cut our losers and let our winners run. We don’t let our winners run because we’re always chasing our losses. And quite often we move our stock losses, don’t we? So we put a stock loss under it, it gets close to our stock loss and you think, ah, just give it another 20 pips.

All of a sudden your risk reward’s gone out the window, hasn’t it? So we will let our losers reverse on us and become winners because we know historically our edge tells us that at some point that reversal or pullback is going to come in. We just need to manipulate our positions with the market and wait for that to happen. So we are programmed to be position traders. We just need to relearn how to trade.

Okay, so that’s really what I’m gonna talk about from a psychology point of view. Okay, there’s loads of courses out there on psychology, but the main problem with traders is stops, because stops are the root problem that causes psychological issues in traders. So if you remove the stops, you remove the psychology, you remove that problem, and therefore, we all suddenly become profitable traders, okay? So what I’m gonna do is I’m just gonna quickly demonstrate this fact, this how you get beaten up as a stop-loss trader using the EA.

Okay, so I’ve got an EA which is developed based on one of the indicators, which a lot of you probably will know about. So first of all, we’re going to look at a stop-loss strategy. And the stop-loss strategy is profitable. Yeah, it does make money. And then we’re also going to look at a position trade strategy with it. And I just want to demonstrate the difference between the two so that you can see psychologically what is happening to you when you’re using the two different types of strategy.

So I’ve got an empty floor up here. I’m just gonna go into the strategy tester and I’ve got two set files set up for the EA. So for those of you that don’t know the EA, this is the market reversal alerts EA, and it’s designed to basically automate trades and strategies you can take with the market reversal alerts indicator. So I’ve got one strategy set up here, which is called bootcamp stock trader.

And this simulates a typical stock loss strategy, okay? So we’re gonna take signals in both directions. So I don’t care if it’s gonna go long or go short. I’m not using a directional bias in this instance, okay? I’m using high-low stop loss, which means basically what we’re gonna do is we’re gonna put our stop five pips above the high or below the low when we get an alert. And we’re gonna target a two to one risk reward ratio. Okay, so we’re not going for massive home run trades here.

We’re just trying to get two to one, which is a fairly conservative TP, isn’t it? Yeah, you should be looking for something around a 40 to 50% strike rate with a two to one risk reward. If you’ve got a decent indicator or a decent strategy that you’re using, yeah. So that’s basically all that is gonna do, yeah. So it will place a trade here when we get one of these alerts and it will place it stop just above the high with a two to one risk reward, okay?

So typical strategy that you would find and any indicator can do this. You could use anything that sticks an arrow on the chart, anything that pings at you and pops you up an alert, you know, it doesn’t really matter, okay? So we’ll just have a quick look at how this one works. So I’m gonna switch over to the graph. I’m not gonna go in visual mode because it would take too long to do. But we’re gonna have a look at what’s happening here.

And this is the stock loss trade-off, okay? So as you can see here, we’re gonna count the number of trades along the bottom. You’re probably familiar with the strategy tester. But we started off with a loser, and then we had a nice winner, which took us into profit. And then we’ve had one, two, three losers in a row, and then a nice winner, which got us back pretty much all of that money. Now we’ve got another loser, another loser, that was a fairly big one, then another loser.

So that’s three in a row, there’s four in a row. So that one, two, three, four losing trades in a row, five losing trades in a row. So what goes next? Now we’ve had another winner, and another winner, and another winner. So we’re on a bit of a winning streak. So we’ve had a losing streak there, and now we’re on a winning streak again. Loser, winner, and you see the winners are better than the vast majority of the losing trades.

So we’re using a positive risk reward. So another loser there, another winner, another loser, another loser, another winner. We’re taking 20 trades now. We’re roughly at break even, so we haven’t lost any money. This is a typical strategy that you will run. You will find that you will lose a little bit of money, make a little bit of money, lose a little bit of money, make a little bit of money. You’ll have a nice little winning run. You’ll have a couple of really good trades, which is working out.

We’re in positive territory now. This is a 10 grand account we started with. Had another loser, another one, another winner. Okay, so it’s not going bad. So we’ve got a positive strategy here, it’s working. Okay, so we’re taking what, 32, 33 trades now. But you get the point, okay? So let me just stop this. Okay, so what this is basically showing us is when we’re using the stop loss, what is happening to us psychologically?

Okay, so we started off with this brand new strategy. We just bought this indicator, looks really, really good. Loads of people are raving about it. It’s fantastic. So I take my first trade and it was a loser. So, well, okay, well, maybe that’s not the end of the world. Then I’ve taken another trade and it’s a winner. I’m like, wow, this thing works. I’m making money.

And all of a sudden we’ve had another couple of losers and you’re like, all right, okay. And then a winner, brilliant. So I haven’t lost any money. So I’ve now taken six trades, I’ve not lost any money, which is pretty good. But then we go into a losing run. And this is what I was saying about the psychology of trading. If you had started with this system or strategy at that point, and this was your first week trading with it.

And that happened, what would you do here? Would you carry on with this indicator? Or would you go, that doesn’t work and hop off to the next strategy? Yeah, and this is the problem. We go into this cycle when we’re using systems and indicators and strategies that don’t adapt with the market and just use physical stops. We get these losing runs and you cannot avoid them. The best traders in the world will have a losing run where they will lose five, 10, 15 trades in a row, but they know that their edge will play out long-term.

So they stick with it because they’ve tested their strategy to death and they have that confidence in it. The problem when we’re trying to learn to trade is we don’t have that confidence. We see somebody succeeding with a strategy or an indicator or we see somebody posting charts all the time where they’re making all these wonderful trades and their P&L every other day looks absolutely amazing. But what happens when we try it? That we tend to lose money. So we scrap it, system or strategy or indicator. But if we give it time, we can see that overall it has a good run and it ends up being a profitable strategy after 35 trades.

This is on M15, I think we were testing this, isn’t it? So it’s not bad, 35 trades, that’s probably taken, where did we take, so that was 15th of September to the 28th of October. So just over a month, we’ve got 35% strike rate, not amazing, not too bad drawdown, we made some profit. But you see what’s happening to us psychologically as traders. We are being beaten up and smashed around by the market constantly because we are trying to time our entries.

So that is you as a stop loss trader. And that is everybody, that’s me, that’s everybody that trades with a stop loss. The only way you can really make this work is to either find a strategy with an incredibly high strike rate, which means you’re going to have to be incredibly patient and probably trade very high timeframes, which to be honest, most of us aren’t going to be able to do, or you’re just going to have to get a lucky run. It doesn’t work that way, does it, in real life. So let’s have a look at a position trader. So I’m just going to load up the position trader strategy. This is very, very similar. So it’s virtually the same strategy, except we are not using a fixed stop loss and we’re not using a fixed TP. We’re trading as normal, but what we’re doing is we have got a target of 1 ADR.

Okay? So we’re gonna enter multiple positions as the market ebbs and flows. And I think in this case, what we’re doing is, yeah, we’re using the RSI, we’re using the RSI 14 on the 15 minute timeframe. And we’re saying, when you get a load of buyers coming in, start selling. When you get a load of sellers coming in, start buying. And that’s basically all it’s doing.

But the target is 1 ADR. We looked yesterday at why we shouldn’t be using PIPs, why we shouldn’t be using risk reward, and why we should be using the average daily range of the instrument we’re trading, because it’s an achievable target, right? So let’s let this play out. So just to remind you, that’s the position, that’s the stop loss trader. Okay, we’ll start this.

We’ll take the same amount of trades. We’ll take 30, was it 34, 35 trades, or however many it was. Didn’t actually see, to be honest. So we’ll see the first trade coming in in a second. Okay, so the first trade’s a winner. Brilliant. Second, third, fourth, fifth, six trades, all winners. Brilliant. So we’re doing well.

So we’re off to a flying start. So as a strategy, do you think you’d carry on doing this at the moment? Yeah, seven trades, winners, all winners. We’ve made 625 profit. How much did that last strategy make? 140 in 34 trades. So it’s not doing bad, is it? We’ve got a bit of drawdown at the moment, okay? Now we’re going to cover drawdown and drawdown control in the course. There’s a whole section on how to deal with drawdown and how we’re going to look at risk and our portfolio in a different way. But for the moment, ignore the drawdown. The drawdown is always gonna be there, but concentrate on how you’re feeling as a trader right now, okay?

So we’ve now taken 11 trades. We’re nearly 900 up roughly. So all the trades are working. And the reason the trades are working is because we’re using our edge. And we’re not putting positions in the market to get us out of our edge, which is what you do with a stop loss. You get the direction right most of the time, don’t you remember?

But what you don’t get right is the timing. So by taking the timing out of the equation, what we’re doing is getting the direction right. And by getting the direction right, we’re making money. Okay. So we’ll let this continue on for a little bit. We’ve taken 25 trades now. We’re what, 1500 quid up? Something like that. It doesn’t matter, money’s irrelevant.

What this is designed to do is to show you the psychological part, okay? So this is how you’re feeling as a trader. You’re feeling like a winner because you’re consistently banking profit on a regular basis and you’re seeing your P&L continuously grow, okay? So we’re gonna retrain our brain to look at drawdown in a different way. We’re gonna use drawdown as a tool, as a positive tool to make us money.

And we’re gonna make sure that we control that part of it because that is the only bit we need to worry about when we’re position trading. Let’s stop it there. So we’ve taken, can’t remember how many trades the other one took, but it was somewhere around the 30, 35 mark, wasn’t it? Yeah. And we had roughly a 40% strike rate and 30% strike rate, whatever it was, we made a little bit of money, but we got beaten up constantly.

Throughout that entire process, psychologically, we were being beaten up by the market. Position training, we haven’t been beaten up by the market. We’ve been consistently making money. And that’s basically all this is designed to demonstrate the fact that the psychological part is what 95% or more of traders struggle with. And the psychological part is caused by the stop loss. Remove the stop loss, remove the psychology, all of a sudden, you have faith in a system and you can take that system forward. And this system, this methodology that I’m showing you here, hasn’t got to be applied using any indicators that I use, any strategies that I use.

You can apply this to any strategy that works. As long as that strategy is based on longer term market movement and expectations of where the market is gonna go and not timing a scalp, okay? This doesn’t work particularly well as a scalping strategy because there’s too much chop in the market. We’ve looked at the amount of chop we’ve seen as we’ve gone down through the timeframes. Okay. So let me just switch back to the presentation again. So you can see how the stop method is up and down all the time and waiting for the market to move to either its risk reward target or it’s stopped.

There’s two outcomes, that’s it. It’s a win or a loss. You can’t do anything else. You can close at break-even maybe, or take a slightly smaller profit. But at the end of the day, there’s two main outcomes that you’re gonna get from that particular style of trading. The position trader just takes advantage of the ebb and flow of the market and extracts money constantly, okay?

And we don’t have that psychological burden of being beaten up time and time and time again as the market comes back and takes us out. So that brings us to the end of part two. We’re going to cover indicators in the next part. So this is a slightly short part than yesterday’s. And this has only been an hour, so hopefully you’re all still awake in this one. But any questions on what we’ve covered there? It’s all been deadly silent in the chat, so hopefully it’s all been sinking in and paying attention. How did you recover from the drawdown? You saw the drawdown recover itself in that case because of the market movement. Remember that particular strategy is a mean reversion strategy. Mean reversion strategies work on the elastic band theory. So as the market is stretched, i.e. there are too many buyers or sellers, the market will obviously come straight back and do the opposite thing, because every time somebody hits the buy button, they become a seller.

I’m not sure Jarvis, if you were in the course yesterday, but it’s the buyers and sellers theory. Every buyer has to become a seller. If you get a string of buyers, you will get a string of sellers. But if drawdown gets to a certain point, we will use a method called drawdown control. And we’re gonna cover the drawdown control in detail. And drawdown control allows us to scale out of losing positions using the profits from our winning positions, which means that we will not take large losses and go into never-ending drawdown.

It’s very, very rare that would ever happen, but we have methods and strategies in place to deal with that. Ralph, I want to stay below 5% drawdown because of CTI restrictions. Position trading is going to be very difficult for you to do that. And I’m going to show you how to use drawdown in a different way. So, I won’t go too much about prop firms now. If you want to talk about prop firms, we can talk about that in telegram group or something, but prop firms business model is designed to take money from traders in fees for taking trials and taking challenges. They know that the vast majority of traders, whether they be highly successful traders or new traders, at some point will go over account, i.e. 5% loss.

As I showed you there, the best strategies in the world when you use a stop loss, and the best traders in the world that use a stop loss, they will have a losing run of five, 10, 15 trades. You cannot control the market movement. If you’ve got a strategy that gets you into a trend, and you take five trades in line with that trend and every single one of those becomes a pullback and then it starts to trend in the opposite direction. And then that trend comes back and goes the other way.

And you take five trades trying to trade trying to trade the other trend that’s just started. I’ll draw this on the screen to explain it better. So let’s say for example, you’ve got a trend, yeah. So you try to take a trade in line with this trend as it pulls back, you get into a position and the market decides to do that and then it does that, you try to get into another one, it does that and basically the trend trails off just as you’re trying to get into it. So you go, okay, this is going short, so you then try to take short trades and just as you try to take short trades, it starts to trend back the other way, i.e. range. Okay, so the best trend trading strategy in the world can easily have 10 losing trades.

If you’ve got a 5% loss target in your account, highly likely that’s probably gonna get hit, isn’t it? Doesn’t mean your strategy is bad. Your strategy curve, your equity curve could do that. But if you’re taking a challenge at the point when your equity curve does this, you’ll lose. If you get funded by a prop firm because your equity curve does this, and then you get that, you will lose your funded account.

Yeah, you can’t control it. You can’t control the market. Remember lesson one yesterday. One thing we know is we have no control over the market. We have to ride the waves. If those waves are bigger than we want them to be, they’re bigger than we want them to be. There’s nothing we can do about it. Your system and your strategy, unless it can adapt to market conditions, is never gonna be able to stay within a particular drawdown or lost target.

No amount of backtesting will ever tell you what’s gonna happen to the market in the future, okay? Let me quickly show you daily chart on a stricter, I don’t know, pound is in or something, okay? Pound, yeah, that’ll do. So here, last year we had this thing called COVID. Do you think the best traders and strategies in the world made money or lost money when that happened? They lost.

It doesn’t matter how good your strategy is, it isn’t gonna survive that. How many FTMO, CTI, I don’t know, 5%ers, just picking proverbs out of my head. How many accounts do you think people lost their accounts because of that? Their strategy up until that point was riding the waves beautifully, making tons of money. And then this happened and they went pop. They didn’t lose everything.

They had the drawdown of seven, 10, 15% on their account, which is a sustainable because they could have made it back very easily. But the prop firms don’t care about that. So the issue I have with prop firms is the restrictions on the accounts are too tight for most realistic strategies. And even if you’re using a stock loss strategy with a 60% strike rate, at some point that 40% loss in your strike rate is gonna be 10 or 15 trades in a row.

And at that point, your strategy is going to fail. Yeah, does that make sense? I don’t want to burst the bubble on prop firms, but you need to understand that the business model is to find good traders. But personally, I believe there’s more money to be made in taking money out of people for challenges. So to answer the question, if you want to stay below 5% drawdown, you’re going to find it very difficult with any form of trading.

Llewellyn, does the drawdown not psychologically play a role as well? Seeing your account in massive drawdown will always get some traders to scare out. Yeah, and I will show you how to deal with that. So yes, you’re going to have psychology in that respect, but the drawdown that you’re going to be in is controllable at any time. And the difference between position trading and trading with a stop is that you haven’t lost any money. So if you have an account where we just saw, you have some winning trades, some losing trades, some losing trades, some losing trades, and you have that losing run. You’ve lost four to 5% of your account when you get down there.

That’s it, you can’t get that back. The only way you’ve got to get that back is by having a massive winning run. And at that point, you’re only gonna get yourself back to break even. If your account goes into drawdown by four to 5%, remember the pies in the oven analogy I used yesterday, while we’re waiting for the market to move, we haven’t lost anything. And we can basically wait for the market to come back.

Now we’re not gonna have this scenario play out every single time, which is where drawdown control comes into it. And I’m gonna teach you about drawdown control and how to manage drawdown. But what we will be doing all the time this is happening on one instrument, on another instrument, we will be banking profit. So you saw from my P&L yesterday, I’m banking profit consistently every day.

So yesterday I banked half a percent, the day before I banked 0.8, the day before that I banked 0.78, before that 0.39. I’m just reading my P&L off my screen. But I’m banking half a percent to a percent every day. So I have a pot of cash, okay? And I can use that pot of cash to wipe away drawdown on positions that aren’t working, okay? I’m not gonna go into this in detail now, but that is how we manage it psychologically.

So we use our profits to wipe away some of the losses that we have that are on our P&L, but we’re using our P&L as an entire portfolio or a position in the market. Okay, and we can control that. Jarvis, did you allow to close all the positions when XXX target profit reached? Can you share where you set the EA. So yeah, as I said, as I showed you when I did that little demonstration as a position trader, the target was one ADR.

Okay. And that will work on the vast majority of instruments because one ADR on each pair is gonna be different. Yeah, we covered this yesterday. So if you’re using your targets as a percentage of the average daily range of an instrument, they’re going to be very easy to achieve. If you are using a 400 pip target on an instrument that only moves 200 pips in a day, it’s going to be very difficult to get to.

So we use levels. And I’m going to show you some indicators that will give you targets to aim for. But we use levels, and we use average daily range to target the profit on our percentages. Right, well we’ve been just over an hour, so I’m going to end part two here, okay, and what we’re going to look at next is indicators, okay. And this is what we’re going to cover tomorrow, and this is going to be a fairly long part of the course. So day three tomorrow is going to be about what a system is, how we define a system, the indicators I use, and why I use them, and what they’re telling you. So I’m going to go into the logic behind the indicators, the testing to a certain extent that I’ve done on some of them, and just basically show you what I use and why I use them. Okay and then after that we’re going to look at how to put it all together and how to use the indicators to build strategies to enter into the market and how to trade as a position trader.