The Piptopia Trend
Range Following No
Rules System
Part One: The Basics
Copyright © 2006 Rob Booker. All rights reserved. No part of this
publication may be sold or changed without the author’s consent.
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Guiding Principles
1. Trending markets are great for breakout trading.
2. Ranging markets are great for divergence (reversal) trending.
Prerequisite Knowledge
Do not proceed with this ebook unless you have already mastered the principles and rules
of the divergence system and the New York Session box system. If you do proceed
without that training, your mind will shatter into a thousand Lego pieces and we will have
to rebuild you, and when we do, your right and left brains might be reversed, so suddenly
you will be able to color with numbers, eat sounds, and craft a new set of curtains for
your home, using only positive thoughts and moonbeams.
Really. We watched this happen to Ben McDonald.
Chart Setup
1. If you use xtick for charting, you will need the Stochastic Divergence + SMA
template. You can get it here:
http://www.robbooker.com/books/stochastic_divergence_MA.cht
If you don’t use xtick, or you want to know what you’re looking at on that chart
template, please move to the next step.
2.
You need the Stochastic Oscillator, set to 9,3,3.
3.
You need the MACD with Histogram, set to 12,26,9.
4.
You need a 800 Simple Moving Average. Color this black or dotted black.
5.
You need a 200 Simple Moving Average. Color this blue.
6.
You need a 62 Exponential Moving Average. Color this red. Woohooo, I love
the 62!
7.
You need to understand how to draw trendlines.
This is what a chart might look like after you set it all up. I’ve used the 60 minute chart
because I’ve tested it more than anything else and it works very well.
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Chart Setup, continued.
Figure 1. The 1hr GBP/USD with the moving averages etc. setup. If this chart does
not make sense to you, then you need to go back and re-study the divergence method.
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Divergence Trading Basics
These rules replace any other rules that you’ve ever learned about trading divergence. I
am going to divide up the rules because they are easier to understand that way.
1. You only trade divergence (long or short) whenthe market is ranging.
2. A ranging market exists when:
a. The 62 EMA is in between the 200 SMA and the 800 SMA.
b. The three moving averages are on top of each other or very close together.
3. A ranging market exists UNTIL:
a. A divergence trade taken in a ranging market condition leads to the
candles touching the 800 SMA.
4.
A trending market exists when the 62 has crossed the 200 which has crossed the
800.
5.
It’s okay to draw divergence across the MACD trigger lines, and not only the
histogram.
6. It is NOT okay to draw divergence where the MACD lines or histogram are at
equal levels – there must be a difference in heighth/depth at the peaks or valleys.
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System Trade #1
In the chart below, you will notice that the 62 EMA is between the 200 and the 800. This
means that we can trade any type of divergence that we see. Long or short, we can take
it. You use the standard divergence rules you learned from the Stochastic Divergence
system, with this one alteration:
Your profit target on these trades can be a moving average –
any of them – instead of the colored candles.
Figure 2. The 62 Exponential Moving Average is caught between the 200 Simple and the
800 Simple Moving Averages. This means that we can take a divergence trade. This
means that we can also hold onto that divergence trade through the colored candles, all
the way upward, until we hit the 800 Simple Moving Average.
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System Trade #2
In the chart below, the 62 has just crossed above the 800. The 200 has not done so yet
(on the far left of the chart). And boom! We get a divergence trade that tell us to go
short. It’s only divergent on the trigger lines, but not the histogram. Who cares? That
does not matter. We take the trade and we hold on, because according to System Trade
#2, we are going to get a lot of profit. We hold on until the pair hits the 800 SMA.
If you want, you can even set your stop loss 20-30 pips above
the highest point that the pair reached before it triggered the
open of the divergence trade. This keeps your stop tight and
your profit huge.
Figure 3. This is the second type of divergence trade that you can take. The next figure
will show you an example of divergence on the opposite side.
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System Trade #2, continued
Figure 4. Thisis an example of buying on a divergence that happens below 800. The
first trade is a loser because the pair falls LOWER into oversold territory again. The
second trade is a huge winner, and we don’t close it until it hits the 800.
In the example from Figure 4, it’s important to note that you could have put your stop
loss 20-30 pips below the lowest candle that formed the divergence, and you would have
been stopped out at pretty much the same place.
The reason that the Buy #2 does not stop out at an oversold candle (which appears later)
is because that subsequent oversold candle forms ABOVE the entry for the divergence.
Got it?
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System Trade #3
When the market is trending, you stay out of the divergence trades. You know it’s
trending because the 200 and the 62 are now below the 800.
When in doubt, stay out! If you think you see divergence in a
trending market, then just don’t take the trade! Let it go!
Figure 5. This is a trending market because the 62 is below the 200 which is below the
800. We do not trade divergence setups here. These are the divergence setups that have
been driving you mad. By avoiding these trades, you can delete at least 50% of your
divergence losers from your testing.
But what kind of trades can you take in a trending market?
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System Trade #4
When the market is trending, then trade in the direction of the trend. You can enter a
trade every time the pair hits the 62 EMA (something I have done a lot of). You can use
the NY session box and only trade in the direction of the new trend. You can trade in the
direction of the trend every time you see a divergence setup, but rather than take the
counter-trend trade, you can take the pro-trend trade! You can trade with the trend every
time the Stochastic gives you a good oversold or overbought area.
There are a lot of ways to do this. But if your only method for
getting into trend-following trades is to close your eyes and hit
the sell or buy button, then do it. For goodness sakes, do it!
Figure 6. Trading with the trend is super profitable.
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Conclusion
This system is far from complete. But is totally awesome, because Ben and I say so.
In order to trade this system, or even test it, you MUST
understand the principles of divergence. You must also relax
and understand that the trades won’t be perfect, and that there
will times when telling the difference between a ranging and
trending market is very difficult. When in doubt, stay out!
It’s now time for you to do some backtesting. Backtesting is the key to
making this work for you. If you have trouble with your backtesting,
please don’t hesitate to keep your questions to yourself. I will be too busy
making money from this sweet new system.
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