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Copyright by Ramon Barros. All rights reserved COPYRIGHT
ORDINANCE (CAP 528) of Hong Kong Special Administrative
Region. No part of this publication may be reproduced or
transmitted in any material form or by any means, including
photocopying and recording or storing in any medium by
electronic means and whether or not transiently or incidentally
to some other use of this publication without the written
permission of the copyright holder, application for which should
be addressed to the author. Such written permission must also
be obtained before any part of this publication is stored in a
retrieval system of any nature.
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CONTENTS
Forword
3–5
Introduction
6 – 14
Chapter 1 Trend, Phase 1 & 2
15 – 49
Chapter 2 Execution, Phase 1 & 2
51 – 84
Chapter 3 Trend, Phase 3
85 – 109
Chapter 4 Execution, Phase 3
111 – 126
Chapter 5 Trend, Phase 4
127 – 138
Chapter 6 Execution, Phase 4
139 – 142
Chapter 7 Conclusion & Resources
143 - 152
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4
FOREWORD
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This book would not have been possible but for the support and
help that my wife, Chrissy, has provided over the years. If not
for her loving care and sacrifice, I would not be the trader I am
today.
I also need to thank the authors and educators who have
provided the essential knowledge I needed:
• First and foremost, Pete Steidlmayer (Market Profile). Had
I not travelled to Chicago to attend his seminars, I doubt I
would ever have achieved consistent profitability.
• Secondly, the works of Richard Wykoff. I see Pete’s ideas
as an extension and revolution of Wykoff’s works.
• Thirdly, the Ray Wave that forms the backbone of Phase-3
is the result of the knowledge obtained from the works of
Bob Prechter, Tony Plummer and Michael Gur.
• Also, I want to thank the friends who have assisted me
throughout the years:
o
o
o
o
Iris Chow
Irene Yee
Mic Lin
Peter Ow,
• Last but not least are the friends and students who have
offered advice and insight:
o
o
o
o
o
Jeff Tie
Sin Cheng Chia
Martin Goh
Jay Tan
Jodie Wright
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In 1980, I sold my legal practice to become a full-time trader. I
had delusions of becoming a multimillionaire within a short
time.
The reality?
My first profitable year was in 1987! In 1990, I commenced a
limited partnership hedge fund with AUD 20 mil. That hedge
fund I closed in 2010 when I experienced my best year.
Figure 1 shows the results and the theoretical value of what
AUD 1000 would have grown over the 20 years. It also shows
that I grew $20 mil to $943 mil in that time.
The journey has not been an easy one. This book is the result
of what I learned on that journey. I hope that it will assist you
in your quest for success.
Figure 1VAMI 1990 to 2010
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8
INTRODUCTION
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The stats paint a dismal picture for the newbie trader. At least
90% of retail traders lose money, and around 69% blow their
account within the first six months.
The question to which I have always sought an answer is: why
this high rate of failure?
I started trading in 1969, and despite advances in technology,
education and personal psychology, the failure rate has
remained stubbornly high.
Part of the answer can be found in the unrealistic expectations
that we bring to the markets.
The markets are a probability game. As a result, we easily
confuse luck for skill. I ventured into trading during the
Australian Poseidon Boom. The result? Total devastation of my
savings.
I did not venture into trading again until some ten years later
when my father in law introduced me to trading the Hong Kong
“tael” futures gold market. I had gone to Hong Kong for a short
holiday and stayed for almost a month. At that time, I started
by trading one contract and by the end of the month, I had
made enough money to buy Chrisy a branded fur coat of her
choice.
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At that point, I thought I was God’s gift to the trading world.
How easy it was to make money! Why keep struggling with a
legal practice?
That fateful day in August, as Chrisy and I climbed the steep
stairs to Bowen Road, we decided to sell my legal practice and
become a full-time trader.
In 1980, I stopped being a solicitor and started my career as
“God’s gift”……..
……..It was not until 1987 that I had my first positive return! In
the intervening years, I managed to lose AUD 760,000.00
(today over $3.5 million). And that’s without the money I spent
on “education”.
Had I started with a more realistic attitude about how difficult
trading success would prove, I might have saved us a great
deal of heartache and frustration. But ‘unrealistic attitudes is
not the whole story.
In my day, most of what passed for “trading education” was
nothing better than pie in the sky ideas. Today, newbies are in
the fortunate position of having some first-class education
available to them.
Of course, even today, the “get rich quick merchants” abound
aplenty.
Newbies need to exercise caution and care when selecting
courses. If it sounds too good to be true, it probably is. If you
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read or hear about 100% success rates, then I suggest you run
in the opposite direction as quickly as you can. The best of
traders in the world failed to attain anywhere near this rate of
success. In any event, the win rate is far less critical than your
Positive Expectancy Return – more about this in the video on
Money. But here’s the formula:
(Average $ Win x Win Rate) – (Average $ x Loss Rate) =
Expectancy Return.
And, speaking of Money……
Consistent trading profitability is a function of the 3Ms:
Method X Money X Mind
Notice the “x” between each of the Ms. Your success will be
depended upon the weakest of the Ms. For example, let’s say
you score 1 for Method, and 1 for Mind, but score only 0.2 for
Money, you will obtain this result:
1 X 1 X 0.02 = 0.02
To succeed, you need at least 0.5 for each of the elements.
But, I can hear you thinking: “Hey, Ray. What do you mean by
the 3Ms?
My answer….
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Method: a process to determine when the probabilities favour
a successful trade.
Money: a set of rules to maximize profitability and minimizes
risk of ruin.
Mind: a process to enable the trader to execute as consistently
as possible Method and Money rules. You also need a mindset
for constant and never-ending improvement (CANI). Trading is
a zero-sum game. You better believe your competitors are
constantly seeking to improve – so must you.
I wanted this e-book to appeal to the novice trader. I also
wanted to cover the 3Ms.
But……
…..marketing research showed that including sections on
Money and Mind would overwhelm the newbie. So, this book
focuses on Method – why the BarroMetrics 4-Phase is so unique
and why it has hundreds attain their trading dreams.
METHOD
Most teach that a method must suit a trader’s personality which is either systematic or discretionary.
The strength of the systematic approach is: a simple and clear
execution framework. Its weakness: it is subject to drawdowns
when the assumptions on which it is based are not valid.
For example, we assume that prices are in an uptrend when
prices are above a 20-day moving average. In that situation,
we buy on a pullback. However, there will be times when the
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assumption (“price is above the moving average are in an
uptrend”) is incorrect. In that case, the trader will experience a
series of losses.
Figure 2 NASDAQ wih 20-day MA
In Figure 2, the Green rectangle illustrates when the
assumption is correct, and the red rectangle illustrates when
the assumption is incorrect. In the latter case, the market is
actually in a sideways mode rather than an uptrend.
A professional trader using a systematic approach would have
backtested his system and had some idea of a normal
drawdown. He is willing to take the drawdowns as a cost of
doing business.
I’m invariably asked: “Ray, why can’t we devise a system that
eliminates the losses?”
The strength of a systematic process is the simplicity of
execution. We invariably increase the complexity when
attempting to eliminate losses (even if such a thing were
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possible). Such a complexity loses the major advantage of
mechanical systems.
How about the discretionary ruled-based method?
This process is usually based on some idea of the nature of
markets, e.g. the Wyckoff Model, the Tubbs Method, the Elliott
Wave, etc.
But, as with a systematic approach, the newbie has a problem.
In this case, he creates such complex rules that execution
becomes extremely difficult. More often than not, “intuition”
becomes “into wishing”. As a result, drawdowns become the
rule rather than the exception.
And, like the systematic approach, the discretionary process
has one advantage: armed with the appropriate knowledge, it
identifies the trend far better than any computer-based
system. Correct trend identification reduces losses.
The newbie must understand this critical distinction. When we
have a set and bound environment, for example, chess, a
computer can identify trends far better than the human brain.
However, in a probabilistic environment, like trading, the
human brain is far superior.
So what then is the solution for the novice trader? This book
suggests that rather than “systematic OR discretionary”, the
newbie adopt the approach: “systematic AND discretionary”.
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MIND
Mind will be covered in detail in the videos available from my
site.
https://members.tradingsuccesseducate.com/courses/
Another problem that newbies face is a lack of appreciation of
the importance of acquiring the appropriate mindset to trading
success.
By our nature, experience and education, we have been taught
that success is a function of controlling outcomes. But in
trading, this is not possible. There are very few courses that
cover both Method and Mind comprehensively.
In the video for Mind, we have taken ideas from the sources
below to provide a structure and framework that have
produced consistent successful results for my students:
1. Acceptance and Commitment Therapy. And,
2. The works of:
a. Brene Brown.
b. Benjamin Hardy
c. Nicole LePera
The videos lead you to execute your Method and Money rules
consistently, keep consistent journal entries, and finally, learn
how to extract the maximum information from your journal for
consistent and never-ending improvement (C.A.N.I.).
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MONEY
The biggest problem the novice trader faces are not the rules.
These are simple enough. I have found that the problem lies in
their consistent application and recording of the results.
In the Money video, we provide guidelines on how to ensure
you record your results, what software or apps you will need,
and how best to use the records to improve.
Here is the link again for the videos:
https://members.tradingsuccesseducate.com/courses/
CONCLUSION
Are you ready to begin? Great! Let’s start with Method.
I have prepared a mindmap that outlines the e-book’s
contents; it’s in Mindjet and html format. The former for those
who have Mindmanager and the latter for those who need to
open the map in their browser.
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Chapter 1
The 4-Phase Framework
Trend: Phase 1 & 2
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INTRODUCTION
The Trend Timeframe
The critical distinction between the 4-Phase Framework and
traditional teaching lies in this phrase:
Discretionary (ruled-based) AND Systematic
The Trend is the discretionary component. Correct identification
of the trend and its status (continuation or change) is a trader’s
primary tool for placing the probability of success in his favour.
And, as I said in the introduction, because trading occurs in a
probabilistic environment, the human brain is better equipped
to assess its direction and status.
ELEMENTS OF THE TREND
1. What is the TREND of the Trader’s TIMEFRAME?
2. Is the current trend likely to continue or change?
3. Given the trend, where should we take our trade (Zone)?
TOOLS
To answer question (1), we need to clarify two concepts:
• What tools do we use to identify a “timeframe”? And,
• How do we define “trend”?
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The best technical tool I have found to identify a timeframe is a
swing chart.
Swing charts
1. For an introduction to swing charts, go to:
tinyurl.com/swingcharts
2. I have modified the tool to reflect not only price but time.
I call my modification “Barros Swings”. To understand
how I draw my swings, download:
https://tinyurl.com/BarrosSwingDraw
3. Figure 3 below shows the swing magnitude for each time
frame.
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Figure 3 Swing Magnitude
The items marked in red are the critical swing magnitudes.
So,
• If you have a daily chart with an 18-period swing, it
reflects the monthly trend.
• If you have a daily chart with a 5-period swing, it
reflects a weekly trend.
The items in black represent approximations. So, the critical
chart for the quarterly trend is the 13-week swing. It can
also be shown as the 3-month swing.
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There will be times when I want to show all the swing
magnitudes on a daily chart. To do this, I have to use the
Hart Swing together with my Barros Swings.
The Hart column in the snapshot shows the equivalent daily
swings.
The reality is most traders would not draw the swings
manually. Two programs will draw the Barros Swings:
1. Optuma, https://www.optuma.com/
2. MT4, https://mt4indicators.com/barros-swing/
If you purchase Optuma, you mustn't change the default
values for the weekly, daily and intraday charts. For the
monthly charts, you can change the final default value to either
30 or 60.
The MT4 is a free download. There are three things you need to
do:
• Ensure that you insert the correct swing value in the
inputs tab.
• Ensure that the setting “XABC_enabled” this change to
“false”.
• If you have more than one timeframe on a chart, go to
the colours tab and change colour 1. If you don’t do this,
you will have swings of different magnitude with the same
colour.
Speaking of colours, I have the same colours representing
different timeframes in all of my swing charts:
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•
•
•
•
12-month swings, green
13-week swings, black
18-period (daily and intraday), red
5-period (daily and intraday), blue
You want to standardize your colours because it will create
habits for success. You will automatically associate certain
swing sizes with the colour of the swing.
Let’s have a look at an example.
Figure 4 S&P 500 CFD
In Figure 4, we have Barros Swings showing the monthly and
weekly trend; we have the Hart Swings showing the quarterly
and yearly trend. Sometimes the black swing is not visible
because the entire swing line is hidden by the green one.
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Finally, to end this section, I should mention that the material
on Hart Swings is no longer available. Trend Dynamics used to
publish a newsletter but is now defunct. Optuma draws Hart
swings.
Thus far, we have been considering the question, “what do I
mean by timeframe”?
I have answered the query by explaining my use of Barros and
Hart Swings.
The next topic for consideration is what do I mean by “Trend”?
Trend?
There are only three possible trends:
1. An uptrend: higher swing highs and higher swing lows. If
a swing low is breached, then whatever you may have,
you don’t have an uptrend in that timeframe.
2. A downtrend: lower swing highs and lower swing lows. If
a lower swing high is breached, then whatever you have,
you don’t have a downtrend in that timeframe.
3. Corrective trends: these are moves against the trend.
They can either be simple or complex. More about this
Chapter 6, Phase 4.
In Figure 7 below
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Figure 6 18d Swing Chart
Once the low at 4136.80 is breached, then whatever you have,
you no longer have an uptrend in the 18-day.
If you don’t have an uptrend, then what do you have? There
are three possibilities.
Firstly, a downtrend will ensue. We’ll discuss this in more detail
when I consider Wyckoff Schematics in this chapter and
chapter 6.
Secondly, there will be a sideways pattern formed between the
high and reaction low. Once the 66.7% retracement level is
breached, I assume that a sideways scenario is possible. That
assumption turned into a “certainty” once we reach the 78.6%
zone. When I say, “certainty”, I mean a certain as I can be in a
probabilistic environment.
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For example, in Figure 7, let’s say a low is formed at 4100. The
S&P heads up and breaches the 66.7% retracement between
the high at 4361.8 and the low at 4100. At this point, I assume
that we will be forming a sideways pattern. The assumption is
confirmed should the S&P proceed on upwards to at least the
78.6% area.
Finally, we have the possibility that the breach at 4136.80 was
a 13-week correction. If so, the 13-week is likely to continue
its uptrend, and we will see a breach of 4136.80.
Figure 7 is a real-time example of this idea. You’ll note I
mention the word “acceptance”. I’ll go into more detail about
the meaning of “acceptance” in later chapters of this book.
I will also go into more detail about changes in trend patterns
in the Phase-4 section.
Figure 7 S&P 12-month Cash
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Once prices accept above 2347.00, the probability of a
downtrend was significantly reduced. That left us with two
scenarios:
• a sideways pattern forming between 3393.52 and
2191.86, or
• the breach of the 12-month low at 2346.58 indicated a 5year (60-month) correction. In this case, we could expect
a continuation of the 60-month uptrend.
The 2-bar congestion between 3588.13 and 3233.94
confirmed the scenario of a 60-month resumption.
This wraps up the Barros Swings section. We have considered
a tool to identify the trend of a timeframe, and we have looked
at some preliminary ideas regarding changes in trend.
The next section will consider the Wyckoff Schematic and
Wyckoff Model to understand trends and changes in trend in
greater depth.
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TOOLS: Wyckoff Schematic
Figure 8 Wyckoff Distribution Schematic
Figure 8 shows the Wyckoff Schematic for the Distribution
Phase.
• Phase A:
• We see a prolonged uptrend.
• We have a warning that the phase is commencing when
we see the Preliminary Point of Supply (PSY). Usually, the
retracement from the PSY will be greater in volume and
range than any other previous retracement.
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Figure 9 Wyckoff Distribution Schematic
• The Buying Climax (BC) takes two forms:
o The first shows a widening spread, greater than any
in the past, accompanied by heavier volume.
o There is no momentum divergence.
o The second takes place with momentum divergences
and below-average range and volume at the climax.
• The final element of Phase A is the Automatic Reaction.
This is the confirmation that the Distribution phase has
begun. The volume and range in the automatic reaction
must be greater than anything that has been seen in the
past. (This is where the Trading Utilities App proves its
worth – it is the best way I know how to compare
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competing ranges and volume. More about this later in
the book).
With the completion of Phase A, we need to change our
strategy. Until now, we have probably been adopting a “withtrend” strategy. The appropriate method in this phase is the
“counter-trend” approach, where we look to sell the Primary
Sell Zone and look to buy at the Primary Buy Zone.
My approach to the Primary Zones is different to Wyckoff’s. It
reflects Pete Steidlmeyer’s mode of calculation. But, instead of
drawing a Market Profile, I use the following process:
1. Take the range of Buying Climax and the Automatic
Reaction.
2. Divide by eight.
3. Subtract one eighth from the high and add one eighth to
the low.
4. The high minus one eighth is the Primary Sell Zone. The
low plus one eighth is the Primary Buy Zone.
5. The Maximum Extensions: take 20% of the range, add
20% to the high, and deduct 20% from the low.
Acceptance above these levels suggests a genuine
breakout.
The above calculations are fixed and do not vary. The
following values will vary depending upon the price action.
• The Value Area: we start with the 33.3% and 66.7%
retracement levels. Then, we go down one timeframe
and ensure that the value area contains all nearby high
and low closes. We increase or decrease the levels as
needed.
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• The Rejection Areas: the 5% and 95% retracement
zones represent the area.
• The 55% to 45% retracement levels of the Value Area:
I use these levels in two ways:
o where the price action is most likely to chop; and
o to identify the “Death Zone Setup”– more in Phase
3.
• The 21.4% and 78.6% retracements: we would
normally expect the price action to fluctuate between
the Primary Buy and Primary Sell Zones. However,
there will be times when the price action will stop at
these levels. Generally, these need not be changed;
occasionally, you may need to. The test is whether or
not the price action is reversing before it gets to them.
If it does, you need to adjust the values.
Let’s have a look at a real-time example.
See Video at link:
https://tinyurl.com/4-PhaseZones.
The Video illustrates important points.
Let’s Take A Pause:
Let’s take a brief pause and recap where we are at.
The 4-Phase Framework distinction between it and other
methods is the combination of Discretionary AND Mechanical.
The discretionary aspect is when we work out the Trend
Section. We ask ourselves three key questions:
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1. What is the Trend of the Trader’s Timeframe?
2. Will it continue or change?
3. Where do I take the trade (Zone)?
In assessing the Trend, I introduced Barros Swings to identify
timeframes. In this section, I’ve introduced the Wyckoff Model
as a further refinement. So far, we have looked at Phase A of
the model and how to draw the various zones.
We will now continue with the Distribution Schematic.
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Figure 10 Wyckoff Distribution Schematic
Phase A terminates when there is a retest of the Buying
Climax. The price action must retrace at least 78.6% of the
boundaries of congestion (the range between the Buying
Climax and the Automatic Reaction). This test is known as the
Secondary Test and must not accept beyond the Maximum
Extension).
Once the Secondary Test is in place, there is a high probability
of a congestion market. This probability is confirmed when
there is a successful retest of the Automatic Reaction. As the
price action approaches the boundary low, we should see
declining volume and range as it moves into the Primary Buy
Zone. If this decline is not visible, you will likely see a failure of
the buy zone, i.e. you will see a downside breakout.
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In Phase B, the declining volume and range at the Primary
Zones is one essential characteristic. The second is the “chop”
that usually takes place within the Value Area, especially the
45% to 55% retracement zones. The third essential
characteristic is the possibility of a “Death Zone” trade. I’ll go
into this in Phase 3.
The critical characteristic of Phase C is the changing character
of the price action at the Primary Zones. Whereas rejection
volume and range was previously evident in both zones, in
Phase C, we start to see acceptance by way of volume and
range at one of the zones. If the development formula is
complete, we will likely see an attempted penetration that fails
at one end. If that attempted penetration:
1. Takes place in the same direction as the prior uptrend,
then you have what Wyckoff called an Upthrust Change
in Trend – a sell signal.
2. Takes place in the opposite direction, then you have a
RePo buy signal. In the chart below, the penetration of
786.63 and re-entry above the primary buy zone at
859.56 gave us a RePo buy signal.
Phase C marks the end of the sideways congestion. Phase D
completes the breakout transition. In this phase, you will see
from the price action the probable breakout direction. Volume
and range will tend to expand in the direction of the breakout
and decrease on its corrections.
Usually, before a breakout, you will see an FTP pattern form
somewhere between the 78.6% (or 21.4%) retracement zone
and the lower boundary. You may also see the FTP form after
the breakout between the lower boundary and Maximum
Extension.
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After the breakout, you generally see a retest of the FTP (if one
formed before the breakout) or the upper boundary of the
Primary Buy Zone. If it is a strong breakout, then you may get
a retest of only the Maximum Extension. We see a retest in the
chart below.
Figure 11 S&P cash 12-Month Swing Chart
After the breakout and acceptance above 1738 (Maximum
Extension), we saw the 12-month swing line turning down and
hold just above 1800 – the retest.
This concludes Wyckoff’s Schematics. We will revisit in Chapter
6,
To this point, we have been considering the question:
What is the Trader’s Timeframe trend?
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To define the timeframe, I use Barros Swings. The swing highs
and lows define the trend:
• Uptrends have higher swing highs and lows.
• Downtrends have lower swing highs and lows.
• If you don’t have an uptrend or downtrend, then you have
a complex correction. Complex corrections usually take
the form of a sideways structure. I define a sideways
market as one having roughly equal highs and lows.
• We concluded the section with the Wyckoff Schematic to
get a better understanding of sideways patterns.
The next section deals with the question: Trend – continuation
or change?
TREND: CONTINUATION OR CHANGE? (Phase 1&2)
I use four tools:
• In an uptrend, the previous swing low. In a downtrend,
the previous swing high. I considered this question in
some detail in TREND?
o In an uptrend of a given swing, you don’t have an
uptrend once a prior swing low is breached;
o You don’t have a downtrend once a prior swing high
is breached.
• I use stats to provide price targets (price zones)
• Since a climax is usually marked by declining momentum,
I use the Linear Regression Band to identify momentum
divergence at a zone (momentum)
• I also prefer to see declining volume and range as prices
move into a zone (structure).
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• Finally, I consider time using the SignalGroup seasonal
charts.
I like to call prior swing lows and highs ‘lagging indicators’;
zones, momentum, structure and time, as ‘forecasting
indicators’.
ZONES (Stats)
My approach to zones is founded on statistics and probability
theory. I recommend all traders secure a basic idea of both.
The best and simplest sources are two books by Derek
Rowntree:
1. Statistics without Tears: An Introduction for NonMathematicians;
2. Probability Without Tears - Primer For Nonmathematicians
Both are available from Amazon in paperback format (no kindle
at time of writing). Statistics Without Tears is available as a
FREE download from:
https://www.pdfdrive.com/
I know, I know: mention the word ‘stats’, and some of you will
be running a million miles away.
Perhaps this story will help: From Form 1to Form IV in Hong
Kong, I moved a class despite failing all my maths subjects
(algebra, trigonometry, geometry and arithmetic). After Form
V, came Lower VI – this class had a public exam to get into
Uni.
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There was no way I was going to be promoted, so I had to
repeat Form V. I felt aggrieved. I had been telling myself the
only reason I failed was because I didn’t put in the effort. I’d
show the school! I was going to top the class!
Hmm… the only problem was that I did not have the muchneeded maths base, and while I did very well in the literary
subjects, I still failed my maths exams.
Why the true story? Here’s the point: if I can become
competent at stats and probability, anyone can!
So, don’t run from acquiring basic knowledge – Rowntree
makes it very easy.
Back to trading…….
One key point I want to make early – I have formulated a
theory around stats with which pure mathematicians will take
issue. However, it has worked for my trading.
Generally, practitioners assume a normal bell curve when using
statistics. Any range within mean +1 standard deviation to
mean -1 standard deviation is considered normal, i.e. for
trading, I take that to mean there is a 50-50 chance of trend
continuation.
Once we move above the mean +1 standard deviation, we
enter overbought or oversold territory. Any range within mean
+1 standard deviation to mean +2 standard deviations, I take
to mean there is a possible chance of a line reversal (around
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67%). I will not take new positions unless they are
overwhelming reasons to believe the trend will continue.
Once we move above mean +2 standard deviations, we are in
strongly overbought or oversold territory. Hence, there is a
probable chance of a line reversal. I will not take new positions,
and I WILL tighten my stops on existing ones because a trend
reversal is likely.
The reverse is also true for probabilities below mean -1
standard deviation and mean -2 standard deviations. In the
former case, it is unlikely that a trend reversal will occur; in the
latter case, it probably won’t happen.
Figure 12 Bell Curve
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Here’s the problem with applying statistical theory to trading:
trading statistics seldom reflect a bell curve. More often than
not, they take the shape of a left-skewed distribution.
Figure 13Skewed Distributions
Figure 14 Skewed Dostribution Curves
Notice that unlike in a normal distribution where the mean,
median, and mode align, in the skewed distributions, they form
separate measurements. Most important, the mean is a long
way off from the mode, and as a result, the stats bear little
resemblance to probability.
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For example, let’s assume we have a mean of 13 and a
standard deviation of 7. In this case, mean -3 standard
deviations would result in a negative -8, clearly an
impossibility.
Pete Steidlmayer produced a method of working out a more
realistic way of working out the statistics. I found the best
summary from MarketDelta
(http://tradingsuccess.com/blog/wpcontent/uploads/2014/04/how-is-the-value-areacalculated.pdf)
“Market Delta: Overview
We calculate the Value Area based upon the Point of Control
(POC). It is based upon the high TPO (letter) count price or
the high volume node.
For the Market Profile charts, you have the ability to display
either the value area based upon the TPO count or the value
area based upon volume at each price.
With the Market Profile, there is a choice.
Method A
First, we count the number of TPOs in the profile, and take
70% of that number (70% is configurable by the user, but
generally
represents 1 standard deviation and is commonly accepted as
the value area). This is the number of TPOs we're looking for in
our Value Area.
Next, the Point of Control (POC) is determined by finding the
price which contains the most TPOs. If there is a tie (two or
more prices with same number of TPOs), the price closest to
the center of the profile is used as the POC. The number of
TPOs in the POC are counted and this number is used as our
42
initial TPO count. At this point the Value Area only comprises
the POC and the number of TPOs in the POC.
We now inspect the two prices above and below the POC. If the
two prices below the POC have more TPOs, those prices are
added to the VA. Otherwise, the two prices above the POC are
added. We increment our TPO count by the number of TPOs in
the prices we just added to the VA. We continue repeating this
process, adding two prices at a time, until we have met or
exceeded our 70% TPO Count, and completed our VA. The
upper price of this Value Area is considered the Value Area
High
(VAH). The lower price of the VA is considered the Value Area
Low (VAL).
Method B
First, we count the number of TPOs in the profile, and take
70% of that number (70% is configurable by the user). This is
the number of TPOs we're looking for in our Value Area.
Next, the Point of Control (POC) is determined by finding the
price which contains the most TPOs. If there is a tie (two or
more prices with same number of TPOs), the price closest to
the center of the profile is used as the POC. The number of
TPOs in the POC are counted and this number is used as our
initial TPO count. At this point the Value Area only comprises
the POC and the number of TPOs in the POC.
We now inspect the two prices above and below the POC. If the
two prices above the POC have more TPOs, those prices are
added to the VA. If the two prices below the POC have more
TPOs, those prices are added to the VA. If there is a tie, we
add both the two prices above and the two prices below. We
increment our TPO count by the number of TPOs in the prices
we just added to the VA.
We continue repeating this process until we come to the point
where adding two prices would exceed our 70% TPO count, at
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which point we begin adding one price at a time using the
same method. Once our 70% TPO count threshold is met or
exceeded, our Value Area is complete. The upper price of this
Value Area is considered the Value Area High (VAH). The lower
price of the VA is considered the Value Area Low (VAL).”
I use Method B.
I can hear your thoughts! Do you mean I need to use this
calculation method for any stats that I need?!! No way!!
Not to worry. Jody Wright has a developed an app, Trade
Utilities, for MT4 and Optuma users that will do all the work for
you. Drop him a line at Jody Wright mail@jodywright.com for
details.
Let’s look at an example.
Figure 15 Trade Utilities 13-week DJIA
44
I took the 13-week stats as at September 1987. My database
was not sufficiently large to calculate meaningful stats for
impulse swings.
For corrective swings, we could draw the following conclusions:
1. The most likely move ranges from 12% to 28%.
2. The equivalent to mean +1 to mean +2 is a move from
more than 28% to 37%.
3. The equivalent of mean +2 and above is a move greater
than 37%. To date, there has been only one swing greater
than 85.34% and below 97%.
But, what about the impulse moves?
I have found a satisfactory method to give me some idea of
probability where the data sample is small:
• Use mean + 1 to mean -1/2 as normal;
• Use mean +2 to mean -1 as possible;
• Use mean +3 to mean -1.5 as probable.
Not as accurate as Pete’s approach, but better than nothing.
Also, I’ve found when the mean and mode are close (within 5%
of their values), the moves will tend to end there.
45
Figure 16 DJIA 13-week
In Figure 16, we see that the 13-week impulse swing travelled
122.3%. The furthest it had gone on my database before then
was 48%. Clearly overbought and time to exercise caution.
LINEAR REGRESSION TOOL (momentum)
The second tool I use to answer “is the trader’s timeframe
trend likely to continue or change?”
Linear Regression Bands
How to draw them is best shown via video. Here’s the
download link.
https://tinyurl.com/LRBMomentum
46
Time
I use David Stendahl’s SignalTradingGroup for projections of
seasonal highs and lows. By comparing the projections with the
actual swing highs and lows, I determine if the instrument
follows seasonal patterns.
The chart below is the 10-year DJIA seasonal pattern chart.
Note:
1. A seasonal high due around mid-July.
2. A low due about mid-August.
3. A high due mid-September.
Figure 17 DJIA 10-year Seasonal Pattern
The following chart shows David’s projections
47
Figure 19 21 day Seasonal Projection
Finally, let’s compare the Dow’s closing price line chart with
the seasonal projection.
48
Figure 21 DJIA 10-year Seasonal Pattern
We see that the seasonal pattern has been accurate except for
this: the congestion was projected to arrive later than it did
(projected mid-July; actual May 7).
49
Figure 22 DJIA 21 Day Seasonal Projections
So, I am prepared to lean towards the view that we will
probably see a decline around July 29 (+/-1 trading day)
followed by continuing congestion.
The chart below is the picture at time of writing – AXI CFD
DJIA.
50
If the Dow follows the seasonal pattern, we should see a
strong down move today or tomorrow. What we should not
see is a bullish acceptance bar above the high (35,192.30).
Such a bar would suggest we are not following the seasonal
pattern.
I have found using seasonal patterns in this way to be very
effective.
We answered two of the three trend questions:
1. What is the trend of the Trader’s Timeframe?
2. Is the trend likely to continue or change?
The third:
3. Where will I take the trade? (zone)
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Phase 1 requires an FTP (defined in the next section) to be
formed between the Primary Zones and the Maximum
Extension. Full details in the next section – Execution
Timeframe.
There is no zone requirement for Phase 2.
Conclusion Trend - Discretionary
The discretionary trend section of the 4-Phase Framework
Method seeks to answer three questions:
1. What is the trend of the Trader’s Timeframe?
To answer this question, we have looked at Barros Swings
• To identify timeframes and trends.
• The Barros Swing helps us identify
o Uptrends
o Downtrends and
o Sideways Trends.
• Each type of trend has its strategy:
o In uptrends, we look to be buyers.
o In downtrends, we look to be sellers.
o In sideways trends, we focus on the Primary Buy
Zone to be buyers and the Primary Sell Zone to be
sellers.
52
• We learned how to draw the zones of sideways markets,
which included the Maximum Extension. Acceptance
beyond this level probably means the sideways congestion
is reverting to a trend phase.
• We learned three responses to expect once a prior swing
low is broken in an uptrend (and a prior swing high is
breached in a downtrend.)
2. Is the trend likely to continue or change?
To answer this question, we looked at (in order of importance):
•
•
•
•
The Wyckoff Schematic (structure).
Statistics (price).
Linear Regression Bands (momentum), and
Seasonal Charts (time).
Ideally, the tools will come together to warn us that a Change
in Trend is in the offing.
3. Where do I take the trade? (zone)
For Phase 1: an FTP (defined in the next section) to be formed
between the Primary Zones and the Maximum Extension.
For Phase 2: no zone requirement.
If you need help in understanding the material – if you, like
me, prefer videos, go to:
https://members.tradingsuccesseducate.com/courses/
53
54
Chapter 2
The 4-Phase Framework
Execution: Phase 1 & 2
55
CHARACTERISTICS OF THE EXECUTION PHASE
There are two key features:
1. The Execution Timeframe is one timeframe below the
Trend Timeframe. For example:
a. if your Trend Timeframe is the 5-day swing (weekly
trend), your Execution Timeframe are the daily bars.
b. If your Trend Timeframe is the 240-min, 5-period
swing (daily trend), your Execution Timeframe are
the 60-minute bars.
2. The Execution Timeframe is a mechanical process. You
take a trade only if it fits your rules.
56
THE PHASE 1 ROADMAP
Once you have completed the Phase 1 & 2 material, come back
to this chart, see if you can make sense of it. If not, drop me a
line.
ELEMENTS OF A SYSTEM
1. The setup
2. The trigger
3. The Initial Stop
4. Position Sizing
5. (Reward: Risk) – for reasons later stated, this is not
necessary for Phase 1& 2 trades.
6. Trade Management.
57
THE SETUP IN PHASE 1
PRECONDITIONS
Phase 1 has two alternate preconditions:
1. A sideways congestion in either the
o Second Higher Timeframe OR
o First Higher Timeframe OR
o Trader’s Timeframe.
For example, if your Trend Timeframe (Trader’s Timeframe) is
the 5-day swing (weekly trend), you need to see a congestion
structure in the:
o 13-week (73-day, Second Higher Timeframe) OR
o 18-day (First Higher Timeframe )
o OR 5-day (Trader’s Timeframe).
2. An FTP forms in one of the three timeframes mentioned
above. I’ll detail the meaning of FTP in the section
entitled FTP in this chapter.
PRECONDITION 1
How Does a Sideways Structure form?
There are three ways:
1. The most common is the formation of an ABCD structure.
2. The ‘Rejection at the top, rejection at the bottom’
structure.
3. The acceptance above the Value Area High (in a bear
pattern); the acceptance below the Value Area Low (in a
bull pattern).
58
The XABCD structure
Figure 24 ABCD SIDEWAYS FORMATION
I hope you recognize the Wyckoff accumulation schematic. I
have labelled the corresponding ABCD structure.
Usually, the XA swing of a timeframe will be greater than
mean + 1 (oversold). Once a swing line turns up at ‘C’, you
have the potential for a sideways structure to form. You need
a turn down at D that forms between the Maximum Extension
and the BC Primary Sell Zone to complete the structure.
If ‘D’ forms outside the ‘B’ high, when the swing retraces at
least to the BC 78.6% retracement and turns up at ‘E’, you
need to redraw the boundaries of congestion: they will be the
highest and lowest points of the ABCD pattern.
59
Reverse for the Wyckoff Distribution
Figure 25 Figure 21 ABCD SIDEWAYS FORMATION
Before moving to the other two patterns, I first need to
explain Pete Steidlmayer’s Market Profile.
Pete believed that price action could be described in statistical
terms. Sideways price action is reflected in the normal bell
curve.
60
Figure 26 Bell Curve
In a Bell Curve, the mean, mode and median are roughly the
same. Pete’s Value Area roughly corresponds to the mean +1
std to mean -1 std (68% occurrences). His Primary Zones to
the mean +3 std and mean -3 std.
An important reference point we looked at skewed
distributions earlier in the book. Trading distributions are
generally skewed distributions, NOT bell curves.
61
‘
Figure 27 Skewed Distribution
In a skewed distribution, the mean, mode and median are
different price points. In the diagram above, ‘P’ stands for
‘statistical probability.
P99 means 99% probability of occurring.
More later on this topic. On to the “Rejection at the Top….”
Pattern.
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Rejection at the Top, Rejection at the Bottom’ Structure
Figure 28 Rejection at Top
In this pattern, there is:
• A strong rejection off the high A
• A strong rejection of the low B.
• The instrument retraces and forms a sideways
congestion area between the 33% and 67% (normally
where a Value Area forms) of A & B.
• When the Value Area completes, we should see a break
above the Value Area High (VAH),
• There will be a test of A. A successful test will see a
sideways pattern form between A & B. An unsuccessful
test will see an upside breakout.
• If we see a breakdown below the VAL instead of a
breakout above the VAH, we can expect the low at B to
be breached.
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• Acceptance of the low breach means we’ll see a
downtrend ensue.
• Rejection of the B breach usually results in a test of the
VAH, then a test of A.
The critical point to remember: there needs to be a
breakout in the original direction for a sideways pattern to
form. A Value Area formed from a swing low will need to break
above the VAH.
If the first swing extreme (A) is a low, and B is the swing high,
then we’ll need to see a breach of the VAL for the sideways
pattern to form.
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Acceptance above the Value Area High (in a bear
pattern)
Figure 29 Bear Profile Acceptance Above VAH
In the chart above:
• A bear profile forms between A & B.
• After the break out of B, the GBPUSD retraces to the VAH
and its high volume node.
• If we see acceptance above the resistance, we’ll see a
retest of the Primary Sell Zone of A & B.
• If the test is successful, a sideways structure will form
between A & B. If unsuccessful, you will see an upside
breakout.
Reverse for bull profiles: acceptance below a bull VAL leads to
a probable sideways pattern between A & B.
More on skewed (bull and bear) profiles and normal distribution
(sideways) profiles later in this chapter.
65
We have completed the Precondition section for Phase 1
trades: a sideways structure in one of three timeframes must
have formed – in the Second Higher Timeframe or the First or
the Trader’s.
Let’s now turn to……. The Setups
66
THE SETUP
Figure 30 The FTP Setup
In Fig 31, the GBPUSD forms a sideways trend between A & B.
An FTP forms between the Maximum Extension and the 87.5
(Primary Sell Zone). This is the setup that Phase 1 requires.
So, what is an FTP?
The FTP consists of three distinct patterns. In order of
reliability:
1. The 3-bar congestion.
2. The 2-bar congestion.
3. The 1-bar swing.
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The key points:
• The patterns form in the Execution Timeframe (also called
the Tigger Timeframe). Remember, this time frame is one
lower than the Trend Timeframe.
• The Trigger bar is different for the congestion patterns
(1&2) and the 1-bar (3).
• The same can be said for the hard stop location.
• The use of soft stops is the key to the profitability of the
setups.
3-Bar Congestion
Figure 31 3-Bar Congestion
The pattern consists of:
1. An anchor bar (bar 0).
2. The anchor bar is defined by Bar 1 closing within its
range. The vital element is the CLOSE, not the range. Bar
1 can exceed Bar 0’s range BUT must close within it.
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3. Each succeeding bar must then close within the previous
bar’s range.
4. The pattern completes when three consecutive bars that
close within the previous range.
5. You can have more than 3 bars. Usually, the limit is 7
bars because the 3-bar has evolved into a 1-bar swing by
then.
2-Bar Congestion
Figure 32 2-bar congestion
This setup is less common than the 3-bar.
After Bar 1 forms, you will have a tentative Boundary of
Congestion. In the 2-bar:
1. Bar 2 breaks beyond the boundary but then closes back
into congestion.
2. Unless Bar 3 is an inside bar, Bar 3 must trigger the
pattern. If it is an inside bar, then Bar 4 must trigger the
pattern.
Why is the trigger bar so important? Because if Bar 3 fails to
trigger, then 3-bar congestion has formed.
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Figure 33 Figure 29 2-bar congestion
An example:
Let’s say your TREND analysis tells you to go short; and let’s
say
• In Figure 34, the boundaries of congestion are 1.3890
(high) and 1.3754 (low).
• And Bar 3 has breached the 1.3890 high but has closed
within Bar 1’s range.
For the 2-bar to be triggered, we must see Bar 3 trigger the
trade. If it is an inside bar, then bar-4 must trigger the trade.
So Ray, how do I determine the boundaries of congestion?
70
For the 3-bar and 2-bar, the process is the same:
• Shift to one lower timeframe (e.g. if your Trigger
Timeframe is the daily, shift down to the 240-minute)
• Identify the highest and lowest CLOSES. The two prices
will form your boundaries.
The 1-Bar Swing
Once a 3-bar has gone 6-7 bars, draw a 1-period Gann Swing.
If you have an ABCD congestion pattern, then this setup has
formed.
Figure 34 1-Bar Swing
I draw the boundaries of congestion differently to the 2-bar
and 3-bar. I use the highest swing high and lowest swing
low of the pattern to form my boundaries.
Let’s turn to the Trigger…..
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THE TRIGGER IN PHASE 1
The TRIGGER for the 2-bar and 3-bar is different to the 1-bar
swing.
The 2-bar and 3-bar
The Trigger Bar is an acceptance bar defined as:
Bear Bars:
1. An open no lower than the top third of the true range.
2. A close no higher than the bottom third of the true range.
3. The true range and volume are at least normal.
Bull Bars:
1. An open no higher than the bottom third of the true
range.
2. A close no lower than the top third of the true range.
3. The true range and volume are at least normal.
Two questions immediately come to mind:
• What do I mean by true range?
• How do I determine what is normal true range and
volume?
For the meaning of true range, go to:
https://www.investopedia.com/terms/a/atr.asp
For ‘normal’ range and volume, most traders use the Average
True Range and a Moving Average of volume. I believe there is
a better approach, especially for intraday ranges and volumes.
72
When traders use the ATR or MA, the assumption is there is
uniformity between the population. Let’s use intraday data
because the issue is more apparent.
Let’s say you want to work out the normal range and volume of
the S&P, day session only, for 30-minute bars. For example,
when using the ATR, you assume that the fifty-eight, 30minute bars are uniform, exhibiting no differential patterns
during the day session.
But, the assumption is incorrect.
In fact, research shows that the first hour and last 30-minutes
have larger ranges and volume.
For example, the S&P CFDs, 9:30 EST true range has a mean
of 14 and a mode of 9.5. But lunchtime, 13:00, has a mean of
7 and 4.5 respectively.
And if you distinguish separate days, for example, Monday
9:30 and Monday 9:30, the difference is even more apparent.
For example:
• The Monday 9:30 true range has a mode of 12 and a
mean of 11.
• The Friday 9:30 a mode of 13 and a mean of 11.
This info tells me there is less volatility for the 9:30 am session
on Monday than on Friday - important information for
determining the normal range of a bar.
How did I obtain the individual data?
73
I used Jody Wright’s Trading Utilitilites apps. I spoke about the
software previously, and complete information is in the
reference sections.
In summary, the Trigger for the 2-bar and 3-bar Congestions is
an Acceptance Bar (bullish or bearish)
The 1-bar Swing
The trigger for a 1-Bar Swing is a ‘stop’ buy or sell above the
boundary high or boundary low.
The question here is how much of a filter should a trader use?
Our biggest fear is being stopped in, only to have the market
reverse on us. We seek a balance between taking too early a
trade and taking one too late.
We are faced with this quandary:
• The earlier the entry, the lower the loss if stopped out;
the later the entry, the greater the loss.
• On the other hand, the earlier the entry, the more likely
the breakout is false; the later the entry, the more
probable it is valid.
Also, it’s well established that traditional breakout trades are
profitable only 30% to 33% of the time.
Here’s how I mitigated the consequences of a false breakout.
Firstly, the FTPs make a massive difference to the win rate
from 33% to almost 48%.
74
Secondly, the soft stops have had a tremendous on the
Expectancy Return, i.e. on the formula
(Average $ win x the Win Rate) – (Average $ loss x the Loss Rate)
because the soft stops dramatically reduce the ‘average $ loss’.
So, what entry filter do I use for 1-bar entries? 1.5 times the
spread. For example, if my S&P spread is .0015, I’ll add
0.00225 to the offer price for a buy stop; I’ll subtract 0.00225
to the bid price.
You need to know how your broker reports prices. AXI reports
the bid. So to know the offer price, I first need to add the
spread to the bid, 00.15 and then add the filter, 0.00225.
INITIAL STOPS
Hard Stops
By hard stops, I mean stop orders placed with your broker.
Key Principle: every open trade must have a hard stop.
Traders seldom wipe out accounts through ‘dripping losses’ –
they usually below their accounts because of one or two very
large losses. If you have a hard stop for every trade, your loss
is limited.
75
The hard stops for Phase 1 are simple: Place a stop order
beyond the boundary opposite to your entry. For example, if
you buy an upside breakout, place a sell stop below the lower
boundary.
My stop would include a filter, as discussed in the previous
section.
Soft Stops
By soft stops, I mean exit prices that won’t trigger until the
close of the bar. For example, if my Trigger Timeframe is the
daily, my stop will only trigger at day’s end. If my Trigger
Timeframe is the 240-minute, my stop will trigger at the close
of a 240-minute bar.
To understand the rationale behind Phase 1 & 2 Soft Stops, see
the section in The 4 Stages of the Steidlmayer Distribution.
Here’s the basic idea.
When we initiate a Phase 1 & 2 trade, we look for immediate
continuation of the breakout.
So the first Soft Soft is: exit should show a bullish or bearish
close back into congestion, beyond the Primary Zone.
For example, you buy a 3-bar daily, breakout, and prices close
below the Primary Buy Zone. Exit on a bearish close below
Primary Sell Zone
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That’s Soft Stop number 1. Easy, right?
Number 2 is a little more complicated.
The principle: given the Steidlmayer stage prices are in, we
should see immediate directional continuation. The question is:
if the trade does not continue the breakout in the next bar,
how long should we wait? (Steidlmayer Phases, see later in this
chapter).
Answer to question: it depends on factors:
1. The swing range magnitude of the Traders Timeframe
swing; and
2. The range of the trigger bar.
What follows is what I do, given my trader’s personality.
• If the Traders Timeframe swing is less than Mean +1 std,
I want to see immediate continuation.
• A swing magnitude of more than mean +1 but less than
mean +2 raises the probability of a move against the
entry. You need to decide if you will wait for the
retracement or take the trade. I tend to take the trade.
• A swing magnitude of more than Mean +2 suggests you
will see a counter-directional move and hence not a
continuation – there is a likelihood of a line change.
How do I apply these ideas to the soft stop?
Upon completion of an acceptance bar, I check the Traders
Timeframe swing magnitude. I want to see immediate
subsequent bar continuation, UNLESS the swing magnitude
suggests otherwise, I want to see immediate continuation.
77
I wait for one bar if the swing magnitude is more than mean
but less than mean +1.
The range of the acceptance bar also has an impact.
1. If the range is within mean +1, I want to see continuation
in the next bar.
2. If the range is between mean + 1 and mean +2, I wait for
one bar.
3. If the range is greater than mean +3, I allow up to three
sideways bars. Here the word sideways is critical. I will
immediately exit if there is a strong counter-directional
bar that forms within three bars.
Figure 35 Directional & Sideways
We are ready to proceed to the next section………Position Sizing
78
POSITION SIZING
We’ll take two different approaches and select the one that
provides the smaller size.
1. The Turtles Formula
2. The Stop Formula
Turtles:
$ Value of % of Capital to Risk/$ Value of 14-period ATR
The ATR uses the Trigger Timeframe. If your Traders
Timeframe is the 5-day swing (weekly trend), you use a 14DAY ATR (because your Trigger Timeframe is the daily).
For example: you want to risk 2% on a capital base of
$10,000; the ATR is 100 pips, and each pip is worth $1.
2% of $10000/100 x $1 = $200/$100 = 2
The formula says you can take 2 contracts.
Stop:
$ Value of % of Capital to Risk/$ Value of Stop
For example: you want to risk 2% on a capital base of
$10,000; the Stop risk is 100 pips, and each pip is worth $2.
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2% of $10000/100 x $1 = $200/$200 = 0
The formula says you can take 0 contracts.
Compare the contract sizes, you find the stop formula says you
cannot afford this trade!
Some of you may be asking how do I determine the percentage
of capital to risk. I show you my approach in the MIND video,
available from
https://members.tradingsuccesseducate.com/courses/
I can tell you that the oft mentioned percentages 1% and 2%
may be too small or too large – it all depends on your results.
With that comment, let me turn to Reward: Risk
REWARD: RISK
A short and sweet section: no need to cover this for Phase 1 &
2. Because of the way I have setup the rules, your R: R will
always be adequate.
We will cover the section in Phases 3 & 4.
Let’s turn to the final element in your trading rules…… Trade
Management.
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TRADE MANAGEMENT
We rely on the stats on the Traders Timeframe and First Higher
Timeframe to manage the trade.
Traders Timeframe
As long as the Traders Timeframe swing stats remain below
mean+1, bring and leave the stop at breakeven once you have
two directional days.
Once the stats move beyond mean +1, use the 3-bar extreme
rule.
Figure 36 Phase 1 Trade Management
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At this point, it would be best to review what we are seeking to
do in Phases 1 & 2….. return to the Phase 1 and 2 roadmap
chart. Be aware that we are seeking to capture the Traders
Timeframe markdown phase from breakdown to the point the
Barros 5-day Swing line turns up.
With that in mind……let’s consider the 3-bar extreme rule.
1. We enter at 1.25296 on 28-07 20:00
2. The initial hard stop is placed at 1.26031.
3. When the USDCAD moves to 1.24669, the swing has
shown three directional bars down. I move my stop to
breakeven.
4. When the pair moves to 1.25410, the swing exceeds Mean
+1 but below Mean +2
5. From the low at 1.245140
In the chart below, the first directional bar after mean +2
attains is the bar after 29/07 (labelled 1); the third bar is the
one labelled 3. I move my stop down to above its high.
Figure 37 Trade Management 3-bar Extreme
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In Figure 37, after Bar 1, the USDCAD moves counter-trend
until Bar 1. At that point, I bring my stop down to above Bar
3’s high.
.
Figure 38 Phase 1 Trade Management
At 1.24322, prices have moved to greater than mean +2. I
turn to the GFA for my trailing stop. In Figure 35, once we see
a close above the 4x1 (magenta coloured). This happens on
July 30 at 1.245040.
GFA (Gann Fan Angles)
The video below shows how I draw my GFAs.
https://tinyurl.com/GFATradeMgt
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We have completed Section 1 of Phase 1. Section 2 covers the
situation where the precondition takes the form of an
FTP(rather than a sideways structure) in the First, Second or
Trader’s Timeframe.
In each case, the trigger will the one appropriate to the
pattern:
• 2-bar and 3-bar, an acceptance bar.
• 1-Bar swing, stop entries.
In all other respects, the same rules apply in Section 2 as they
apply to Section 1.
PHASE 2
Phase 2 seeks to join the Phase 1 party. We participate at the
early stages of a trend – from breakout to the end of a swing
before a swing line retracement.
The precondition for Phase 2 is:
• The swing magnitude of the Trader’s Timeframe must not
have exceeded mean +2.
• The swing magnitude of the First Higher Timeframe must
not have exceeded mean +2.
• The swing magnitude of the Second Timeframe must not
have exceeded mean +2.
• In each case, there is a high probability of a line turn.
What about if the line has travelled beyond Mean +1 but
below Mean +2?
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This is your choice. In my case, I may look to continue taking
Phase 2 trades if I have reason to believe the impulse will
continue – for example, the instrument is in the 3rd of a 3rd
impulse structure (see Ray Wave Phase 3).
As far as the other rules are concerned, all Phase 1 apply to
Phase 2.
THE STEIDLMAYER STAGES
Understanding the stages provides a context to the Phases.
Peter believed that within a trend, the market moves in four
stages:
1. The Initial Price Movement: a directional move where the
Barros Swing Trader’s Timeframe line does not correct. It
tends to be a one-directional move. (Phase 1)
2. The Pause (a two to seven bar rest phase). The swing line
won’t turn, but the directional momentum takes a
breather. (Phase 2)
In both Phase 1 and 2, breakout should continue quickly
in the breakout direction. Reversal bars and pauses in the
directional moves are warnings that the breakout is false.
3. The Development Phase. The corrective swing occurs. The
retracement level, 55%, should hold the retracement. If
prices touch the 67%, the IPM is thrown into doubt:
• either a complex correction is forming, or
• the IPM is ending.
• in a downtrend, bearish profiles should form. In an
uptrend, bulliish ones form.
The Profile turns into a Bell Curve. Prices either start a
new trend, or continue the prior trend.
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Figure 39 Market Profile 4-stages
Figure 39 shows the 4-stages with a bear profile. Figure 40
with the bull.
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Figure 40 Market Profile 4 Stages
CONCLUSION
Phases 1 & 2 seek opportunities at the start of a trend upon
breakout or at the end of a correction.
Phase 1 initiates a trade at the beginning of the breakout;
Phase 2 initiates a trade with the Phase 1 IPM so long as a
corrective swing is unlikely in the Trader’s Timeframe or the
First or Second Higher Timeframe.
We look to close out positions at the price range where the
current impulse move in the Trader’s Timeframe is likely to
end. We reinstate the positions at the end of the Trader’s
Timeframe correction.
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If the Higher Timeframes swing lines turn, the Trader’s
Timeframe trend will also change. We then take positions in
line with the new trend – risk: reward and other Money
considerations permitting.
The link below will take you to the video sets. Each Method
video set contains an introduction and the theory videos of a
webinar where I dealt with the each Phase in detail. If you are
feeling overwhelmed, the video set will be a great help.
https://members.tradingsuccesseducate.com/courses/
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Chapter 3
The 4-Phase Framework
Trend: Phase 3
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INTRODUCTION
This chapter considers three different tools: two belong to
trend analysis; the final is a group of additional setups and
triggers for taking responsive trades. Recall that Phase 1 & 2
are breakout patterns – sell new lows, buy new highs. In
responsive trading, we sell (new) highs and buy (new) lows.
The tools:
1. The Ray Wave to define the likely end of a corrective
structure. I also use it to determine the completion of
impulsive moves in Phase 4.
2. Market Profile ideas to determine if our Trigger
Timeframe is likely to be rotational or 1-timeframe. The
concepts are essential because they allow us to finesse
our entries. For example, we have a Phase 1 acceptance
bar that tells us whether it’s better to fade a correction or
initiate a trade on the bar's close.
3. Setups and triggers aligned with responsive trades:
a. Contraction setups and triggers – including using the
Linear Regression Bands as a setup and entry tool.
b. Negative development setups and triggers.
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RAY WAVE
SOURCE OF IDEAS
I took my idea from three sources:
1. The Elliott Wave Principle by Robert Prechter: the
general framework for the Ray Wave.
2. The Symmetry Wave Method by Michael Gur: the idea
that waves need to relate to one another by 20% within
any structure.
3. Forecasting Financial Markets by Tony Plummer: the
idea that impulse structures can be 3-wave structures. In
the Elliot Wave universe, impulse waves MUST be 5-wave
and corrective ones, 3-wave.
ESSENTIAL RAY WAVE RULES
1. Impulse structures can be either 3-wave or 5-wave.
2. In 5-wave structures:
a. The wave structures are fractal. The patterns are
seen, and the same rules apply to all timeframes.
b. Wave 2 and Wave 4 must align by 20% of price.
c. Wave 2 and Wave 4 must alternate. If Wave 2 is
simple, Wave 4 must be complex and vice-versa.
d. Once a swing exceeds 20% of Wave 2, it does not
belong to the current structure.
e. Wave 2 cannot close below the starting point of
Wave 1. There will be structures where the extreme
of a candlestick exceeds the Wave 1 start but not the
close. I believe that the extreme penetration of Wave
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1 constitutes a Wave 2 low if all other rules are
satisfied, especially the 20%.
f. Wave 4 cannot overlap the high of Wave 1 even if
the overlap does not breach the 20% rule.
g. One of the waves MUST be the strongest.
h. Wave 3 cannot be the shortest.
RAY WAVE GUIDELINES
5-Wave Pattens
1. There are three patterns (in order of occurrence)
a. Wave 3 is the strongest
b. Wave 5 is the strongest
c. Wave 1 is the strongest
2. Waves relate to one another by a Fibonacci ratio.
3. A close below the 2-4 trend line in the same time or less
time it took to complete wave 5 indicates that the 5-wave
structure is complete.
3-Wave Pattens
• Wave 1 and Wave 3 will alternate in their volatility. The
difference is best seen using Gann Fann Angles.
• 3-wave structures remain in a Channel, joining the
extremes of Waves 1 and 2. A parallel line is drawn
through the extreme of Wave 1. We should see Wave 3
contained by the parallel line. If Wave 3 accepts beyond
the parallel line, you don’t have a 3-wave structure within
20% of Wave 2.
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THE 3 TYPES OF RAY WAVE IMPULSE STRUCTURES
Wave 3 STRONGEST
Figure 41 Ray Wave - Wave 3 strongest
Characteristics:
1. Wave 1 is less than the usual price impulse move.
2. Wave 2 is a deep correction.
a. The Wave 1 retracement is more than 67% but less
than 78.6%
b. If Wave 2 retraces to 78.6%, you will most likely see
a retracement to the zone bounded by the start to
the 87.5% (Primary Zone).
c. The Wave 2 Swing will be greater than the
mean/mode numbers in Trading Utilities.
3. Wave 3 will be the strongest.
4. Wave 3 will be at least 1.618 of Wave 1. Once Wave 3
attains this number, I assume we’ll see it as the strongest
Wave.
5. If Wave 3 is the strongest, it will probably not form any
relationship with Wave 1. The best way to determine its
likely termination is to use the first or second lower
timeframe count.
Why the second? In a very strong Wave 3, you may only
see the swings only in the second lower timeframe.
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6. Wave 4 will be within 20% +/- of Wave 2 (I say it will be
‘symmetrical’ with Wave 2).
7. Wave 4 will alternate with Wave 2: a complex Wave 2 will
see a simple wave 4. A deep Wave 2 correction of Wave 1
will see a shallow correction of Wave 3. By shallow, I
mean retracements:
a. 23.6% (rare),
b. 33% to 38.2% (most common) and
c. 50%
8. Use Gann Fann Angles to determine the most likely
relationship between Wave 5 and Wave 1.
a. If the GFA is about the same, Wave 5 = Wave 1
(88.6% to 127.2%)
b. If Wave 5’s GFA is more acute than Wave 1’s, Wave
5 = 1.618 wave 1, or occasionally 2.618 wave 1
(IMPORTANT Wave 5 can be equal to BUT cannot
exceed Wave 3. If it does, this is not a structure
where Wave 3 is the strongest).
c. If Wave 5’s GFA is less acute, then Wave 5 = 0.618
Wave 1.
9. Where Wave 3 is very strong (the Traders Timeframe
exceeds mean +2 or the First Higher Timeframe exceeds
mean +1), look for a Wave 5 failure, i.e. Wave 5 fails to
make a new high or low before a change in structure
occurs. In this case, the 2-4 trendline and 20% rule will
identify the end of the structure.
The 2-4 trendline breach on close and the 120% rule are the
tools to confirm that Wave 5 is complete.
An example of my approach to Ray Wave Labelling: the video
link below. Note I say at the beginning of the video that we’ll
be looking at an example of the 3rd Wave being the strongest
whereas it turns out to be an example where the 1st Wave is
the strongest.
In the example, I consider the S&P at time of writing (August
14, 2021). A seasonal high was due Friday and a low is due on
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August 25. It’s an example of the possible end of the current
minor structure.
http://tinyurl.com/RayWave-Labelling
Figure 42 S&P Ray Wave Example
For the 18-day trend to remain intact, the low at 4136 (the
first swing low above 4035) needs to hold.
Let’s see if we can work out a possible correction zone.
1. The correction will be at least 4235 (red price on the
chart). This price will go up about 60-pips a day until we
see 4373. If we the correction ends on August 25, the
redline turning price will be at least 4373.
2. The corrective stat zone range is 97 to 206 (see Figure 41
below).
• 4469-97 = 4372
• 4245-206 = 4263
3. There is 5-d support coming in 4393 to 4373 and 4277 to
4232
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Combining the data, I have two zones:
• Around 4373 and
• 4277 to 4232
As the correction develops, it will display its structure so we’ll
be better able to pinpoint the end of the corrective zone.
The 18-day corrective stats are:
Figure 43 S&P 18d stats
In Figure 44, the light red numbers are the corrective stats. In
my system, the probable termination range for the corrective
swing: the mean +1 to mean -1/2 range, 206 to 97.
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Wave Channeling, where Wave 3 is the strongest
Figure 44 Channeling where Wav3 stongest
Channelling is a supportive tool to identify the possible end of
Wave 5. Where a possible Wave 5 meets price resistance or a
projected price target AND we see a Channel line intersection,
the probability of a Wave 5 termination increases.
Where Wave 3 is the strongest, the process is:
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1. Draw a 2-4 trend line once we see a Wave 3 extreme
breached. In Figure 42, Wave 5 is in motion when price
exceeds the Wave 3 high.
2. Draw two parallel lines:
• One from the Wave 1 high and
• One from the Wave 3 high.
3. Wave 5 tends to end where price intersects one of the two
lines.
Wave 5 STRONGEST
Figure 45 Wave 5 Strongest
Characteristics:
1. Wave 1 is less than the usual price impulse move.
2. Wave 2 is a normal correction: Wave 2 retraces Wave 1
by 38.2% to 68% Wave 1.
3. Wave 3 will stronger than Wave 1, usually between Mean
to Mean +1.
4. Wave 4 will be within 20% +/- of Wave 2 (I say it will be
‘symmetrical’ with Wave 2).
5. Wave 4 will alternate with Wave 2: a complex Wave 2 will
see a simple wave 4. A deep Wave 2 correction of Wave 1
will see a shallow correction of Wave 3. By shallow, I
mean retracements:
a. 23.6% (rare),
b. 33% to 38.2% (most common) and
c. 50%
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6. Wave 5 will be the strongest. Usually Wave 5 will be at
least:
a. Wave 5 = Wave 1 + Wave 3
7. Gann Fann Angles are a usual tool to confirm when Wave
5 is the strongest. We should see an angle of ascent
greater than those in Waves 3 and 1.
8. As in a strong Wave 3, use the internal structure to
identify the end of Wave 5. The selling climax will tend to
be the blow-off variety, where the last Wave shows a
much stronger volume and range than previous impulse
waves.
The 2-4 trendline breach on close and the 120% rule are the
tools to confirm that Wave 5 is complete.
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Wave Channeling, where Wave 5 is the strongest
Figure 46 Wave 5 strongest
Where Wave 5 is the strongest, the process is:
1. Draw a trend line joining the extremes of Waves 1 and 3.
Project it once we see the Wave 3 extreme breached. In
Figure 47, Wave 5 is in motion when price exceeds the
Wave 3 high.
2. Wave 5 tends to end where price intersects the trend line.
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Wave 1 STRONGEST
Figure 47 Wave 1 Strongest
Characteristics:
1. Wave 1 is at least greater than mean +1.
2. Wave 2 is a normal correction of the last subwave. In
Figure Wave 2 from the low marked by the arrow. It
retraces the subwave by 38.2% to 68%.
3. Wave 3 will be around Mean to Mean -1/2.
4. Wave 4 will be within 20% +/- of Wave 2 (I say it will be
‘symmetrical’ with Wave 2).
5. Wave 4 will alternate with Wave 2: a complex Wave 2 will
see a simple wave 4. A normal Wave 2 correction of Wave
1 will see a shallow correction of Wave 3. By shallow, I
mean retracements:
a. 23.6% (rare),
b. 33% to 38.2% (most common) and
c. 50%
d. Wave 5 will be the weakest. Usually, Wave 5 will be
61.8% Wave 3.
6. Gann Fann Angles are a usual tool to confirm when Wave
1 is the strongest. We should see an angle of ascent
greater than those in Waves 3 and 5.
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7. As in a strong Wave 3, use the internal structure to
identify the end of Wave 1.
The 2-4 trendline breach on close and the 120% rule are the
tools to confirm that Wave 1 is complete.
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3-WAVE IMPULSE STRUCTURES
Figure 48 3-Wave Impulse Structures
Characteristics:
1. The Ray Wave does not use the Elliott Wave format of
letters to label corrective moves and numbers for impulse
moves. I use numbers and letters interchangeably.
2. In the Impulse structure, Wave 3 usually equals Wave 1.
The other ratios are:
• Wave 3 = 1.618 Wave 1.
• Wave 3 = 0.618 Wave 1.
3. Wave 2 will tend to retrace Wave 1 by 33% to less than
67%.
4. Waves 1 and 3 will tend to be mean.
5. Use GFAs to determine if Wave 5 will be equal to, less
than or greater than Wave 1.
• If Wave 5 is about the same, Wave 5 = Wave 1.
• If Wave 5 has a more acute angle, Wave 5 will be
greater than Wave 1.
• If Wave 5 has a less acute angle, Wave 5 will be less
than Wave 1.
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THE 4 TYPES OF RAY WAVE CORRECTIVE STRUCTURES
SIMPLE CORRECTIONS
1. The Straight Line
2. The Zigzag
COMPLEX CORRECTIONS
1. Sideways
2. Sideways with an upside or downside bias
3. Triangle and
4. Irregular
For complex corrections, go to Nature of Trends and Phase 4.
https://tinyurl.com/NatureofTrendsBk
The straight line is simply a line change in the Traders
Timeframe.
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Figure 49 Straight Line Correction
In Figure 51, Wave (3) – (4) is a straight line correction.
The Zig-Zag is a 3-wave or 5-wave counter-trend swing in the
First or Second Lower Timeframe.
Figure 50 ZigZag First Lower Timeframe
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In the period 23/03/2020 to 02/09/2020:
• The Traders Timeframe is the 18-day.
• The First Lower Timeframe is the 5-day.
• In the 5-day,
o We have a straight line to Wave 1,
o Followed by a straight line to Wave 3.
• The whole structure is a 3-wave zig-zag if the instrument
were in a downtrend and 3588.13 was in a resistance
zone.
How to decide if the correction is over? I use three tools:
1. The stats of the Traders Timeframe and that of the First
Higher Timeframe.
2. The 20% rule, assuming we have a Zig-zag, the current
Zig-zag correction is over if there is a resumption of the
main trend swing that exceeds the 120% limit of Wave 2.
Figure 51 Zig-Zag
i
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In Figure 51, Wave
starts a correction but is not a
resistance zone, I assume after the correction, there will be
more downside. But at 3/ 1 , price not only hits a resistance
zone, in the subsequent pullback, prices exceed Wave
120%.
ii
i
by
I have one more tool I need to discuss. It’s not as reliable as
the Stats tools and the 20%, but it is useful: Channeling.
Wave Channeling in a Zig-Zag
In a 3-Wave Zig-zag, the parallel trend channel will contain
prices. If prices move beyond the Channel, then you probably
have a 5-wave structure forming.
Figure 52 Zig-Zag Channel
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Figure 52 assumes the S&P is a downtrend and assumes that
support has not been reached. If the S&P accepts below the
trendline drawn at 1, we will likely see a 5-wave structure or
complex Zig-zag on the way to support.
One question you may be asking:
1. What do I mean by complex Zig-zag?
A. When we see smaller 3-wave patterns make up a larger
one.
Figure 53 Complex ZigZag
The wave structure i
is made up of a 5-wave formation.
Can you see it? Check your answer with Figure 54 below.
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Figure 54 Complex ZigZag
SUMMARY PHASE 3 USE OF RAY WAVE STRUCTURES
Phase 3 trades occur when we look to trade responsively (buy
lows, sell highs) at the end of a correction in the Traders
Timeframe. The corrective Ray Wave structures occur in the
timeframe one lower to the Traders Timeframe, e.g. if the
Traders Timeframe is the 5-day, the first lower timeframe
would be the 1-day swing (or its equivalent 5-day swing in the
240minute).
The Ray Structures provide targets for the end of the
correction. In effect, they zero in on the corrective stats. The
structures also tell us if we can expect momentum divergence
at the end of the correction – by using GFAs.
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Coupled with the stats, the structures provide a high
probability are where a correction is likely to end.
Let’s proceed to the Market Profile and see what Zones it gives
us.
MARKET PROFILE ZONES
In a trending market, the Profiles forms either a Bull or Bear
Profile.
Figure 55 Bull Profile
In a Bull Profile, the support zones are:
• The end of the Value Area, especially if there are gaps.
For example, in Figure 54, between 4373 and 4341,
trading thins out. I’d treat the 4341 to 4332 zone as a
support zone.
• The 45% to 55% retracement area.
• If we see a 67% retracement, a Bull Profile is probably not
forming – confirmed by a move to the 78.6%.
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The ideas are the same for the Bear.
I’d be looking for the Stats, Ray Wave termination and Market
Profile retracements to provide a Phase 3 support zone.
We have completed the Zone section of Phase 3 – where is a
correction likely to end.
Let’s proceed to another Market Profile concept – the one that
helps us determine if a timeframe is likely to be one-timeframe
or rotational.
MARKET PROFILE STRUCTURE
INTRODUCTION
To understand how we answer the question, one-timeframe or
rotation, we need to understand the concepts of:
1. Initial balance.
2. Price action within the Value Area.
3. Trade Facilitation
Initial Balance
For the 5-day swing trader, the initial balance tends to be the
first part of Monday. For most instruments, it’s Monday’s
range.
For day traders, the initial balance:
• FX: Monday’s Asian Timezone Range (EST 17:00 to 3:00
am)
• Futures Day session: First 60-minutes, excluding openings
not on a 30-min time. For example, the US bonds day
session open at 8:20 (EST). Their Initial Balance ends at
9:30.
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What about the futures that trade 24-hours? I prefer to treat
all trading before the day session as the initial balance.
Value Area
We covered this previously. It’s where 70% of the trading
takes place in the previous Market Profile.
Figure 56 Value Area
112
Figure 56 shows a Bull Profile and its Value Area. If prices are
trading:
1. Within the Value Area, I’d be expecting a rotational
market.
2. If the instrument trades between the Value Area and the
high or low, I’d have to consider various elements like
the type of open, how the instrument approached the
extreme….. (Phase 4 material)
3. If the instrument trades beyond the previous period’s
extreme, I’d see the price action as likely to be one-time
frame.
In Figure 56, we see a one-timeframe after the upside
breakout
Conclusion
By assessing whether the current timeframe is rotational or
one-timeframe, a trader can improve his entry location.
In Phase 3, the Ray Wave helps define the zone where a
correction ends, and Market Profile helps define the entry
conditions. Both form part of the discretionary armoury. Let’s
turn to the execution aspect of Phase 3.
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114
Chapter 4
The 4-Phase Framework
Execution Phase 3
115
INTRODUCTION
With stats, retracements zones and the Ray Wave roadmap of
the First Lower Timeframe, a trader assesses where a
correction is likely to end. He is ready to execute if the entry
conditions are met.
SETUPS & TRIGGERS
The Phase 1 setups – 2-bar & 3-bar congestions, 1-bar swings
(FTP) work here. We look for a breakout of the FTP zone.
Phase 3 has its setups, and a different principle applies to
Phase 1: whereas Phase 1 are ‘go with’ trades (sell new lows,
buy new highs), Phase 3 are responsive trades (buy new lows,
sell new highs). The stops for Phase 3 are generally smaller
than Phase 1.
Contraction Setups
All setups must appear within the calculated zone that probably
marks the end of a Traders Timeframe correction.
Linear Regression Bands
I described the setup in Phase 1. Here I add the other
elements…
Trigger:
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The buy triggers:
1. A contraction bar between the first standard deviation
lines. The optimal location is the midline. A contraction
bar is one with below normal range and volume. The
setup bar needs to demonstrate bearish characteristics for
a sell and bullish ones for a buy.
Figure 57 Contraction Setup
Figure 59 shows a contraction setup on July 13 and July 14
2020 that also qualifies as sell triggers.
Two bars back from July 14, the bar does have below normal
range and volume but shows the buyers are in control. July 13
is a sell contraction bar, as is July 14.
2. Contraction bars followed by an acceptance bar trigger (to
sell, a bearish acceptance bar). I covered ‘acceptance bars
in Phase 1).
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In Figure 60, the July 16 bar is a bearish acceptance bar.
INITIAL STOPS
SOFT: There are no soft stops for the LRB setup.
HARD: I place the hard stop beyond the setup bar extreme. I
also apply a filter. If there is a congestion pattern in the First
Lower Timeframe, the filter I use is the maximum congestion; I
use 10% of the setup bar if there is no congestion pattern.
In the example above, there is a congestion pattern from July
12 to July 14, 14. The maximum extension above 4393.50
comes in at 4401.20. I’d set my initial stop above that price
using the spread method discussed in Phase 1.
If I use a trigger bar, and the maximum extension stop results
in too much or risk, or this no maximum extension, the stop I
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use is: 10% of the trigger bar range. I also apply the spread
filter discussed in Phase 1.
REWARD: RISK
The initial stop in the LRB setup is so tight that it automatically
produces a healthy reward: risk ratio.
If you use the Rule of Three trade management method, the
reward used in the calculation is the core profit target.
POSITION SIZING
Use the Phase 1 Method.
TRADE MANAGEMENT: RULE OF 3
1. Exit 2 times the stop risk. For example, if the risk is 200
pips, your first exit is at 400. One of the questions I am
asked is: “What happens if the exit price is near support
or resistance?”
The first point to remember is that no matter what filter
you use, there will be times when your exit price is missed
by a pip or two. And, there is no way you can prevent that
from happening.
To mitigate the adverse effect: set a quantifiable filter
(e.g. I use 20% of the normal range to define ‘close’) and
test. You will find a filter that produces optimal results for
you. What you don’t want to do is to leave ‘close’ to your
discretion.
After the first exit, I do not move my original stop.
2. Exit at a core profit level.
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In a congestion market, my exit is usually at the Primary
Zone. In a trending market, I use the price level that
attains Mean +1.
After the second exit, I move my original stop on
the last third to breakeven.
3. The last third uses stats and the GFA trailing stop method.
a. The strategy now is to remain in the trend until the
First Higher Timeframe line turns.
b. Until the First Higher Timeframe line exceeds Mean
+2, the trailing stop is placed beyond 67% of the
Higher Timeframe IPM, the line change price, or the
initial stop – whichever incurs the least loss.
c. Once the Higher Timeframe line exceeds Mean +2, I
use the GFA trailing method.
It’s important to understand that once you have completed
Phase 3, you are looking to take advantage of a strong bull or
bear run.
• Let’s say you buy gold in a Phase 1 breakout at 1830 with
a hard stop at 1799.
• Your risk is $32.
• Your first is exit at 1894.
• Without moving your stop, your open position is no longer
at risk.
• You can now take a second set and apply the Rule of 3 to
it.
• At the mean +1 Higher Timeframe price, I exit all open
positions except for last thirds. These I manage as per the
rules above.
• By pyramiding safely, you look to increase your profits
while minimizing the loss potential.
BELOW NORMAL VOLUME AND RANGE AT THE ZONE
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Setup and Trigger
Similar to the LRB setup, except that you don’t have
momentum divergence at the time prices attain the zone.
The trigger is an acceptance bar.
Initial Risk to Trade Management
The same steps as with the LRB setup.
POSITION SIZING
Use the Phase 1 Method.
Negative Development Setups
I use three:
1. Above normal volume, below normal range.
2. Big Bar, no follow-through.
3. Re-penetration (RePo).
By ‘negative development’, I mean the market does the
opposite of what I expect.
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Above normal volume, below normal range
Setup and Trigger
Volume drives price (Wyckoff & Stedilmayer). If the market is
moving up and experiencing buying volume, BUT the price
range fails to follow, it says sellers are capping the advance at
a zone where buying is likely to fail.
The trigger is an acceptance bar in line with the Traders
Timeframe Trend.
Initial Stop
Soft: No soft stops
Hard: Add 10% to the Acceptance Bar’s range and add to
opposite entry extreme.
REWARD: RISK
If you use the Rule of Three trade management method, the
reward used in the calculation is the core profit target.
POSITION SIZING
Use the Phase 1 Method.
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TRADE MANAGEMENT: RULE OF 3
Same as LRB
Big Bar, no follow-through
Setup and Trigger
Volume drives price (Wyckoff & Stedilmayer). After an above
normal range and volume bar in the counter-trend direction,
we should not see prices move in the direction of the Traders
TimeFrame Range.
But, in this case, the direction is reversed. For example, a big
bar up is followed by a breah of the big bar’s low.
The setup and trigger is a breach of the big bar’s opposite
extreme by 10% of the big bar’s range.
Initial Stop
Soft: The entry is a stop entry. If the entry bar fails to become
an acceptance bar on close, exit the trade.
Hard: Add 10% to the Acceptance Bar’s range and add to
opposite entry extreme.
Initial Risk to Trade Management
The same steps as with the LRB setup.
POSITION SIZING
Use the Phase 1 Method.
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Repo
Setup and Trigger
Setup: Usually, we see an FTP or sideways pattern in the
Trigger Timeframe. Then, there is a breakout in the countertrend direction that is followed by a return to congestion.
Trigger: an acceptance bar that returns to congestion.
Initial Stop
Soft: Same as Phase 1
Hard: Same as Phase 1.
REWARD: RISK
If you use the Rule of Three trade management method, the
reward used in the calculation is the core profit target.
POSITION SIZING
Use the Phase 1 Method.
TRADE MANAGEMENT: RULE OF 3
Same as LRB
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CONCLUSION Phase 3
Discretionary: Phase 3 uses the Ray Wave to identify the price
zones that mark the possible end of a corrective move. It also
uses Market Profile to assess whether the Trigger Timeframe is
likely to be one-timeframe or rotational. This information
finesses trade location.
Execution: Phase 3 uses Phase setups and triggers. It also has
its own:
• Contraction
• Negative Development.
I also modify the Phase 1 trade management approach, using
what I call the Rule of 3.
The final section of this chapter focuses on Corrective Patterns.
I have left it till the end because identifying the types is not
essential to applying Phase 3. On the other, becoming familiar
with them will add to your skill to identify corrective end
terminations.
CORRECTION PATTERNS
There are two broad categories:
1. Simple
2. Complex
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SIMPLE
• Straightline: There are no swings in the First Lower
Timeframe.
Figure 59 Stright Line Correction
In Figure 59, the 5-day swing is in blue (Traders Timeframe),
and the 1-day swing is in grey (First Lower Timeframe).
Look at the swings in the red rectangle, you see no grey lines.
The corrective, ABC, are simple corrections.
• Zig-zag: The First Lower Timeframe or Second Lower
Timeframe forms a 3-wave or 5-wave corrective structure.
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Figure 60 Zig-Zag Correction
In Figure 60, the 18D-day swing is in red (Traders Timeframe),
the -day swing is in blue (First Lower Timeframe), .and the 1day swing is in grey (Second Lower Timeframe).
In the blue rectangle, the 5-day is correcting the 18-day
uptrend. There are no blue lines seen because the red line
covers them. We do see an XABC 3-wave structure down – a
zig-zag.
COMPLEX
• The Sideways Structure (most common), including the
upward/downward slopping variety
• Triangles, expanding and diagonal
• Irregular-Complex
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Sideways Structure
I’ve covered the Horizontal Pattern at the beginning of the
book:
a. Distribution Wyckoff Events/Zones pages 27-28
b. Trend Continuation or Change (Phase 1&2)/Zones (stats)
pages 35-40
c. Setup Phase 1/Precondition 1/How does a sideways
structure form? Pages 55-62.
The key concepts to remember are the zones and three types
of formation. I’ll also be addressing Sideways structures in
Phase 4.
One other idea I want to cover here is the Horizontal Slopping
patterns (also called Running Corrections, In Nature of Trends,
I call them R0 waves).
Recall that an impulse wave MUST remain beyond the Primary
Zones of the prior corrective wave. Should the price action
accept within the Primary Zone, the structure turns into a
corrective one.
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Figure 61 Horizontal Upsloping
In Figure 61:
• The GBPUSD is an 18-day Uptrend.
• XA is impulsive (in the direction of the 13w)
• BD, BC, CD, DF, EF, FG, GH are corrective waves because
they close below the prior Primary Sell Zone.
To identify the zones of this sideways pattern, we need to draw
Linear Regression Bands of 1,2 and 3 standard deviations.
Start at the climax and end at the final swing extreme.
In Figure 61, we start the LRB at A, and after D forms, we end
the LRB at D. As the congestion forms, we keep bringing the
end of the LRB to the most recent swing point until the low at
H – because, after H, we have an upside breakout.
The other two complex patterns happen less often. I have dealt
with them in Chapter 2 (Nature of Trends), Change in Trend
Patterns.
One key point relating to Triangles: Point E is usually a throw
over, i.e. it breaches the trendline but holds within the C
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extreme. After E, you need to see an explosive move,
otherwise you don’t have a triangle.
You can download the Nature of Trend here:
https://tinyurl.com/NatureofTrends
So far, we have been dealing with ‘with trend trades’. In the
next section, I’ll be considering Change in Trend patterns –
using Wyckoff Schematics, Barros Swing Change in Trend
Patterns and Market Profile ideas.
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CHAPTER 5
The 4-Phase Framework
Trend: Phase 4
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INTRODUCTION
In this chapter, we consider changes in trend. Since markets
are fractal, the ideas apply to all timeframes.
At the base of the patterns are two fundamental principles:
1. Pete Steidlmayer’s ‘Facilitation of Trade’
2. Richard Wyckoff’s Law of Effort and Result.
FACILITATION OF TRADE
A trend needs to be supported by range and volume. In an
uptrend:
• If range and volume are below normal, the market will
seek lower levels to bring in trades.
• If range is normal, but volume is below normal, sellers are
absent. The risk is the trend will reverse once sellers come
in their usual numbers.
• If volume is above normal but range is below, sellers
capped the market, and a trend change is likely.
Before QE, a lack of trade facilitation suggested an imminent
trend change. QE has caused a delayed market response for
the timeframes 13-week and above.
For example, after Trump won the 2016 elections, The FED
ramped up QE. The average S&P cash range dropped 41%
(volume 27%) from November 18 2016 to December 29 2017.
And yet, the S&P ground up with only three shallow 18-day day
corrections.
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At the time of writing (August 18 2021), the 13-week swing is
grossly overbought. From the March 20, 2020 low, the index
has risen 104% when the average rise has been 45%, with a
standard deviation of 20%. So far, I have not seen any
indication of 13-week weakness.
A 13-week correction will occur on confirmation of QE stopping
or easing OR an event that suggests that the FED will have to
raise rates, e.g. an unexpectedly sharp rise in the US inflation
indicators.
THE LAW OF EFFORT AND RESULT
Stock Charts describes the law in this way:
“Effort and Result. Volume provides Effort and the action of Price is the
result. It takes Effort, in the form of Volume, to drive Price upward.
As an illustration; the Stock Price climbs out of the Accumulation Phase
and begins Marking Up. The Price Spread then should be wide and
typically the close will be toward the high of the day (or week). Volume
expands from the prior days. A Wyckoffian would conclude the Result
(price advance) to be large on increasing Effort (higher Volume). This is
Bullish for the continued advance of prices.
Toward the end of a trend, the daily price spread begins to narrow in
comparison to prior Markup days. Meanwhile, the Effort of Volume is
very high and expanding. The analysis of this condition is that large Effort
(Volume) is Resulting in a marginal price advance. Large Effort with
minimal Result is a form of divergence or inharmonious action between
price and volume. This is an indication of a tiring uptrend and a
correction of prices is expected. The above example is only an illustration.”
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(https://stockcharts.com/articles/wyckoff/2015/12/the-laws-ofwyckoff.htm).
WYCKOFF SCHEMATICS
I’ll describe the Accumulation Phase, the mirror image applies
to the Distribution.
Recall I said that four warnings signal changes in trend:
1. The structure of the market – the subject of this chapter.
2. Momentum: I use Linear Regression Bands to identify
when new extremes lack increased momentum.
3. Price: the use of stats to indicate overbought and
oversold. Especially useful when combined with the Ray
Wave.
4. Time: I use Signal Trading Group’s subscription service.
We’ll be examining in detail the structural clues and patterns
that define the likelihood of a change in trend.
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Figure 62 Wyckoff Schematic Accumulation
Phase A stops the current trend.
Usually, the Preliminary Point of Support (PPS) shows a greater
retracement (range and volume) than in any previous rally.
The selling climax takes two forms:
• A point displayed by a sharp rise in volume and price – at
levels not previously seen. There is no momentum
divergence. The Ray Wave should display a structure that
ends a move where Wav 3 or Wave 5 is the strongest
wave. The bar marking the end may take the form of a
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pin bar (see https://tinyurl.com/PinbarURL) or an
engulfing bull bar (see https://tinyurl.com/EngulfingURL).
• The other is where the Selling Climax displays lower
volume and range the PPS. Also, you have momentum
divergence. Within the Ray Wave structure, Wave 3 is
weaker than Wave 1; and in a 5-wave, wave-5 is NOT the
strongest wave.
I use the Selling Climax as the point to exit open positions
short.
The Automatic Reaction is marked by volume and range
greater than in any other contra-trend rally. I will look to
institute new short positions (normally with reduced size).
The Secondary Test is the key point of Phase A.
1. It usually retraces at least 78.6% of the move from the
Climax to the peak of the Automatic Reaction. If the
Selling Climax is valid, the volume and range of the Test
will be less than the move up and can be less than any
downward impulse in the whole structure.
If the scenario proves true, I look to exit open shorts.
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Figure 63 Wyckoff Schemaric Accumulation
Phase B starts the congestion structure.
In Phase B, the declining volume and range at the Primary
Zones is one essential characteristic. The second is the “chop”
that usually takes place within the Value Area, especially the
45% to 55% retracement zones. The third essential
characteristic is the possibility of a “Death Zone” trade.
I usually will only take trades in the Primary Zone (both long
and short). If the Development Formula is complete (unlikely),
I’ll also this setup.
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DEVELOPMENT FORMULA.
The first requirement is confirmation that the market is in a
sideways structure. Normally this means you need a XABC
pattern.
Once you have that, you can apply the formula. Here’s a video
showing the application.
So you can create your spreadsheet:
1. Col E, F and G are ideal values, do not change, 0.80.
0.50, 0.40 respectively.
2. Col H & I are inputed values – see video.
3. Col J: I/H
4. Col K: inputed value – see video
5. Col L: J*K
6. Col M: L-G
7. Col N: L/G
Once Col N exceeds 100%, the development formula says a
breakout is likely to be valid.
It’s unlikely that the formula will say development is complete,
so the Death Zone setup will not apply.
Phase B continues until the clues mount up that Phase C has
taken over.
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Phase C starts the Breakout Phase structure.
Figure 64 Wyckoff Schematic Accumulation
In Phase C, you are most likely to have:
• The Development Formula signal that congestion is
complete.
• The formation of a Spring Change in Trend Pattern.
• The Primary Sell Zone start to erode. The rejection area
of the Zone becomes smaller.
• Volume and Range to the upside pick up and reduce as
the prices near the Primary Buy Zone.
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Phase D completes the breakout transition.
Figure 65 Wyckoff Schematic Accumulation
In this phase, you will see from the price action the probable
breakout direction. Volume and range will tend to expand in
the direction of the breakout and decrease on its corrections.
This is the best place to take a Death Zone trade:
1. The instrument moves to the Value Area High.
2. It then retraces below the low of the 45% to 55% range.
3. It does not close below the Value Area Low.
4. Finally, it closes above the Value Area High.
I give full details in the Execution section of this chapter.
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CHANGE IN TREND PATTERNS
The second question in the Trend section is: Is the trend likely
to continue or change. My book, The Nature of Trends, covers
the subject in depth.
One addendum to Nature: when I wrote Nature of Trends, I
used the time, momentum and price filters as preconditions to
a trade. In other words, I won’t go against the trend unless
these filters first appeared.
Nowadays, I use them as exit filters. For example, the 18-day
swing fulfils the conditions for change in trend:
1. It’s gone mean +3.
2. It’s hit price targets.
3. It’s showing LRB momentum divergence.
4. Time is showing that a change is ripe.
I’ll take a Phase 1 trade, BUT if within half the value of the
Traders Timeframe Swing I don’t see the three filters, I exit the
trade.
An example of what I mean by half the swing value: I am
trading the 5-day swing. Half the value is three (3) days.
Watch out for the filters in the Nature of Trends:
• Time: Whole Point Count (WPC)
• Price: Maximum Extension (ME)
• Momentum: Line Change Count (LCC)
The link to download:
https://tinyurl.com/NatureofTrendsBk
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We are now ready to proceed to the Execution rule of Phase 4.
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CHAPTER 6
The 4-Phase Framework
EXECUTION: Phase 4
143
Introduction
This set is the most personal of all the Phases. Except for the
Death Zone, there are not new setups and triggers. You have
an understanding of the Phase. Create your rules to take
advantage of the structure best.
Death Zone Setup & Trigger
Buy Setup:
1. The instrument moves to the Value Area High.
2. It then retraces below the low of the 45% to 55% range.
3. It does not close below the Value Area Low.
Trigger: Finally, it closes above the Value Area High.
Initial Risk
Soft Stop: No soft stop. Price action within congestion tends to
be choppy.
Hard Stop: Below Value Area Low.
Trade Management: Rule of 3
1. You need to be prepared to risk the breakout because you
are unlikely to have 2 x initial stop even if the trade
moves to the Primary Sell Zone.
2. If you do get a breakout and a Phase 1 trade, then the
Death Zone trade management is the same as Phase 1.
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POSITION SIZING
Use the Phase 1 Method.
145
146
CHAPTER 7
RESOURCE PAGE
AND
CONCLUSION 4-PHASE FRAMEWORK
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Final Words
It’s been a journey. Over fifty years trading experience
condensed into 140 pages.
Undoubtedly some of you will be feeling overwhelmed.
Read over the material, there’s a lot of info. Some of you will
be able to use the content immediately to create your trading
and rules. Others may need additional assistance.
The link below will take you to the member's page, where you
can upload videos for Method, Mind and Money. The latter are
a bonus package for any Method download.
The link:
https://members.tradingsuccesseducate.com/courses/
All the best
R a y Ba rros
The pages that follow are the resource pages for
products I use in my trading.
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EDGEWONK
A professional trading journal is the backbone of any longlasting trading career. Without an efficient feedback loop, it is
impossible for a trader to improve and make the move from
losing to winning trader.
Every business knows its numbers. Every business knows its
strongest and weakest products, where it is bleeding money
and where it is raking in the coins.
As a trader, your trades are your product. You have to know
which ones perform well and which ones do not. The next step
is to figure out why something is working in your favor or not.
And then you have to either fix it or get rid of it and keep doing
more of what works.
All of that is, again, impossible without the use of a trading
journal. Every high-performance athlete has a coach. Trading is
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With that in mind, Edgewonk, the professional trading journal,
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how to fix it. And it is highly customizable so you can adapt it
to your personal trading style.
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A few highlight features are…
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And those are just a few examples of what Edgewonk can do
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Besides these, you can also quantify qualitative metrics, for
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We made sure to design it in a way that actually makes
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150
If you truly want to become a professional trader, a trading
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You can take a look at what we have to offer at
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Co-Founder & Managing Director
Quantum Trade Solutions GmbH
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Germany
Email: moritz@edgewonk.com
Internet: www.edgewonk.com
District court Offenbach am Main HRB 48296
VAT Identification Number: DE299024904
Management Board: Moritz Czubatinski, Rolf Schlotmann
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TRADING UTLITIES
jody wright <jodyswright@googlemail.com>
Trade Utilities, the companion app to the Barros Four Phase
Framework.
As the primary tool for answering the second part of "what is
the trend of the timeframe I'm trading and is it likely to
continue or change?", keeping track of the stats is key to the
whole system. It is, however, labour intensive and prone to
human error. Trade Utilities does away with all that by
algorithmically collecting, categorizing and summarizing the
swings/bar ranges for any given instrument & timeframe.
What does it do?
Swing stats gives the mean, standard deviation, Poisson
value, upper/lower value areas and frequency distribution, for
Barros swings. Armed with this information, you are better able
to forecast whether a particular move is overbought/sold.
Bar stats gives the same aggregate functions as above but
using bar ranges. These can be filtered to a particular
day/interval, to give an indication as to whether a particular
bar is within 'normal' limits.
position size calculator.
Knowing what is normal for a particular move or range at
specific times usually means the difference
between……………….
………………………….. a profitable trade and one that loses
money.
If, like a lot of us, you prefer to shortcut repetitive and
laborious work, then this is for you. Having seen in classes,
different people arriving at different results using the same
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rules, it's clear that human error, and or elements of
subjectivity creep in when collecting the data. TU gives
repeatable values in an instant, giving you a key component of
the Four Phase Framework in a fraction of the time, leaving you
to focus on your analysis and trading.
The only question you have to ask yourself is: "what's my time
worth?" Depending on how many instruments you follow, the
time spent collecting and managing the stats manually could be
many hours per week. For just one payment of USD248 you
can save yourself all this time. Even if you only spent 1 hour
per week doing this manually, then USD248 would be the
equivalent of only USD 4.77 per hour over 1 year. So really,
what is your time worth?
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Testimonials
Martin - Malaysia 2020
I have used Jody’s stats spreadsheets for few weeks I found that it is really helpful for me get to
know the current stats of wave from your spreadsheet to let me have a better idea to read the
market condition and do the trading decision with other trading tools. With the stats data I have
more confidence in reading the market as well.
Besides this I can finally apply completely Ray materials in trading with the stats idea the benefits of
spreadsheet is a lot for me:
•
save the time of drawing probability box to extract data for stats.
•
reduce human error in drawing probability box in impulsive or corrective wave.
All is done within seconds with just 2 clicks very simple, efficient and systematic. Great job overall is
a great spreadsheet work together with the Ray materials.
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Peter – Singapore 2020
I trade using Ray Barros methodology, which uses stats to put probabilities of winning in
our favor.
Stats provide two important pieces of information; is the current price move direction
(aka swing) going to continue and what is the "normal" price range for the day.
However, the steps required to get those stats are rather manual and hence often
skipped....
until Jody's spreadsheet. That helped me regain my trading edge. I highly recommend
it.
Joe - Australia 2020
Collecting stats on the various timeframes is essential to the trading system I use.
However, it has always been a boring and time-consuming activity for me. This was
actually one of the main roadblocks to my trading success...until I get to know the Stats
spreadsheet Jody developed. I've been using it for several months now. It is so easy and
user-friendly, the stats are simply one-click away. Compared to the previous
manual process, this software literally saves me hundreds of hours! I would highly
recommend Jody's software!
155
Disclaimer
This app is for information purpose only. The app is an analytical tool - it processes
the raw data input by its user and therefore, its output is a direct result of the
user input and accordingly, the use of this app does not constitute investment
advice. The use of this app is solely at the user’s own risk.
The app is provided on an “as is” basis, without any representations or warranties
of any kind. The provider takes no responsibility for the accuracy of this
information, nor any decisions, actions and/or inactions based on or resulted from
the use of this app. The users should be aware of the risks involved in investing
and the provider does not guarantee the accuracy, validity, suitability of any
output produced by the app, nor take responsibilities for any errors or omissions
which this may contain. As the app processes user inputs, its statistical
representation and/or analysis or that of any of its partners do not provide, imply,
or otherwise constitute a guarantee of performance. The users should not assume
that future results will be profitable nor will it equal past performance, real,
indicated or implied.
The users should conduct their own independent research into individual securities
or seek the advice of a properly licensed advisor, before making any decision to
purchase financial products. In addition, the users are reminded that past stock
or signal performance is not indicative of future price action. The users are also
reminded that trades, especially leveraged investments such as foreign exchange
trading and investment in derivatives can be very speculative and may result in
losses that exceed profits.
jody wright <jodyswright@googlemail.com>
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OPTUMA
For over twenty years it has been a privilege to provide our
advanced charting platform “Optuma” to Ray Barros and his
students. Optuma is the perfect fit for the type of advanced
technical analysis Ray and his students apply across multiple
markets.
From the ability to setup several real-time sources for Foreign
Exchange data, Ray’s own Barros Swing Overlays indicator, and
the inbuilt journaling system, allowing you to maintain the type
of detailed journal Ray attributes as one of the key items to
trading success, Optuma provides a depth of functions and
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If you would like to try a free 30 day demo of Optuma, and see
for yourself why Ray and his students choose Optuma as their
analysis platform of choice go to https://optuma.com/BRSBK
MATTHEW HUMPHREYS
Client Services & Product Director
AUS: +61 7 3102 3306
s: matthewhumphreys79
e: matthewh@optuma.com
Brisbane, Australia | Charlotte, US | London, UK
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