17 Apr 2013

The Three Trade Types of Elite Range Bar Trading


Today I wanted to give everyone a better look at how we trade here at Samurai Forex Trading.  If you've watched a lot of my market recap videos you probably already have a pretty good idea what I'm going to show you, but for those of you new to The Elite Range Bar System I wanted to give some additional detail on the types of setups we look for.

In my trading I have three basic Trade Types that I have defined that repeat over and over again.  The exact setup differs slightly each time, of course, but each of these Types has certain common characteristics that we can identify to find high quality trading opportunities.  There are also some variations of these that I sometimes mention in the videos but to keep things simple for the purpose of the video I will just focus on the basics.



Type 1 Trades - Beginner Setup


These trades have already been covered a bit on the blog before in The Importance of Trend Trading.  As the name of that blog post suggests, these are trades taken in line with the moving average shown on the chart in purple.  Sometimes they are also taken when the line is turning over for a trend change, but those are slightly more advanced.  Trading with the trend while following the rules leads to excellent win ratios and a very good risk to reward.  That's why I like beginners to stick to Type 1s, since the edge and expectancy are often greatly in your favor. 

With Type 1 Trades the rules are quite simple.  I look to trade when price pulls back and then resumes in the direction the purple moving average is sloping.  Of course, we can't just trade every bearish bar on every pullback and expect to do well.  We need other criteria as well to put the trading edge in our favor.  So while I consider the purple moving average to show me the medium-term momentum, I also have defined rules for when the short-term momentum has shifted.  That's truly the key - when both short and medium term momentum are in alignment then the possibility for a high quality trades exists.

The final criteria is that we look for specific price action patterns in order to trigger our trade.  We need to know that the battle between bulls and bears has shifted in our favor and we can do this by looking for repeatable price patterns in line with the momentum I previously mentioned.

For those wondering how we manage to get such precise entries in the videos with such small stops, the explanation above should give you a better idea.  It's all about everything lining up before hitting the button to pull the trigger on a trade.  If you're too early or too late it's going to hurt your overall performance and as an intraday trader you really want to keep that win rate high.  So we just wait until the timing is right according to our rules and then jump in for the ride just as momentum is turning.



Type 2 Trades - Intermediate Setup


These trades are probably easiest to define as range trades but with the occasional larger reversal.  With Type 2s, we want to see price reach an extreme and in most cases for the market to be fairly flat or at least in a weaker trend.  We are also looking for something called a Traders' Trap.

What that means is that we look for false breaks of prior highs and lows and for traders to be trapped in positions with the market getting ready to move against them.  For example, if price has just made a false break of an earlier low and risen above it then the traders who are short on the breakout are now trapped in a losing trade.  They won't want to hold their losing positions for very long so if price goes against them they will often exit quickly (which means they now have to buy to clear their previous sell) and this will accelerate the move up as more and more traders exit their failed false breakout trade.

We look to take advantage of these scenarios by looking for these traps and then entering just at the point that short-term momentum shifts as defined by the tools we use.  Again, timing is crucial here.  We want to get in before the trade accelerates as trapped traders exit, but not so early that we might be caught in a false reversal as well.  Luckily by following our rules and also looking for specific price patterns we can usually time these trades extremely well maintaining both a high hit rate and excellent risk/reward.



Type 3 Trades - Advanced Setup


I won't go in to a lot of detail on these because quite simply there would be too much to cover here.  It's not that these setups are insanely complex by any means (in fact the rules are still quite simple), it's just that they require the introduction of some other concepts that are beyond the scope of this post.

Basically Type 3 Trades are full on counter-trend and reversal setups.  Because entering a Type 3 means fighting the medium term flow of the market these are the riskiest trades we take and are for advanced Elite Range Bar traders only.  It doesn't take long to get to the level where you can trade these, but you do need some screen time to feel comfortable and confident in your timing.

A Type 3 is actually pretty simple in reality.  We look for these setups when price is on an extreme and very extended.  In these cases we then trade the shift in short-term momentum as we look for price to "snap back" quickly and head the other way.  Again, you can't just trade every time price goes to an extreme.  This is exactly the sort of trap many traders fall in where they take counter-trend losses over and over in strong trends.  So to do it right we need other factors as well and this means introducing things like M5 and volume analysis to provide the extra evidence that will make us confident in our timing.  It can be done without these elements, but when it comes to counter-trend trading I want all the evidence I can get so I do like to add  a few things in that I find highly useful.

Keep in mind that many traders (including myself at times) don't even bother with Type 3s and instead just focus on Type 1 and 2 trades.  When trading with 3 and 4 pip range bars and multiple pairs, there are more than enough opportunities to make good pips without having to counter-trend trade.  So if you are more of a conservative trader or simply developing your skills you can definitely take a market approach that doesn't include these more advanced setups and still do very well.


Conclusion


 I hope you enjoyed a bit of an inside look at our Elite Range Bar System methods and gained a better idea of the sort of setups we look for in the forex market every day.  This is a very basic overview and doesn't go over a lot of the bonus setups we look for but it still covers the basics.  If you are following along with our YouTube market recaps that have been posted on the blog it should give you a better understanding of how and why the actual trades are taken as well.

If you want to know more about The Elite Range Bar System and why it was developed you can CLICK HERE.  Also, if you want to subscribe to blog updates be sure to sign up in the box on the right at the top of this post and also receive your free Samurai Trading Report: Lessons for The Warrior Trader.

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