Inside Trend System - a boring trading strategy for those who are tired of merging
Hello, comrades forex traders.
Today we will analyze the complex trading system Inside Trend System, which is not a grail, does not bring 100500% per day, often catches stops (which are compensated by larger profits) and which, if you have been trading for less than 2-3 years, you are unlikely to understand.
But she works. This is an old-school strategy based on the ideas of Larry Williams, Ralph Elliott and Alexander Elder. We will penetrate into the very essence of the trend and its corrections, we will find out WHAT actually are the highs and lows of the movement and ... maybe you will start to see the market differently. Ready?
Currency pairs: any
Timeframe: D1 + H4
Trading time: around the clock
Recommended brokers: Alpari, RoboForex, Exness
The idea behind the strategy
In the first lines, I would like to thank Anton Zimin (nickname on the forum Anton Zimin), who proposed an algorithm and described the basic rules of the considered vehicle. The branch is actively visited and commented, in the discussion section of the trading system, traders can gather useful information on practice and some features of theoretical interpretations.
The strategy is based on the basic concept of a trend, first described as a rule of trading by Charles Dow, who designated the directional movement of quotes as a series:
- Rising highs and lows - with an asset rising in time;
- Lowering lows and highs - with a downward movement of the price.
Charles Dow, like many of his contemporaries-traders, considered trading on day timeframes, dividing them into smaller time intervals led to another postulate:
- The higher the timeframe, the lower the probability of a trend determination error.
Therefore, in the strategy, directional movement will be determined by us on daylight candles.
The rules for determining the maximum and minimum are taken from the theory of the analysis of price movements by Larry Williams, which are set out in the book "Long-term secrets of short-term trading." We recommend that all traders familiarize themselves with this work by choosing the second edition, which was significantly supplemented and revised by the author.
On the daily chart, the highs and lows will be determined by us, as extrema in the formations of three candles, and market reversals - as the moments when the price fixes:
- Below the latest low of the uptrend:
- Above the downtrend high:
The moment of a turn and the emergence of a new directional movement is an ideal moment to enter a position. To clarify the entry point, we use the tactics of Elder, who developed the “Three Screens” strategy, from which we take the principle of its search on the lower timeframe, when a signal occurs in the older time period.
As soon as a trend on D1 is determined, the chart switches to the H4 candle format, on which the trader “waits” for the correction of the higher time frame in the form of an uptrend in the lower time period.
Entrance to the market is made at the pivot point of the uptrend of the lower timeframe - for the example above, this will be a breakdown of the nearest minimum H4. This tactic allows the trader to get advantages:
- From the coincidence of the trends of the older and younger periods;
- Entrance to the third wave.
The latter circumstance strengthens the chances of making a profit due to the principle discovered by Elliott, who described the wave theory of price movement. According to his postulates - the market is fractal, any gap can be described using the same formations. Trend development occurs on five waves, the third of which is the longest. We will try to enter into it.
How to determine highs and lows
Highs and lows of the trend are determined by the average candle or bar, provided:
- for maximum market:
- A high is a candle or bar on either side of which is a candle with lower highs. Also, a necessary condition is to update the minimum (breakdown of the Low point of the candle, which we consider the maximum) with subsequent candles or bars.
Examples of highs - candle number 2 on all 4 pictures:
- for a minimum of the market:
- Minimum is a candle or bar on both sides of which there are higher lows, and the subsequent subsequent candles or bars will necessarily update the maximum (breakdown of the High point of the candle, which we consider to be the minimum).
Examples of lows - candle number 2 in the picture is a minimum:
If the current candle (3) could not exceed High (in the case of the low) or Low (in the case of the high) of the previous (2) - exit the “shadow” of its price range, we denote it as “internal” and ignore it.
At the same time, it is not necessarily “internal” that there can be only one candle - the idea laid down by Larry Williams is to update the extremum so that the candle “counts”. The picture below shows the situation when the “inner candles” preceded the minimum and did not allow to determine the maximum in the flat area:
Despite the fact that the pattern contains three candles, the maximum and minimum can be changed literally with the next candle, as shown in the figure below. The first three price ranges 1, 2 and 3 form a classic minimum, but candles 4, 5 and 6 form a maximum. It turns out that the candle under the double designation 2 and 4 is replaced by 5, which is already considered a local maximum for this trend.
To avoid confusion in determining extremes, use the text label function in MT4.
How to determine a trend change on D1
A trend reversal is defined as a breakdown:
- The nearest minimum to change the upward trend to a downtrend;
- The nearest maximum when determining a reversal in the direction of growth, on a downtrend.
A breakdown is such if the closing prices of two candles in a row are:
- Above / below the level held at the closing price of the “average” candlestick of the last high / low determined by the rule of Larry Williams.
- On the senior timeframe D1, we determine the direction of the trend by the location of the highs and lows. The reversal of the current trend is identified using the rule of closing two candles behind the level of the local maximum / minimum (see above):
- The work on determining the entry point takes place on the H4 chart, where three waves should form (in the opposite direction relative to the daily trend).
On the lower timeframe, the wave maxima and minima are determined according to the Larry Williams rule, but to break the extremum, it is enough to exceed the maximum or minimum values by the tail or the candle body itself. It is not necessary to wait until the two candles close.
- The formation of three waves serves as a signal about the need to track a new minimum (to enter sales, if D1 is a bearish trend), or a maximum (to enter purchases if D1 is a bullish trend) on the chart in anticipation of the formation of a 1-2-3 pattern.
Entry into sales is carried out after the formation of a NEW minimum AFTER a pattern of three waves, for purchases a similar condition, we are waiting for a NEW maximum, AFTER three waves against a trend with D1.
In the figure below, the green line indicates pending sell stop orders paired with stop loss (red lines). Orders are placed every time a new low is formed (the second point of the 1-2-3 pattern), at the moment when the previous high is “overwritten”.
Strategy management, stop loss and order tracking
The triggered position is accompanied by a trailing stop at local minimums and maximums of the trend.
- On the daily chart at the entrance to the formation of a new trend on D1:
- In case of entering a trend already developed on D1, on a four-hour chart.
The trader is not recommended to allow the size of losses on one transaction exceeding 0.5-1% of the deposit allocated for the strategy. The lot size can be calculated independently, since the size of the estimated loss is known before entering the transaction, or calculated using the lot calculator on our website in the Tools section.
We set Stop Loss for the maximum bar of the updated high low in the case of sales, or for the minimum of the bar that updated the low high in the case of purchases. As a buffer we use 5-10 points from min / max.
1) Consider a deal in the direction of the current trend.
I remind you, in the case of entering an already established trend, we will accompany the transaction (move SL) to H4.
On the daily chart, we determine the direction by designating the minimums and maximums according to the rule of Larry Williams. In this case, it is obvious that the EURUSD rate is growing.
Switching to the H4 timeframe, we are waiting for the formation of three waves against the trend with D1, determining their minimums and maximums according to the Larry Williams rule, and the breakdown of the trend, as the usual excess of the maximum, without fixing two candles. That is, we are waiting for a change in the trend to bearish on H4. And only after the breakdown of the local minimum, we begin to count the waves at H4.
After 3 waves of a bearish trend on Н4, we are waiting for the formation of a NEW maximum, the maximum of the second wave is ignored.
The order was knocked out in the foot. What to do in such cases, provided that the trend for D1 has not changed? Wait for a new breakdown of the local maximum at H4.
A little later, we entered the market and the price moved in our direction.
What are we doing now? Move Stop Loss to the positive zone, for each new minimum at H4.
As a result, the deal brought + 144 points.
2) The example of the transaction below, after a trend reversal, has the feature of tracking stop on the daily chart. In this case, switching to TF H4 occurs after the detection of a trend change to D1.
So, two bearish candles closed below the closing line of the last low.
Since there was a breakdown of the uptrend, we are looking at the entry point for the short on H4 - that is, we are waiting for the breakdown of the local maximum, and then three waves of the bullish trend. After their formation, we place a pending Sell Stop order below a new low. Stop Loss - for the candle that broke the high of the low.
Our order is activated and will soon be knocked out in the stop, lost 37 points.
We are waiting for a new minimum to enter again, it soon succeeds.
Further, since we had a trend change, we will move the stop loss for each new maximum at D1.
As a result, the deal closed with a profit of 205 points.
The strategy is unique in its simplicity and clarity of approach to transactions. The rules unambiguously interpret trend determination and entry algorithms, the trading system is deprived of the need to use indicators, and the use of the H4 timeframe gives minimal losses for a vehicle based on daily candles.
However, the above examples show that even observing the canons of trading (the third wave, trend trading, and so on) does not protect the trader from losses in the flat, accidentally knocking out a stop on the news and other standard Forex traps.
Even if you don’t like the Inside Trend System strategy, I advise you to adopt the rules for determining highs and lows - it will come in handy, believe me.