Using our Mapping Method to Determine the Trend
We use our mapping method in three key ways:
As a trend identification tool (and a measure of the strength of the trend)
To trade off important levels
To set the risk reward ratio (RR*) of any given trade
*RR ratio is the proportion of what we expect to win on any given trade relative to what we are risking. For instance, if we are expecting to make 60 pips and we are risking 20 on a given trade, the RR ratio is 3:1 (60/20=3).
The trend identification is the most important usage of our mapping method. This is a very simple yet very effective way to measure the trend and its strength at any given situation; it tells us which way to trade.
Use the following guidelines to measure the trend:
When the market is trading above the pivot point the market is considered to be in a possible uptrend.
When the market is trading above HOPS1 the market is considered to be in a strong uptrend.
When the market is trading above both HOPS´s the market is in a very strong uptrend.
When the market is trading below the pivot point, the market is considered to be trading in a possible downtrend.
When the market is trading below LOPS1, the market is considered to be in a strong downtrend.
When the market is trading below both LOPS´s the market is in a very strong downtrend.
When the market breaks up and down repeatedly the pivot point, and bounces off HOPS´s/LOPS´s the market is considered to be in a sideways condition.
The chart above shows a very strong uptrend. On October 25 the market starts trading above the pivot point and HOPS1, and then it breaks HOPS2 marking a very strong uptrend. At this point only long positions are in play.
Under sideways market conditions, the market breaks back and forth past the pivot point. As long as the market trades below HOPS1 and above LOPS1 both long and short trades are in play at extreme levels.
Note it is very easy to get caught by whipsaws in a sideways market so trades should only be taken at the extremes of the range to make a worthwhile pip gain and to reduce the risk of the market reversing back to lower part of range and possibly hitting stop loss.
So now you will be starting to piece together an idea of the trading systems you could put together using this information.
It is a good start but a lot more pieces to be added to the puzzle before we are ready to trade it.