Day Trading Forex with S&R ZonesBy Laurentiu Damir

Copyright © 2012 Laurentiu Damir All rights reserved. No part of this book may be reproduced or transmitted inany form or by any means, electronic or mechanical, including photocopying,recording, or any information storage and retrieval system, without prior writtenpermission of the Author. Your support of author’s rights is appreciated.

Table of Contents IntroductionMoving averageTimeframesSupport and ResistanceEntryExitTake profit level determination

IntroductionDay trading the foreign exchange market can be very profitable if you knowwhat you are doing, if you have a set of rules to follow and if you have thediscipline and patience to respect them. Let me show you what this day tradingsystem can do if applied to the forex market:

You can see in the diagram above two trades taken using this system. All thetrades with this forex strategy look exactly the same. They have small stop losslevels and a high reward. The first sell order in the example above won 210pips, the second sell order made 250 pips.

Here is another trade example with this strategy. Very small stop loss, 215 pipsprofit. I will now go through every component of this trading strategy, explainthem in detail and at the end, put them together to give you the complete forextrading system.

Moving average This system uses the 200 period exponential moving average or 200EMA. Youhave to insert this moving average on your charts because it will tell you if youhave to look for trade setups to buy or look for trade setups to sell. This is themost popular moving average in the trading markets; many people watch it anduse it as a direction indicator. This strategy uses this moving average in thefollowing way: when the price of any forex pair is completely above the movingaverage we start looking for trade setups to only buy the pair. When the pair istrading completely below this moving average, we will be looking for tradesetups only to sell that pair. Let me show you more clearly what this means:

As you can see in the diagram above, price action for this pair is completelyabove the exponential moving average, it never touches it. This is good; itmeans that you can start to look for trade setups. We will do that later. If theprice does touch the 200EMA but quickly bounces back up like it did in thechart above at the end there, that is also a good thing. Now let me show youwhen not to look for trade setups even if the price is above or below the movingaverage:

Here you can see that price is above the moving average for the most part butit intersects with it there in the middle of the chart and does not bounce back upquickly enough. The pair trades there in the zone of the EMA, passing itmultiple times, returning to the upside, and then crossing it again to thedownside. This is not good; it means that the uptrend in this case, is not strongenough so you will not be looking for trade setups if you see this kind of priceaction behavior. You always have to look for the price action to be completelyabove or below the moving average or just touching it for a brief period andthen bounce off of it and resume its direction. There is one more important thingabout the moving average that you always have to keep an eye on. The slopeof the moving average has to be always in the direction of the price action. Inthe two charts above you can see that the direction of the price action is clearlyto the upside and so is the slope of the moving average, it’s pointing up. On thelast chart, in that middle section that we discussed you can see that the movingaverage has no slope there, it is sideways. That is a good indication to stay outof the market. Let me give you an example:

When you see this on one of your charts, you have to go visit some other pairto look for trade setups. The moving average is almost horizontal, and the priceaction is ranging, it’s going up and down crossing the EMA.

TimeframesWe will be using the 4 hours timeframe to see the overall trend as explainedearlier. If the pair trades above the 200 period exponential moving average thenthe trend is up, if it trades below the moving average then the trend is down.After we do this, we go to the 1 hour chart and do the same thing. If on the 4hchart price is above the EMA, on the 1 hour chart price must also be above themoving average for us to consider looking for trade setups on that pair. Samegoes for the other direction, if on the 4h chart the pair is trading below theEMA, on the 1h chart price must also be trading below the 200EMA and theEMA itself must be sloping down on both timeframes. Only when theseconditions are met we will watch that pair for potential trades and only in thedirection of the trend shown to us by the 200EMA. If a pair is trading above themoving average on the 4h and 1h charts and the EMA is sloping up on bothcharts then we will be looking for trade setups to buy that pair. If a pair istrading below the moving average on both 4h and 1h charts and the EMA issloping down on both timeframes we will be looking to sell that pair if a tradesetup occurs.You might ask yourself why do you need to look at the same moving averageon two different timeframes. Well, the answer is - confirmation. If on the 4hchart, the pair trades above the EMA this tells us that the overall trend of thatpair is up. When you go to the 1h chart and see that the same thing ishappening there too, then you have a confirmation of what you saw on the 4hchart and you also know that the overall trend is gaining strength andmomentum because the short term trend on the 1h chart is in line with thebigger trend. These are the perfect conditions for you to trade and maximizeyour profits. When these conditions present themselves on a chart then you willbe using the same 1h chart zoomed out to find the most significant support orresistance area. After identifying these areas, you will stay on the same 1hchart but zoomed in this time to wait for a trade setup to occur and then carrythe trade from entry to exit. We will discuss how to do this later.You may ask yourself why to trade on the 1h chart and not the 5 or 15 minuteschart. Day trading is not about entering trades on the smallest timeframepossible. The smaller the timeframe the less accurate your trading setups willbe and the more losing trades you will have. For a trade setup to be a winner itmust hold significance within the overall picture. A support or resistance level onthe zoomed out 1h chart has far greater importance than one on a smallertimeframe, therefore it has much greater chances of success.

Support and Resistance As I said earlier, we will be looking for significant support or resistance levelson the zoomed out 1h chart. Here is a chart to show you what to look for:

In the above 1h chart, you can see that there is a downtrend, price is below the200EMA, and the moving average is sloping down. The same is true for the 4hchart on that pair at that moment in time. You can see three points in themarket where buyers have stepped up to push the price up only for the seller tostep in again and resume the downtrend surpassing these levels. Those threelevels are support zones.

In the chart above you can see the short-term trend in up and the movingaverage is sloping up. The same thing is happening on the 4h chart for thatsame period of time. Sellers try to push the price down and this creates those4 turning points in the market that become resistance levels, which the buyerswill have to overcome by pushing the price back up in the initial direction andresuming the uptrend. A very important notion that you have to know in order toidentify these support and resistance levels correctly is the degree. You cansee in the above two charts that there are many more support and resistancelevels on them but I only marked 3 of them on the first chart and 4 of them onthe second. The reason for this is that a support or resistance level issignificant only if it has the same degree or the same amplitude as the rest ofthem. Let me show you the last chart again:

This is the same chart as the last one. You can see that apart from the fourimportant resistance levels, we also have two minor resistance levels that arevery small; therefore, they hold no real importance to the overall trend. We donot consider those small turning points as resistance levels, instead we wait fora resistance to form with approximately the same size or amplitude as thepreceding ones. Let us look again now at the first chart in this chapter:

Here too we had a very small support just after the first real big support.Now, you know anything there is to know about the moving average on the twotimeframes, you know exactly what market conditions to look for with respectto this moving average and you also know how to spot significant support andresistance zones on the zoomed out 1h chart. What this system does is to waitfor a break of these support/resistance levels once the market is presentingyou a clear direction of the trend, direction that you will gauge with the 200EMAas described in the moving average section. A break of an important support orresistance level occurs when a 1h candle closes below the support or abovethe resistance with more than half of its body. Let us see an example:

You can see in this diagram that the breakout 1h candle closes below thesupport level and more than half of its body is situated below the support level.

In the example above, we have something very interesting. The first candle thattries to break through the support level fails and quickly goes back up closingwithin the territory of the support level. This is definitely not the breakoutcandle. Next, we have a small candle that indeed closes below the supportarea and also has more than half of its body below the support. Thiscorresponds to the definition of the breakout I gave earlier but there is aproblem with this candle: It is very small in size. Do not consider such smallcandles as breakout candles even if they fit the definition of a breakout. For abreakout to be true, it has to happen with force, price has to create a bigcandle to show us that the sellers in this case, are committed to push the pricedown further. A small candle does not show too much commitment from thesellers. Such small candles usually form in late New York session and in theAsian session when the market in choppy and there is not much volume in themarket. A valid strong breakout usually takes place in the European session.Next, we finally have a breakout of that support level with a huge bearishcandle that is entirely below the support level. This is the true breakout and thisis what we will use to enter our orders in the market.

EntryYou probably know that almost every time a strong support or resistance levelis broken price comes back to retest it shortly after. This retest is what you willuse to find the entry level for your order and also your stop loss level. After thebreakout candle closes price will come back to the support or resistance leveland retest it before continuing in the direction of the breakout. After you seethat price has retested the level you enter a pending stop order at the pointwhere the retest began and after your order gets filled you set your stop losslevel at the point where the retest finished. Let us see a chart to explain thisbetter:

In this example we have the price below the moving average on both 1h and 4hcharts and the EMA is sloping down on the two timeframes. We have abreakout of the strong support level previously marked by us. After thebreakout candle price goes a little further down and then starts to climb backup to retest the support level represented here by the red horizontal line. This isthe point where we set our sell stop order. Price retests the level and staysthere for a while before it comes back down to resume the downtrend and

triggers our sell order. When our order gets triggered we know that the retesthas finished and price is resuming the trend in the direction of the breakout sowe set our stop loss level just above the point where the retest move hasfinished as show in the chart. Let us see another example:

The same thing is happening here also. A breakout of the support with a strongcandle, a retest, and then a selloff.

This example is very interesting as price goes above the strong resistance butthere is no strong convincing breakout candle. Price just trades above theresistance level but it does not give us strong clues that the buyers havestepped in to resume the uptrend. Only later, we see that we have a strongbullish candle away from the resistance and very shortly after, we have a retestand then price shoots up. This is our trade setup as shown in the chart.

Exit To exit the trades you have to use something that lets you exit just at themoment when the trend is ending and price starts to go against you and eatinto your hard-earned profits. The best tool for doing this is a price pattern andit is called the wedge pattern. The wedge pattern can be, depending on itslocation, a continuation pattern, and a reversal pattern. As we seek a way tosignal us when a trend in about to end we will use it only as a reversal pattern.Let me give you an example to see how this pattern looks like:

The wedge pattern consists of two lines that converge at the end. These linesare formed by connecting the most recent swing highs and the most recentswing lows as in the chart above. When this pattern emerges it almost alwaysmeans that the trend is in its final moments. Therefore, when we have a tradeopened and we are in profit, we look at the chart to see if there is such apattern by connecting the last two minor highs and the last two minor lows thatprice makes on the zoomed out candlestick 1h chart. Let me show you knowwhere exactly you exit the trade after discovering this price pattern:

This way you will rarely have a trade that goes against you and eat your profitsbecause you did not exit when you were supposed to.In 90% of cases, these reversal patterns do form at the end of the trends, butif you cannot find this pattern from time to time when trading, you will then usethe moving average to exit the trade. When selling, if there is no wedge patternyou exit the trade when a 1h candle closes above the 200EMA, when buying,exit when a candle closes below the moving average like in the example below:

In these cases when there is no wedge pattern, you can also use a simpletrend line to connect the highs if you are selling or the lows if you are buying. Ifthere is no wedge, draw the trend line and when it is broken by a 1h candleclosing above or below it then exit the trade.

You bought this pair above but there is no wedge pattern. There is however, atrend line that you can draw by connecting all the lows that price makes, whengoing up in profit. Exit when the trend line breaks. Notice that the movingaverage is way down, the trend line always gives you a much better exit level.So, when exiting a trade you must first look for a wedge, in the majority ofcases you will find one, but if you don’t then draw a trend line. If you cannotdraw a trend either then use the moving average break to exit the trade. To conclude this trading system let’s recap what you should do: Plot the 200 EMA on your chart.Look at the 4h chart and see if the pair is trading above or below the movingaverage and if the slope of this moving average is up or down. Do the same on the 1h zoomed out chart, if things look exactly the same like onthe 4h chart then mark the most recent strong support or resistance level antrade the break of it like shown in the sections above. If market conditions donot coincide on the two timeframes of the same pair than you have no tradethere, go to the following pair. Let’s see a trade example:

We have a breakout of the support here, we enter the trade, we set the stoploss, price trades in a small range for a while, and then it goes strongly in ourfavor. Let’s see what happens next:

This was a 400 pip winning trade.

Take profit level determinationNow that you know how to exit the trades it is time for you to find out how touse price action to predetermine you take profit level. When you first enter thetrade, the system gives you a stop loss level and now it will give you an initialtake profit level as well. This TP level will not be set in the market because it isnot a fixed value; it depends on the speed of the price movements and theirdirection. Ideally, price will touch it easily and you will not have to worry about athing but if the price does not go to this take profit level and instead makes areversal wedge or breaches the trend line or the moving average then you exitthe trade manually as explained earlier. After you enter the trade and put yourstop loss in place you must do the following: on the zoomed out 1hour chartyou connect with a trend line the current support or resistance level (the onethat you are trading the break of) with the previous one like in the chart below:

You can see in this chart that after entering the buy order at the break of thatresistance and after putting your stop loss in place you should draw a trendline(the red line in the chart) to connect that resistance level with the previous

one and then extend it forward like in this example. When price goes in yourfavor, it will start to approach your trend line. When it finally touches it you exitthe trade, the touch of the trend line is your take profit. Here is an example of ashort trade:

This is it.In the end I would like to apologize if I sound a little to rigid in my explanationsand if there are any misspellings.English is not my first language. I am doing the best I can. Thank you. If you find that this adds value to your trading please consider writing areview of the book on Amazon. It does not have to be long, just a fewwords to state your opinion about the trading system presented in order

to help other people make more informed decisions.Please email me afterwards at damirlaurentiu@yahoo.com and you willreceive the PDF version of this e-book so that you can read it more easilyand print the contents on paper if you want. In addition, if you want to combine this strategy for better results with otherpowerful trading systems you can check out the following books:

Trade the Price ActionTrade the Momentum

Follow Price Action TrendsDay Trading Forex with Price PatternsForex Range Trading with Price Action

50 Pips a Day Forex Strategy