How to Build Your Trading Watchlist

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  • How to Build Your Trading Watchlist

    By Raghee Horner

  • Text copyright 2013 TF GLOBAL MARKETS (AUST) PTY LTD

    All Rights Reserved

  • Table of Contents

    RISK WARNINGWeve all been thereWhy do you need a watchlist?Starting where you have an edge!Find the dominant psychology in a pairUnderstanding Directional BiasMarket Memory or Look back.Trend following and Time frame SelectionThe power of the 34EMA Wave!

  • RISK WARNING

    Trading in the Foreign Exchange market involves a significant and substantial risk of loss andmay not be suitable for everyone. You should carefully consider whether trading is suitable for you inlight of your age, income, personal circumstances, trading knowledge, and financial resources. Onlytrue discretionary income should be used for trading in the Foreign Exchange market. Any opinion,market analysis or other information of any kind contained in this material is subject to change at anytime. Nothing in this material should be construed as a solicitation to trade in the Foreign Exchangemarket. If you are considering trading in the Foreign Exchange market before you trade make sure youunderstand how the spot market operates, how ThinkForex is compensated, understand theThinkForex trading contract, rules and be thoroughly familiar with the operation of and the limitationsof the platform on which you are going to trade. A Financial Services Guide (FSG) and ProductDisclosure Statements (PDS) for these products is available from TF GLOBAL MARKETS (AUST)PTY LTD by emailing [email protected] . The FSG and PDS should be consideredbefore deciding to enter into any Derivative transactions with TF GLOBAL MARKETS (AUST) PTYLTD.The information on the site is not directed at residents in any country or jurisdiction where suchdistribution or use would be contrary to local law or regulation. 2012 TF GLOBAL MARKETS(AUST) PTY LTD. All rights reserved. AFSL 424700. ABN 69 158 361 561. Please note: We do notservice US entities or residents. The information in this material, the links provided are for generalinformation only and should not be taken as constituting professional advice.

  • Weve all been there

    Most of us have experienced the whipsaw, the correction that keeps on going, high volatility,and the painful contrarian trade. And for many traders that is the sum total of their trading experience:Frustration and confusion. What if I told you it neednt be that way, that with a handful of indicators Ican show you how to understand why trades go wrong and to reduce that helpless feeling? I can.My name is Raghee Horner and I have been trading for over twenty years. I have traded stocks,options, futures, and forex and have seen it all and suffered through many of the same things that maybe troubling you now. Theres no magic bullet but there are better ways to select and prioritize yourtrades and increase your winning percentage so lets get to it.

  • Why do you need a watchlist?

    Coming from a background of nearly a decade of trading futures and stocks, its not so long agothat my mornings were filled with endless scans: Scans for the biggest percentage moves, scans foroverbought and oversold markets, scans for price breaks through a 50 or 200 day moving averages.This was all in an effort to whittle a mammoth list of potential symbols to trade into a managementand focused watchlist. This is initially why trading the foreign exchange market was so appealing; myworld consisted of anywhere from six to seven, maybe eight pairs. Soon however this focusbecame limiting as I realized that while different individual currency stories played out, I wasmissing opportunities. Naturally I began to expand my watchlist and as a result it began to lose focus.I found that a longer watchlist wasnt necessarily a productive thing and I began to see that my focuswas my edge. I began to consider why a pair was on my watchlist to begin with. I shifted mycriteria: A pair had to offer me an edge to be on my watchlist; it had to earn a spot on the list. Butwith what criteria? This process had to be simply, fast, and straightforward as to not distract or slowdown my process of setting up actual trades.

  • Starting where you have an edge!

    Starting with pairs where you have an edge is the first step. Keeping with the idea that the filterI want to use must be equally as fast as it is effective I kept with the notion that the dominantpsychology of the market is the market TREND that will be most agreed upon. The simplicity in thatis the fact that the daily chart is the most viewed time frame across all market participants andtherefore that trend - the daily trend - is the one that most trades will agree is the dominant psychologyor trend.

    My process for creating a watchlist became very simple: I would identify whether the dailychart had an up or down trend and then include that pair on my list of symbols to consider for a trade.Now let me mention this: Just because I am using the daily chart does NOT mean that is the timeframe I will ultimately trade, it simply is a means of looking a market with ideal price actionorganization.

    Think about it this way: If most (its never all) market participants agree that the daily chart isin an uptrend, it then increases the likelihood and expectation that moves lower are corrections andthe floors that these corrections test will likely be supported and bought into. Uptrend increase theexpectations for higher highs and when a market is in an overall (dominant) uptrend, traders also tendto gravitate towards the positions fundamentals in the market. There is a bias that a trend creates in amarket and thats why I identify a trending daily time frame as having Directional Bias.

    I call my main list of pairs to scan and trade my D.B. Watchlist. D.B. of course stands forDirectional Bias and therefore my list of pairs is made up solely of pairs that are trending on theirrespective daily time frames. This keeps me focused on those specific pairs that have what I callMarket Clarity. I will get into what that is and how I measure that in a moment.

  • Find the dominant psychology in a pair

    This is where the Directional Bias concept meets the chart. I will now share with you a toolthat I have been using since I basically developed it. Its called the 34EMA Wave and it is comprisedof three exponential moving averages.

    Why exponential moving averages? Most simply put, this weights the most recent price actionmore heavily than older price action. In a simple moving average, all the prices (for example all thecloses in a simple moving average calculated on the closing price) are weighted equally. I prefer toplace more emphasis on what has most recently plotted on the chart. The setting I use is based on 34periods so this means that I would be calculating the exponential moving averages on the last 34 dayson a daily chart or the last 34 five-minute candles on a five-minute chart.

    Why 34? Its a Fibonacci number and as a believer in the power of Fibonacci as applied to theway in which things in nature expand and contract, I believe there is application in the financialmarkets since it is a reflection of human nature.

    The last part of putting together the 34EMA Wave is the three exponential moving averagesthemselves. I use three because it plots a wider footprint on the chart and gives me more insight intothe area in which price action could be accelerating, decelerating, stalling, and/or reversing. I dontbelieve price action always necessarily turns on a dime. The 34EMA Wave is plotted on a chart byinserting three separate exponential moving averages (EMA):

    The 34 period EMA on the high The 34 period EMA on the close The 34 period EMA on the low

    These three lines will move higher, lower, and sideways with price action but will also allowyou to more consistently and objectively identify the underlying market trend on any time frame,which of course includes the Directional Bias (D.B.).

    There is a process to follow to find the D.B. easily and correctly every time.

  • Understanding Directional Bias

    Subjectivity is the bane and blessing of discretionary traders and unless you are using a systemto trade, you are to some varying degree a discretionary trader. But let me add, at some point even themost dedicated systems trader had to have and explore discretionary ideas that eventually becamesystematized. These ideas had guidelines and rules and its these rules and discipline thatdiscretionary traders can learn from as they build their methodology. And yes, a discretionary tradershould have a methodology; its the difference between having a system and being systematized. Iprefer the former, which is to say that I have a system or methodology but I do not mechanize it orsystematize it, rather I will execute it at my discretion when I want to and on which pairs I want to. Ido not want to deviate from that system - that is not what discretionary trading means.

    The goal for a discretionary is to use their discretion to identify when their trading approach ora particular strategy would be best applied. So for me there are two parts to being a discretionarytrader.

    1) I determine which pair(s) I will look to trade.

    2) I determine which strategy applies to the pair.

    This all starts with Directional Bias.

    Since I have the three lines of the 34EMA plotted on my daily chart I can look to it to help medetermine not just the trend but also the CLARITY of the trend which takes into consideration thevolatility, the length, and the strength of the trend. The goal is consistency and objectivity so there areguidelines to this process. It starts with how much data I have on the chart.

  • Market Memory or Look back.

    I find it interesting that traders dont always have a set amount of data on their chart for eachtime frame. Since the time frame for determining Directional Bias is the daily, lets discuss that lookback now. Any time I begin analyzing a daily chart I will begin with a one-year view, 52 weeks, at aminimum. From this view I will view the dominant trend of the past year, the 52-week high, low,significant rallies and declines, trend lines, and the angle of the 34EMA Wave.

    The last part, the angle, is of course by its very nature subjective because I am using movingaverages and the angle at which they are moving. This angle is more consistently determined by usingthe same look back each time I view a daily chart with the 34EMA Wave. The angle can better bedescribed with the term clock angles. I call these clock angles because I literally imagine whatangle the trio of moving averages are making as it would line up with the right side of a clock face.(e.g. one, two, three, four, five, and six oclock) Once you have the daily time frame chart you arelooking at filled with one year of price action, look at the angle at which the three lines of the 34EMAWave are travelling. Imagine that it is the hour hand of a clock. What time is it pointing at?

    If the 34EMA Wave is travelling at between twelve and two oclock then it is in an uptrend.If the 34EMA Wave is travelling at between four and six oclock it is in a downtrend. If the34EMA Wave is flat its a three oclock angle and is consolidating. Finally, if the 34EMA Wave isnot steep enough to be a twelve to two or four to six oclock angle and not flat enough to be athree oclock angle, its a two to four oclock which is a non-trending, choppy, congestion. Thatis like a warning sign to price action organization.

    In fact, if all you were to get out of this section was to AVOID pairs that have daily chartsmoving in a two to four oclock 34EMA Wave, that would be reason enough to use this tool!

    Here are three examples:

    This is the daily NZD/JPY trending higher in a twelve to two oclock 34EMA Wave uptrend.

    This is the daily GBP/USD trending lower in a four to six oclock 34EMA Wave downtrend

  • This is the daily USD/CAD moving in a narrow, sideways range (consolidating) in a flat,three oclock 34EMA Wave angle.

    Notice that the individual candles on the chart are not necessarily in a comfortable view andseparation for your eyes. Dont worry. Once you have taken some key information about what you seefrom this vantage point, you are free to expand the chart and look at less price action. Do take note oftouch points for trend lines, support, resistance, gaps, perhaps chart patterns if you are a patterntrader, and again be sure you take the 34EMA clock angle reading; too much price action canartificially steepen the angle of the 34EMA Wave while too little data can flatten it out distorting thereal market trend of the time frame and therefore giving you an incorrect Directional Bias reading!

    One last set of questions I would also like you to ask while the daily chart is in the marketmemory or look back view of one year is concerning the way in which the 34EMA is moving. This iscalled determining the MARKET CLARITY.

    Are the lines of the 34EMA Wave smooth?

    Are the lines of the 34EMA Wave established? (Or for how long has it been moving in the mostcurrent clock angle?)

    Are the lines of the 34EMA Wave being respected as support or resistance on pullbacks or bounces -this depends of course on whether there is an UP or DOWN trend on the chart.

    Once you have asked and answered those three questions, you now know the volatility of the market,how long the trend has been in place (if at all!), and whether the corrections are organized. Again,you have asked the questions that will answer whether you have clarity in the price action henceMarket Clarity. This goes hand-in-hand with Directional Bias. If D.B. tells you what the trend is (ifany) in the market, then Market Clarity tells you the quality of that trend.

    This is the NZD/CAD daily chart trending higher in a twelve to two oclock angle however it

  • is important to notice that the uptrend has pierced the 34EMA Wave on one occasion with a wick thatbroke the 34 period EMA low and notice the shaky (lack of smoothness) nature of the 34EMAWave itself; this reflects a higher amount of volatility and lack of price action organization.

    On the other hand, notice the Market Clarity quality of the following trend which has a smooth34EMA Wave, respect on pullback to the 34EMA Wave, and is established (it has been moving at thecurrent clock angle for long enough to make the overall or dominant opinion of the market moreobvious).

    Each pair you are considering trading must go through this process and if the pair is not trending(up or down) in a twelve to two or four to six oclock angle, leave it off your watchlist.

  • Trend following and Time frame Selection

    I will now share with you another reason to understand Directional Bias and use the 34EMAWave to help determine which pairs are moving in up or down trends. Its about understandingintraday time frame selection.

    Remember that even though we are starting off our analysis with the daily chart, we may noteven be trading this time frame. This analysis is primarily used to determine whether there is adominant psychology at work in the pair. It also defines for us what constitutes a trend followingintraday trade and a counter-trend trade. This isnt just trading lingoits the difference betweengoing with the (price action) flow of the market or fighting the dominant opinion of the market. Trendfollowing is like floating with the flow of a river - while counter-trend trading is like trying to swimagainst the flow! You may be able to swim upstream for a short while, but eventually (and most often)you will exhaust yourself and succumb to the flow of the water.

    Time frame selection therefore becomes much easier when you understand the flow. In anuptrend, going long or buying is trend following just like in a downtrend, shorting the market is trendfollowing. That is not to say that there are not strategic times that a counter-trend trade can besuccessful, its just that these trades should ideally be nimble and executed on a shorter-term intradaytime frame.

    For example, if the daily is in an uptrend. Feel free to look for buy entries across any timeframe; you are trading with the Directional Bias and overall, dominant psychology However if themarket begins to correct, there will often be opportunities to take shorter-term entries that arecounter-trend. Be sure to focus on the five, 15, or 30-minute time frames for these counter-trendentries. Remember that you are swimming against the flow. By staying nimble and not committing tolonger-term, counter-trend trades you will avoid fighting the stronger forces of the market which areworking with a clear, defined trend. You know what the clear, defined trend is because you will havealready determined the market clarity of the 34EMA Waves clock angle!

  • The power of the 34EMA Wave!

    While these examples have focused on the way in which the 34EMA Wave is used on the dailytime frame thus also showing the Directional Bias of that pair, the 34EMA Wave can also be used onintraday time frames to reveal the trend on shorter-term charts. The trend (or lack of trend) onintraday charts can reveal trend-following entries (trades that follow the Directional Bias on thedaily) and counter-trend entries (trades that go against the Directional Bias on the daily). In this way atrader can better understand their entry within the overall psychology of the market.

    For example, to follow a trend is to trade with the flow of the market and the widest heldopinion of the markets movement. In this way a trade can choose to trade counter-trend trades ononly the shorter-term, more nimble time frames.

    Traders can also choose to not trade markets that do not have a clear trend and thus avoid thechoppy, non-directional movement of range bound markets. Conversely traders who look to capitalizeon range-bound markets and the price action exhaustion at the extremes of range can more accuratelyidentify when that approach is more likely to be successful.

    copyrightRISK WARNINGWeve all been thereWhy do you need a watchlist?Starting where you have an edge!Find the dominant psychology in a pairUnderstanding Directional BiasMarket Memory or Look back.Trend following and Time frame SelectionThe power of the 34EMA Wave!