TOWER ONE FX GROUP

Continuing from the analogy ( FOREX System ) of the previous step we see that in a jigsaw puzzle each piece completes the others to form a greater whole and this is what we are striving for as well. We do not want several indicators that show us the same thing. In the following example I will show you how a Forex system can be put together. In this example I will use EURUSD 30 min bars but you can choose any bar period or currency pair you like. We start out with just price action:

Of course looking at this chart for our Forex System we can easily pin point the optimal places to buy and sell short. Well, anything seems easy in hindsight. Try doing this with streaming data and the task becomes difficult. That is why we need to add indicators in order to supply the mind with reference points. Anyone who has been out on the ocean knows the difficulty of judging distance at open sea, the reason being the lack of reference points. This is exactly why we need to add indicators that enable us to measure our current position. Otherwise you are nothing more than a ship adrift at sea without crew, compass or nautical chart.

By studying the chart of our Forex System you can determine the different rules that would be possible to trade by. The three most common rules are the following:

• Cross-over


• Change of direction


• Divergence

By experimenting I have found that in general a cross-over is preferable to a direction change. A cross-over filters out small annoying changes, but unfortunately adds lag. If your indicator is very smooth and robust, direction change can be be traded with advantage and sometimes is outright better. It all depends on the robustness and smoothness of the indicator. In our example we will use cross-over and divergence for rule creation.

Divergence in our Forex System is simply a discrepancy between price and an indicator. We can use the following divergence rules:

• Long: Price makes a lower low, but your indicator makes a higher low.
• Short: Price makes a higher high, but your indicator makes a lower high.

Look at the image below to get an idea how divergence works. Compare the cyan and yellow lines. The indicator in the Forex System (Golden R) is proprietary.

When we are creating a Forex System, we usually start with an idea, probably something we have observed during chart study. In our chart we have added TSI and Keltner Channels and by looking at their behavior we can draw certain conclusions. Going through the Forex System chart you will notice that when price move beyond either the upper or lower Keltner Channel Bands, prices tend to change direction, in other words price has reached a state of exhaustion and turns. Further when TSI is significantly above or below zero, price also tends to reverse. TSI also gives fairly good divergence signals. The Forex System described below works for me and my trading style, it might not be entirely suitable for you. At the very least it will give you some design ideas for your own Forex System, so study it diligently.

Settings

TSI: 25 bar Long MA, 13 bar Short MA, 5 bar Signal MA.Keltner Channel: 34 bar Exponential MA, 2.6 ATRs.Trend MA: 100 bar Exponential MABy studying the charts our rules become the following:


Exhaustion Trade

This type works best in an active and trendless market. Doesn't work in a trending or choppy market. Important: Price must have been outside the Keltner Channel just prior to or at time of signal, else it is not valid.

Long Entry

If TSI crosses above Signal Line AND TSI is below 0 AND Close is inside the lower Keltner Channel then Buy.

Short Entry
If TSI crosses below Signal Line AND TSI is above 0 AND Close is inside the upper Keltner Channel then Sell Short.


Trend Trade

This type works best when we have a robust trend in action. Works poorly in choppy, trendless market. Important: The Trend MA must be pointing up for Long Entries and vice versa. When I get a Trend Trade Signal I also look for the current TSI high to be lower than the previous TSI signal high for a Short Entry and vice versa for a Long Entry.


Long Entry

If TSI crosses above Signal Line AND TSI is above -20 AND Price goes through Keltner Channel midline and then reverses back up then Buy.

Short Entry
If TSI crosses below Signal Line AND TSI is below 20 AND Price goes through Keltner Channel midline and then reverses back down then Sell Short.


Divergence Trade

This type works best in an active and trendless market. It also doesn't work in a choppy market. Important: The best is if price has been outside the Keltner Channel, it then effectively becomes a mix between an Exhaustion Trade and a Divergence Trade. Price doesn't need to be inside the Keltner Channel when the divergence crossover occurs.

Long Entry
If TSI crosses above Signal Line AND TSI is below 0 AND TSI makes a higher Low AND Price makes a lower Low AND Close is inside the lower Keltner Channel then Buy.

Short Entry
If TSI crosses below Signal Line AND TSI is above 0 AND TSI makes a lower High AND Price makes a higher High AND Close is inside the upper Keltner Channel then Sell Short. On the following Forex System picture you can see that it works out pretty well:


In a trend like this, you will experience a lot of fake signals:



Fake signals are unavoidable and the only way to handle them is with Trade Management and through experience. By experience you will learn how to distinguish between a trending market and a trendless. Many of the signals above are obvious fake Long signals. Look at raw price velocity at some of the signals and you will realize that is very weak (price pushing up with difficulty) and thus you should avoid such trades. Do not only look at individual parts, but pay attention to the big picture as well.

Be aware that sometimes different platforms have slightly different ways of calculating indicators, so you must check visually and through backtesting (more on that later) the validity of the Forex System described above. I don't know how your trading platform works or how it calculates its indicators.

As far as I know, this system works on all time frames, although you might find yourself changing the parameters to suit your time frame of choice. If you want to trade a currency pair other than EURUSD, then please double check the setting and rules so that is suits that particular currency pair. It wouldn't surprise me if you change them anyway, we are all different with different preferences. Once you have find something that works, stick to it.