In Part 1: Analysis , we covered the analytical concepts that are required to understand how to be able to find and identify great deals on any chart. Analysis and the entirety of the first part were designed to introduce you to the ways a BFI Trader analyzes a chart; how to “identify ” a trade opportunity. Without the ability to find and identify a great deal, execution is truly irrelevant.
We learned how to draw and validate potential Buy-Zones and Sell-Zones, and we learned how BFI’s stack their positions at these specific areas using a period of consolidation, as the price undergoes certain market movements and the price travels from zone to zone.
At a Sell-Zone, BFI’s distribute all their initial Buy-OFV at a profit, and they begin accumulation of their Sell-OFV. BFI’s always work in pairs; they close & reverse. They never close and go home. They must always trade. At a Buy-Zone, BFI's distribute all their initial Sell-OFV at a profit, and they begin accumulation of their Buy-OFV. They either close initial Buy-OFV and sell, or they close their initial Sell-OFV and buy. Business must continue and large amounts of orders must be constantly transacted. For BFI’s, money never sleeps.
We also learned that after a zone is created and validated, the first return of price to the zone is the trade with the least risk. Not the 2nd or 3rd or 4th retest of a valid zone; there is a reason price keeps returning to the zone; it is likely going to experience Zone Wipeout if price keeps returning to a zone.
In a Sell-Zone scenario, we know BFI’s sold heavily initially when the zone was created, which resulted in a BFI-footprint, and it is very likely that they sell heavily again when price returns to the zone and becomes “expensive” again. The same applies for a potential Buy-Zone scenario; we know BFI’s bought heavily initially when the zone was created, and it is very likely that they buy heavily again when price returns to the zone and becomes “cheap” again. If the BFI's was a person, they would have the tattoo "Protect the position; Add to position" tattooed all over their body; they live and die by these principles of operation.
Everything we have covered so far was concerning analysis; the finding of great deals; simply the ability to identify them and point them out on a chart. That is the absolute first step. Flawless execution and this second part entails the process of “entering” the great deals, only to be done after your analysis has identified a valid trade opportunity. Our analysis is performed on our macro timeframe, and our entry is performed using an entry-signal or method on our micro timeframe. This second part of this education will discuss these entry-signals in detail.
Remember, the macro timeframe is only for analysis. The micro timeframe is strictly for entry. Do not analyze on your micro, and do not enter on your macro. We have rules of operation and these are the most basic fundamental timeframe principles we follow. Macro zone – micro entry.
When we discuss Flawless Execution, most traders believe that their entry is the problem. They dream of a perfect entry as if that would solve most of their problems. Most traders believe that if they had a great entry then the rest will take care of itself, but this is very far from the reality of trading. I’ve seen traders catch the perfect entry but still somehow found a way to self-sabotage themselves and destroy the entire trade. “Entry” wasn’t the problem. There are many great analysts who correctly guess exactly where price will go, but are not able to financially benefit from the movements. Rarely are they ever on the train to ride along the market movements.
You can analyze perfectly and enter flawlessly, and still not make consistent money. This is why trading is very difficult for most; they cannot and do not understand why they keep losing. It is not enough to analyze and it is not enough to execute; as a BFI Trader you must be able to not only analyze and execute, but you must also allow the trade to play out after you’ve clicked; the difficult part of being a trader. Every trader sets, but few traders can forget. As a BFI Trader, you will turn the idea of “allowing the trade to play out” into a habit, because that is the only way you can trade without thinking much about it; only when you’ve turned trading into a subconscious habit can you "forget". You may need to “try” and hold a trade, or you may find that it is a torturous experience when you leave a trade to run, as the ups and downs tear you into pieces psychologically. This is not the proper approach and we will discuss the neuro-science of habits and habit-forming. In order to change, you must first understand the problem. Understanding the issue in detail is the first step in any potential solution. Education is not a course; it is a transformation-process of change. We need to cut all the dead weight, unproductive trading habits, and lighten up our focus on only a few key simple productive habits and ways of operating.
Remember, Part 1: Analysis discussed how to find and identify the potential trade opportunities. This has nothing to do with the way you are going to enter into that potential trade opportunity. Do not confuse Analysis with Execution. Some traders have issues with Analysis, and some traders have the more common issue with Execution. Differentiate between the two and you will be able to pinpoint precisely any potential barriers to improved trading performance.
After every loss, a BFI Trader must ask themselves a very important question; was the issue with my entry, which is a timing issue (too early or too late), or was it a directional issue, meaning you are trading in the wrong direction. Before any potential re-entry, a BFI Trader understands exactly if their trading loss was due to an entry and timing issue, or was it a directional issue; simply on the wrong side of the OFV.
Although most traders believe trade entry and execution is where they have most of their issues, but my years of experience tells me that it is almost always a psychological issue, as we will see in Part 3: Psychology that most matters in the end tend to be mental; an imbalanced inner-game, which we will discuss much more deeply in Part 3: Psychology.
Position Sizing and Risk Modeling
What is the number one cancer in this trading game?
Improper position sizing.
That is the number one killer for most traders; they open a position size much larger than they can handle or much larger than what is appropriate for their account size. Why? That question will be answered in Part 3: Psychology . Proper position sizing is a pre-requisite for proper trading. In this section, we will learn how to resolve this cancer and we will learn how to develop risk models so we are never afflicted by this cancer of improper position sizing in the first place.
A trader’s position size is a very sensitive topic because it should be not too small and not too large; there is a perfect balance between the two that a trader must achieve in order to be able to trade fearlessly. The proper position sizes will allow you as a trader to not only “set”, but to also “forget” and move on with life without being tied to a screen. The most elite traders on the planet allow time, money, and the market to do most of the heavy lifting and they give very little time to sitting on a screen compared to the average retail trader. Any professional trader knows that “less” is “more” in this game, and trading for longer hours does not necessarily equal to “more profits”.
Managing Your Exposure
Exposure, or risk, is the dollar value exposed to any potential loss. The management of your exposure ranks above everything else in trading. If you cannot manage your exposure efficiently, then you will eventually have nothing left to manage. We have already seen how dirty and manipulated the markets can be, so it is crucial to manage your exposure like a professional. You do not need to increase your exposure in order to make more money. In fact, those who falsely believe they can make more by risking more will be unpleasantly surprised when they realize they will end up making less, not more. Trading is a game of contradictions and counter-intuitiveness, which we will discuss in Part 3: Psychology.
There are two steps to manage our exposure, and there are two methods to managing our exposure.
Two steps of Exposure Management:
1. Calculate your exposure.
2. Accept your exposure.
Few traders calculate their exposure, and those who do calculate it typically calculate it wrongly. But from those who do calculate their exposure properly, even fewer traders accept their exposure. Notice Step 2, the acceptance of your exposure, is an entirely different and separate step, and it is a psychological step.
In this section we will discuss Step 1: Calculating your exposure. In Part 3: Psychology , we will discuss Step 2: the complete acceptance of your exposure, which means you are absolutely and completely comfortable if the market were to take the amount that you have exposed. To trade properly, you must perform both steps properly. Calculate your risk, and accept that risk fully knowing very well that anything can happen at any time in the markets.
Two Methods of Exposure Management
1. Fixed % of Balance Per Trade Idea
2. Fixed Dollar Amount Per Trade Idea
1. Fixed % of Balance:
This is where a trader risks X% per trade. For example, they may risk 2% per trade, meaning they calculate what 2% of their balance would be, and that is how much they would lose if price where to hit their stop loss. Usually, that means having different position sizes for every trade. This is the more common method used by most traders.
2. Fixed Dollar Amount:
This is where the exposure is capped at a fixed dollar amount, and this dollar amount is within certain risk parameters of the account balance. For example, you may risk $100 per trade, and that $100 of exposure should be within your risk parameters. We develop our own Risk Models when we risk fixed dollar amounts per trade idea, which means having fixed lot sizes. This is the approach I recommend; using fixed dollar amounts and fixed lot sizes, with exposure within your risk parameters. A new trader is better off using fixed lot sizes; not having a different lot size for every trade.
Risk Models
A Risk Model is a pre-decided and pre-calculated customizable exposure model that uses pre-determined and fixed position sizes that are entirely dependent on the size of your stop loss in number of pips.
Let us take a look at a simple example of a very basic risk model: the $100 Risk Model. In order to develop your risk models, we need to know the average stop loss size. In this example, we will use an average stop loss size of 20p, 30p, and 40p. Remember, you can customize the Risk Models to suit you and your own unique style of trading.
Let us assume that one standard lot, 1.00, equals to $10 per pip. Some pairs have a pip value that is less than this, but using a pip value for a standard lot at 10$ per pip, we can develop a safe risk model that over-estimates our exposure instead of under-estimating it.
If we are risking $100 on the trade, then a 20p stop loss means each pip is costing us 100/20 = $5 per pip, which equals a position size of 0.50 lots.
If we are risking $100 on the trade, then a 30p stop loss means each pip is costing us 100/30 = $3.33 per pip, which equals a position size of 0.33 lots.
If we are risking $100 on the trade, then a 40p stop loss means each pip is costing us 100/40 = $2.50 per pip, which equals a position size of 0.25 lots.
This is how we will be creating our risk models; using a fixed dollar amount, and the average size of your stop loss, which gives us our proper position size.
Hopefully you are getting the idea of how to develop a proper risk model. Remember, if your average stop loss sizes are 10p, 15p, and 20p, then you will develop your models using those stop loss sizes.
Who decides how large the stop loss should be?
The market structure.
The market tells us where the stop loss level should be, based on the market structure. The trader does not decide the size of their stop loss; the market decides that.
As a final example, let us create a $10 Risk Model [RM10].
You need to take a few moments and develop your own risk models based on your account size and based on the average stop loss sizes that you use.
This fixed dollar amount and fixed lot sizes approach to managing our exposure is a much easier and more efficient approach to position sizing and risk management. We are not here to calculate; we are here to trade. Get comfortable with implementing a $10 Risk Model and then you can upgrade your risk model as your account balance increases and the next level risk model is safe to implement.
Learn to become very effective and profitable with a $100 Risk Model, and the position sizes of your $100 Risk Model, where you can implement a $100 Risk Model in your sleep, and you are able to achieve multiple winning trades using your risk model before moving on to the next larger risk model.
Remember, you cannot lie to yourself and get away with it. You must develop and implement the appropriate risk models for your given account size, and make sure the position sizes used are appropriate and comfortable to the point where you experience no fear when implementing them. Only graduate your risk models when your account size has increased and moving on to the next larger risk model is within your risk parameters. If a $100 Risk Model is about 2% of your balance, then do not graduate to the $200 Risk Model until $200 is about 2% of your balance.
Two steps to Risk Modeling:
1. Determine the size of your stop loss in pips
2. Choose the appropriate Risk Model to implement.
If the market says a safe stop loss level is 17pips, then you would implement the 20p position size. If the markets says a safe stop loss level is 26 pips, then you would implement the 30p position size. Always round up.
Develop your risk models based on your account size and learn to become fluent with them, and be smart and patient about when to move on to a larger risk model. Do not skip. Grow through your risk models and eventually you will be implementing RM1000 and RM10000 effortlessly; if you manage your risk properly and graduate your risk models slowly, it will be only a matter of time.
The Standard Manipulation At The Zone
In order to understand how to execute flawlessly, we need to understand how the zones are manipulated. When a zone is validated and price returns to test the zone for the first time, we have a typical scenario that plays out.
At a Sell-Zone, we typically see rally’s up into the zone.
At a Buy-Zone, we typically see collapse’s down into the zone.
These rallies and collapse can be likened to the Judas Goat.
The Judas Goat is the BFI-sponsored Rally's and Collapse's into our valid zones.
The Judas Goat is a deception; it is fake.
So we typically have these fake Judas rally’s into a Sell-Zone, and these fake Judas collapse into a Buy-Zone. We need to always keep this in mind when we execute or enter any potential deals because the BFI’s sell into these fake rally’s, and they buy into these fake collapses. You will almost always see the rally into a Sell-Zone creates the high, and the collapse into a Buy-Zone creates the low. Remember, BFI’s require liquidity because they transact large amounts of OFV. They have the power to create their own liquidity using these Judas Rally's and Collapse. They need ignorant traders to take the opposite side of their orders and to provide the liquidity that the BFI needs. Without a large amount of retail selling, BFI's cannot buy large amounts of OFV. Without a large amount of retail buying, BFI's cannot sell large amounts of OFV. That is why you will almost always see price drop slightly before a strong rally and why you will almost always see price rally slightly before a strong collapse. There is nothing accidental in the markets.
In order for the BFI to buy a bunch, they need a bunch of sellers to buy from them.
In order for the BFI to sell a bunch, they need a bunch of buyers to sell to them.
Imagine if you had a bunch of T-shirts to sell, and you could click a button (a BFI-sponsored Judas Rally), and a whole bunch of buyers show up to your front door. Wouldn't it be very easy to sell all your T-shirts? Yes, and that is exactly what the BFI's do.
It is these fake rallies and collapse into the zones that provide the proper liquidity for the BFI’s to transact their huge orders.
A rally into a Sell-Zone attracts a large number of retail buyers that create a Retail Buy Party at the peak of the rally, which is precisely where the BFI’s are able to transact huge amounts of Sell OFV with ease. We will typically see that the peak of the rally is the high, and most retail traders will find themselves buying the top.
A collapse into a Buy-Zone attracts a large number of retail sellers that create a Retail Sell Party at the peak of the collapse, which is precisely where the BFI’s are able to transact huge amounts of Buy OFV with ease. We will typically see that the peak of the collapse is the low, and most retail traders find themselves selling the bottom.
This is mainly why the majority of retail traders end up on the wrong side of the markets, and the vast majority end up losing in the long-term.
Judas Collapse into a Buy-Zone attracts retail sellers.
When price returns to a valid Buy-Zone for the first time, we typically see a strong sell-off into the Buy-Zone. This is the BFI-sponsored Judas Collapse, designed to attract the average retail sellers who wrongly sell AFTER a collapse in price.
Judas Rally's into a Sell-Zone attracts retail buyers.
When price returns to a valid Sell-Zone for the first time, we typically see a strong rally into the Sell-Zone. This is the BFI-sponsored Judas Rally, designed to attract the average retail buyers who wrongly buy AFTER a rally in price.
One crucial characteristic of these fake rallies and collapse is the FIRST rally into a Sell-Zone, and the FIRST collapse into a Buy-Zone. The first rally into a zone creates a high, and the first collapse into a zone creates a low. These first high’s and low’s into a zone are almost always breached.
That means we do not trust the first price.
Do not trust the first high created by the first rally into a Sell-Zone.
Do not trust the first low created by the first collapse into a Buy-Zone.
The first high or low into the zone is usually breached, so keep this in mind when executing flawlessly and entering a trade at a zone.
Never trust the first high into a Sell-Zone.
Never trust the first low into a Buy-Zone.
Good Deals vs Great Deals
In trading, there are good deals, and there are great deals. As a BFI Trader, your job is to find great deals, and to maximize your risk-to-reward ratios.
For a Buy-Zone, the top half of the zone is Good Deals for a buyer. The bottom half of the zone, the cheaper half, is Great Deals for a buyer (assuming it is not a Zone Wipeout scenario).
The cheaper half of a Buy-Zone is where you will find the least risk highest reward trade scenarios. If a BFI is going to buy at this Buy-Zone, they will initiate their buy programs in the bottom half of a Buy-Zone, the cheaper half.
The bottom half of a valid Buy-Zone is where a BFI is most likely to "click" BUY.
For a Sell-Zone, the bottom half of the zone is Good Deals. The top half of the zone, the more expensive half, is Great Deals (assuming it is not a Zone Wipeout scenario).
The more expensive half of a Sell-Zone is where you will find the least risk highest reward trade scenarios. If a BFI is going to sell at this Sell-Zone, they will initiate their sell programs in the top half of a Sell-Zone, the more expensive half.
The top half of a valid Sell-Zone is where a BFI is most likely to "click" SELL.
Now that we have covered the essential concepts of execution, we are now ready to discuss our precise entry-methods in the next section.
Entry Methods
In this section, we will introduce you to the various entry methods we use to “enter” the deal. Our analysis has identified a potential trade opportunity, "finding" the deal, and now it is time to determine the best method of entry. Remember, the following entry methods are tools, and every trade scenario is unique, and it is your job to determine which tool should be used to best fit the trade scenario. One of these entry methods will work; it is your job to study the trade scenario and determine which entry method would be best implemented for each specific trade scenario.
Entry #1: 50% Of The Zone
This entry is the simplest and the laziest. However, being lazy could be a good thing in this trading game. Measure 50% of the zone, and a limit order is placed at the 50% level, with a stop loss above the zone. This could also be executed manually where you watch how the price reacts when it reaches the middle of the zone and then enter. For this entry, the stop loss is placed about 5 pips beyond the zone. Do not place your stop loss at the top level or bottom level of the zone, nor do you want to place it 1 pip beyond the zone so the spread itself does not take you out. Sometimes price will stay within the zone but stop you out because brokers like to widen their spreads, so make sure when you are stopped out it is because the setup has been invalidated, not because of a wide spread.
50% of a valid zone is our simplest entry method.
This is our most basic and simplest entry but it can be extremely effective, especially for those who are tight on time and would rather set and forget.
Entry #2: 50% Of A Pinbar Wick
This entry must be a LIMIT ORDER entry and it is a conservative entry and not an aggressive entry. Sometimes price does not return to retrace to 50% of the wick, but if it does, this entry gives you a great risk-to-reward ratio. This entry consists of using the 50% level of a WICK only, with a stop loss set beyond the wick. Do not set your stop loss at the wick, or 1 pip beyond the wick, so the spread itself does not take us out. We are looking for a pinbar with a wick that is longer than the body. The longer the wick, the better.
A BFI-footprint validates our Sell-Zone.
Here we have a zone that has been validated with a BFI-footprint. When price returns to this zone for the first time, we may have a potential sell opportunity.
Price has returned to our valid Sell-Zone and a bearish pinbar has printed inside the zone.
Price has returned to our valid zone and has printed a pinbar at the zone on our macro-timeframe. Now we measure 50% of the wick and set a limit order at that price level, with a stop loss above the wick.
Use the Fib tool to measure 50% of the wick only.
Set a limit order at 50% of the wick and it either triggers or it does not.
Our valid Sell-Zone was respected and 50% of the pinbar limit order was triggered.
A valid pinbar prints inside a valid Sell-Zone.
50% of the pinbar is where we set a Sell limit order with a stop loss above the wick.
The next few candles trigger our limit order entry with minimal drawdown.
Entry #3: Retracement Entry
This entry consists of finding a strong and clean impulsive move, and entering at a certain retracement level. However, a retracement level is not enough and I do not take trades based on a Fib level alone. We need our retracement levels to confluence with a valid Sell-Zone or Buy-Zone. This is best done on a 4H chart and up. Do not use a Fib on timeframes lower than the 4H because it is mostly noise, and definitely not on a 15m chart.
Let us go through the steps for this entry because there are key steps we must perform. For those beginners who do not know what an impulsive move is; it is the money-move. The move with the BFI’s behind it.
Impulsive movements vs Retracement movements.
There are two retracement areas that we are interested in and they are the only two that matter. The first is the 50% - 61.8% retracement area. The second is the 61.8% – 78.6% retracement area.
[50% - 61.8%]; This area is the most common level that price reaches.
[61.8% - 78.6%]; This area is called the OVEREXTENSION, where price goes past both the 50% retracement level and the 61.8% retracement level.
Sometimes the price will reach the [50-61.8] area and the price rejects it slightly, only to come back and overextend to the [61.8-78.6] area.
If price goes beyond the 78.6% and goes even further, then it is likely not a retracement and the move could be an impulsive move, and the setup is invalidated.
Retracement levels for a downwards impulsive move.
Retracement levels for an upwards impulsive move.
Now that we have labeled the two areas that are of importance, we can delete the Fib.
These are the two retracement areas where there may be a potential entry.
The next step is to see if there is a valid Sell-Zone or Buy-Zone to the left of our retracement areas. In the case of an upwards impulsive move, we are seeking a valid Buy-Zone to the left. In the case of a downwards impulsive move, we are seeking a valid Sell-Zone to the left. Remember, we do not trade using Fib retracement levels only, as most traders do. We must have an institutional level; a bank level; a BFI level. There must be a BFI level to the left of our retracement area. We do not trade off retracement levels alone. We are BFI Traders and we need a BFI level to confluence with our retracement level.
A valid Buy-Zone to the left of our retracement areas.
A valid Sell-Zone to the left of our retracement areas.
After confirming that we have a BFI level to our left, we need to find a more accurate level within each area, the [50-61.8] area and the [61.8-78.6] area.
To do this, we go on a line chart, which only shows where price closed. Each candle has a high, low, an open, and a close. A line chart only shows the closes.
On our line chart, we need to look left and go as far back as possible in order to find a sensitive price level where we have multiple touches on our chart.
A downwards impulsive move that is beginning to retrace. This is when we use the fib tool to determine our two retracement areas.
Here we have an impulsive move to the downside, and we are seeing prices beginning to retrace, and we have our two areas drawn: [50-61.8] & [61.8-78.6]. The next step is to find a very accurate horizontal line within each of our retracement areas. So we will use a line chart to find a very accurate horizontal line within the [50-61.8] area and we will use the line chart to find a very accurate horizontal line within the [61.8-78.6] area.
Using the line chart, we place a horizontal line that has multiple touches for each of our two retracement ranges. Notice the multiple touches make our horizontal line stronger and more accurate.
In our [50-61.8] range, we have determined a very accurate horizontal line within this range.
In our [61.8-78.6] range, we have determined a very accurate horizontal line within this range.
It should now look like this:
A very accurate horizontal line within each of our retracement areas.
Now the next step is to create a precise 50 pip range; 25 pips above our horizontal line and 25 pips below our horizontal line. Our retracement areas are usually large, and we need to make it much more precise. We do this by creating a smaller retracement area.
For the [50-61.8] retracement area, we add 25 pips above the horizontal key level, and 25 pips below the horizontal key level, which turns our [50-61.8] retracement area into a very accurate 50 pip range.
For the [61.8-78.6] retracement area, we add 25 pips above the horizontal key level and 25 pips below the horizontal key level, which turns our [61.8-78.6] retracement area into a very accurate 50 pip range.
So now we should have two ranges on the chart, each of which are 50 pips wide, and now we can delete the horizontal line, knowing that in the middle of each of our ranges is a very accurate key level taken from our line chart.
This should be the final result of this entry method; now we wait for price to approach these areas and then get on our entry time frame and observe.
Now we have completed the process, and when prices approaches one of these areas, we must be on our micro-timeframe; our entry time frame, prepared and ready to sell when we see a sell-signal on our micro; a bearish pinbar or a bearish engulfing on our micro-timeframe, within one of our retracement ranges.
Price respected the first retracement area and did not overextend into our second retracement area.
We see price has reacted to the [50-61.8] retracement range. Here is how it looks like on our micro-timeframe. In this case, it is 15m since our macro is the 4H.
Multiple entry signals on our entry time frame at our first retracement area.
We see multiple entry signals printed on our micro-timeframe and within one of our retracement ranges. The key to this entry is to find the proper impulsive move, and to make sure the impulsive move is in alignment with the higher timeframe directional bias. The stop loss would be above the candlestick signal that was used for entry; in this case it would be above the bearish pin bar pattern or it would be above the bearish engulfing pattern. Make sure to place your stop loss at a level where the spread itself won’t take you out.
Entry #4: The Liquidity Run
This entry can be taken on any timeframe at any time. This type of event occurs all day long in the currency markets. It is much more common on a 15m chart but it also occurs often on a 4H chart. This is called a Liquidity Run because it is an attack on an area of liquidity, or orders. We know that above a market high sits the stop losses of sellers, and below a low sits the stop losses of buyers. These stop losses are liquidity; orders, and the market always seeks liquidity.
It is very important that this be in alignment with the higher timeframe trend. Context is key for all our entry-methods.
This can also be called a Fake Breakout, but I like to call it entering where all the stop losses are. This is a strategy in itself and it is very accurate especially in the highly manipulated currency markets.
We will be looking for a reversal signal on our micro-timeframe, and entering after a reversal signal prints, with a stop loss above the candlestick confirmation signal.
A reversal signal can be a pinbar, or an engulfing pattern, so we can make sure it is just a liquidity run; a fake breakout, not a real breakout.
Conceptually understanding a liquidity run.
The key in this entry method is to make sure you trade along the directional bias; context is key.
A liquidity run that runs the stops of all buyers before BFI’s perform a BFI-footprint to the upside.
A liquidity run that runs the stops of all buyers before BFI’s perform a BFI-footprint to the upside.
A liquidity run that runs the stops of all sellers before BFI’s perform a BFI-footprint to the downside.
A liquidity run that runs the stops of all sellers before BFI’s perform a BFI-footprint to the downside.
These types of scenarios happen all day long, and as a BFI Trader you can use it to your advantage and enter the market after confirming that it is just a liquidity run, or an attack on the liquidity before the trend continues and BFI’s continue their operations. You will almost always see a BFI footprint right after a liquidity run. Remember, for BFI's to buy a bunch, they need sell-liquidity or OFV. For BFI's to sell a bunch, they need buy-liquidity or OFV. Forever seller, there must be a buyer on the opposite side of the order.
Entry #5: Candlestick Signal Confirmation
This entry method we have saved for last because it can be combined with other entry methods. This is a simple candlestick signal confirmation entry on our micro entry time frame; such as a pinbar candlestick or an engulfing pattern on the micro that is inside our macro zone. There are two ways to set a stop loss for this entry method. A conservative stop loss would be above the zone. An aggressive stop loss would be above the micro candlestick pattern. I usually use the aggressive method and place my stop loss above the candlestick signal confirmation that was used.
A trader can use a conservative stop loss or an aggressive stop loss.
Some traders only use one of these entry methods. Some traders only enter after a liquidity run, and some traders only look for a pinbar at a valid zone to enter at 50% of its wick. Some traders use the 50% of the zone entry method. There is no right or wrong. You must see for yourself which methods you like most and become a professional worksman with that entry tool. Practice them by implementing them and you will become more experienced with each entry tool. Eventually, after you have taken thousands of trades and have traded for many years, you may begin developing your own entry methods based on a deeper understanding of the way markets move.
Targets
Targets are one of the most difficult things in trading. Most traders would say their issue is in their entry or their analysis, but the reality is that most traders have problems with setting targets, if they even set one. Targets is psychology. If you have a problem with targets, then you have a problem with psychology. The reasoning behind this is that most traders do not align their expectations. They set unreasonable targets or they manually bail out early, as if they magically knew ahead of time that the trade will be a loser.
Most traders simply do not have a precise system of getting paid regardless of what the market does. The decisions you make after you enter the markets are usually wrong, and the decisions you make before you enter the markets are usually right. The most difficult time to make a decision is after you have entered the markets and there is money on the line; the point at which you are the most subjective. That is the time where you are most likely to make an emotional decision. However, decisions made pre-entry, are most likely to be very objective and accurate, because you are not attached to any biases and there is nothing on the line, yet.
A target is your paycheck, and nobody can tell you what you deserve to get paid but yourself. Targets are a very sensitive topic and the essence of setting targets is to get paid constantly and consistently. There are many methods to setting targets, but let us revisit the concept of HPT and LPT; high probability trades and low probability trades.
An LPT is a trade that is against the monthly directional bias.
An HPT is a trade that is in the same direction as the monthly directional bias.
In Part 1, we discussed that LPT’s have a closer target, while the HPT’s have further targets. We also said that for LPT’s we close partials and must get paid, while for HPT’s we like to go breakeven and let the whole position run. This is the way to maximize the profit potential of your trading system.
The easiest way to set a target is using the most recent previous market structure; a swing point such as a previous market high or low. You can also set a target as the next valid macro-zone, and ride the trade from zone to zone. A short position can be taken to the next valid Buy-Zone, and a long position can be held to the next valid Sell-Zone.
Closer targets and Farther targets; beginners should close a portion of their position at the closer target.
Closer targets and Farther targets for a Sell position.
In order to align our expectations for targets, we need to understand how the timeframe we enter on is related to the targets that we set.
SCALP:
I consider a 15m entry a scalp trade, (off a 4H macro zone) and the potential of a scalp is 50 pips - 100 pips. 50 pips is an average scalp, and 100 pips is a great scalp.
The main concern here for traders is that there are some traders that enter on a micro 15m chart, and the market moves in their direction 50 pips and eventually 100 pips, but they are still hoping and praying for more, and this false hope prevents them from closing a single penny. For those traders, the market usually reverses and stops them out and they had to watch the entire profit movie, and then ended up with nothing, not even a basic minimum wage was taken from the market. Avoid this mentality at all costs. For most traders, when I ask them if they would make more money if every time they close a portion of their trades at 50 pips or 100 pips, 100% of those I ask said that they would have ended up with more money, not less money. So understand this point and position yourself accordingly. Never be scared of getting paid.
SWING:
I consider a 4H entry a swing trade, (off a Weekly macro-zone) and the potential of a swing trade is 100 pips+.
The problem traders experience with swing targeting is that they take an entry on the 15m chart but expect the market to give them hundreds of pips, hoping it becomes a swing trade. They may also take an entry on the 4H chart but due to a flawed psychology the trader closes out the trade after a few pips. These are all trading errors and they stem from a lack of understanding of proper targeting, and a lack of a very precise profit system.
Your Own Unique Profit System:
As a BFI Trader, it is your duty to develop your own profit system; a system of exactly how you will get paid and exactly when, regardless of what the market does. There are thousands of ways to get paid in this trading game, but you only need to choose one that works for you and your own unique trading style.
For beginners, it is very important that you develop the habit of getting paid. This not only will help a beginner trader financially, but also psychologically, because getting paid develops confidence and trading is a game of confidence. The trader who makes millions is the trader who knows and is absolutely confident that they will do so. The anxious hesitant trader will always be doubting their actions, and the market is great at pinpointing your doubts and exploiting them.
So I would recommend that a beginner trader use the most recent market structure, or swing point. A beginner should set their targets at the most recent previous swing high or low; the closer target. Another simple way for beginner traders is to set a 50 pip target for any 15m entries, and to set a 100 pip target for any 4H entries. This may result in a lower risk-to-reward ratio, but it will develop the habit of getting paid constantly and consistently, and it will definitely improve your accuracy and your confidence. Yes, the market may go a million pips more after your target is reached, but we are not here to make millions; we are here first to develop the proper habits and to develop the proper process of trading, and then after doing so the profits will take care of themselves. You just worry about planting the seeds, watering them, and caring for them, and don't worry about whether or not a flower will sprout.
Most beginners lose money, so setting closer and simpler targets will improve your trading and your trading psychology. Remember, we are here first to develop the proper process of trading and the proper trading habits, and the profits will be automatic. Eventually, it will be hard NOT to make money, although today you may not believe this. But as a beginner, traders should focus on developing the right trading habits, which we will discuss in Part 3: Psychology.
15m micro entry – 4H macro zone;
Scalp trade with a potential of 50 pips to 100 pips
4H micro entry – Weekly macro zone;
Swing trade with a potential of 100 pips+
As mentioned before, do not take a 15m entry and expect hundreds of pips, and do not take a 4H entry and close out after 50-100 pips. Both are common trading errors. Yes, sometimes you may get a 15m entry that becomes a swing trade, but that is not common, so let us plan and prepare for what usually occurs, and not for what rarely occurs.
Trailing Stops - The Most Efficient Method
The best method for setting targets and the method I use most often is trailing the stop loss as the market moves further in your favor. As the market makes more money available to you, you secure more profits as the market provides them. There are many ways to do this but the simplest would be to move your stop loss above the recent high or low that is created, after a BFI-footprint.
After the market creates a BFI footprint, the stop loss level would be placed above the origin of that footprint. As the market moves further in your direction, the stop loss is moved further as well, locking in those capital gains as the market makes more available to you for the taking.
After a BFI footprint, the stop loss is placed above the origin of that footprint, and so on.
This is the best way to maximize your profit potential and squeeze the majority of the market movement. Trail your stop either above a recent zone that has been wiped, or trail your stop above the origin of every BFI-footprint in your direction.
For beginners, I would recommend that for any 15m entry, they should have a very certain action to take when the price moves 50 pips in their favor, such as closing half. For a 4H entry, they should have a very specific action to take when price moves 100 pips in their favor, such as closing the amount of money they risked for that trade and letting the rest run to their farther target.
There are many ways to get paid in this game, but most traders do not have a very specific method of doing so. Getting paid should be a habit; a powerful habit of getting paid regardless of what the market does. If you have a precise system of getting paid, then it shouldn’t matter what price is doing. Retracements are irrelevant because if your scalp system says to close half after price moves in your favor 50 pips, then that is exactly what you do. You either have an action to do, or you don’t; the way price is moving or retracing is irrelevant. Follow your own unique profit system that you are comfortable with, and learn to develop the habit of getting paid constantly and consistently. As the saying goes, you cannot go broke taking profits; but you can go broke constantly taking small profits.
Advanced Execution – Proper Position Pyramiding
In this section, we will discuss how to pyramid a trade, meaning taking multiple entries on a single trade idea. Most traders take one single entry, and hopefully they are able to hold the trade to their target without making any costly errors in execution. Again, if you are not able to handle one single trade entry, then taking multiple entries will only make things worse at a much faster pace. If you have any fear, doubt, or anxiety as you trade, then it is very likely that if you try to attempt this, it will end in disaster.
This section is for the fearless traders who want accelerated account growth. Obviously, this requires a more active trading approach, and it will require more time on a screen as this method entails manual live execution. You must understand that implementing this method is very difficult, and it will require years of experience in trading. However, it is definitely worth the time to learn it and master it. This is a very aggressive form of trading, but aggressiveness does not mean riskier. The one key aspect to understand when using this method is that we NEVER increase our risk ; our exposure must always remain constant and should never increase.
You do not have to risk more to make more; you just need to learn to risk more efficiently using the same amount of risk.
First, let us answer a few questions.
WHICH TIMEFRAME:
This method is best implemented on a 15m micro timeframe using a 4H macro zone. This could work on a 4H timeframe using a Weekly macro zone, but it will require more patience as price moves differently on the 4H chart than it does on a 15m chart.
WHEN:
The question of “when” do we implement this trading method is an important one. You can pyramid and compound any and every trade you take, but I would not recommend it. The best time to implement position pyramiding is as price is leaving a valid zone that has been respected. If price is not respecting the zone and experiencing a zone wipeout scenario, then obviously this method should not be implemented. We pyramid a position as price is leaving a valid zone and it is time for price to leave the zone and begin its downward impulsive moves or BFI-footprints away from the zone.
Proper position pyramiding is best implemented on the final move as price moves away from a valid zone before it begins its downwards impulsive moves away from the zone.
Proper position pyramiding is best implemented on the final move as price moves away from a valid zone before it begins its upwards impulsive moves away from the zone.
The labeled “money-move” is the final move price made before it leaves a valid zone and begins BFI-footprints. This is when price returns to a valid zone for the first time. This is not to be performed on the second or third retest of a valid zone. We only trade the first retest of a valid zone because we understand that if price returns to test the zone a second time or a third time, then we may see a zone wipeout scenario and a trader should adjust accordingly.
Let us see how this final money-move looks like on real charts:
The best time to pyramid a position within a narrow 20 pip range or less.
HOW:
The question of “how” is also an important one. We need to understand that the market will give you a 10 to 20 pip range in which unloading multiple positions would be optimal because price is least likely to retrace back to your entry point. Remember, if BFI's are selling at this Sell-Zone, nobody on the planet can buy enough to push it upwards back into the zone. We do not like drawdown, so the key in this method is to unload your positions and trigger your multiple entries within this tight range which is usually less than 20 pips.
Remember, the more price moves away from the zone and your entry, the riskier it gets to add more to your position because the possibility of a retracement and thus drawdown increases. So, we will use a tight 20 pip range to unload all our positions.
The Number One Rule:
Add an additional position to your initial position only when your initial position is at break even or risk-free. Never increase your risk.
If you add to your position and your initial entry still has exposure, then you are increasing your risk and you are making a classic trading mistake. You only add another entry when your initial position is at break even and it has zero exposure. As we said earlier, you do not need to risk more to make more. You just need to risk what you usually risk but in a much more efficient way.
Let us zoom in on this money-move in red and try to understand the pyramiding process:
Proper position pyramiding as price leaves a valid Sell-Zone and only adding additionals when initials have zero exposure.
After determining that the zone is being respected, and price is about to finally leave the zone, we will define a 20 pip range within which we will begin our position pyramiding method. First, we will take our first entry, entry #1. For example purposes, let us say we are risking 1% of our account on this entry. If this is the prices’ last moments inside the zone, then we will see prices leave the zone as BFI-footprints begin to be printed.
After our first entry, we will make sure price continues its downwards impulsive movement. If price continues to go in your favor, then we will add a second entry, with a stop loss at the first entry, and we will make sure to go breakeven on the first entry, so that will free up our initial 1% risk to be used on a second entry.
Now we have triggered a second entry with an exposure of 1%, but now we have a total position size of 2% with only 1% exposed. If price continues to go in your favor and the trade setup is still valid, we will go breakeven on our second entry, and that will free up our initial 1% risk to be used on a third entry with a stop loss at the second entry. If price continues to move in your favor and you see a BFI-footprint (a strong move down that breaks previous market structure), then we will go breakeven on the third entry and now all our positions should be risk-free.
This will leave us with a position size of 3% in which we have maximum upside potential and zero downside risk, without ever risking more than 1% throughout the entire process. If our initial entry has a risk-to-reward ratio of 1:5, then 3 entry’s should have a risk-to-reward ratio of somewhere near 1:15. This is the power of pyramiding a position properly and generating the profit potential of multiple trades but it is in fact only one downward impulsive move that we are taking advantage of.
You can have as many entries as you like, but remember that the more price drops, the more likely that price will retrace. So, keep a tight 20 pip range or less in which you will unload all your positions so as to experience the least amount of drawdown.
If this is the final move before price leaves the zone, then price will not retrace to your entry points and you should have a great trade that you must ride to your target, based on your own unique profit system or method of getting paid.
For this position pyramiding method, it is recommended that you go breakeven on your trades as soon as possible, but not too soon. If price drops another 5-10 pips after your entry, it would be a good idea to go breakeven. Worst case scenario is that you get stopped out without a loss, but you get the opportunity to observe and re-assess the situation and decide if a re-entry is valid.
Usually when price leaves a zone on the 15m timeframe, the movement will be similar to this:
Classic break and retest movement on a 15m chart as price leaves a valid zone and begins its downwards impulsive moves.
As price exits the zone and begins its downward impulsive moves, on the 15m timeframe price will tend to move in a “break-and-retest” fashion. We can take advantage of this kind of movement on the 15m timeframe and add more positions at the retest of the level that has been broken. You can even risk the floating profits that are being generated by your first three entries, and risk them on the 4th entry at the break and retest. Or you can risk the 1% that was freed up when you moved your 3rd entry to breakeven.
Some traders trade very aggressively as I do, but make sure you never increase your risk and you are always risk-free on your initials before thinking about adding any additional ones. We never increase our risk, because we understand and believe that we can make much more money by using the same amount of risk, safely and efficiently.
Break and retest patterns as price moves downwards and away from the Sell-Zone; potential entry add-to-position points.
Remember, the further the price travels, the more riskier the entries become. The best entries are inside the zone, and as price is leaving the zone. However, you may also add more positions at the retest of a classic “break-and-retest” scenario but understand that the further price moves away from a zone, the more likely it will retrace and the more likely you are to experience some drawdown.
Practice this method on a demo account first so you can make sure you understand the proper process of pyramiding a position first before doing it on a live account. Remember, when our initial entry is at break even and we have freed up that risk, then and only then can we use that risk on an additional entry, and the stop loss of the additional entry will be placed at the same level of the initial entry.
Using these methods and tools properly will allow you to take full advantage of a single A to B price movement. Instead of taking 20 different trades on 20 different pairs, learn to compound a single A to B price movement, and you can achieve the results of 20 trades with only a single pair and a single price movement. This is true trading efficiency.
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