Advanced system #13 (The Floor Trader System)

Yesterday I've got another great feedback from one of our readers - Rahul.
He writes:

Hello Edward,

I have found a strategy which is the real thing .... it has been used by a contemporary of Denis Richard and used by many professional traders who have made millions from it.

I demoed it and made a 100% profit every day for 5 days in a row only taking level 1 signals.
I used to make 2 hundred pips a day to double my account and it worked everyday.

thanks for your kindness

Rahul

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Thank you, Rahul!

Sure, why not highlight it here.
So, here we are, starting a new topic discussion and simply re-publishing the system, with all credits to the source: http://www.trading-naked.com/FloorTraderMethod.htm

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The Floor Trader System

This is a retracement-continuation trading method. It combines trend identification properties of moving averages with the pattern recognition entry techniques.
The primary pattern to look for is the Price Reversal Bar - in conjunction with a retracement within the current Trend Cycle.

RETRACEMENTS

A retracement within a downtrend is a minor rally.
A retracement within an uptrend is a minor decline.

In diagram "A", areas 1 and 2 are rally retracements in the overall downtrend - minor rallies that ended with descents to new lows.

In diagram "A" areas 3 and 4 are decline retracements in the overall uptrend - minor dips that ended with rallies to new highs.

THE PRICE BAR REVERSAL - Buy signal after a decline retracement.

During an uptrend, a decline retracement forms - price bars with lower highs. If the uptrend is confirmed by the Moving Average indicator (explained later), then the trader looks to buy the upside breakout of this temporary decline, by watching the high of the price bar prior to the current price bar. When prices within the current price bar rally above the high of the prior price bar by 1 tick or more, the trader should buy.

Diagram "B" shows two examples. Price bar "X" is the first bar in the decline retracements which rallies above the high of the bar which precedes it.

THE PRICE BAR REVERSAL - Sell signal after a rally retracement.

In a downtrend, a rally retracement forms - price bars with higher lows. If the downtrend is confirmed by the Moving Average indicators, then the trader looks to sell the downside breakout of this temporary rally by watching the low of the price bar prior to the current price bar. When prices within the current bar fall below the low of the prior price bar by 1 tick or more, the trader should sell short. (In the above example, price bar "X" triggers the short sale.)

(In practice, a trailing sell stop adjusted to the low of each successive ascending price bar would be placed, if the trader used one of the new on-line entry systems enabling frequent cancel/replaces. If phoning in the trades, the trader would have to resort to trading at the market or at a limit price "giving up" a tick or two. This procedure would be reversed for buy signals.)

The best retracements will contain 2-5 bars before the reversal occurs. In volatile price moves, 1 bar retracements are sometimes valid. Generally, rally retracements in a downtrend will be steeper and will contain fewer price bars than decline retracements in an uptrend. A retracement lasting longer than 6 bars may be suspect.

The shape of a retracement is also important. The optimum formation consists of price bars which become smaller in range as the retracement progresses. (Example "A" above, for sells.)

Also valid are price bars of equal size "B". Patterns with widening price bars are less reliable and may be skipped "C". This is an area where individual judgment is needed. For buying into an uptrend, "D" and "E" are ideal formations, "F" is questionable.

What makes certain patterns ideal is the "V" shape they form when the Price Bar Reversal occurs. The best trades usually spring from symmetrical V patterns.

THE MOVING AVERAGE INDICATOR

Trend Cycles - looking at the price bar formation in conjunction with the 9 and 18 period moving averages will identify the presence of either an Uptrend Cycle or Downtrend Cycle. Once the trend cycle is known, the trader next looks for retracements.

The Uptrend Cycle is identified by:

1. Prices trading above both MA's (moving averages).
2. The 9 MA line is above the 18 MA line.
3. The slope of one or both of the MA's is up.
(Exception: occasionally the 9 MA will be under the 18, but curving upward, about to cross over. This formation is allowed.)

Number 1 is the primary qualifier; prices must first trade above both MA lines - subject to these 2 conditions:

1. Trade above the lines should last for at least 3 bars. OR
2. Trade should take place at a "significant" distance above the lines (before retracing to touch the MA lines).

The Downtrend cycle is the reverse:

1. Prices trading below both MA's (moving averages).
2. The 9 MA line is below the 18 MA line.
3. The slope of one or both of the MA's is down.
(Exception: occasionally the 9 MA will be above the 18, but curving down, about to cross over. This formation is allowed.)

Number 1 is the primary qualifier; prices must first trade below both MA lines - subject to these 2 conditions:

1. Trade below the lines should last for at least 3 bars. OR
2. Trade should take place at a "significant" distance below the lines (before retracing to touch the MA lines).

TRADE ENTRY SIGNALS

There are three types of entry signals: Level 1, Level 2 and Level 3 (abbreviated as L1, L2 and L3.)

Buy signals, LEVEL 1:

After establishing the Uptrend Cycle a decline retracement occurs, then:

* Prices trade lower to enter the zone between the 9 and 18 period moving averages.
* One or more price bars touch the 18 MA (or penetrate slightly below the MA line)
Once the 18 MA has been touched, watch prices for a rally that breaks above the high of the preceding price bar by 1 tick or more - the Price Bar Reversal, which sets off the L1 buy.

The LEVEL 2 Buy signal:

* The MA qualifiers are the same as with the L1 buy, and prices decline in a retrace from above the MA lines to enter the zone between lines. In the L2, however, a Price Bar Reversal buy signal occurs before the 18 MA is hit. The market begins to rally without touching the 18 MA and triggering the L1 signal.
Level 2 buys are subject to this condition: Do not take an L2 buy right after a Crossback Top (explained later). Wait instead for a Level 1.

The LEVEL 3 Buy Signal:

In this case the Price Bar Reversal takes place above both MA lines (or just touching the 9 MA line) after a shallow retracement. Two qualifiers:
1. The Corssback Top condition as with the L2 signal, and
2. Only take L3 buys if they are the first buy signal in a new Uptrend Cycle.
Qualified L3 buys are not common. The best ones form when the market is trading at new highs in a "runaway" rally, or in mid-range after a strong bottoming formation.

Sell signals, LEVEL 1:

After establishing the Downtrend cycle a rally retracement occurs, then:

* Prices trade higher to enter the zone between the 9 and 18 period moving averages.
* One or more price bars touch the 18 MA (or penetrate slightly above the MA line)
Once the 18 MA has been touched, watch prices for a decline that breaks below the low of the preceding price bar by 1 tick or more - the Price Bar Reversal, which sets off the L1 sell.

The LEVEL 2 Sell Signal:

* The MA qualifiers are the same as with the L1 sell, and prices rally in a retrace from below the MA lines to enter the zone between the lines. In the L2, however, a Price Bar Reversal sell signal occurs before the 18 MA is hit. the market begins to fall without touching the 18 MA line and triggering the L1 signal.
Level 2 sells are subject to this condition: Do not take an L2 sell right after a Crossback Bottom (explained later). Wait instead for a Level 1.

The LEVEL 3 Sell Signal:

In this case the Price Bar Reversal takes place below both MA lines (or just touching the 9 MA line) after a shallow retracement. Two qualifiers:
1. The Crossback Bottom condition, as with the L2 signal, and
2. Only take L3 sells if they are the first sell signals in a new Downtrend Cycle.
Qualified L3 sells are the best when the market is trading at new lows in a "panic" decline, or in midrange after a strong topping formation.

CONTINUATION ENTRY SIGNALS

Continuation buys are additional buy signals given after the first signal in the same Uptrend Cycle. For sells, they are the reverse; additional sell signal, withing the same downtrend, which follow the first sell signal.

The rules are somewhat different for buys vs. sells:

Continuation Buys - The first buy signal in a new uptrend must be monitored, whether taken or not. If this trade stalls, or returns to breakeven, take no additional buy signals in the current uptrend cycle. Wait for a change to a downtrend, and "recycle" to a new uptrend.
If the first buy signal is a winner and a secondary buy signal sets up, take it if the price pattern which creates it is well above the price pattern of the earlier buy signal - no "overlap". (There should be a strong upward slope on the chart.)

Continuation Sells - Additional sells in the same downtrend cycle can be taken with more freedom than in the case of buys.
Continuation sell patterns can overlap as long as the MA line qualifiers hold to the downtrend cycle. However, once three Level 1 sells have taken place, take no more sells of any kind in the current downtrend cycle. Wait for an uptrend cycle to intervene, even if it is an incomplete one (discretionary).

In general, the best trades of any kind, are the first trades of a new Trend Cycle. In other words, the highest % success will be with a trigger on first pullback after the MA crossover.

PROTECTIVE STOPS

Initial Stops: Upon entry of a trade, the initial stop-loss is usually the Pattern Stop, the basic stop in this method.
When a trade shows average follow-through into a profit position, the Pattern stop is placed. For sell stops on a long position, it is 1 tick below the low price of the setup pattern. For buy stops on a short, it is 1 tick above the high price of the setup pattern.
If a trade "stalls" after entry, use Pattern Extended stop, which is the width of the setup pattern multiplied by 2, in most cases. Sometimes it is measured by the pattern before the entry; sometimes the pattern is measured after trade entry, and includes the distance reached before the stall and reverse.

Going to Breakeven: Once the trade is a winner and travels a distance 2X the setup pattern, one can move the stop to breakeven.
Another condition, subject to individual judgment, is to look to exit as breakeven on a stalling trade once 3 or more price bars have formed after entry, including the entry bar. (However, some trades end up winners after trading sideways for a while.)

PROFIT TARGETS

Conservative strategies: Once a trade is profitable, one exit method is to look for "V" reversals in the other direction to signal a possible exit. These can be monitored on a smaller time frame than the trade entry timeframe to give greater accuracy - especially if volatility increases after entry. For example, a winning entry on a 5 minute chart can be monitored on a 3 minute chart for exit levels.
Watching market action as prior price wave tops (if long) and prior price wave lows (if short) is another strategy. If a "V" forms, and prices reverse, and exit may be needed (at the market).

Possible extended profit moves: If a long position shows an increasing profits, a strategy to take advantage of a possible large move is a sequential process -
1. Leave the initial breakeven stop in place.
2. Hold on though the first V reversal declines, as long as B/E stop is not reached.
3. Watch for the formation of ascending price waves; higher highs with higher lows. When the first one forms, move the B/E stop up to a position 1 tick under the low of this upwave; if another clearly-defined upwave forms later, move the sell stop 1 tick under this one as well.
4. Watch the market action at the current days' high. Drop down to a smaller timeframe - the 2 minute chart, if day trading indexes.
5. If the market makes a new high, then "crosses back" under this price, watch the low reached on this downwave. Cancel/replace the sell stop to a position 1 tick below this low, once formed. This strategy, though complex, will reduce of the desire to take profits "before they get away".
6. If the days' high is surpassed, check for important price tops on longer term charts - 15 minute, 30 minute, even daily, for highs reached on previous days. Apply the same crossback sell rules to these levels as well.

If trading with multiple contracts, there is more flexibility. Part of the position can be exited conservatively, while the remainder can be held for a longer move.

The "extended" strategy is nearly the same for winning short sales in a declining market. Make the appropriate substitutions in the above directions.
Once exception: rally retracements in declines tend to carry further than decline retracements during rallies. Buy stops should be given more "room" to avoid exiting too soon on a sharp, but temporary short covering rally.

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Apparently, the strategy promises, but doesn't describe the "Crossback Top" and "Crossback Bottom" cases.

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Screenshots with trading examples are taken from the source: http://www.trading-naked.com/FloorTraderMethod.htm

On the last two screenshots you can notice that Bollinger bands has been added to guide the entries. The settings for Bollinger bands are believed to be (8, 1.8)

Happy trading!

Edward Revy,
http://forex-strategies-revealed.com/
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