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Saturday, December 10, 2011

QUAD TUNNEL CHARTING part TWO..TRADING the QT - Simple's Green Room #FX

Many thanks to Fred for being willing to try to help people trade better for FREE!

The techniques I use, or have used, are very similar in many regards to the trading techniques discussed by Fred in this post. While I cannot promise you will become rich I can promise you that in the very least this is all rock solid trading educational material.

Here is the source post on Simple's Green Room on investor's hub

Thanks again Fred!


For those who built my Quad Tunnel trading template this is the followup post on what I look for in trading with it. The Quad Tunnel itself is mainly for finding strong support or resistance areas across any time frame. The QT continues to amaze me as far as S/R are concerned.. there are several things that need to be understood about it and the chart itself coupled with experience teaches itself but I will try to point out things to be watching for.

If built as I described in Part One [Guest Post QUAD TUNNEL CHARTING - Part 1] then the EMAs it uses are color coded.... I prefer purple for the EMA(196).. the longest EMA. When the 196 is at bottom of the QT it is a bullish indication.. if 196 is on top its a bearish indication. The lines of the QT cross over each other as a pair trends so long that it goes from bull to bear and bear to bull. I call this a Tunnel Twist.

The QT also has convergence of the Tunnel lines as a major trend begins to lose momentum as well as having divergence as a pairs momentum increases in a trend. Because the QT is built with EMAs of 121,133,169 and 196 the convergence/divergence is being generated at a snails pace but must be watched for and these expansions/contractions are easily observed on any chart and across any time frame.

If any of you have ever built a simple EMA rainbow chart you will more readily understand what the QT is doing. If never involved with an EMA rainbow then for a better grasp of what the QT does build a basic rainbow.. the QT is sort of like a slow motion version of a rainbow chart. Use EMAs of 6,9,12 and 15... or EMAs of 5,10,15 and 20.. matters not as long as they are short EMAs and also equidistant. Once built you will see trends begin and end as shortest EMAs become support on a new uptrend and theres an apparent divergence as the lines rise in perfect order. A new downtrend begins as the rainbow begins to converge then crossover with a perfect order seperation after the trend begins and shortest EMA will be resistance in this trend down.

My dialogue on the rainbow is not meant to confuse but to demonstrate more easily what the QT does.... but the QT has much greater power even on an M5 time frame since it is built with EMAs of 121 minimum bars and 196 maximum bars!

A Quad Tunnel is an excellent S/R level on all time frames from M1 though monthly. Check any pair as price action comes from below and hits the QT.. unless its a news driven move it will stop & reverse at the 196. Normal action will see candles hit the QT from below.. then retrace.. then test it again.. after the test (if it fails) then the pair usually becomes a nice short yielding a lot of pips. If a pair crosses the QT after testing.. it may soon become a long play yielding pips. The QT should be like any other tech tool in that support becomes resistance and resistance becomes support.


Riding The Donchie

Will stop on the QT dialogue but I have tried to bring understanding to the fact that the QT is our major S/R magnet or repellent for price action and in this section will give my criteria for trading this chart template which also uses 3 Donchian Channels and they are where the trade decisions are made since the QT does not always come into play. To be sure I will look to short a pair if it hits an H4 QT from below or may go long on a pair if candles hit the H4 QT from above.The candles are often well removed from the QT area but we want to trade with an eye on the QT level for major S/R.

First a tad bit of psychology is in order here.Many traders are victimized not necessarily by the market but victimized by the flaw in human nature that causes us to place trades based on "bargains".. we are bargain seekers!... always wanting to find "bottoms" to go long and "tops" to go short. Thats all well and good for obvious reasons but this same "flaw" in thinking causes most retail traders to trade trends poorly and constantly find themselves trading against a major trend. The fact of the matter is that most have a hard time buying a new high or selling a new low! Many traders are more apt to do the opposite. The Donchian Channels I use can be a possible cure for this problem. When it comes to trend trading (which is where the most money can be made) there is actually a micro genealogy involved... new highs beget new highs and new lows beget new lows til the trend has exhausted itself!

I use 3 Donchian Channels... one is a 9 period.. next a 26 period and third one is a 52 period.Notice that the parameters are the same as a standard Ichimoku Cloud... 9,26,52. I trade this primally on an M5 or M15 chart but can be used on any time frame.

My bread & butter for trading is the Donchian(9)... I watch the Donchian(9) channel as it establishes itself and I have a short term channel to trade in from its top to its bottom or bottom to its top. If candle action hits top of channel I do NOT enter a short yet.. I watch the QT and any factors that might support the bullish move.. if I see cause to believe the price action may continue up then I watch for a sharp one candle rise that breaks above Donchian channel top.. at this point if my gut and my chart lets me I will open a long!Thats right .. a long!.. I just bought a new high! I would NOT place this trade tho if QT is just above because I know it has very little running room but if support on Donchian 26 or 52 is just below and especially if the QT is just below I am well supported to buy the new high.

The opposite of all I just said is also to be seen.A move down to the Donchian(9) lower line is to be watched... if candle action makes a sharp one candle drop that breaks lower channel line downward I will go short.. that's right! .. I just sold a new low! All support/resistance areas need to be watched tho to make sure your trade will produce enough pips to be worthwhile to enter. If major support is close then stay flat and wait for a better setup.

The major components of this template are the Quad Tunnel and the Donchian Channels. Any other MAs or indicators can be used. I gave details on my full template in the first segment.

Will stop now and its my sincere hopes that you find this info useful to bring greater success to your trading.

Chart is M5 AUD/USD and had numerous trade setups.. the second short arrow from left would have been briefly a small loser but as you can see soon went as expected.

Fred Adams @simplegreen67

Click chart to enlarge

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