41# Escalator to Pips Methodology Trading System
Submit by JanusTrader (written by Forex Factory)
I use this only on GBPJPY however I am sure it can be used on any pair. One pair is enough for me to concentrate on and earn pips from. I set up 4 charts at 15 minutes (15M), 30 minutes (30M), one hour (1H) and 4 hours (4H).
I use and only need one single indicator, the stochastic slow set at 5,3,3. Our trades are always initiated by a simple series of events that happens over multiple time frame stochastics. If you need an explanation of stochastics you will not find it here, please look on the Internet.
1. Ignore the %K, %D cross.
2. Always wait for the 4H chart to lead our entry.
3. Long trades are entered when all 4 time frame stochastics are moving upwards and the solid lines are all above or at 20.
4. Short trades are entered when all 4 time frame stochastics are moving downwards and the solid lines are all below or at 80.
These four rules are our foundation for entering a trade. I wish it was this simple for every trade entry, and most of the time it is. However, there are always some variances to watch for and these are explained in the following charts.
Exit Rules (choose any of the below)
1. Exit at a pre-determined pip amount
2. Exit when you see a reversal in one or more time frames
3. Exit when the 15M hits the line (80 long; 20 short)
4. Exit when any of the other time frames hits the line (80 long; 20 short)
5. NEVER use the 4H chart 80 or 20 line to exit.
By looking at the exit rules you can see why I call this the escalator to pips. As we enter a trade we will ride the 15M, then the 30M and finally the 1H stochastic chart to either the 80 line (long) or 20 line (short).
I think I could actually write a book on stops. In fact this is one of the hardest sections to write and keep short. So, I am just going to tell you how I use stops and leave it at that.
Stops are used to either protect my account or my profits. I never use a stop to stop a bad trade. The stochastics stop my trade, not the stop. That means I am in full control of my trade and it is based on the same exact method I use to make pips. I give my trade lots of room…usually 70-100 pips away from price. My stop is going to get hit if there is something abnormal happening in the world or the market, not because the stochastics are
wrong. You can never lose taking profitable pips. You only lose when you lose a pip profit. Always move your stop to protect your profits. Never cry over lost pips if you made at least 1 pip. You’ll have another trade to make more pips, but how many pip losses can you survive?
The more margin you have the less risk you’ll be at for any single trade. $500 mini account traders carry lots of risk every trade…you have to accept this and have your next $500 ready when something bad happens. If you are trading to protect $500, you are going to have an extremely tough time making pips in Forex because you’ll simply set too low a stop trying to protect too low a margin. I’m not saying you need to lose your $500 on a single trade. What I am saying is don’t set your stops like you only have $500 to trade with…even if that is all you have.
If your in doubt about my stop theory. Sit and watch my trades in my journal and watch how often I hit my stops or how much I lose from stops. Then look at how much I lose. Then you will understand what I am writing about and you will have more confidence in what I suggest.
All charts are only stochastic indicators from GBPJPY. All times are GMT. All charts have stochastics from top to bottom of 15M, 30M, 1H and 4H. Vertical dashed line in each chart identifies a significant time as discussed in each chart. Dashed horizontal lines at the top and bottom of each chart identify the 80 (top) and 20 (bottom) lines.
I have purposely left the price out of each chart to show you that we do not need the price chart to know where our trade is (although knowing how stochastics and price move together is extremely beneficial). We really only need price to know how many pips we are making, or how close we are to our stop.
Every long trade you enter should resemble this chart. In this
sequence, the 15M is higher than we would like and the 4H has
just cleared the 20 line which is not ideal.
Notice every time frame stochastic for this long trade is above
Notice too, that we did not enter this trade until the 4H crossed
the 20 line. There is a huge misleading idea in trading that long
term charts identify the trend. This is false. Long term charts
tell us only what the short term charts have been doing. There is
no guarantee because a long term chart is just starting an up
trend it will continue to go up. However, we do know if our
short term charts reverses, our long term chart will be affected.
You might think I’m splitting hairs on a definition here, but I
am not. I am trying to dispel a false train of thought that you
probably have. I don’t know how many times people state that
“the 15M is doing such and such but it is too short a time frame
to matter”. All I can say is “open your eyes, the 15M chart is
telling you something”.
Statistically we know that stochastics will behave a certain way.
I know in this situation we have about a 99% chance that we will
see continued up ward movement in price based on all four time
frames. The only thing I do not know is how far up the price
will move. What will dictate the limit of the move will be the
15M, the 30M and the 1H charts. The higher the time frame I
ride on the “escalator” the greater my risk is of a price move in
the opposite direction. However the higher up I go the more pips
I have already gained.
Getting back to my explanation of trends and time frames. Each
movement in a lower time frame will affect the time frames
above. It is the degree that a lower time frame affects a larger
time frame that will indicate what our price will do. Why?
Because lower time frame movements build longer time frame
Exite the trade
All our exits appear at the same time; 16:00 however each
will give us a different exit price:
Entry was at 223.50 Long
Exit on 15M is at 224.14 +64 pips
Exit on 30M is at 224.07 +57 pips
Exit on 1H is at 224.81 +131 pips
The discrepancy here is exiting at highs, lows or closes
during each time frame. However, it does not matter, all
Look at the charts and you can see the 15Mchart going for
a wild ride up. If we pay attention to our other time
frames, especially the 30M as it is closest to the 15M, we
can see things are fairly stable.
Can you see how the 15M builds the 30M, the 30M build
the 1H chart?
I can tell the price is going to continue going up in the
15M chart because the downward moves on the 30M chart
and even the 1H chart are almost non-existent. As wild as
the 15M chart is, it is building an upward trend for the
longer time frame charts
The 4H chart during any trade is merely a reference point
to our direction and what the short terms are building.
I can show you a dozen more long trades and they will all
look like this. Shorts are just the opposite.
So how about something tricky and bad. Let’s go on to the