The Steam Forex System

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TABLE OF CONTENTS
PREFACE
A SHORT HISTORY
ROAD MAPS
TRADING BEFORE THE LONDON OPEN
False bre ak – 2B
STEAMM STRATEGY
The tre nd
Expone ntial moving ave rage s
Entry filte rs
The STEAMM se t up
REAL TRADING EXAMPLES
PREFACE
“An inve stme nt in knowle dge pays the be st inte re st.”
~ Be njamin Franklin
Trading is a zero sum game.
If you are winning someone else is losing and vice versa.
This is the first thing you have to understand about the financial markets.
If you don't get this you have good chances to join the 95% club of
unsuccessful traders.
The good news is that you can make nice income working from home just a
few hours a day because trading is like any other business.
The other important aspect of the trading is that it is not an art gallery which
means that technical analysis is not all you need to know.
You must learn how markets operate which are the main players and what
they exactly do.
Also you have to learn what market conditions you can trade and which
financial instruments you should use.
To tell the long story short trading is a business and you have to treat it like
that and if you consider treating it like a hobby you’d better do something
more relaxing.
The fact that trading is a zero sum game implies one very important
requirement
- you must have an edge if you want to be a successful trader.
This is the reality and you can't change it.
After the 18 years that I’ve spent on the financial markets as an individual
trader, risk manager (during the world financial crisis) and FX dealer
(during the EU debt crisis) I‘ve learned one thing - the ULTIMATE trading
EDGE you need before you name yourself experienced trader is
KNOWLEDGE.
It is not a holy-grail trading system or secret method for analysis.
Financial markets are always changing and if you want to make money in
the long term you must adapt.
And you can't adapt to the new market conditions if you don't have
sufficient knowledge.
You have to know how the markets work, what the large participants do,
what types of instruments you can use, how the fundamentals affect the
prices, etc.
Remember! Knowledge about the markets will pay the highest interest on
your capital.
Bon voyage!
-Svetlin
A short history
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Financial markets are changing often and in order to trade successfully, you
need to use a range of a few strategies to trade the different market
conditions.
More important, everyone should have a specific trading style that suits
his/her temperament, experience, vision of the financial markets as a whole,
risk aversion, etc.
In this book I will try to explain in more detail what exactly my trading
style is and how I trade the FX market.
For the past 15 years I have seen a lot of strategies that work well and then
fail, but it could not be otherwise.
Technology is developing too fast and it is used by large funds and banks to
give them an advantage. Also the role and behavior of market makers are
changing and that also requires adaptation of some rules of the trading
systems.
There is no way in the presence of super-fast computers and the light-speed

Internet and increase of the daily volume from 1.2 to 5.3 trillion USD, to
apply the same strategies without any change. It should not be forgotten that
the methods of the classical technical analysis were developed in quite
different conditions and speed of dissemination of information.
The currency market was not available for many of the current players back
then.
More popular were the stocks and commodities futures.
The development of various technologies allows almost anyone to trade on

the foreign exchange market, as well as contracts for difference (CFD) and
any other financial instruments.
The development of the same technologies, however, created the so-called

"high frequency traders" (HFT). Armed with super-fast computers, servers
and the Internet connection they have significant advantage over other
market participants.
In the middle of the past decade, the forex market was joined by large
sovereign funds (mainly from Asia). They significantly increased the
liquidity, but started to have
a serious impact on price movements. EUR/USD managed to reach 1.60 in

2008 fueled at least partly by sovereigns buying. This trend was not
confirmed by the fundamentals and as a result, the pair tumbled to 1.23 in
just 3 months. This event convinced me that it doesn't matter what I think
about the forex market or what the classic fundamental and technical
analysis are telling me.
Much more important is what the big market players are intending to do.
They have the resources to move the prices wherever they want, and their
only purpose is to make more money from money. Everything else is
irrelevant for their managers and traders.
For the above stated reasons, I found that for me it is best to follow the "big
money", of course as far as possible.
It is wishful thinking to imagine that a manager of a large fund or dealer at a

major bank in London or New York would call me to tell me exactly when
to buy or sell. Somehow I have to identify what they are doing and try to
follow their actions.
Initially I started with trading strategies based on technical indicators and
chart patterns. This is inevitable, since at the beginning there is no way that
you have an accurate idea of what exactly are the financial markets and
what's working best.
In fact, these strategies were working very well, because the market was not
as crowded as today. Also the computers were not the largest group of
traders. The uptrend in EUR/USD since the beginning of 2002 to the end of
2004 was perfect for trading.
With the opening of London usually a new leg in the direction of the trend
started.
Pullbacks were pretty clear creating good entry points.
Around 12:30AM London time a deeper correction after a test of the

European session extremum (high/low) used to start, which was providing
great trading opportunities. The most popular chart patterns worked almost
perfectly and breakouts of flags or triangles on 1- hour chart could be traded
easily.
In 2006, however, major sovereign funds joined the forex market. They
were well capitalized with money (mainly dollars for diversification into
other currencies) from exports (China) or the high prices of raw materials
(the Middle East, Russia). The market was no longer the same and the old
strategies did not work so well. Funds had enough resources to buy or sell
without any retracement. This immediately changed the notions of
divergence, overbought and oversold conditions.
First breakouts of chart patterns were usually false, because the entry and
exit points were crowded. Then I found out about the price action trading
and the other methods of Joe Ross.
TTE (Trader’s Trick Entry) is an excellent strategy and can be used in any
financial market, as long as there is a trend. However, I did not like the size
of the stop and I had to do something to reduce it. Trends were not as clear
anymore and I had to trade on 1 minute chart.
Unfortunately, at such small time frame this strategy is not effective. Then I
decided to add the good old moving averages to my trading toolbox. This of
course did not happen by accident.
After long hours of screening time, I noticed that before the next leg of the
trend starts, the price retraces to the moving average. Of course there is no
way it will always be the 20-period EMA, because everyone will learn the
set up and trade it. Therefore I had to find a filter that can restrict the
number of losers, but at the same time not increasing the size of the stop.
The quote reading was perfect for achieving these goals.
Moreover, it could help to meet the basic principle of the strategy, which is
to follow big money.
As I wrote, the quotes are the first source of information that can be used by
traders to get an idea of what orders are executed. Of course entries had to
be in the direction of the trend, and the moving averages could be used as
dynamic trend lines and support or resistance levels. Their location and
direction gives us insight on whether a trend is present and whether it is
bear or bull.
Basically, this is the short history of my trading strategy that I named first
TTE of TTE (the terminology of Joe Ross) and then someone came up with
the name STEAMM
(Simple Trick Entry And Make Money). As I said, every trader must have a
range of strategies. In this book you can read about how I trade at the spot
market. Every morning, I start by reading the main news affecting the
financial markets (not just forex), quick overview of the closing of the
previous day (in all major markets) and drawing the so-called road maps.
Road maps

Roadmaps show the technical picture and give me the first entry levels for
the day. They depict the major support and resistance levels and especially
the points of confluence.
I draw my road maps on 15-minute chart, but everyone can select the time
frame suitable for his trading style.
The road maps show all major price levels from daily to 15-minute chart.
Most important for me are the levels on the 1-hour chart, as they are often
tested throughout the day.
Longer-term traders can start with weekly or monthly charts and go down to
4-or 1-hour time frames. In such cases it may not be required to update the
road map every day. I use the following levels of support and resistance:
- Swing highs and lows
- Trend lines
- Moving averages – 20, 500, 100 and 200 EMA
- Pivot points
- Fibonacci retracements
- Psychological levels (round numbers)
- Bollinger bands
The is updated every morning before the start of the European session, but
when you gain experience, it takes only a few minutes. Major levels on a
daily time frame change less frequently, while the moving averages and
pivot points are drawn automatically by the charting software. Only the
horizontal support and resistance levels and probably trend lines and
Fibonacci levels should be updated.
Also it makes no sense to trade all financial instruments that are available.
You have to choose only 2-3 major currency pairs and learn everything
about them. At some point you can guess, with a good degree of
probability, what comes next just by watching the quotes or the candles.
I trade mostly EUR/USD, GBP/USD and EUR/JPY and sometimes the
stock indices DAX and FTSE. The whole procedure of drawing of road
maps takes less than 5 minutes. On charts 1 and 2 you can see road maps
for EUR/USD and EUR/JPY. The ellipses show the buying zones, while the
rectangles show the sell zones.
The first area where you can look for a long position in EUR/USD is
1.3045/40.
This area is based on the confluence of the central pivot point and the 200-
period EMA.
Short position could be open around 1.3100, where we have a round

number, swing high and a pivot (R2). Between the two sell zones there are
several resistance levels (upper boundary of a consolidation, pivot, and
Fibonacci retracement) but none of them is strong enough.
For EUR/JPY the situation is slightly different. The pair has been in an
upward trend and therefore it is much safer to open only long positions. We
can identify to buy zones and as they are within 10 pips, it is advisable to
look for a long entry between them, or closer to the second one (129.80).
When you plot all support and resistance levels on the chart, it looks like a
maze. The idea is not to look at all horizontal, vertical and diagonal lines.
Important for us are only the points where there is a confluence of at least
2-3 support or resistance levels. In addition, I have set some priorities. For
me, most reliable are the swing highs and lows, moving averages and trend
lines. All other levels are only for confirmation and without one of the
main, I would not look for an entry. The more types of support and
resistance are concentrated at some point, the more likely there is someone
else to buy or sell around the same level.
Road map EUR/USD
Chart 1 - Source: MetaQuotes Software Corp.
Road map EUR/JPY

With a few more examples of roadmaps I will try to make it clearer how the
levels of support and resistance are determined and the principles for
defining the buy and sell zones.
On Chart 3 of the currency pair EUR/USD was initially in a downtrend, but

then the price entered a period of consolidation.
In such cases, the direction of the market is no longer clear and we can look
for short and long entries.
On road map initially could be marked first two levels in each direction. If
the technical picture changes throughout the day, the roadmap should be
updated. The first buy zone is 1.3200/195. Round numbers are always very
good support and resistance levels and this time about 5 pips below the
figure we have a swing low, at which was formed a bullish engulfing
pattern. This shows that there was a strong reversal of the direction of the
price move, which is an indication of the presence of larger bids.
The next buy level is 1.3160. At this support the downtrend stops, then the
market goes into consolidation, which forms upward price channel. When a
strong price move ends, it is usually not by accident. It could be expected
that, when the same level is tested again, there will be a good bids or offers.
Sell zone will be just over 1.3250
(swing high and Fibonacci level) and then around 1.3270 (swing high,
central pivot and 200 EMA). I would prefer to look for short entry around
the latter.
Road map EUR/USD
Chart 3- Source: MetaQuotes Software Corp.
On Chart 4 is presented a roadmap of USD/JPY. The pair has been in

consolidation and therefore we can select entry levels in both directions. As
20, 50 and 100 EMA show some signs of an upward price move, the first
buy zone is between 95.15 and 95.00. In principle, a break below 100 EMA
will put the bears in control, but 95.04 is a swing low, and 99.00 is a round
number.
Major market players like to break minor levels and when the price goes to
a stronger support, they start to buy. If there is any stronger support (swing
high/low and round number) near, I prefer to look for entry around it. Short
position could be open around the upper boundary of the consolidation,
which in this case is 95.80. The entry set up could be 2B (false break of the
swing high).
Road map USD/JPY
On Chart 5, you can see another road map of EUR/USD. In this case, the
currency pair is in an uptrend and it is better to look mostly for long entries.
Two small breaks of the trendline however indicate that the prolonged
uptrend is facing difficulties and therefore we can determine also a sell
zone. This will be the last swing high (1.3415), which could be tested at
least.
Appropriate entry techniques are 2B (higher high) or TTE in anticipation of

a 1-2-3 top reversal (lower high). Three buy zones could be identified on
this chart. The first one is 1.3385/80 and it is formed by swing lows and 100
EMA. The second buy zone (1.3370/65) is stronger, as there are two trend
lines and 200 EMA. As I said upward price move was long and may need a
larger correction. This is why I have identified a third area to open a long
position (1.3330/25). This is determined by the swing low where a strong
rally started. In this case, I would open a long position in the first zone, only
if the quotes or price price action strongly confirm the entry. The second
and third zone are much better options.
Road map EUR/USD
Trading before the London open

Once you have the technical picture and buy and sell zones you can follow
the price action to determine the exact entry levels, while the pair did not
show clear signs of trending. Usually the direction of the trend for the day is
determined after the London open with a break of the Asian range. The buy
and sell zones can be used during the rest of the day. If the currency pair is
in a clear trend, it is advisable to open positions only in its direction.
One of the best setups is based on a false price move that occurs between
the opening of the Frankfurt and London (respectively 5:00AM and
6:00AM GMT).
On Chart of 6 you can see a roadmap of EUR/USD around 5:15AM GMT.
The pair was in a strong downtrend and therefore it is advisable to look for
short entries.
The first sell zone is around 1.2880, which is defined by a swing high and
23.6%
Fibonacci retracement. They are just below the 20 EMA. Then comes the
second sell zone around 1.2895/900, where we have a swing high, 100
EMA and round number.
The third area is 1.2918/20, where are the 200 EMA (this is approximately
50 EMA on the 1 -hour chart) and 38.2% Fibonacci retracement. There is
only one buy zone and it is around the swing low reached during the
downward price movement (1.2830). The pair has tumbled 2 big figures in
the previous day without a major correction and a short squeeze is possible.
It is not a bad idea to look for a long entry with a small stop.
Road map EUR/USD

On Chart of 7 you can see how the situation has evolved during the day.
Before the opening of the Frankfurt started an upward price move, which
ended at 1.2881. We can refine the position entry on a chart with a smaller
time frame. The price nears the first area for opening of a short position and
during the test 200 EMA is just above the same area. In this case you can
sell at 1.2880 or ate the 200 EMA, which is one pip higher. The initial
protective stop is from 6 to 10 pips. The target of any downward price move
is the low of the previous day (1.2830 ). With such a stop you will trade
with a maximum risk/reward ratio of 1:5 to 1:8. Depending on the rules for
position management that ratio may fall to 1:3, which is also acceptable. In
this case, the position would have survived with a stop of 6 pips, and the
maximum profit was between 20 and 40 pips.
After the initial test of the resistance there is another one, which I think
gives a better opportunity to open a short position. In my experience, the
test always occurs
around 7:30 AM GMT (±10 minutes). In this case we have a very good
price action signal. At 7:20AM there is a large white candlestick that breaks
a few pips above the resistance level. This shows that the bulls have serious
intentions to drive the pair up and test the round number. However, the next
candle shows that the bulls may have the intentions, but they are not strong
enough. Two consecutive inside candles form, and the second one's range is
the lowest range for the last four periods.
When there is no follow-through after a strong price move, we can expect

reversal. With two successive inside candles the entry level is clear. We
could place a sell stop order 1 pip below the minimum of the second inside
candle (in this case 1.2880). The initial stop is above the last swing high
(1.2887). Seven pips stop is perfectly normal for this position. You can see
that after the break below the inside candles the downward price move is
fast. The pair tumbles 40 pips in about 30 minutes.
This is precisely the idea of this strategy. To open a position when major
players are looking for liquidity before the London open. They know their
job well, and we just have to manage the position in order to catch a larger
part of the price move. Of course we have to do this with very small risk.
Short position in EUR/USD
False break – 2B

In general, it is not advisable to trade when the market is in consolidation

and has no clear trend. Unfortunately, the currency pairs are trading in a
range very often and it is better to have a strategy for such cases.
Most importantly, this strategy must have very precise rules for a protective
stop and money management. The problem with the ranging markets is that
the price has no clear trend and we have to guess what will happen.
Another, much larger problem comes from the fact that many traders do not
manage their risk and open position without stop. If you trade in a trend that
is not so fatal, but if the market is in a period of consolidation, it may cost
you the entire account.
When a currency pair has traded in range for a while, both bulls and bears
have gathered enough power to start a new trend after a breakout. When
this breakout happens, if you are in the wrong direction, you can realize
huge loss for a very short time. As novice traders do not realize that, they
often trade without a protective stop, and suffer severe consequences. The
stop is mandatory in every situation, but if you open a position when the
market is in consolidation, you should place it every time.
The 2B strategy (a.k.a. false break or turtle soup) is very suitable for trading
in a range. The levels for entry and initial stop are perfectly clear. I think
this should be a mandatory feature of any strategy and is something that
should not be compromised. The idea is to buy around the lower boundary
of the range or sell around the upper boundary, after a false breakout. This
false breakout shows that the bears or the bulls still do not have the strength
to drive the market down or up and possibly the consolidation will continue.
Furthermore, during the breakout some traders will open new positions in
its direction. When the price returns back in the range, their stops will be hit
and some of them will reverse. This will accelerate the price move further.
The rules of the 2B strategy are pretty simple. Position is open when the
price breaks one of the boundaries of the range, and then returns back
below or above the broken boundary. 2B can be used as a standalone
strategy or as an option for entry for other strategies. The boundaries of
each range are determined usually by swing highs or lows could be
determined very accurately. When the price breaks one extreme we can
prepare an order to open a position in the opposite direction of this
breakout. The entry level is the oldest extreme ± few pips. How many pips
you will add or subtract from the level depends on what time frame you are
trading.
For example, on a 1-minute chart it is better to subtract 1 pip of a swing

high if you want to open a short position, but on the 1-hour chart you
should use a buffer of 2-3
pips. For example, let's assume that the upper boundary of the range is
defined by the 1.3560 swing high. When the price breaks above this high
we place a sell stop order at 1.3559. The stop is on the other side of the
extremum, that is reached after the breakout.
The positions should be opened only if the size of the stop is within
reasonable limits.
When the break is too large it could be a start of a new trend. The first
objective of the price move is the opposite boundary of the range.
Therefore, the size of the stop must ensure a risk/reward ratio of at least 1:3.
If the break is too large and does not allow us to do that, just skip the signal
and wait for the next one.
Chart 8 shows one perfect example of a situation in which can be used the
2B
strategy. Generally, during the Asian session liquidity is lower and therefore
usually currency pairs trade in range. The first price move when the
European traders come to work is often false. Usually it is used by the
larger market participants to find liquidity to open positions for the main
price move, which begins after the London open. In such cases it is better to
wait for a false breakout and look for 2B entry. Let's see what happens on
Chart 8. The lower boundary of the Asian range is 1.51350 and the price
breaks below. Immediately we place a buy stop order 1 pip above this level
at 1.51375
(the spread should be added in this case). The calculation is pretty simple:
1.51350 (previous low)+ 0.00010 (buffer) + 0.00015 (spread) = 1.51375
You can open the position with a market order, but the stop order is a much
better option. I recommend the stop order, because it eliminates the human
factor.
If you try to open the position with a market order, a moment of hesitation
and you will miss the entry.
When you place the entry order you should use the options of the trading
platform and attach the protective stop. Again, I would like to emphasize
that the risk management is extremely important and therefore you should
try to limit the possibilities for unnecessary errors. We don't know in
advance what should be the size of the initial stop. When I place the entry
stop I attach a protective stop of 15 pips to this order. When the position is
open I calculate the right size of the stop and adjust the level. Thus way I
have a kind of insurance against sudden price spikes that can have
unpleasant consequences for my account. Such price moves do not happen
often, but if you want to trade longer, you have to take care of everything.
In the situation shown in Chart 8, we have a long position in the GBP/USD
at 1.51375, with an initial stop at 1.5127. Given that we expect a price
move to 1.5175, the stop of 10 pips is quite reasonable.
In the present example the price move went beyond the initial target 1.5175,
but this is normal given the fact that the entry was around the London open.
This is a very important issue, so I want to pay it more attention. Liquidity
and volatility are cyclical
throughout the day, which is largely determined by the working time of the
major financial centers. The price move will have more potential when we
open a position at the right time. The best periods for entry are the opening
of the European and U.S.
session. The biggest market players come to work and their actions can
provide strong support. You should keep this in mind and use it in your
strategy. In the example on Chart 8 the maximum profit was about 60 pips,
but the actual result depends on the position management rules.
2В GBP/USD
You can use the 2B strategy not only when the market is in range. The trend
is a sequence of higher (up) or lower (down) highs and lows. When the
price fails to confirm a new high in an uptrend, we can expect a pullback or
trend reversal. In such cases we can use 2B (false breakout of the last
extreme ) for early entry in the direction of the new price move. This entry
is pretty aggressive, as the old trend is still intact.
Although, if it is successful, the risk/reward ratio will be perfect and it is

worth trying.
Ideal conditions for such attempts are present when:
- the price move is losing momentum;
- strong support or resistance level is near;
- the market is oversold or overbought.
On Chart 9 the currency pair USD/JPY was in an uptrend. Another swing

high was broken, but the candles were showing that bulls have some
problems. First candle has a long upper shadow and a very small body,
which is in the lower half of the range.
This is almost perfect shooting star that signals a possible end of the
uptrend. The next candle is a doji with a close almost at its minimum. This
doji could be used for the short entry in anticipation of a false breakout of
the last swing high of the trend.
With the 2B strategy the exact entry point could be not only the previous
extreme, but also a reversal or breakout candle. Inside candles with smaller
range are also a good entry point. In this example a short position is opened
1 pip below the minimum of the doji candle (100.41) with initial stop 2 pips
above its maximum ( the spread should be added - 100.48). Seven pips stop
is pretty normal, given that the target of a possible downward price move is
the lower boundary of the consolidation, which is 100.20. Maximum profit
that could be realized from this position was 25 pips. In this case it was just
the start of a pullback, not a trend reversal.
2B USD/JPY
On Chart 10 you can see another example of the 2B strategy with the
currency pair USD/JPY. This time the chart time frame is 15 minutes. The
upward price move reached strong resistance around 100.85 and the market
has gone in consolidation. The latest swing high of the trend has been
tested, but the price couldn't break above.
Formation of a lower high indicates that a trend reversal could be expected.

In such a situation it is wise to look for options to open a short position.
If we are right we will be short at the very beginning of the new downtrend.
Moreover, this all happens just before the London open, which I think is the
best time to open positions, especially if there is some element of surprise
(in this case false breakout of a lower high).
We have a choice of many different strategies, but in this case I think the
most suitable is 2B. I've noticed that when the entry is not around an
important extremum, very good results could be achieved. Usually always
the best positions are opened after some hidden set ups, as almost all market
participants are focused on another more obvious scenario. Before most of
the good trending price moves, part of the traders should be surprised and
then forced to close out positions and pursue the new trend.
This is providing further acceleration which is very good if you entered

earlier.
In the example on Chart 10 is 1 pip below the lower high at 100.79. The
stop in this case can be over each of the last two swing highs and the
difference is only 3 pips.
More conservative option is the higher high, but there are two tests and the
possibility of a third is very small. Whatever option you choose, the risk/
reward ratio is acceptable as the first target of any downward price move is
34 pips. As you can see, USD/JPY tumbled about 150 pips and the
aggressiveness was worthwhile.
2B USD/JPY
The 2B strategy is not always profitable, but there are situations when you
can avoid unnecessary losses.
On Chart 11a you can see a roadmap of EUR/USD. The pair made a
downward price move in the previous day and during the Asian session
retraced some of the losses. First sell zone is around 1.3030/35, where there
are matching a swing high (1.3032), the central pivot and 200 EMA.
The next appropriate level for a short position is 1.3040, which is

determined by previous swing low. This is a good set up for a 2B entry. We
have to wait for a break above 1.3032 with the hope it will be stopped by
sell orders 1.3040. The entry will be at 1.3031, and the initial stop is
probably between 6 and 10 pips. The first target of any downward price
move is the round number support (1.3000), which allows an acceptable
risk/reward ratio.
Road map EUR/USD
Chart 11a - Source: MetaQuotes Software Corp.

Chart 11b shows how the situation developed during the day. The first
breakout that allows us to apply the 2B strategy is around 7:20AM London
time. The initial stop is 6 pips and the subsequent downward price move is
12 pips. Depending on the position management rules you could realize a
small profit or end up with a stop hit at break even. The price goes up again,
be this time we are looking to sell around 1.3034
(the new swing high). This upward price move is much faster and on 15-
minute chart we have a large bull candle. The bears do not have control of
the market anymore and it is not worthwhile to go short. In such cases it is
better to miss a trading signal than to incur unnecessary losses. Moreover,
during the upward movement after the opening of London it's better to look
for a STEAMM entry. Try to avoid trades that are doomed from the start.
This is one of the characteristics that distinguish successful from
unsuccessful traders.
EUR/USD 15-minute chart
Chart 11b - Source: MetaQuotes Software Corp.
STEAMM strategy
Strategy that I designed is based on the "Trader's Trick Entry” (TTE) by Joe
Ross. The idea is to identify a trend, and then to open a position in its
direction during a pullback. The rules are very simple and straightforward
and meet one of the most important principles in trading - KISS (Keep It
Simple and Stupid).
As I said the name STEAMM was proposed by a fellow trader and means
Simple Trick Entry and Make Money (STEAMM). The idea of Joe Ross is
to use the TTE to open a position before most other traders. My idea is to
open a position even before Joe Ross. Now I will give you the basic rules
for opening and management of positions, and will explain why and when
to apply them.
The trend
The first thing we have to determine is whether there is a trend and what is
its direction. As you know very well, there are various methods to do this,
but I prefer to use the exponential moving averages (EMA ). When the
EMA is calculated, greater weight is attached to the recent closing prices
and the EMA reacts more quickly to the changes in the direction of the
price. This enables me to see early when a new trend begins and to look for
entry signal.
To determine the trend in my trading system I use 20-, 50-, 100- and 200-
period EMAs. As I said, the rules are simple, but they do a good job. When
the 20-period is above the 50-period EMA and together are moving up, the
trend is bullish (Chart 12).
When the 20-period is below the 50 -period EMA and both are moving
down the trend is bearish (Chart 13).
During an uptrend I look only for long entries while in a downtrend I prefer
to sell. The remaining two exponential moving averages (100- and 200-
period) are used mostly as dynamic support and resistance levels. If there is
no very sharp reversal, 100-and 200-period EMAs show that the old trend is
still valid and can provide good opportunities for entry. The first test of the
200 EMA is one of the best trading signals in my arsenal. I trade it with
spot position or binary options. For additional filter I use the quote reading.
Uptrend
Downtrend
Exponential moving averages
Once the presence and the direction of a trend are determined, you just have
to wait for a pullback. The first pullback is the best time to open a position
in the direction of the trend. The trend is just starting and the price move
has more potential. The time when the major financial centers (London and
New York) come to work provides very good trading opportunities.
When more money enters the market, the liquidity and volatility increase.
Good places for entry are the levels of support and resistance and I use
exponential moving averages for this purpose. The advantage of EMA
compared to the swing highs and lows, Fibonacci retracement and pivot
points for example, is that they are dynamic and quickly adapt to the
direction and acceleration of the price movement. This fact gives me an
advantage over the other market participants who watch only the static
levels of support and resistance.
Of course, I chose EMAs as entry levels for my strategy not by coincidence.
This happened after watching the market long enough to find out that when
a trend is developing, often the pullbacks end at EMA. Price usually returns
sharply from the EMA which indicates that large orders were filled.
Probably a hedge fund or bank open positions at the same level. Moreover,
they do not trade for 5-10 pips and the price move will be large enough. I
will have the opportunity to join at the first correction and make at least a
small profit. If major market participants buy or sell, they probably have a
reason for this and it is good for us to do the same. My basic principle in
trading is "follow the big money". Of course if every pullback ends at the
20 EAM on 1-minute, everyone will begin to open position at the same
place and make money. This is impossible in the real life trading. Therefore,
sometimes the pullback stops before the 20-period exponential moving
average occurs before the middle or at 50- or 100-period. This uncertainty
imposes the use of additional filters to determine the exact level and time of
entry.
The time frame of the chart is extremely important. This is the parameter
that determines the initial risk and potential profit for each position. The
larger the time frame of the chart we use for generating trading signals, the
greater should be the initial stop, but bigger potential profit can be
expected. STEAMM strategy and almost any any strategy could be traded
on charts with various time intervals. I prefer to trade with low risk and the
1-minute chart is the right for me. The potential for profit is smaller, but if
the position is open in the direction of the trend of larger time frame, the
results could be much better than expected. Sometimes with the risk of 1-
minute Chart, you can join a
price move with potential that is normal for daily chart. Moreover, the
smaller charts generate greater number of signals and therefore they are
suitable for people who do not have the patience to wait to get the perfect
conditions to open a position.
If I have to wait several hours or days to find a good set up, surely I would
trade a few others in the meantime. As you can guess most of the positions
will be losers.
From my experience I know, that on a 1-minute chart, 2 to 5 good set ups

could be expected. On a daily chart you can wait for good trading signal
days even weeks. There is no right time interval that is valid for everyone.
You should find your own, depending on how much risk you are willing to
take and how much patience you have to wait all the conditions to open a
position to be met.
Entry filters
The test of exponential moving average is only the first requirement for the
set up. To avoid unnecessary losses it is better to use additional filters,
which can reduce the number of losing trades. When signals are generated
on 1-minute chart the choice is limited, because the price moves are smaller
and shorter.
For example, you could find a lot of reversal candles or false breaks. If you
trade this or any other strategy on a chart with larger time frame, there will
be a better choice. Additional filters that I use are the following:
- levels of support or resistance - usually swing highs and lows;
- quote reading;
- Correlation with other currency pairs and financial instruments.
Large orders could be expected around price level where several different
types of support or resistance match. In addition to the exponential moving
average, I use swing highs and lows. Best conditions for STEAMM are
created after a double bottom bull flag (Chart 14) or double top bear flag
(Chart 15) according to Al Brooks'
terminology.
The slight difference is that a breakout of the trend extreme is allowed, but
the requirement for a double top or bottom, at the end of the correction
remains. Actually this is the most important element of the pattern.
What is the logic in using these configurations to open a position?
First, there is the beginning of a new trending price move, which could be
identified by the crossing of 20- and 50-period EMAs.
Let's see what the price action is. The first leg of this trend ends at some
point and a pullback begins. Usually this first leg is with greater
acceleration and the 20-period EMA lags behind the current price levels.
For this reason, the first retracement ends before the moving average is
reached. There is another leg in the direction of the trend and its extreme is
tested. This extreme can be broken or not reached. The idea of the
STEAMM set up is that if there is a trend, those who have started it, will
continue to buy or sell at any pullback, until it is valid. Once they have
bought or sold at any price
level, it is likely they continue to buy or sell at the same level. This process
will be double top or bottom on the chart. The bottoms or tops should be
formed within reasonable time limits, because if the trend is strong, the
correction should not be very large in price and time.
Double bottom bull flag
Chart 14
Double top bear flag
Chart 15
On Chart 16 you can see how should be traded the STEAMM strategy after
a double bottom bull flag forms (a little later there will be real examples).
With thin line is plotted the price movement and the thicker line is the 20-
period EMA. We have an uptrend, followed by a correction reaching above
the 20-period exponential moving average. The next leg of the trend ends
around the first swing low.
During the second correction however, the swing low of the first one
coincides with the 20-period EMA. This is the best place and time to open a
long position. The initial protective stop is just below the double bottom
and for EUR/USD (1-minute chart) is usually 4-5 pips. For GBP/USD,
USD/JPY and EUR/JPY the stop is larger by 1-2 pips because of the spread
and volatility. The first target of the new leg of the trend is the swing high.
It is recommended that this distance is at least 2 times greater than the
initial stop, but I'm trying to achieve even 1:3.
STEAMM after double bottom bull flag
Chart 16
Another filter that I use is the quote reading. This is the most important
factor that determines whether I will open a position and exactly what level
to do this. The quotes give an idea about whether around the exponential
moving average are filled large orders in the direction of the trend.
My basic rule is the ticks in the direction of the trend should be larger than
the ticks in the opposite direction. When looking for a buy signal, the size
of the ticks during the pullback towards the EMA should be 0.4-0.6 pips for
example (sometimes may be smaller or larger). When the price bounces off
the EMA the upticks should be larger and they are typically between 1 and
3 pips. This indicates that larger orders are filled in the direction of the
trend. Based on this information, we can assume that the larger market
participants still open positions in the direction of the prevailing trend.
There's no way we can be 100% sure that this is indeed true, unless we have
a very close friend at the dealing desk of a large bank in London or New
York.
In trading all decisions are based on probabilities, and we must learn to rely
on
them, especially when backed by experience gained over the years.
The actual opening of the position should not be done at the very first test
of the exponential moving average. There is no way to know in advance
that the first tick will be larger.
Usually I wait for a double or triple bottom or top on tick chart and only
then buy or sell (Chart 17). In fact, I watch the quotes from the platform's
quote board rather than tick chart, but this is a matter of personal
preferences. The principles are the same.
Another important rule is that I buy at downtick and sell at uptick. Given
that the size of the ticks usually is at least one pip, I can reduce the initial
stop 20 %. If we consider a single transaction, a pip is nothing. Given,
however, that daily I have 3 to 5 trades in long-term the difference is
significant and the efforts are worthwhile. Major market players also buy at
downtick and sell at uptick, because they need liquidity to fill their orders .
Tick chart
Chart 17
The third filter that I use in my strategy are correlations between the
currency pair that I trade and other currency pairs and financial instruments.
The quotes of many financial instruments move in tandem for a variety of
reasons.
Factors that determine price movements are similar and therefore generate
similar trading signals. Correlations worked best when the risk appetite
determined the actions of the major market participants. Then all risky
assets (currencies like the British Pound, Euro, Australian and New Zealand
dollars, gold, silver, copper, oil, stock indices, etc.) were bought or sold
almost simultaneously. This greatly facilitated the trading, and the traders
just had to follow one or more assets from this group to move before the
financial instrument they trade, and to take advantage of this delay opening
position in the specified direction.
Usually, stock indices were the most active and generate good signals,
which could be traded with currency pairs like EUR/USD, EUR/JPY,
AUD/USD and NZD/USD. Furthermore, some large market participants
were simultaneously purchasing one currency pair (e.g. EUR/USD) and its
crosses (EUR/JPY). EUR/USD
and GBP/USD have always had a good correlation, as the economies of the
Eurozone and the UK are linked and influenced by the same factors. UK is
not in the Eurozone, but is an EU member.
For the above reasons, when trading EUR/USD, I also follow the currency
pairs GBP/USD and EUR/JPY, as well as a major stock index like DAX or
FTSE100. With the price moves of the currency pairs and indices can be
filtered the entries in EUR/USD. Sometimes EUR / USD is testing the 20-
period EMA, but the same EMA was already pierced by the EUR/JPY and
cross was headed towards the 50-period EMA. In such cases it is better to
wait for both currency pairs simultaneously to test the EMA and then to
open a position in EUR/USD. Of course there should be a confirmation
from the quote reading also.
The perfect case, when working with correlations, is when all financial
instruments that we use as a filter have completed their retracements and
resume the trend, while the main currency pair is lagging behind. In this
case, we have an edge, because we can use the other financial instruments
for signal when to close the position.
However, correlations don't always work perfectly. For example, for several
months the correlation between EUR/USD and EUR/JPY was very low
because the activity in USD/JPY increased substantially. EUR/JPY is a
cross pair and is influenced by both currencies. Therefore the cross
(EUR/JPY) could not be used as a filter for the trading of the major
currency pair (EUR/USD). Currently, the entries in EUR/USD can be
filtered only with GBP/USD and not all the time. Unfortunately, situations
like these exist, and the only sure thing in the financial markets is that they
are constantly changing.
The STEAMM set up
Now let me summarize what are the conditions for the opening of a position
with the STEAMM strategy:
- 20 and 50 EMA show that the market is in a trend. When the fast EMA is
above the slow EMA and they are heading north, the trend is up. When the
fast EMA is below the slow EMA and they are heading south, the trend is
down;
- after the last leg in the direction of the trend (best trades are after the first
one) starts a pullback and the EMA is tested;
- the exponential moving average, around which we look for entry,

coincides with previous local swing high or low (this condition is not
required, but if it is met, we have a better chance of success);
- financial instruments that have a high correlation with the currency pair
we trade, also test EMA (it is better if they already bounced off);
- the quote reading shows that around the exponential moving average are
filled larger orders in the direction in which we intend to open the position.
Once you open a position, it is better to manage it actively, not just wait for
the market to hit the initial stop or limit.
Basically, when you are trading the financial markets, you can often see one
of the following two situations. In the first situation you have a limit of 50
pips, the market goes to 49 pips profit, but then returns in the opposite
direction and hits you 10 pips stop. In such cases, we get angry why we've
missed the 49 pips profit for just 1 pip more, and realized a full 10 pips loss.
In the second case, we have a limit of 50 pips, which is hit and we get the
target profit. However, the pair continues in the same direction and goes for
another 200 pips.
We feel totally screwed by the market as for 250 pips price move, we had
realized only some 50 pips profit. Many traders are wondering what to do to
not feel bad in any of these two cases. The solution to this dilemma is to
close the position in several parts. I
have to admit that I learned this style of position management from books
by Linda Raschke and Joe Ross years ago. As it usually happens, until I
was convinced that this is the right way, a few years passed. My advice is
not to waste your time and solve this problem faster. The problem that you
feel fooled by the market is not so scary in itself.
Rather, its consequences could be fatal for your account. The market is
always right and you should not try to revenge for whatever reason.
There are various styles of position management. Al Brooks closes his

positions in two parts, while Joe Ross closes in three parts. I think there
cannot be universal rules, as traders are different and each has its own
understanding of risk and good profits. You have to choose a specific
strategy to manage the position and to apply it consistently.
I prefer the system of Joe Ross. Of course the rules were adapted for my
trading strategy and risk preferences (Chart 18).
The first part of the position is closed for 5-6 pips profit, which is equal to
the size of the initial stop. The second part is closed around the last extreme
of the trend.
Usually the profit is 10-15 pips. With the closing of the first two parts I
have ensured a positive financial result, which fully covers the amount of
the initial stop, and usually provides some profit.
Position management
Chart 18
With the closing of the first two parts of the position we solve the problem
with feeling tricked by the market. Now we have some profit even the stop
of the third part is hit. This fact will let us wait patiently for the price action
to develop. Moreover, if the market is in consolidation, we have some
positive result, which is a much better option than collecting losses.
Closing the third part is slightly more complex and solves the second
problem -
not feeling like a loser and catch only 10 or 20% of the entire price move.
There are two options for closing of the third part. The first is to use a fixed
trailing stop (10 pips for example) and wait for it to be activated. The
second option requires a bit more work. In this case it is positive that we
have some control over the situation and not leave it to the chance.
Recall again that the uptrend is a series of higher highs and lows (Chart 12),
while the downward trend is a sequence of lower highs and lows (Chart 13).
Therefore, if within the uptrend we have a lower high or within downtrend
we have a higher low,
we can expect that trend may be ending. Accordingly, if we have an open

position in the direction of the trend, it is wise to close it and wait until the
situation is clarified, and a new trading signal is generated.
Rules for managing of the last part of the position are simple. They are
based on the key principles of the development of the trend. Once the price
breaks the last extremum of the trend (for example swing high in an
uptrend), I move the stop to break even. Then, if the trend continues, a
series of higher (or lower) highs or lows will be formed.
When you have a long position, after the price breaks above a swing high,
move the stop 1 or more pips below the last swing low.
When you have a short position, after the price breaks below a swing low,
move the stop 1 or more pips above the last swing high.
That's all about the management of the last part of the position.
When you move the stop 3 times, that means that the trend may have gone
too far, and the probability for a larger pullback is high. In this case, close
the position or move the stop closer to the current market levels. You can
also switch to a higher time frame and move the stop according to the same
rules.
If you want to have long-term success as a trader, it is important not only to

find the right place to open positions. Probably much more important is to
manage your working capital. There's no way to make money on consistent
basis if you lose more than you gain in a single transaction. Therefore any
strategy for trading should include rules for money (capital) management.
There are all kinds of complicated formulas for this, but I've chosen a
simple strategy that I found in one of Larry Williams' books.
Once again, the simplest methods give the best results in trading.
For each position my risk is about 0.5% of the current account balance.
Sometimes, when the set up is very good, I allow the risk to be 1%, but no
more.
My approach is a little conservative, but meets my preference to take risks

and gives me peace of mind when I trade. You have choose for yourself
how much of your account to risk for every particular position, but I think
more than 5% is too much.
In my experience, traders take more risk than they should, because they
want to make for example $ 500 per month, trading with a $ 1,000 account.
This is unreal and can only lead to undesirable consequences. The other
reason is because they have the
opportunity to trade with much larger volume because of the leverage.
Always look at what is real and not plan for miracles. If they occur, you will
be pleasantly surprised, but do not count on them.
By the money management rules you have to calculate the size of every
position.
First you must determine how much you will risk in dollar terms depending
on the size of the account. Then divide this amount by the size of the initial
stop (as determined by the trade set up). As a result you will get what
should be the value of a pip of your position size. Here is one example:
- Current balance of the account: $1,000
- Risk per trade: 1%
- Value of the risk per trade: $10
- Size of the stop (pips): 5
- Value of 1 pip: $2
- Position size (EUR/USD): 20,000
The money management system with a fixed percent of the account balance
has one big advantage. This system automatically adapts the amount of risk
per trade, depending on whether we are in a series of winning or losing
trades.
For example, if you have several consecutive gains, the size of the trading
account will increase. If you keep the same percentage for risk, the dollar
amount that you risk per trade will increase. In principle, the size of the stop
is approximately the same and you will automatically trade with larger
volumes. When you get into a losing streak, the size of the account will
begin to decline. This will automatically reduce the amount you risk per
position, and hence the trading volume .
On the subject of money management can be written dozens of books, but

I'm not going to waste your time. What you have to remember is that
trading is a game of probabilities. To win in the long term, we need
somehow to get these probabilities to work for us. The easiest way is to risk
a small share of the account for each position and trade with risk/reward
ration of at least 1:2. If you follow these simple rules, you will be surprised
by the effect.
The design of a good trading system is not sufficient to be a successful

trader. It
turns out, that to apply consistently a few simple rules, is much more
difficult than we think. Sometimes our brain decides to play tricks, and
although you have to buy the test of the 20-period EMA, you buy a few
pips higher. Of course, when you experiment, protective stop is not
required. In most cases, the price will reach the 20-period EMA and you
will add to the position to get a better average price.
Again, you don't protect the position with a stop, because it is only an
experiment (although with real money). It seems like the market knows that
you don't trade by the rules and the price continues to go against you.
Usually, the size of position increases steadily, until you no longer have
funds for new entries. Then you go in a hoping mode, and pray the price to
return at least a couple of pips to get rid of the position at break even or
small loss. Typically, these situations have two outcomes. One is to close
the trade for a huge loss (with or without margin call) and the market almost
immediately to go in your direction. The second option is a little better. You
close the position at break even and only then the market goes in your
direction.
A bigger problem, however, are the consequences. If you have a large loss
usually, you want to revenge to the market and continue with stupid trades.
Sometimes the luck helps and you think that you will always get away, but
eventually you come back to the first situation.
What is the problem with this style of trading?
Discipline to follow even a few simple rules is the most difficult issue in
trading. There are enough good rules for opening and management of
positions, and money management.
Most traders, however, do not realize that if they want to make money
trading these systems, they have to apply their rules, not others. Moreover,
many traders do not bother to develop their own trading system. The fact
that someone else is making money trading by certain rules, does not mean
that everyone can do the same. Strict discipline is very important in order to
be successful trader. To be disciplined you must have the proper mind set.
That means that you have to trade in a way that best suits your
temperament, daily routine, experience, etc. If you try to be someone else,
don't expect to become a successful trader.
Real trading examples
I will start with a typical case of STEAMM (Chart 19). Initially EUR/USD
was in consolidation phase, as evidenced by the flat exponential moving
averages. Around the New York open (3:00PM London time) an uptrend
began, which was confirmed by the upward sloping EMAs. When we have
indications of a trend we should wait for a signal to open a long position
during a test of the 20-period EMA. In this case, the first test ended just
above the average and the entry was missed.
Soon there was a second test where a long position is opened at 1.28302.
The lowest level, reached during the pullback was 1.28290, and therefore
we place initial stop 2 pips below it at 1.28270. The size of the initial stop is
just 3.2 pips, and the distance to the last swing high is 8 pips. This gives us
a risk/reward ratio of 1:2.5, which is perfectly acceptable.
After the test of the 20 EMA the uptrend resumes. The first part is closed
with a profit of 6 pips profit and the second with 11 pips profit. In this case,
the acceleration of the upward movement is good, so we can close the
second part above the swing high gaining some extra pips. After the break
above 1.28380, the stop for the remaining of the position is moved at break
even.
The uptrend continues and after the break of every swing high, we move the
stop 2 pips below the last swing low. Finally, the stop is hit at 1.28510,
which gives about 21 pips profit for the third part. The average profit for the
position is 12.6 pips, making the risk/reward ratio of 1:4.
STEAMM off 20 EMA
Chart 19 - : MetaQuotes Software Corp.
On Chart 20 the exponential moving averages indicate a downtrend, but the

test of the 20 EMA does not give a good opportunity for short entry. The
attempt for resumption of the trend, however, failed and the pair returned
again to test the EMA.
This time we are looking to sell around the 50-period EMA. The quote
reading suggests that someone else is selling, and open a short position at
1.39369, with 5 pips initial stop. For more than 10 minutes EUR/USD is
barely moving, but we manage to close the first part of the position for a
profit of 7 pips.
A subsequent attempt of the bulls to return the pair up met a new wave of
sales.
This shows that we have chosen the right entry level. In the ensuing sharp
downward price move the second part of the position is closed for profit of
9.8 pips. The stop of the remaining of the position is moved at break even.
After the consolidation, the downward price move is developing rapidly and
the stop is moved at +30 pips and then at +40 pips. The third part of the
position is closed for 70 pips profit, as the quotes show that large buy orders
appeared. The average profit of the position is 29 pips with initial stop of 5
pips. This is providing a risk/reward ratio of almost 1:6.
STEAMM off 50 EMA
On Chart 21, you can see how the price move developed after the position
from the previous example was closed. As I said, the quotes shown that
large buy orders entered the market. Candles on the 1-minute chart
indicated that the bulls have intentions to stop the downward trend. After
the selloff, EUR/USD was in oversold condition and a squeeze of the short
positions was possible.
In such cases, wait for the pair to enter a period of consolidation and look
for an entry around the boundaries of the trading range. In this case, we
open a long position near the lower boundary at 1.38458, with a stop at
1.38358. The initial stop is larger than usual, but if you really think that a
short squeeze could be expected, the upward price move will be with
increased momentum. Position is closed again in 3 parts, respectively for
7.5, 11 and 40 pips profit. The average profit is about 20 pips, which gives
us risk/reward ratio of 1:2.
Given that this is a position against the main trend, this ratio is acceptable.
In general it is not advisable to trade this way, but it is also not absolutely
forbidden.
When you decide to do it, you should follow three basic rules:
- market is in overbought or oversold condition and near major support or

resistance - this implies a probability for a long or short squeeze;
- price action and quote reading signal that there are orders in the opposite
direction;
- Always use protective stop.
In the example on Chart 21 I underestimated the strength of the bulls, as the

upward price move continued throughout the next day for 4 big figures.
Such cases show that Al Brooks is very right in saying that with the last part
of the position we should follow the price move to its very end. Sometimes
the profit can be much greater than we may think.
Short squeeze
Following the publication of important economic data have usually the

prices go in one direction and this could provide good trading opportunities.
In such cases the direction of the market is clear and you just have to wait
for the first pullback to find an entry.
For this purpose, you can use a variety of strategies, including STEAMM.
On Chart 22 you can see an example how you can trade after the
publication of the services PMI index for UK. The results were better than
expected and the first reaction of GBP/USD was a 40 pips rally. Then the
pair began a slow correction and you can look for a long entry. In this case,
20 EMA is around 1.5200 and the round numbers are some of the best
support and resistance. The price has hovered just around exponential
moving average for more than 2 minutes, which is a plenty of time to open
a position. I bought at 1.51995 with 1.51940 protective stop.
For currency pairs like GBP/USD it is recommended that the initial stop is
3
pips below the low (or above the high) of the retracement. Once the quotes
touch the 20-
period EMA, they bounce off sharply for another leg up. Because of the
high acceleration of the upward price move I was able to close the first two
parts for bigger than usual profit respectively at +7 and +15 pips. With such
strong upward momentum it is advisable to move quickly the stop to
breakeven.
Finally the third part is closed when the stop is hit at 1.5242. The average
profit of the position is 21 pips with initial stop 5.5 pips. This provides
risk/ratio of 1:3.9.
STEAMM after the release of major economic news
According to Al Brooks, second attempts are more reliable, because often

when the market tries to do something twice and fails, it does the opposite.
For this reason, many pullbacks have 2 legs and he prefers High or Low 2
as a set up for entry. Two legs pullbacks can be used for trading the
STEAMM strategy.
On Chart 23 you can see a real example. If we had opened a position during
the test of the 20-period EMA, the initial stop would be hit. In this case we
have one more reason to wait for the second leg of the correction. The
second option for entry is the 50-period EMA, which is close to a round
number (1.3100).
As you know, round numbers are one of the best levels for entry and if they
are close to the market it is better to wait for a test. In the example on Chart
23, after a 2
legs pullback, the price hovered around 50-period EMA. In such cases it is
better to buy around the minimum reached during the downward
retracement. The initial stop is 5
pips and during the subsequent upward price move first two parts of the
position are closed for 5 and 10 pips profit. The third part was stopped at
break even. The average profit of the position was 5 pips with 5 pips initial
stop.
You should always take into consideration the particular market situation
and choose the most suitable option for entry.
STEAMM after 2 legs pullback
After a break out of a range, you can expect trending price action, so it is
wise to look for entry on the first correction. On Chart 24, you can see how
you can trade this.
The price breaks out of the Asian range and the first correction goes just to
the 20-period EMA. We sell at the EMA with 4 pips initial stop. First part is
closed for 5 pips profit and the second for 11 pips profit. Then the quotes go
back up and stop of the third part is hit at break even. This could be
expected, because the price move before the opening of London is often
false. The big market players are looking for liquidity.
However, after the breakout of the Asian range it is normal to have at least
some price move in its direction. With 4 pips stop we can afford to try
whether it will continue. If we are wrong, there will be a new crossing of
the exponential moving averages, which will provide us with an opportunity
to open a new position.
STEAMM after range breakout
The pair EUR/JPY usually is trending well and is very good for trading
with the STEAMM strategy. On Chart 25 20- and 50-period EMA cross and
go up, giving an indication of the beginning of an uptrend. We are waiting
for the first correction to look for entry for a long position. However, the
price does not reach the 20-period exponential moving average, and then
sharply goes back up. During the next pullback, there is an opportunity for a
double bottom bull flag (Al Brooks terminology).
We have two options for entry. One is the 20-period EMA, and the second
is the swing low of the first correction, which coincides with the 200-period
EMA. For me, the second option is much better, because we have to types
of support levels. In this case, we buy at 120.325, with an initial stop at
120.268 (5.7 pips). Short consolidation just above the 200-period EMA
allows us to refine the entry and thus have a close stop.
Uptrend continues and we close the first part for profit of 6.2 pips and and
the second for +9.8 pips. The stop is moved below every swing low after
the price breaks above the last swing high.
Another sharp upward price move is followed by a sharp return in the

opposite direction, indicating that the bulls may have problems. In such
situations, I prefer to close the remainder of the position and wait for a new
signal. Profit of the third part is 37 pips, which makes an average profit of
17.7 pips. Risk/reward ratio is 1:3. You may have noticed that in this
example the position was opened before the opening of the European
markets. For currency pairs like EUR/JPY this is normal as it is active
during the Asian session.
STEAMM EUR/JPY
Sometimes even if all the conditions for entry are satisfied, the price move
may not develop as expected. For this reason, I use time stop and limit that
help me to escape unnecessary losses. In the situation presented on Chart 26
we have perfect conditions for a short position. The pair breaks below
round number support after the opening of London. This normally should
lead to a downward price move during the European session. The first
pullback stops at the 20-period EMA, which is close to a round number and
we open a short position at 1.2997. The initial stop is just 4 pips. The pair
begins to move slowly down, but this is not normal, given that recently the
largest financial center opened. Usually the time limit for the first part is
activated 5 minutes after the position was opened. In this case, we close the
first part for +3 pips profit.
Downward price move continues with slow momentum, and 10 minutes

after we sold the second time limit is activated. This time, the profit for the
second part is 5 pips.
The stop on the remainder of the position is moved at -3 pips. The pair did
not even reach the low of the first leg down. The stop of the third part was
hit and the average
profit of the position is 1.7 pips. If we had not managed the position
actively probably we could end up with a loss of 4 pips.
The difference between the two results is not that great, but I in the long run
it makes sense to use this type of position management.
STEAMM EUR/USD
The following two charts (27 and 28) also show trades from 14/05 and are
perfect examples what the point of trading a strategy like STEAMM. is The
pair EUR/USD was trading in a range at the beginning of the European
session and I had a position with 1.3 pips loss (not shown) and another one
with 1.7 pips profit (Chart 26) for the day. When the market has no clear
direction a trend trading strategy with active position management will
provide financial result around break even. After 10:00AM
London time the exponential moving averages give another signal for
beginning of an uptrend (Chart 27). During the first pullback I opened a
long position at 1.30145, with initial stop of 4 pips. The first part was
closed for 6 pips profit.
There was another test of the 20-period EMA and the prices went up again,
but the quotes were showing the presence of large sell orders. For this
reason, I closed the second part for 7.5 pips profit. Bears failed managed to
take control and pushed the prices down. The stop of the last part of the
position was hit for a 4 pips loss. The average profit for this position was 3
with initial stop of 4 pips. The market still had no direction, but closing in
parts helped me to end up with a positive financial result.
New downward price move was confirmed by a cross of the exponential
moving averages. I expected a pullback and test of the 20-period EMA

(Chart 28). The upward momentum was slow during the test, and I sold at
1.29855, with a stop at 1.29905. The initial stop had to be at 1.28890 (3.5
pips), but I prefer not to place orders above or below the levels in multiples
of 10.
For this trade the stop was 1.5 pips higher, but it is not a big deal. It seems
that this day liquidity was lower and horizontal corrections were developing
slightly longer than usual. During the seventh minute after the opening of
the position I closed the first part for 1.5 pips profit, and at the tenth minute
the second part for +4 pips. Bears seem to have decided not to give up
easily this time and downward price move continued.
Prices tumbled over 10 pips in about 2 minutes. Immediately I moved the

stop at break even. The downtrend was intact, and I followed by moving the
stop above each swing high. After another attack on the support level
1.2950, it appeared that the bulls will not give up and the last part was
closed for 32.5 pips profit. The average profit for the position was 12.7 pips
with initial stop of 5 pips.
From the last three examples you can see how with active management of
the position you can safely wait for the big market players to decide in
which direction will move the market and then just to follow them.
STEAMM EUR/USD

Like any other strategy STEAMM also has losing positions. On Chart 29
you can see one of them. I will not fool you that this is the ultimate strategy
producing only winners. When you trade with a 5 pips there is not much
you can do if the market goes against you. Accept the loss and just wait for
the next trading opportunity. That's all. You have to treat your losses as
inevitable costs of business.
STEAMM EUR/USD
The first two signals on Chart 30 were missed because the pullbacks were
very strong and the price was turning up sharply. Also there was no
confirmation from the quotes that someone is buying. It is better to miss a
signal if it does not meet important criteria than to incur unnecessary losses.
The price approached the 50-period EMA and there was a chance for a
double bottom bull flag. I opened a long position at 1.28690, with initial
stop at 1.28645 (4.5 pips). The upward price move resumed and I closed the
first two parts respectively for 4 and 8 pips profit. After a quick rally,
however, the quotes sharply returned back down. This is an indication that
large sellers emerges, so I closes the rest of the position for 8 pips profit.
Once the bears show signs of strength, I do not want to stay with a long
position.
The average profit was 6.7 pips with initial stop of 4.5 pips. When trading
on charts with smaller time frame, we can always have the luxury to close
position if it is not clear which of the two camps prevail currently. After the
situation is clarified, we will again have the opportunity to enter in the
direction of the trend (no matter which way it is).
STEAMM EUR/USD
On Chart of 31 you can see how to use technical indicators as additional

filter when trading the 2B set up. The pair EUR/USD has traded in a range
during the Asian session, which lasted through the beginning of European.
There was a false breakout of the lower boundary and it was logical to at
least test the upper one. During this test, however, we have a divergence
between the price and the stochastic oscillator, which indicates that the
upward price move is losing momentum.
Once there was a false breakout of the lower limit of the range, it is better to
sell just after the price action shows that the right direction is down. In this
case we have another advantage. The first top is just below a round number
at (1.4400), and these are some of the best levels of support and resistance.
You can expect that almost every time large orders are placed below and
above the round numbers. The entry level is clear and it is one pip below
the first high. The test of 1.4400 met strong offers and the currency pair
moves down again. We have a short position at 1.43969, with an initial stop
at 1.44040. The risk is 7.1 pips, which is perfectly acceptable for a signal at
15-
minute chart. The entry could be below the low of the bearish engulfing
patter, but then the stop will be significantly larger.
Each trader must decide for himself whether he wants to have a small stop
and or a better confirmation by the price action. The first part of the
position is closed for 7
pips profit and the second for 12 pips profit. Then the downward price
move accelerates, and we follow it by moving the stop above the high of
every candlestick.
The last part of the position is closed for 200 pips profit. What happens in
this example is an exception rather than the rule and you should not expect
any time to make such large profits.
However, you must be ready when the position is opened at the beginning
of a large price move, to wait for it to develop and get as much profit as
possible.
2B EUR/USD
Usually, there are many trading opportunities around the round numbers.
These are natural levels of support and resistance and large market players
place various orders. After a break of a round number support or resistance,
there is often a pullback where we can look for a STEAMM entry.
On Chart of 32 EUR/USD breaks above 1.4200 and initially the quotes go a

few pips above the figure. Before going long, however, I wait for stops to
be hit above the round number, which results in 10-15 pips jump in prices.
Then it is more likely that the whole operation has not been a search for
liquidity.
After the break prices usually test the 20-period EMA and if the quote
reading shows that someone is buying I will open a long position. In this
case, I bought at 1.42009, with an initial stop at 1.4195 (5.9 pips). First part
was closed almost immediately for 7 pips profit. After a brief consolidation
above the round number, upward trend continues and the second part was
closed for 10 pips profit. Then the stop is moved below every swing low
after a break above the last swing high. Third part was closed for 61 pips
profit. The average profit of the position was 25 pips with 5.9
pips initial stop.
STEAMM at round number
STEAMM after a break above or below a round number is one of the best
strategies and I will give you one more example.
The pair EUR/USD was in a downtrend, as evidenced by the location of the

20-and 50-period exponential moving averages (Chart 33). The first attack
of the round number (1.4200) was stopped by large bids, but the second
managed to activate the stops below the figure and the quotes tumbled 20
pips. First pullback reached the broken support, now resistance, and I
opened a short position at 1.42001, with an initial stop of 1.42055 (5.4
pips). Almost immediately the downtrend resumed and the first part was
closed for 5 pips profit. The second part was closed less than a minute later
for 9 pip profit.
Because of the rapid collapse of the EUR/USD after the test of 1.4200, the
stop was moved to +1 pip, and then to +10 pips. Downward price move lost
momentum and I close the last part of the position for +36 pips profit. The
average profit was 16.7 pips with initial stop of 5.4 pips.
STEAMM at round number
Chart 33 - Source: Forex Strategy Builder
When the market is in consolidation we can look for entries close to its
borders.
Best strategy in such cases is 2B, but sometimes you can use other methods
if you have confirmation by the price action.
On Chart 34 the currency pair EUR/USD attempted an upward price move,

but around the 1.4170 resistance have emerged strong offers. These orders
were confirmed by the sharp return from the level the bear trend candle on
1-minute chart. A little later, second attempt for a break above 1.4170
followed, but it also was unsuccessful. You can note several combinations
of a large white candle followed by a large black candle.
This is a sign that the bulls cannot take full control of the market and
implies that a break above the resistance level is less likely. The third attack
gives us the opportunity to open a short position.
We can choose a more conservative approach (2B) or an aggressive sell at

the double top. Short position was opened at 1.41659 with initial stop at
1.41708 (4.9
pips). Prices go back down sharply, and a triple top appears on the chart.
The next
minute we close the first and second parts of the position respectively for
6.2 pips and 9
pips profit. Then we follow the downward price move by moving the stop,
which eventually was hit for 19 pips profit.
Unfortunately, the lower boundary of the range is not tested and another
attack on the resistance level follows. The average profit is 11.4 pips with
4.9 pips initial stop.
When trading in a range always use protective stop, because a break against
your position may lead to huge losses.
Triple top short position
The time before the London open is appropriate to look for a false breakout
of the Asian range. The best option for opening of a position is after a small
break of previous extreme (2B).
Some experienced traders can also use more aggressive approach. One of
these methods is the formation of a double bottom or top close to strong
support or resistance levels.
On Chart 35 you can see one of these cases. EUR/USD breaks below the
Asian range low shortly before 7:00AM (London time) and goes to the
1.4170 support, where are clustered strong bids. In general, liquidity before
the opening of London is not large and these orders can stop the downward
price move. So we have a reason to join with the idea that a double bottom
will form. The stop is very small when we use aggressive approach, so it is
worth a try.
Of course it is good to have confirmation at least from the quote reading.

When you want to go long (as in Chart 35), upticks must be larger than the
downticks. Buy on a
downtick (at 1.41698), as close to the first low as possible. The stop has to
be two pips below the first swing low (4.9 pips). Double bottom is formed
and upward price move starts. The first part is closed for 5.2 pips profit and
the second for 10 pips profit. As this rally is very fast, the stop is moved
immediately at +3 pips. Third part of the position is close at the 100-period
EMA for 29 pips profit. The average profit is 14.7
pips, which provides us with risk/reward ratio of 1:3.
Long position at double bottom
Correlations between different financial instruments are some of the best

filters for trading the STEAMM and any other strategy.
Charts 36 and 37 show how correlation can be used in practice. EUR/USD
tested the 50-period EMA, but EUR/JPY was still above its EMA. I waited
for EUR/JPY to touch its 50-period EMA and opened a long position in
EUR/USD at 1.41978. Both pairs went back up together almost
immediately, and this allowed initial stop of 4 pips. The first part was
closed for 5.4 pips profit and the second for 10.5 pips profit. Unfortunately,
200-period exponential moving average stopped the upward price move of
EUR/USD. The stop of the remainder of the position was hit for 4 pips loss.
Ultimately, the average profit for the position was 4 pips.
Unfortunately, correlations do not work well recently, but you should know
them, as they are a very good tool for any trading strategy.
STEAMM for EUR/USD with confirmation from EUR/JPY

There is an interesting modification of the strategy that I call "Early

STEAMM
entry". In this case, we open the position at the very moment of crossing of
the exponential moving averages before they are heading in one direction.
Mandatory condition is that before the entry the pair should consolidate in a
narrow range on 1-minute chart. Also the quotes must show the presence of
larger orders in the direction in which we will open position.
The advantage of the "Early STEAMM entry" is that we enter at the very
beginning of the new trend. If you open the position near one of the borders
of the consolidation range, you can afford very small stop. It is better the
market to be trending on a higher time frame and the position that we open
to be in its direction. On Chart 38
the currency pair EUR/USD has been in tight consolidation just below the
20- and 50-period EMA. We sell near the upper boundary of the range at
1.39619 with an initial stop of 4.6 pips.
Shortly after the crossing of the two exponential moving averages a new
downward price move started. The first two parts of the position are closed
respectively for 5 and 10 pips profit. Pullback follows and the exponential
moving
averages are tested but the bears are selling and the next leg down begins.
Such price moves are often exhausted quickly, and we can close the last part
for 31 pips profit. In such cases you can only move the stop closer to the
current price levels. The average profit of the position is 15.3 pips with
initial stop of 4.9 pips.
Early STEAMM entry
STEAMM strategy can be traded on any time frame. The difference is that
the greater the time interval, the higher the initial stop, but we can also
expect bigger profit.
On the hourly chart of EUR/USD (Chart 39) exponential moving averages

indicate a bearish trend. The second correction of the downtrend tested the
50-period EMA, which coincides with the level of the swing that was
formed by the first correction. We have perfect conditions for STEAMM
and open a short position at 1.4282. The initial stop this time is 10 pips,
because the trade is on a larger time frame. The position could be opened at
the level of 50-period EMA.
You can also wait for a little break above the EMA and sell 1 pip below it
for 2B entry. The third option is to determine the exact entry level on a
smaller time frame chart as this could be a double top or breakout of
consolidation pattern. The test of the 50-period EMA is followed by a sharp
selloff. We close the position in 3 parts, as the profit targets must be
consistent with the size of the initial stop. The stop for the third part should
be moved above the swing highs on 5- or 15-minute chart. In this case, the
maximum profit for the third part was about 140 pips.
STEAMM on hourly chart
Finally, let me show you an example form the last few days. This is a very
interesting case, because it shows a lot of advantages that we have with the
STEAMM
strategy. The USD was under selling pressure for fundamental reasons and I
was looking only for long entries. Major currency pairs were trending
upwards during the Asian session and the 200-period EMA was supporting
GBP/USD. Around the London open EUR/USD was bought, while the
GBP/USD was still testing the 200-period EMA.
This is a perfect buy set up:
The market has an upside bias;
Correlated currency pair (EUR/USD) starts to move in the direction of the

trend; Currency pair we trade is testing strong support (200 EMA).
In this case GBP/USD tested the 200-period EMA with double bottom and I
bought at 1.5985. The initial stop was at 1.5979 (6 pips). First part of the
position was closed during the tight consolidation for 5.5 pips profit. The
upside price move started with good momentum and the second part was
closed for 14.5 pips profit. Stop was moved to break even. Let me turn your
attention to the first test of the 20-period EMA.
When the quotes show that someone is buying with large orders, I add to
the position when there is a good STEAMM set up. This time a bought 1/3
of the original size at 1.6023 with 5 pips stop. The last part of the position
was closed when the stop was hit at 1.6073.
STEAMM GBP/USD
STEAMM is a strategy for trading in the direction of the current trend,

which is determined by the position and the slope of the 20-, 50-, 100- and
200-period exponential moving averages. Positions are opened at the end of
the pullbacks to the EMAs (mostly 20- and 50-period). The following
conditions could improve your trading results:
- levels of support or resistance - usually swing highs and lows;
- quote reading;
- correlation with other currency pairs and financial instruments.
The more of these conditions are met at the time of the opening of the
position,
the more likely it is to be profitable. Each position must be actively

managed and closed in parts. The first part is closed when the profit is equal
to or greater than the size of the initial stop. The second part is closed when
the profit is two times greater than that of the first.
After the second the second part is closed, move the stop to break even. For
the remainder of the position follow the price move by moving the stop
above the swing highs or below the swing lows. Used time stop/limit and
close the first part after 5-10
minutes (for 1- minute chart entry) if the price stop or limit are not
activated. The second part is closed after 15-20 minutes, and the third after
30 minutes. Position may be closed if the quotes show the existence of large
orders in the opposite direction.
STEAMM strategy can be traded on any time frame. The higher it is, the
larger will be the size of the initial stop, but also a large profit can be
expected. Also, by increasing the time interval of the chart, we reduce the
number of the trading signals.
When trading STEAMM as well as any other system you must strictly
apply the rules for money (risk) management. Very simple but very
effective rule is to risk a fixed percentage of the current account balance.
Follow the big money and your trading will be much easier and much more
profitable!
Document Outline
PREFACE
A short history
Road maps
Trading before the London open
False break – 2B
STEAMM strategy
The trend
Exponential moving averages
Entry filters
The STEAMM set up
Real trading examples

The Steam Forex System

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TRADING BEFORE THE LONDON OPEN

Expone ntial moving ave rage s

REAL TRADING EXAMPLES

“An inve stme nt in knowle dge pays the be st inte re st.”

Trading is a zero sum game.

If you are winning someone else is losing and vice versa.

- you must have an edge if you want to be a successful trader.

This is the reality and you can't change it.

It is not a holy-grail trading system or secret method for analysis.

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There is no way in the presence of super-fast computers and the light-speed

More popular were the stocks and commodities futures.

The development of various technologies allows almost anyone to trade on

The development of the same technologies, however, created the so-called

a serious impact on price movements. EUR/USD managed to reach 1.60 in

It is wishful thinking to imagine that a manager of a large fund or dealer at a

Pullbacks were pretty clear creating good entry points.

Around 12:30AM London time a deeper correction after a test of the

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- Swing highs and lows

- Moving averages – 20, 500, 100 and 200 EMA

- Psychological levels (round numbers)

Short position could be open around 1.3100, where we have a round

Chart 1 - Source: MetaQuotes Software Corp.

Road map EUR/JPY

On Chart 3 of the currency pair EUR/USD was initially in a downtrend, but

Chart 3- Source: MetaQuotes Software Corp.

On Chart 4 is presented a roadmap of USD/JPY. The pair has been in

Chart 4 - Source: MetaQuotes Software Corp.

Appropriate entry techniques are 2B (higher high) or TTE in anticipation of

Road map EUR/USD

Chart 5 - Source: MetaQuotes Software Corp.

Trading before the London open

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Road map EUR/USD

Chart 6 - Source: MetaQuotes Software Corp.

When there is no follow-through after a strong price move, we can expect

Chart 7 - Source: MetaQuotes Software Corp.

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In general, it is not advisable to trade when the market is in consolidation

For example, on a 1-minute chart it is better to subtract 1 pip of a swing

Chart 8 - Source: MetaQuotes Software Corp.

Although, if it is successful, the risk/reward ratio will be perfect and it is

Ideal conditions for such attempts are present when:

- the price move is losing momentum;

- strong support or resistance level is near;

- the market is oversold or overbought.

On Chart 9 the currency pair USD/JPY was in an uptrend. Another swing

Chart 9 - Source: MetaQuotes Software Corp.

Formation of a lower high indicates that a trend reversal could be expected.

This is providing further acceleration which is very good if you entered

The next appropriate level for a short position is 1.3040, which is

Road map EUR/USD

Chart 11a - Source: MetaQuotes Software Corp.

EUR/USD 15-minute chart

Chart 11b - Source: MetaQuotes Software Corp.

Chart 12 - Source: MetaQuotes Software Corp.

Exponential moving averages

Of course, I chose EMAs as entry levels for my strategy not by coincidence.

From my experience I know, that on a 1-minute chart, 2 to 5 good set ups

- Correlation with other currency pairs and financial instruments.