N
ow that you’ve learned the main cornerstones, or building blocks of this approach to trading, we move on to what is really the third section of the book. In the first section we introduced you to the basics: we introduced you to the markets themselves, to the Bet On Markets website, and to the MetaTrader charting software. In the second section we moved on and showed you the actual concepts we use to analyse the markets and to help us make trading decisions.We introduced those concepts to you one by one as a separate sections, and what we’re going to be doing now, in this third section, is show you how all the different concepts we have showed you so far fit together to create a complete approach to making money on the markets.
First of all, let’s recap on the three cornerstones of our trading approach.
Trend, divergence, and support/resistance.
Trend is effectively the prevailing direction of the market. Most of the time, we will be looking to trade in the direction of prevailing trends, and we establish the trend by using the Market Direction indicator.
Divergence is a specific pattern which shows up on technical indicators and indicates that a change of direction may be coming. There are two types of divergences. First of all there’s “regular” divergence, which is a type of divergence which shows us that a trend may be coming to an end. Then there’s “hidden” divergence, which shows when a trend may be about to resume following a retracement.
Finally, there’s support and resistance. The study of support and resistance leads us to the identification of certain levels in the market where a change of direction may occur. This change of direction occurs because sellers come into the market at resistance levels, and buyers come into the market at support levels. This causes a change in the weight of
Putting it all Together
144
buying and selling, altering the ratio of supply to demand in the market and, as a result, prices change direction.
What we are looking for is for all these factors to come together to produce a high-probability trade. What we are effectively looking for is this:
“Divergence signals which occur at strong confluences of support or resistance, and which indicate that the prevailing trend may be about to resume or reverse.”
In a situation like that, you have all the cornerstones of the system working together. A divergence signal is a sign that the market may change direction. If that signal occurs at a level where we can expect a shift in the supply/demand ratio, that then adds to the probability of the signal. And if that signal is pointing us in the right direction as per the prevailing trend of the market, then the probability is even higher.
What we can then do is go to Bet On Markets and place a trade that will pay out a profit provided the market doesn’t do the exact opposite to what the signal is telling us it will do. This is the fantastic edge afforded to us by fixed-odds trading, and means the probability of success in our trading is extremely high.
Let’s actually take a look at an example of how one of our trades might come about:
• Monthly trend is strongly down according to Market Direction indicator.
• Weekly trend is also strongly down according to Market Direction indicator.
• Daily chart shows a bearish hidden divergence re-entry signal. • The signal occurs at an area containing a swing zone, a trend
line, a Fibonacci retracement and two moving averages. • All the indications are that the market will go LOWER, but… • We can actually make money from a trade that the market
won’t touch a level much HIGHER!
In the example above, the monthly and weekly charts are both in a strong downtrend, as per the Market Direction indicator. From that, we therefore know that the longer-term trend is down.
Binary Options Profit Pipeline
We then cross over to our shorter-term charts and look for signals in the direction of that longer-term trend. We then see a bearish hidden divergence signal on the daily chart, which is setting up in an area where a swing zone, a trend line, a Fibonacci retracement, and two moving averages are all converging on approximately the same place to form a “confluence” of resistance.
That means the market is trading at a level where we can expect a significant number of sellers to come in, and for the supply to outweigh demand, which will push the market lower. This is accompanied by a bearish divergence signal on the daily chart, which also indicates that the market wants to move lower. We already know we are trading in a longer-term downtrend, so we have the trend on our side too!
At this point, all three cornerstones of our approach indicate that a downward move is coming in the market. If the signal then gives us the extra confirmation by moving low enough to hit its 50% confirmation line, we can then trade the signal with complete confidence, knowing that the market has already started doing what the signal suggests it will do.
This is therefore a high-probability trading opportunity. Even if you were trading in a more traditional way, you would be looking to “sell” here, meaning you would take a bearish position in the anticipation that the market will fall.
The great thing is that we can actually go one step further than that to put the odds even more in our favour.
We have all the indications that the market will move lower. But we can then go to Bet On Markets and actually place a trade which will pay out a profit provided the market doesn’t move considerably higher!
We can go to Bet On Markets and place what’s called a no-touch trade, which you should already be familiar with from the Bet On Markets chapter (Ch4). The no-touch trade is our speciality and that’s what we will be using going forwards.
In this example, we have all the indications that the market will go
lower, but we can then place a trade that the market won’t touch a level
much higher than where it is now.
We’ll make a profit if the market moves a long way lower. We’ll make a profit if the market only moves a little way lower. We’ll make a profit if the market goes nowhere. We’ll even make a profit if the market
Putting it all Together
146
moves a little higher! As long as the market doesn’t put in a very strong upward move, when all the indications are that it will put in a strong down-move, we will make a profit!
Now let’s just think about that for a moment…
All the indications are there that the market is ready to move lower. The trend says so. The divergence signal says so. And the resistance levels say so. The chances of this market going lower are therefore pretty high. But the chances of this market making a strong move higher are extremely slim. Tiny even!
But at Bet On Markets we can place a trade that following on from this strong bearish signal, the market will not rise strongly. That’s what the no-touch trade allows us to do. It’s an extremely high-probability trade.
It’s just the same as walking into a sporting bookmaker and saying I want to make money if Havant and Waterlooville don’t beat Liverpool!
Remember that from chapter 2? You may also remember that we discussed how it was quite likely that the sporting bookmakers might not have even let you place that trade because the odds are simply too much in your favour. It would be “financial suicide” for a bookmaker, because they’d have tens of thousands of people all over the country coming in and wagering on a near-certainty. It would be obvious to anyone that Havant & Waterlooville would have very little chance of beating Liverpool.
The same kind of near-certainty trades exist in the financial markets—we’ve been just been looking at an example. However, they’re
not obvious to everyone. You can only spot them with special training, therefore Bet On Markets are happy to let us place them. They’ll let us find high-probability situations such as the one in the example we’ve just been looking at and profit from them.
In the example we’ve just been looking at, all the indications are that the market wants to go down. And we can then make money provided it doesn’t go up strongly.
Just because all the indications are there that the market wants to go down, however, that doesn’t mean for sure that it will. You can never predict with 100% accuracy what the market will do, and that’s what makes more traditional trading methods difficult. In more traditional trading methods you have to be right about the direction of the market to make any money.
Binary Options Profit Pipeline
The thing is, you can predict with an extremely high degree of accuracy what the market will not do, which is the great advantage of this style of fixed-odds trading. That’s what we’re going to be looking to do as we go forwards.