Price action strategy the STEAMM

TABLE OF CONTENTS
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


PREFACE
“An investment in knowledge pays the best interest.”
~ Benjamin 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
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 4or 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

Chart 2 - Source: MetaQuotes Software Corp.
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

Chart 4 - Source: MetaQuotes Software Corp.

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 12-3 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

Chart 5 - Source: MetaQuotes Software Corp.


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

Chart 6 - Source: MetaQuotes Software Corp.
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

Chart 7 - Source: MetaQuotes Software Corp.


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

Chart 8 - Source: MetaQuotes Software Corp.

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.