Forex Snap back Trade – Learning a price action entry technique

The Snap Back entry method. You will learn in this lesson:

1. Why All Indicators Are Lagging
2. Why I Use Indicators
3. Price Action Is Leading
4. The SnapBack Trade Setup
5. The Best Trade Filter For False Entries

 

 Why All Indicators Are Lagging?

Let’s begin with why all indicators are lagging and what that means to you. Interesting fact, over 90% of traders use indicators on their charts in order to help them gauge the market. I use them too but we will get into why in tomorrow’s lesson. First let’s understand why indicators are lagging and how you can use that knowledge to gain an edge in your trading.

I always like approaching things, especially those as complex as the markets, by keeping things as simple as possible. There are many types of indicators ranging from trend indicators, momentum indicators, volume indicators to many types of oscillators. They are all used to help use understand why the current market price is trading where it is and where it is expected to move next.

The problem with indicators helping us to know what the future price is expected to be is that ALL indicators use PAST price data in order to sum their calculations.

All indicators are lagging because they all use past price in order to formulate their current calculations.

In other words indicators are reflecting PAST price behavior.

Let’s take a look at a graph to illustrate this..

Let’s look at a chart with the popular MACD indicator attached. I highlighted with a yellow circle as a point of interest to help you understand how all indicators are lagging.

First focus on the MACD bars in the circle itself. Notice how the middle of the three bars is making a lower low than the previous bar. The MACD itself is negative and is making lower lows, clearly a bearish move.

Now move your eyes up on the chart and look at how price has had a breakout to the upside moving more than 100 pips in just an hour.

If you were using the indicator to help you make trading decisions by the time the following bar prices in the up move it is too late to enter as price has ALREADY made it’s move which is why it is then showing up on the indicator.

Pretty clear how price leads and indicators follow. Go ahead and take a look at some charts today looking at any indicator you choose and notice how this repeats over and over again. Price moves and then the indicator reflects the price move afterwards.

I am not recommending to trade with price alone rather it is just important you first understand why all indicators are lagging before you use them so that you can utilize them in the most profitable way instead of continuing to chase their signals as they chase past price movements.

Why Trade with Indicators?

First we looked at why all indicators are lagging. If you are trading with indicators it is important to first understand that and not be under the false assumption that there are any leading indicators.

Now let’s see why I use indicators to trade. Indicators to traders are similar to pilots and their cockpit instruments. Sure pilots could fly without instruments but they use them to help them know exactly where they are. Same thing when it comes to trading, although a trader could trade with price alone indicators help traders know where they are.

I use two types of indicators that together help me know which way the trend is and when price is oversold or overbought against the trend. I am looking for high percentage trade setups and that is when price is stretched away from the trend. As price resumes back toward the trend like a rubber band stretched apart when released it ‘snaps back’ toward the trend. Now you can see why the setup is called the SnapBack trade.

The first indicator I use is the True Trend. The true trend is a modified CCI to the 333 period. It holds the trend better than any other indicator I have ever seen and I use it to keep me in the trend rather than taking the wrong side of the trade before the trend has actually changed.

The second indicator I use to trade the SnapBack is the Stochastic with custom settings of 34,3,3. The Stoch helps me measure when price is oversold or overbought against the trend. More on that in the fourth lesson which will go over the trade setup itself.

(These indicators are for the Metatrader 4 platform, you can see instructions at the bottom of the page for help downloading Metatrader and installing the indicators.)

True Trend:

Stochastic (34,3,3):

Now let’s look at how your chart should appear once both indicators are attached together. Right now our concern is getting your charts setup so that I can next explain how we use price action to get us in trades ahead of the move and how the two indicators together are used to find high probability setups.

Completed Chart Setup:

Go ahead and setup your charts as in the picture above.

Tomorrow’s I will show you ‘How to use Price Action to get in the trade ahead of the move’ and then we will look at how to put it all together.

If you have any questions you can send me an email. There is info below on downloading both Metatrader and the indicators.

God bless all.

Downloading MT4 Charting Platform:

If you not already using MetaTrader 4 for your charting you can download it
here. Demo accounts do not expire after 30 days but remain open and free.

Download Meta Trader 4 (MT4) [Client Terminal] here:
http://www.metaquotes.net/download/

Downloading the Indicators:

Make sure you close your MT4 before downloading the files

Download one file at a time by saving them to this folder on your C Drive:

C:Program Filesmetatrader 4expertsindicators

Do not try to open it the file, save it.

Indicators:

True Trend
Stochastic
Adding the Indicators:

If you have already downloaded the indicator to add it to the chart click:

Insert > Indicators > Custom > True Trend
Insert > Indicators > Custom > Stoch

Why Price Action is Leading

First we took a look at why all indicators are lagging and then at why to use indicators to trade. Now let’s see how t use price action in order to get into the trade ahead before next putting it all together and seeing how to use price action along with indicators to provide the best trade setup.

Let’s take a look at the chart we used in the first lesson to show why all indicators are lagging.

Now let’s focus on the price bar that caused the MACD to move up AFTER price had moved up then reflecting in the indicator after the fact.

A trader has to be able to perceive what is going to happen next in the market in order to profit from it. The thing is even as a successful trader I cannot predict the market nor the future. If the day ever comes that I do come across a crystal ball that problem will be solved! Until then I have to rely upon my God given creativity and knowledge of how the markets work.

How could a trader get into the trade before the indicator shows the change in direction or signal?

Let’s focus in on price.

As a trader the most important mantra you can remember is “I know nothing” and that is the mentality you need to maintain. I am not smarter than the markets and I cannot figure them out. But through proper trade management and especially money management I am able to consistently profit from the markets while making sure to remain humble so that I am not humbled by the markets themselves.

I DO NOT know what is going to happen ever but I am able to position myself so that I am able to profit from moves in the market. In the above example we are able to see how the price action alone got us into the trade way ahead of any signal an indicator could have given us.

Now we are going to see how to put together the use of price action along with indicators one of the most consistent trade setups “The Snap Back Setup” that will put you on the right side of the trade from the start!

The Snap Back setup

Here is how the SnapBack method works.

“You are able to find high probability setups by waiting for price to be waiting for price to be oversold or overbought against the trend.”

We use the True Trend and Stochastic indicators to show us when this occur. Once price resumes back toward the trend price snaps back toward the trend like a rubber band that is stretched apart jumps back together when released.

Buy entries occur once the Stochastic is below the 30 level showing that price is oversold when the trend is positive shown by the true trend being above the zero line. Once price makes a higher high than the previous price bar you enter the trade long as price resumes back toward the positive up trend.

Sell entries occur once the Stochastic is above the 70 level showing that price is overbought when the trend is negative shown by the true trend being below the zero line. Once price makes a lower low than the previous price bar you enter the trade short as price resumes back toward the negative down trend.

Let’s also take a look at some short setups as the Stoch crosses above the 70 level showing you that price is now overbought against a negative down trending market giving you the opportunity to get into a good trade as price action shows us price is heading back toward the trend.

You can use this trade setup on any pair on any time frame. The sure sign of a solid method.

Go ahead and look over your charts first spotting the SnapBack setup and then seeing the entry and how far back price tends to snap back toward the trend from entry. Once you are more familiar with and comfortable with the setup you can begin taking trades on a demo account to gain the experience and confidence you need to trade live.