My SDH1 trading system - part 2

This is a part 2 of my Supply & Demand trading system on H1 charts traded End Of Day

In part 1 I covered foundation: way of chart analysis, approach to markets, what markets I trade, risk management rules.

In this part I share specifics to offer a complete trading system: entry setup (what exactly needs to be printed on chart for me to enter my orders), entry method (order type and placement), initial stop loss, way to manage the trade, and other considerations such as news, higher timeframes, confluence with other factors, etc.)

Entry setup

Supply or demand zone is the setup I want to see on the chart to consider placing orders.
I draw SD zones on H1 chart. I need a 'fresh' zone, i.e. level not yet tested (I will clarify in future posts).
How I draw the zones: 
For Supply zone, I use the highest high of the consolidation bars and the open of the last bullish candle, typically the one that was engulfed by a bearish candle on a way down.
For Demand zone, the low of the zone is the lowest low of the consolidation and the zone high is the open of the engulfed bearish candle.  Please refer to free materials referenced in the credits section of part 1 for more.
I use discretion in the way I draw zones. Sometimes I will use high or low instead of the open of engulfed candle. This will become clear as I will share more charts.
I mark the zone if there was a brief consolidation and then a fast and significant move in one direction.

Entry method and stop loss placement

I use limit orders to enter. I place orders in the evening, before midnight in CET timezone.

If I trade a supply zone, I place a sell limit order just below the low of the supply zone. "just below" means a couple of pips, it is discretionary. My stop loss is a few pips above the high of the zone.

If I trade a demand zone, I place a buy limit order just above the high of the demand zone. My stop loss is a few pips below the low of the zone.

Trade management and take profit placement

I use set & forget trade management. There is no 'active' trade management. Once the trade is triggered (i.e. my order is filled), I do not touch the trade. I will be closed either at SL or TP level.

TP level is roughly at 2 times the SL distance, e.g. if SL is 20 pips, then the TP will be 40 pips.  [ I know many people believe this is not logical because the market does not 'know' what is my R and TP level should be in a logical place based on market structure not my SL, but this method works for me and usually TP level derived like this happens to be in a quite a logical place]  [I know many believe we should 'let the profits run' and trail the stop, but this method works for me because I have the result fast, it is SIMPLE, and if the market gives me 2R, I take it ]

Deleting unfilled orders. If the market goes really far away from my limit entry and there is another level that justifies placing a trade (a new setup), then I will delete unfilled order (e.g. a buy limit at a demand zone below) and place a new order (e.g. a buy limit at a new demand zone above the previously used).

Other considerations and conditions

News. I ignore the news. News have no impact on my trading decisions. I read the news because I am curious, but I do not use news for decisions.  [I know many advise to refrain from trading before high impact news. It seems that for me and for this method, it is OK to have orders in place even before big news. Often the news will trigger the move that will fill our pending order ]

Higher timeframes. I look at D1 bars and D1 supply and demand zones (I mark them red and green on charts, while the H1 zones I mark grey). I  do not trade long just below daily supply. I do not trade short just above daily demand.  I like trading long right above daily demand. I like trading short right below daily supply (but I still trade H1 levels).

Confluence. Things sometimes I look at include: fibo retracement, support / resistance, previous levels. I trade fresh levels only (i.e. not tested, nothing on the right on the chart after the zone). I also look at trends (but this method is essentially counter trend at a lower timeframe, however I will avoid trades that are evidently counter-trend on a higher timeframe).

Other criteria. My planned TP level at 2R (2 times SL distance from entry) should not be beyond next demand/supply or S/R, e.g. if I go long, and my planned TP level is at or above a supply level, I do not take the trade.  In other words, I do not want my trade to need to break through a "trouble area" such as another SD or S/R level.

Best setups only. The essence of high quality trading. I intend to trade best setups only. More on that soon, with examples of best and not best setups.

Weekend. SDH1 positions usually get closed, at SL or TP, within 1 or 2 days. But what if it is Friday and I have the trade still open? I have no set rule here. If it is at almost SL, I may close it manually, because with weekend spread widening, chances are it will anyway be stopped out. And I do not want to risk a gap opening against my position. If it is very close to a TP, I can also close it and move SL to break even or to 1R TP level. If it is around 1R, I move SL to BE or close.

Time stop. In general you can consider using a time stop for the setup. In SD H1 system, the price "should" do what we expect within a day or two.  If instead, the price is consolidating between your SL and TP... looks like our setup is not valid anymore, so it is a good idea to be disciplined to close it manually vs. hoping or gambling it would reach a TP.  Of course, sometimes it will happen that we closed a position at a small loss while, had we waited, it would be a winner.

Exotic currency pairs. For H1 system the spread is a significant cost. I stick to top 10 majors. For D1 systems, where spread is less important , you can look for more trading opportunities among pairs like CADCHF or NOK/SEK, but spreads will be higher and remember often the pairs are correlated.

Correlated pairs. This is a risk management issue in fact. USDJPY and EURJPY are highly positively correlated. There are many other combinations. If you open a position on both pairs, should it reach SL, likely both will hit SL, so you are doubling your risk.  My reco: avoid correlated pairs, trade just one where the setup looks to be higher quality.  Alternatively, you can trade half the position on both pairs (because if you choose one, often you "would have" a winner on the one you did not trade while no fill or even a loss on the one you traded... again, cost of doing business... better accept than get frustrated... and always take best setups only.

High quality trade. Take high quality trades only. Trades where the trading plan criteria are really met. With the right position size, SL placement, TP placement. After each trade, do the quality assessment. This is independent from a monetary outcome. You can have a poor quality winning trade and high quality losing trade. Whether it is a loss or win, it is almost "random", whether at this instance of our trading edge it paid or not. Whether it is a quality trade, is a reflection of our decisions.  So, review each trade in the journal and grade its quality. Review, especially poor quality ones and think how to eliminate them (i.e. do not over trade).

Summary 

This describes a complete trading system I use: entry, setup, risk management rules, stop placement and position sizing, and other considerations.

In the future posts I will cover some other important factors such as trading journal, tools used, logistics, effective mindset and beliefs, etc. For complete understanding of the method please also refer to Sam Seiden video referred to in part 1.


Happy to take your questions or comments. Feel free to share with your friends.