Kaufman with ABC pattern Trading System For MT4
Table Of Contents:
- Kaufman with ABC pattern Trading System For MT4
- Indicator Used and Time Frames
- Trading Strategy
- Long entry
- Short entry
- Conclusion
Please note: This strategy was publicly published in the trading community and is free to use. We do NOT make an attempt to decide if this strategy is profitable or not, because we know that the major factors regarding trading results are the skills/experience of the trader who executes the strategy. Therefore, we are mainly explaining the components and rules of the strategy. If applicable, we are highlighting advantages, disadvantages and possible improvements of the strategy.
The Kaufman with ABC Pattern Trading System for MT4 is a trend-following strategy that works a bit like a moving average strategy. It is basically used to perform scalp trades, which are done in the direction of the trend. Remember, the trend is the trader’s friend until it ends.
The strategy aims to make profit by generating trades that follow the trend, using the momentum indicators as the filters for the trade signals.
Indicator Used and Time Frames
Therefore, it is important to detect the direction of the trend within the context of using the strategy. It is for this reason that an indicator known as the Kaufman V.3 indicator has been introduced. This indicator is meant to detect the trend of the asset.
The indicator is made up of two lines: a white line and a magenta coloured line. The two lines of the Kaufman v.3 indicator behave like two moving averages and the basis of using these lines is the crossover. The white line acts as a fast moving average while the magenta line acts as the slow moving average. So what is traded is the cross of the fast moving average line
over the slow moving average line.
Apart from this indicator, two other indicators are used. These are:
- ABC Pattern indicator
- FX Trender
The ABC pattern indicator is meant to detect the A-B-C pattern on the chart and place a buy or sell arrow on the chart according to where the long and short trade setups are created.
The FX Trender is a momentum indicator which has a vertical range along with a midline marked 0. The indicator line’s location with respect to the midline is what generates the signal to trade using this indicator. The FX Trender’s market extreme function is not used in this strategy.
The strategy can be traded on any currency pair. Time frames suited to this strategy are the M30 and higher time frames.
Kaufman_with_abc_pattern_trading_system_1: Indicator Setup
Trading Strategy
The Kaufmann with ABC Pattern trading strategy relies on the Kaufmann indicator pointing out the direction via the cross of its white line above or below the magenta line. As it does this, the ABC pattern is detected by the ABC pattern indicator, and the confirmation is obtained from the cross of the FX Trender’s indicator line above or below the 0 line in the indicator window. These signals have to align to produce a signal that can be traded.
Usually, the white line of the Kaufmann indicator is required to have crossed the magenta line. What usually plays out is that the line curves back a little towards the magenta line as the price on the chart starts to retrace. The retracement entry is what is traded here. So this is a form of “buy on the dip, sell on the rally” kind of strategy, but on shorter time frames.
Long entry
How do you trade the long trade opportunity? These are the parameters for the setup.
- The first thing that has to happen is that the white line of the Kaufmann indicator must have crossed above the magenta line, and both lines should ideally be pointing upwards to show that the asset is trending upwards. If the lines are pointing sideways, ignore any crossover signal: the market is ranging at this time.
- If the Kaufmann indicator cross has occurred and the lines are pointing upwards, check to see that the indicator line of the FX Trender is above its midline point (i.e. the zero level).
- Wait for the blue arrow to appear below the candles, indicating that the time to buy the asset has arrived.
- Buy the currency pair at the open of the candle that follows the arrow signal to ensure you have not ended up with a repainted arrow.
The chart below showcases the buy trade setup. You will immediately notice that the ABC Pattern indicator tends to throw up a lot of blue arrows. Do not buy on these arrows but ensure that the other parameters have all been met.
You can see on the chart that only one blue arrow signal area was valid. This was the area where the FX Trender was above the zero line and the white line had previously crossed the magenta line, with both pointing upwards.
kaufman_with_abc_pattern_trading_system_2: Long Trade Setup
Stop Loss and Take Profit
Place the stop loss and take profit settings in such a way that the risk-reward ratios for each of these setups is at least 1:3. You must aim to make 3 pips for every 1 pip risked as a stop loss. Place your stop loss below the magenta line, ideally setting it below the lowest low of the preceding 5 candles.
In setting the Take Profit price, use a previous resistance as the benchmark. However, you need to also look at the line of the FX Trender to see what it is doing. If it is still close to the 0 line and shows signs of pointing upwards, then you can extend the Take Profit by setting a trailing stop to keep chasing the advancing price until no further advance is possible. Otherwise, you can also take half the position as profit at the first TP level, then adjust the SL to breakeven and apply a generous trailing stop to chase the rest of the profits risk-free.
Short entry
What are the parameters to look out for when trying to capture a short entry opportunity? These are the parameters for the setup.
- The first thing to check for is that the white line of the Kaufmann indicator has crossed below the magenta line, and both lines should ideally be pointing downwards to show that the asset is trending downwards. Ignore any crossover that occurs and leaves the lines of the Kaufmann indicator still pointing sideways.
- If the Kaufmann indicator crossover has occurred and the lines are pointing downwards, check if the FX Trender is below its midline point (i.e. the zero level).
- Wait for the red arrow to appear below the candles.
- Sell the currency pair at the open of the candle that follows the arrow signal to ensure you have not ended up with a repainted arrow.
kaufman_with_abc_pattern_trading_system_3: Short Trade Setup
Only one red arrow showed a valid signal. Other red arrow signals are considered invalid as the other indicators did not produce matching signals.
Stop Loss and Take Profit Settings
As usual, you have to set the stop loss above the highest price of the 5 candles that precede the entry candle.
The Take Profit setting is set using a previous support as the benchmark. Notice how the price dropped from the entry point and immediately halted its decline once it reached the price level where the previous support was found. The RRR setting of at least 1:3 must be followed to ensure that a single successful trade gives a cushion to guard against three potential losses.
Conclusion
This strategy has a good success rate if the trader is patient to ensure that all components of the strategy are met. It is important to target a risk-reward ratio (RRR) of at least 1:3.
Download the complete system description and the files here:
Partially Automated Trading Besides Your Day Job
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