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Presents 

Forex 3T 
Trading Strategy 
eBook 

By James Chen, CTA, CMT 

FXpath.com | Copyright 2010 James Chen, CTA, CMT


FXpath.com Presents: Forex 3T Trading Strategy eBook by James Chen, CTA, CMT

IMPORTANT NOTE: Please direct all inquiries regarding this document and all requests for this
document to the website: FXpath.com, or to the email address: ebooks@fxpath.com.

Copyright

No part of this publication may be reproduced, transmitted, or distributed in any form or by any
means, mechanical or electronic, including photocopying and recording, or by any information
storage and retrieval system, without permission in writing from the Author (except by a
reviewer, who may quote brief passages in a review.)

Risk Warning

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all
investors. The high degree of leverage can work against you as well as for you. Before deciding
to trade foreign exchange you should carefully consider your investment objectives, level of
experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of
your initial investment and therefore you should not invest money that you cannot afford to lose.
You should be aware of all the risks associated with foreign exchange trading, and seek advice
from an independent financial advisor if you have any doubts.

Market Comments/Opinions and Distribution

Any opinions, comments, or other information contained on this document is provided as general
market commentary, and does not constitute investment advice. The author and distributor of this
document will not accept liability for any loss or damage, including, but without limitation to, any
loss of profit, which may arise directly or indirectly from use of or reliance on such information.
These comments are for information purposes only. The information contained on this document
does not constitute a solicitation to buy or sell, and is not to be available to individuals in a
jurisdiction where such availability would be contrary to local regulation or law. It is the
responsibility of readers of this document to ascertain the terms of and comply with any local law
or regulation to which they are subject. Opinions, market data, and recommendations are subject
to change at any time.

Hypothetical Results

Hypothetical performance results have many inherent limitations, some of which are described
below. No representation is being made that any account will or is likely to achieve profits or
losses similar to those discussed in this document. In fact, there are frequently sharp differences
between hypothetical performance results and the actual results achieved by any particular trading
program. One of the limitations of hypothetical performance results is that they are generally
prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial
risk, and no hypothetical trading record can completely account for the impact of financial risk in
actual trading. For example, the ability to withstand losses or to adhere to a particular trading
program in spite of trading losses are material points which can also adversely affect actual
trading results. There are numerous other factors related to the markets in general or to the
implementation of any specific trading program which cannot be fully accounted for in the
preparation of hypothetical performance results and all of which can adversely affect actual
trading results.

FXpath.com | Copyright 2010 James Chen, CTA, CMT Page 2


FXpath.com Presents: Forex 3T Trading Strategy eBook by James Chen, CTA, CMT

ABOUT THE AUTHOR

James Chen, CTA, CMT is Chief Technical Strategist at FX


Solutions, a global leader in foreign exchange trading. He is
also a registered Commodity Trading Advisor and a Chartered
Market Technician.

He is the author of the books, Essentials of Foreign Exchange


Trading (John Wiley & Sons, 2009) and Essentials of Technical Analysis for
Financial Markets (John Wiley & Sons, 2010), as well as author of the
instructional video DVD set, High-Probability Trend Following in the Forex
Market (FXstreet, 2010).

Mr. Chen contributes daily and intraday technical analysis to key financial
media, is a frequent speaker at trading seminars, and has authored numerous
articles on forex trading strategies and technical analysis in major financial
publications.

He has been quoted by:


- Reuters News
- Dow Jones Newswires
- The Associated Press (AP)
- International Herald Tribune

And his feature articles have been published in:


- Forbes.com
- Futures Magazine
- Technical Analysis of Stocks and Commodities Magazine
- Stocks, Futures and Options (SFO) Magazine
- Forbes Media’s Investopedia
- International Business Times
- FX Street

Mr. Chen graduated from Tufts University with a degree in social


psychology, and has been a currency trader and market analyst since the
inception of the retail forex market.

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FXpath.com Presents: Forex 3T Trading Strategy eBook by James Chen, CTA, CMT

Forex 3T Trading Strategy

The Forex 3T Trading Strategy is a high-probability


approach to trading in the forex market. “3T” can either
represent “three timeframes” to denote the multiple
timeframe aspect of this approach, or it can represent the
three T’s of “Trend,” “Turn,” and “Trailed-entry,” which
together describe the strategy’s methodological process.

The variation of multiple timeframe trading that will be


described here is loosely-based upon a time-tested trading
approach that originates from Dr. Alexander Elder’s Triple
Screen methodology. The 3T strategy has been customized
and enhanced for trading in the forex market. Although
primarily a discretionary trading strategy, 3T’s rules can be
customized to be as rigid or as flexible as required by each
specific trader or trading style.

As with other trend-following strategies, this trading


approach tends to thrive in trending conditions while
attempting to avoid choppy, whipsaw markets. Since
currencies are well known to have a tendency towards
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FXpath.com Presents: Forex 3T Trading Strategy eBook by James Chen, CTA, CMT

frequent and prolonged trending, the multiple timeframe


trading approach is well-suited to the forex market. Of
course, this is not to say that currencies are always trending,
as they most certainly are not. But the instances where one
may find a currency pair in trending mode, whether bullish
or bearish, are relatively frequent. And when trends do
occur, they often tend to endure for prolonged periods.

The 3T strategy of multiple timeframe trading that will be


described in this e-book is a time-tested methodology. The
key concept behind this multiple timeframe approach is that
an intelligent trader should view the market from different
angles in order to understand and apply the critical strategic
elements of (1) trend, (2) retracement/correction (turn), and
(3) breakout entry (trailing-entry). The primary objective of
3T trading is to enter into a strong trend at the most
opportune time and price – after a minor countertrend
retracement/correction (or turn) ends, and then price breaks
out to resume momentum in the direction of the trend.

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FXpath.com Presents: Forex 3T Trading Strategy eBook by James Chen, CTA, CMT

The process of implementing an effective 3T strategy


begins with a simple choice of which timeframes to use.
Three timeframes, as the name of the strategy suggests,
should ultimately be chosen to execute the strategy. The
easiest way to approach this choice is first to identify one’s
customarily preferred timeframe, and label it as the
intermediate timeframe. For example, if one is accustomed
to trading most frequently on 4-hour (240 minute) charts,
one would label that timeframe as “intermediate.”

To derive the long-term timeframe, one would simply take


one’s intermediate timeframe and multiply it by 4, 5, or 6.
This range of multipliers provides flexibility for the trader
to fine-tune the choice of timeframes. As an example of the
long-term timeframe, the aforementioned 4-hour chart
trader might multiply by 6 to choose the 24-hour chart (or
the daily chart in forex) as the long-term timeframe.

Similarly, to derive the short-term timeframe, one would


simply take one’s intermediate timeframe and divide it by 4,
5, or 6. To use the 4-hour trader as an example once again,

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FXpath.com Presents: Forex 3T Trading Strategy eBook by James Chen, CTA, CMT

that trader might divide the 4 hours by 4 to choose the 1-


hour (60 minute) chart as the short-term timeframe.

Besides the example given above of the Daily/4-Hour/1-


Hour combination, other possibilities include
Weekly/Daily/4-Hour, 4-Hour/1-Hour/15-Minute, 1-
Hour/15-Minute/3-Minute, and really any combination that
can be imagined.

Once the three timeframes are determined, 3T analysis and


trading can begin, starting with a look at the long-term
timeframe. This timeframe represents the strategic element
of trend. The sole function of this timeframe is to determine
the overall trend conditions – if the current market is
trending up, trending down, or non-trending. If a certain
market is determined to be non-trending, a decision should
be made to refrain from trading that particular currency pair
at that particular time. If the market is determined to be
trending up, only long trades should be taken. And if the
market is determined to be trending down, only short trades
should be taken.

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FXpath.com Presents: Forex 3T Trading Strategy eBook by James Chen, CTA, CMT

But how exactly can trend conditions be determined? If one


is trading manually on a discretionary basis, the trend can
readily be determined through several subjective, yet
effective, methods. One of these methods is to draw simple
dynamic trendlines – primarily uptrend support or
downtrend resistance. If a trendline can be drawn
convincingly to connect higher lows in an uptrend or lower
highs in a downtrend, there is a good chance that a trend is
indeed present. If not, that market should probably be
avoided for the time being.

Another rather subjective method of determining the trend


is through the visual assessment of a single moving average.
After choosing the period of the moving average, a trader
could assess the presence and magnitude of slope on the
single moving average to determine the presence and
magnitude of the trend, or the lack thereof.

A better, more concrete method to denote trend on the


long-term timeframe also employs moving averages, but
multiple versions of them. Please see chart below.

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FXpath.com Presents: Forex 3T Trading Strategy eBook by James Chen, CTA, CMT

Daily Chart with Multiple Exponential Moving Averages (periods of 10, 20,
30, 50, and 100)

If all of the exponential moving averages (EMAs) in a


multiple set (e.g., 10-, 20-, 30-, 50-, and 100- periods) are
in the correct order for an uptrend (shorter period moving
averages on top followed progressively by longer periods
towards the bottom), with no current crossing of those
EMAs, price can be considered to be in an entrenched
uptrend on a longer-term basis. Conversely, if all the

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FXpath.com Presents: Forex 3T Trading Strategy eBook by James Chen, CTA, CMT

moving averages are in the correct order for a downtrend


(shorter period moving averages on the bottom followed
progressively by longer periods towards the top), with no
current crossing of those EMAs, price can be considered to
be in an entrenched downtrend on a longer-term basis. Any
situation where there are EMA crosses and a lack of correct
order would signify a market that is non-trending, and
therefore a market to stay away from.

Once the presence and direction of the trend is determined


on the longest timeframe using the trader’s method of
choice, the focus would then turn to the intermediate
timeframe. This timeframe represents the strategic element
of retracement/correction, or turn. A minor dip in an
uptrend or a minor rally in a downtrend both represent ideal
locations for getting in on high-probability, risk-controlled
trades.

But how does a trader locate and identify these dips and
rallies on the intermediate timeframe? Simply, with the
intelligent use of oscillators. Please see chart below.

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FXpath.com Presents: Forex 3T Trading Strategy eBook by James Chen, CTA, CMT

4-Hour Chart with Slow Stochastics

Oscillators help confirm overbought and oversold


conditions, and give readings of overall price momentum.
There are countless variations of oscillators available to
traders, but only a handful that are most commonly used.
These include Relative Strength Index (RSI), Stochastics
(both Slow and Fast), Rate of Change (ROC), and
Commodity Channel Index (CCI), among others.

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FXpath.com Presents: Forex 3T Trading Strategy eBook by James Chen, CTA, CMT

A 3T trader viewing the intermediate timeframe would scan


for instances when the countertrend retracement move
within the longer-term trend becomes exhausted. The
method by which this exhaustion is measured relies on
crosses of the oscillator over the horizontal lines of
demarcation between the overbought/oversold regions and
the middle region of the oscillator range.

To illustrate, suppose a currency pair has been determined


by analyzing the daily chart (the long-term timeframe in
this example) to be firmly entrenched in a strong uptrend.
This is evidenced both by a clearly-drawn uptrend support
line as well as a correct order of five exponential moving
averages. Turning next to the 4-hour chart (the intermediate
timeframe in this example), the trader utilizes the Slow
Stochastics oscillator to locate an exhaustion of a
countertrend retracement/correction within the uptrend. The
chart event that would confirm this countertrend exhaustion
is a cross of the Slow Stochastics %K line above the
oversold barrier at the 20 level, indicating that price is
emerging up from oversold.
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FXpath.com Presents: Forex 3T Trading Strategy eBook by James Chen, CTA, CMT

Once the long-term timeframe is showing a significant


trend and the intermediate timeframe is indicating that price
may be in the process of resuming the prevailing trend after
a countertrend retracement/correction, the final step is to
drill down to the third, and shortest, timeframe.

The sole purpose of this short-term timeframe is to seek the


most opportune entry point possible. This is accomplished
by implementing a trailing entry stop strategy, in search of
a strong momentum breakout where price takes off in the
direction of the trend. At this point in the 3T trading
process, the trader has already been assured that a trend is
indeed in place and that any trading will be in the direction
of this primary trend. The trader also knows that a
countertrend retracement/correction, or turn, within the
trend has occurred, and that price is in the process of
recovering from this trend setback.

This constitutes a classic high-probability trading setup.


The only remaining consideration before committing to this
trade is planning the actual execution of the entry. Using

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FXpath.com Presents: Forex 3T Trading Strategy eBook by James Chen, CTA, CMT

the mentioned trailing entry stop methodology, the trader


wisely waits for price momentum to breakout in the
direction of the trend.

As mentioned, a trailing entry stop as it relates to the 3T


trading strategy is a type of breakout entry in the direction
of the overall long-term trend. It is a dynamic entry because
the breakout entry price level is progressively moved to
“better” prices if the trade is not triggered immediately. In
the case of potential buy (long) trades, progressively better
prices refers to progressively lower prices. In the case of
potential sell (short) trades, progressively better prices
refers to progressively higher prices.

As an example, on buy signals from the two longer


timeframes, a 3T trader would begin looking immediately
on the shortest timeframe (e.g., a 1-hour chart in a daily/4-
hour/1-hour timeframe set) for potential opportunities to
enter into buy trades. This entire process would be reversed
for sell signals identified on the longer timeframes. Please
see the chart below.

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FXpath.com Presents: Forex 3T Trading Strategy eBook by James Chen, CTA, CMT

1-Hour Chart with a Trailing Entry Stop and an Initial Stop Loss

The 3T trader who has just identified the buy signals on the
two longer timeframes would plan on looking to the short-
term timeframe to enter the market on a breakout above the
previous bar’s high. If the current bar closes without
breaking the previous bar’s high, the breakout level for the
next bar would effectively be lowered to the current bar’s
high. If, in turn, the next bar does not violate the new

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FXpath.com Presents: Forex 3T Trading Strategy eBook by James Chen, CTA, CMT

breakout level, yet another even lower breakout level is set


for the following bar.

This process of setting the trade entry level at progressively


better prices allows the trader to stay out of trades where
the price momentum is not optimal for breaking out in the
direction of the trend. Re-setting of the entry breakout level
at progressively better prices continues until a breakout in
the direction of the trend actually occurs, or the trade setup
simply becomes invalid. This latter condition where the
trade setup becomes invalid can occur if the original signals
on the two longer timeframes no longer apply. Perhaps a
breakout on the short-term timeframe fails to occur for so
long that the long-term timeframe begins showing a change
in the long-term trend (e.g., the multiple EMAs begin
crossing). Or maybe the oscillator on the intermediate
timeframe begins showing that the original momentum is
becoming exhausted as the opposite extremity of
overbought/oversold is quickly being approached.

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FXpath.com Presents: Forex 3T Trading Strategy eBook by James Chen, CTA, CMT

If the trade is not invalidated, and an entry is executed on a


short-term breakout that triggers the trailing entry stop, the
initial stop loss for the trade can prudently be placed (for a
buy trade) directly underneath the lowest low of the
intermediate timeframe’s retracement move. Likewise, for
a sell trade, the initial stop loss can be placed directly above
the highest high of the intermediate timeframe’s
retracement move.

The logic behind this stop-loss placement is classically


technical in nature. If the reasons for getting into a trade are
no longer valid (e.g., the expected dip becomes a potential
reversal), the prudent reaction is to get out of the failed
trade as quickly as possible.

After entry into a trade using this 3T strategy, price may


perform one of three actions. It may hit the stop loss,
confirming that the expected retracement/correction could
in fact be a potential reversal, and thereby exiting the trade
for a controlled loss. It may consolidate for a period of time
without hitting the stop-loss. And finally, the best possible

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FXpath.com Presents: Forex 3T Trading Strategy eBook by James Chen, CTA, CMT

outcome is clearly for price to move strongly in the


direction of the trend after the breakout entry, placing the
3T trader in a favorable position.

Since 3T trading is a form of trend-trading, one of the best


ways to manage an open trade is with a trailing stop-loss
methodology (this is a position-exiting strategy in contrast
to the previously-mentioned trailing entry stop, which is a
position-entering strategy). This trailing stop-loss exit
strategy potentially allows the 3T trader to lock-in
progressively greater profits while dynamically managing
risk.

There are a couple of different variations of the trailing


stop-loss – automated and manual. An automated trailing
stop-loss follows price by a pre-determined number of pips.
In contrast, a manual trailing stop-loss is actually moved
manually by the trader. In the case of a long (buy) trade, the
trader would progressively move the stop-loss up in the
direction of profit as price moved in the trade’s favor,
effectively locking-in those profits. Technically, the most

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FXpath.com Presents: Forex 3T Trading Strategy eBook by James Chen, CTA, CMT

logical locations to move stop-losses (in long trades) reside


right under the most recent swing low retracements. These
areas are the most reasonable locations for initial stop-
losses, and they are also the most reasonable locations for
manually-trailed stop-losses. The same holds true, but in
reverse, for short (sell) trades.

Using the high-probability techniques of 3T analysis and


trading, forex traders know from the very beginning that
they are on the right side of the trade – the side that moves
with the dominant, prevailing trend. 3T traders can also be
assured that they are taking advantage of optimal trade
entry opportunities, right after corrective turns, or
retracements. Finally, 3T traders also know that they are on
the right side of short-term momentum, as they wait to get
into high-probability trades with a trailing entry stop
methodology, triggering trades only when price carries
enough momentum to breakout in the direction of the trend.

The Forex 3T Trading Strategy is not only a high-


probability method for trading forex. It is also an extremely

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FXpath.com Presents: Forex 3T Trading Strategy eBook by James Chen, CTA, CMT

flexible and customizable approach to viewing the currency


markets. With proper practice and experimentation, as well
as fine-tuning of the 3T strategy to one’s own individual
trading style and personality, each forex trader potentially
holds a key to attaining greater success in the forex market.

Good Trading,
James Chen, CTA, CMT

IMPORTANT NOTE: Please direct all inquiries regarding this document and all requests for this
document to the website: FXpath.com, or to the email address: ebooks@fxpath.com.

FXpath.com | Copyright 2010 James Chen, CTA, CMT Page 20