Introduction to TheStrat
What is TheStrat?
Very simply, TheStrat is a Price Action trading strategy developed by Rob Smith, that applies across all asset types from Forex to Bonds to Commodities and Stocks, and which provides specific guidance on entry and exit points.
It defines three key elements:
Timeframe Continuity - We use Timeframe Continuity to ensure we are on the right side of the market.
Broadening Formations - Broadening formations exist everywhere, and we can use these to determine the potential magnitude of future movements in price.
Inside Bars - Inside bars are excellent for identifying consolidating price and breakouts.
Another key feature of TheStrat, is that of Full Timeframe Continuity, which is simply looking for the very strongest assets to trade, and trading them while strength remains. This is done using a multi-timeframe approach, checking price is either above or below the open on consecutive timeframes.
When trading, Targets are recent highs or low in price, while stops are kept very tight, typically using price structure on a lower timeframe. Having a tight stop does mean there are occasions when you get stopped out, but when you do, the losses are very small.
Yes, that's all very well, but what is it!?
OK, Lets start at the beginning.
In figure 1, you can see 4 candles. The first is unnumbered and this is common when discussing TheStrat, as this is just a reference candle. Each candle is always in relation to the candle that came immediately before it. Also, none of the candles are coloured, because we are not currently interested in whether the body is red or green.
The candle with a 1 above it is typically known as an inside candle, as the whole of it, body and wicks, are entirely within the range of the previous candle.
There are two candles labelled 2, these are trending or directional candles, so called because they are showing a tendency for price to be moving in one direction. the first type 2 candle has a higher high and a higher low, signalling an upward direction, while the second type 2 candle has a lower low and lower high, signalling a downward movement.
The last candle in the group is labelled 3, this is a powerful signal of expanding price range, having taken out both the high and low of the previous candle.
But what about patterns?
Patterns are collections of two or more consecutive candles. Each pattern will indicate a potential bullish or bearish trade entry. A pattern can be a reversal, a continuation or a breakout. In all cases, a trade entry is defined as the break of the last candle's high or low.
The examples below should give you an idea what we mean. You might note that no Stop levels are shown, and that's because we look for the breakout at a lower timeframe, and that timeframe is where we look for a stop level.
So what's Full Timeframe Continuity all about?
Full Time Frame Continuity, or FTFC, is like the magic sauce. It makes sure you are on the right side of the market, trading only the strongest of signals.
To have FTFC, you need the Quarterly, Monthly, Weekly, Daily and Hourly open prices to be below current price to open a long position, or above the current price to open a short position.
You can look at FTFC in one of two ways. As a band of two price levels, where the upper band is the highest of the opening prices of each time frame and the lower band is the lowest of the opening prices. The second way is to know the candle state of each timeframe, so whether it is a type 1, 2 or 3 candle, and whether it is up or down.
I can't see how you make money doing that!
That's because if you use just candle types, patterns and FTFC you won't make money, in fact you will likely lose quite a bit!
TheStrat often provides trades which on a single timeframe would appear to offer a very poor risk to reward ratio.
This is where multi-timeframe analysis comes into it, we need to look at the whole picture, and we need to consider where we open a trade and where we get out, be it stop loss or take profit.
To trade using TheStrat successfully, you need to look for potential entry and target points on a higher timeframe, and then switch to a lower timeframe where you can look for entry signals (patterns). You also need to do this while trading in the direction of the FTFC.
Switching between lots of different timeframes and trying to plot or remember the levels is tedious and not without error. We prefer to see all the relevant levels directly on the chart, so we can concentrate on just the triggering timeframe.
The chart below shows that the day opened with a gap up, breaking the previous days high so immediately making todays candle a type 2, but price failed to hold and in the first hour closed down, below the FTFC level. From here, we know that any trading is now going to have to wait for a bullish reversal, and a breakout from the previous days highs. The chart is now showing a 2-1-2 bullish reversal, so we could play that, with stops below the recent lows and an initial target being a retest of the days highs. That's a trade with a risk reward of 0.64 which is very favorable (the smaller the number, the better).
OK, got all that. Is that it then?
Pretty much, Broadening Formations are something you will want to read up on, and there are a few other terms like Pivot Machine Gun, and Triangle They Out which you might want to find out about.
If you wish to learn more about TheStrat, the best place to start is this blog post Rob did back in February 2019
There is a huge community of traders using TheStrat now, a lot of which is done on Twitter. Follow these top twits to start with.
A vast array of videos are also available:
Sara Sabatino on Youtube