The Natural Number Trading Method

George Kleinman wrote about the Natural Number Method in Trading Commodities and Financial Futures: A Step-by-Step Guide to Mastering the Markets (4th Edition) and The New Commodity Trading Guide: Breakthrough Strategies for Capturing Market Profits.

Natural numbers are numbers we count with. But that’s not how George Kleinman defines natural numbers. He meant natural numbers as whole round numbers that are “cleaner”. Basically, he is referring to numbers that are significant to market players.

Although George Kleinman designed this trading method for the commodities market, I find this concept useful in the forex markets where round numbers are significant.

Trading Rules – Natural Number Method

The trading strategy uses a trailing stop-loss. For long trades, once price moves above a round number, we shift the stop-loss order to the round number just below it. Apply the same logic to short trades.

Long Trading Setup

1. Bar closes above 180-period weighted moving average (Setup bar)
2. Price exceeds the high of setup bar
3. Place buy stop at the closest natural number

If a bar closes below the weighted moving average, the trading setup is null.

Short Trading Setup

1. Bar closes below 180-period weighted moving average (Setup bar)
2. Price falls below the low of setup bar
3. Place sell stop at the closest natural number

If a bar closes above the weighted moving average, the trading setup is null.

The Natural Number Method Trade Examples

Winning Trade

In this 30-minute chart of 6E futures (EUR/USD), we have placed horizontal lines every 10 ticks to help us with this trading strategy. (For Ninjatrader users, you can right-click on the vertical axis and select “Properties” to change the horizontal grid lines to 10 ticks apart.)

1. This bar closed below the 180-period weighted moving average (orange) and became the setup bar.
2. The following bar went below the low of the setup bar and confirmed the down trend. Our sell order at 1.3580 was also triggered by the same bar. It is better to set your sell stop order in advance as prices might move swiftly past the entry price after confirming the trend.
3. The red line marks our entry point and the green line marks our exit. We followed the trailing stop-loss method. As prices hit 1.3530, we shifted the stop-loss order to 1.3540. Prices bounced up and triggered the stop-loss order, giving us a profit of 40 ticks.

Losing Trade

This is another 30-minute chart of 6E futures. This example is the polar opposite of the winning trade above. We entered at the worst possible price.

1. This bar closed above the 180-period weighted moving average.
2. Price went above the high of the setup bar, before going sideways for around 2 hours. We placed a buy stop at the next round number 1.3600. (George Kleinman calls numbers ending with two or more zeros “master natural numbers”.)
3. Price rose and triggered the buy stop order before falling violently. The Natural Number method dictates that our first stop-loss was at the next-lower round number, so we managed to limit our losses to 10 ticks.

If we kept our composure and took the next short trading setup, we would have captured the down thrust as our profit.

Review – The Natural Number Trading Method

Th Natural Number Method is a unique approach to trading. Instead of relying on indicators or price patterns for trade entry, it uses natural numbers of significance.

It is a safe approach to trading break-outs and does well when the market moves quickly in one direction. The market tends to meander around long-term weighted moving average and leads to whipsaws. However, entering at the next natural number reduces whipsaws.

Furthermore, the clear trade management rules limit our losses and allows us to lock in windfall profits.

Selecting the natural number interval is crucial decision. It affects every aspect of the strategy from trade trigger to trade management. It depends on the instrument’s volatility and the market consensus of important psychological levels.

Pay attention to price as it moves beyond the setup bar. It gives clues about the trade quality.

Look at the winning trade. Price moved past the low of the setup bar with conviction. For the losing trade, the bar that tested the high of the setup bar ended as a doji and the market drifted sideways.

For another trading setup that uses the weighted moving average to assess trends, look at jjrvat’s day trading strategy.