Category: Forex Basic Strategies

A collection of the most basic strategies

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Forex Basic Strategies

Understanding The Volatility Breakout Strategy

Introduction
Breakout trading is one of the most common and popular strategies among traders across the world. In this article, we have added a powerful concept to this strategy, which

Introduction
Breakout trading is one of the most common and popular strategies among traders across the world. In this article, we have added a powerful concept to this strategy, which

Introduction

Breakout trading is one of the most common and popular strategies among traders across the world. In this article, we have added a powerful concept to this strategy, which is volatility. In a volatility breakout, we determine the movement of prices just before the breakout and also their reaction at important support and resistance levels. After analyzing the market, we will decide which breakout is safe to trade and which is not.

Volatility cycles

We have built the volatility breakout strategy in a very simple way. The principle of this strategy is that, when the market moves from one level to another (support to resistance or resistance to support) with strong momentum, the momentum is said to continue further. The other characteristic of the price is that it moves from periods of sideways movement (consolidation) and vertical movement (trend).

Price breaking out of a consolidation prompts us to believe that price will continue in that direction, which might last for one day, one week, or one month. The market after trending downwards gets choppy and reduces directional movement. Traders can use technical indicators like Bollinger Bands, which helps them to determine the strength of the breakout. Breakouts that happen with low volatility are ‘real’ breakouts; on the contrary, breakouts with high volatility can result in a false breakout. We shall look at each case in detail in the next sections of the article.

 

High volatility breakout

When we are talking about volatility, we mean the choppiness of the price, i.e., the back and forth movement of price. There are traders who like this kind of volatility, as they feel price moves very fast from one point to another. But this isn’t necessarily true in case of a breakout. If you don’t have the required strength in a breakout, you could be trouble.

In the above chart, we see that the price has been in a range for a long time. This means a breakout could happen anytime. Much later, the price tried to break above resistance and stayed there for quite a long time. The price is just chopping around without moving in any particular direction eminently. All these are indications that the breakout, if it happens, will not sustain. Hence, one needs to be extra cautious before going ‘long’ after the breakout.

There are many traders who are willing to take the risk and want to try their luck in such conditions. In that case, after you buy the forex pair, always keep a tight stop loss. The reason why we are suggesting a tight stop loss is that there are high chances for the trade will not work in your favor, and you should avoid making a big loss in that trade. The setup would look like something below.

If the trade works, it can give a decent profit with risk to reward of more than 1.5, which is really good. Again this strategy is only for aggressive traders.

Low volatility breakout    

When a breakout happens with a lot more strength, it is said to be a low volatility breakout. The price here does not face much of hurdle and crosses the barrier with ease.

As you can see in the above chart, the price does not halt at resistance, and the breaks out smoothly, which is exactly how a breakout should be. After that, you can see that the breakout happens successfully, and the price continues to move higher. When such type of volatility comes into notice, we will see a higher number of traders being a part of this rally because they are relatively risk-free trades. This strategy is recommended by us to all types of traders, irrespective of their risk appetite. The next question is where to take profit and put a protective stop.

Stop-loss can be placed below the higher low, which will be formed near the resistance, and profit should be booked at a price which will result in a risk to reward ratio of 1:2. Some money management rules should also be applied while booking profits. The setup would look something like this.

Measuring volatility

Since this strategy is mostly based on volatility, it is important to know how to measure volatility.

  • Bollinger bands are excellent volatility and trend indicators, but like all indicators, they are not perfect.
  • Average true range (ATR) measures the true range of the specified number of price bars, typically 14. ATR is a volatility measuring indicator and does not necessarily indicate a trend. We see a rise in ATR as the price moves from consolidation to a strong trend and a fall in ATR as market transitions from strong trend to choppiness.
  • ADX is also a prominent indicator that measures the strength of a trend based on highs and lows of the trend over a specified number of candles, again typically 14. When ADX rises, it indicates that the volatility has returned to the market, and you might want to use a strategy that fits that market condition.

Bottom line

The market does not always be in trending and consolidation phases, and we also have to learn to deal with different types of volatility. This is where most of the strategies can be used at their best, and using volatility indicators can help you trade more effectively. A breakout, when accompanied by the right amount of volatility, can be highly rewarding. Hence this is an important factor in any breakout trading system. Cheers!

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Forex Basic Strategies

You Must Definitely Try These Most Promising Bollinger Bands Strategies

Understanding Bollinger Bands
Bollinger Bands is one of the most famous indicators out there, developed by a technical analyst named John Bollinger in the 1980s. This indicator primarily identifies the

Understanding Bollinger Bands
Bollinger Bands is one of the most famous indicators out there, developed by a technical analyst named John Bollinger in the 1980s. This indicator primarily identifies the

Understanding Bollinger Bands

Bollinger Bands is one of the most famous indicators out there, developed by a technical analyst named John Bollinger in the 1980s. This indicator primarily identifies the volatility level of a currency pair. Bollinger bands are volatility bands placed below and above a moving average. These bands are designed such that they automatically widen when the market volatility increases and narrow or contract when volatility drops.

One of the important purposes of the Bollinger bands is to determine the relative high and low prices of the market. As simple as it gets, the prices are comprehended to be low at the lower band and high at the higher band. With this definition, we can come up with trading patterns that can help predict the upcoming market trend.

Calculation

Bollinger bands have three bands, namely, the upper band, the middle(mean) band, the lower band. And they are calculated as follows:

Upper Band = Middle band + 20-day Standard deviation x 2

Middle Band = 20-period the moving average (20 SMA)

Lower Band = Middle band – 20-day Standard deviation x 2

Below is a chart that has the Bollinger Bands embedded in it.

Setting up the Bollinger band

Every trading platform will ask you for the length of the Bollinger band. By default, the value is set to 20. And it is highly recommended to keep the default configurations to obtain optimal results from the indicator.

Now, let’s put all of the above information into action by analyzing some great strategies.

Strategy 1: Double Bottom Setup

One of the most popular trading strategies using the Bollinger bands is the double bottom setup. This is because John Bollinger himself said that, “Bollinger bands can be used in pattern recognition to define pure price patterns such as “W” bottoms, “M” tops, momentum, shifts, etc.”.

In this strategy, we will be discussing the “W” bottoms, and “M” tops.

W-Bottoms

This strategy can be applied when the market is coming from a predominant downtrend. There are four stages to consider to trade the W-bottom (double bottom) Bollinger band strategy.

  1. The reaction low must form around the lower band.
  2. From the lower band, there must be a bounce up to the middle band.
  3. Thirdly, there should be a new low, which must hold above the lower band. The hold above the previous low confirms the inability of the sellers to push the prices lower.
  4. Lastly, the price must move off the low and break the previous resistance. This confirms the start of bullishness in the market.

Example

In the below chart, the market was in a downtrend. It made a low at the lower band and went up until the middle band and held. This satisfies the first two considerations in the W-bottom strategy. Moving forward, the price comes down again, but this time, it holds above the lower band. This confirms the third consideration, as well. Finally, the market shoots up and breaks the resistance (black line), indicating a buy signal.

M-top

M-top is the opposite of the W-bottom strategy. But, the working of this strategy remains the same. That is, firstly, the price must try to go above the upper band. Secondly, the price should drop down to the middle band. Thirdly, it must go up again but not higher than the previous high. And finally, the market must drop below the support line. And once all these scenarios take place, we can prepare to go short.

Example

In the below chart, the market went above the upper band, pulled back to the middle band, shot up again, but could not go higher than the upper band, and finally, the price dropped below the support (black line). So, this is when we can confidently hit the sell.

Strategy 2: Return to the Mean or Middle of the band

If you wish to extract only small profits from the market, then this strategy will be apt for you. This strategy mainly focusses only on small movements rather than big swings. An advantage of this strategy is that you will be able to pull off consistent profits and reduce risks significantly.

The principle of this strategy is to go long when the price comes down to the middle line. However, to reduce the risk, there are some factors which are implemented when trading this strategy. Below, we have mentioned some of the techniques to trade this strategy.

In the below chart, we can see that the market shot to the upside, pulled back to the middle line, and again shot up north. Here, if we were buying at the middle line, we would have made a profit out of it. But, not always will this work in your favor.

There are some points you must consider before trading this strategy. Firstly, the initial buyers must be very strong. Secondly, the sellers (pullback) must be weaker than the preceding buyers. Thirdly, the price must hold around the mean line. The occurrence of patterns like doji, hammer, spinning top, etc. around the mean line can give additional confirmation on the trade. Therefore, once all the criteria are satisfied, you can go for the buy.

Bottom line

Bollinger band is an excellent indicator to determine the direction of the market. The bands indicate if the market is at a relatively high or low. And these highs and lows help in predicting if the market is continuing its trend or preparing to reverse. Also, chartists combine this indicator with other indicators to have an extra edge over their trade.

We hope you understood these strategies. It is highly recommended to try these in your daily trading activities. With practice, you can master this indicator and can make consistent profits if used correctly. Let u know if you have any questions in the comments below. Happy Trading!

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Forex Basic Strategies Forex Trading Strategies

What Should Know About Trading Ranges Using Support & Resistance?

What is Range trading?
It is said that the market only trends for 30% of the time. So it becomes necessary to have a range trading strategy to take advantage

What is Range trading?
It is said that the market only trends for 30% of the time. So it becomes necessary to have a range trading strategy to take advantage

What is Range trading?

It is said that the market only trends for 30% of the time. So it becomes necessary to have a range trading strategy to take advantage of the other 70% of the time. Range trading is not difficult, but it requires discipline and determination to make most out of it. When a market is trending, it forms a pattern of higher highs and higher lows, in case of an uptrend. The move, in this case, is really strong and is known as an impulsive move. The other type of movement is known as the corrective move, which comes in the form of a pullback. Impulsive moves are stronger than corrective moves.

When the market is making any such moves, it finds itself stuck between a high or low and continues to oscillate between these two points. It means buyers and sellers are equally strong, and this creates a very choppy environment.

Traders now trade these extremes and continue to trade until price breaks out on either of the sides. These two points act as potential support and resistance points, used by traders to place their orders.

In the above chart, we have drawn a few lines from where the market bounced off. The price action in those areas creates many trading opportunities. The instrument in the chart first trends down and then puts up a low (marked by line 1). Initially, you might think it as a downtrend and expect the pattern of lower lows and lower highs to continue.

Then you see the market rally to line 2, from where the market falls back to line 3 but does not fall till line 1. This highlights the fact that the market is no more trending. The market instead could be stuck in a range between line 1 and line 2. These are not ‘defined’ prices. Always consider them as zones with a margin of error both outside and inside the range. A trader will look to position himself/herself at these zones of support and resistance that forms the range.

Why support and resistance?

The price that is stuck between these two extremes has a lot of significance. This is because, at this point, the price can either Stop, Reverse, or Breakout. When you have the right knowledge, it will stop you from simply pushing the buttons and will make you trade with a defined strategy.

Range = Consolidation

A range is nothing but a price consolidation of the overall trend move. It could either end the current trend or cause a reversal. The different price behavior pattern in the range creates many trading opportunities, which can be traded by all types of traders, depending on their risk appetite. Now let’s discuss some important trading strategies using support and resistance of ranges.

Strategy Using Technical Indicators

Using technical indicators to trade can aid your trading strategy. Especially while trading ranges, many indicators can be a part of your trading plan. Here, we have used the Stochastic Indicator as a tool to trade the ranges.

In the above image, the two lines represent the support and resistance of the range formed. When the price reaches the resistance at point 1, the Stochastic enters the overbought area, and the slowdown in momentum is the confirmation signal for a sell. The resistance pushes the price back to support (point 2), but this time the momentum is very strong, hence no entry. The stochastic also does not enter the oversold area clearly. Next time the price goes to resistance with greater momentum, and the Stochastic too does not give an entry signal as it is not in the overbought area. This means one shouldn’t be going short at this point.

Overall, there is only one risk-free trade available in the above chart, and that is at point 1 (short).

Strategy Recap

Firstly, we should be able to see the price at one of the extremes. When that happens, the indicator should show either be at overbought or oversold conditions. The momentum of the price should be an important factor that determines our entry. If we see reversal patterns, this could be the best entry with a good risk to reward ratio. Do not forget to place protective stops much below or above the support and resistance levels, respectively. This will always protect your trades from a false breakout.

When not to buy at support and sell at resistance in ranges

You must have probably heard traders saying that more time a level is tested, the stronger it becomes. This is not true in the case of our range break-out strategy. You need to start paying attention to the price patterns at these ends. If the price has made multiple touches, it could be getting ready for a breakout in the direction of the higher time frame.

The above chart is an example of such a scenario. It shows a range, and at point 1, you can see the strength in the candle as price pushes towards the resistance area. The next push makes the price to consolidate at the extreme. It appears to be a battle between the bulls and bears. It is also making higher lows as a part of the uptrend. Hence a breakout after this point is not surprising.

You don’t want to see the higher lows at the resistance extreme and lower highs at the support extreme.

The resistance could still work, and a reversal could happen, but this type of price action does not give much confidence for shorts. Only aggressive traders may find some entry in that consolidation, for a potential long. They can put a protective stop below the higher low that was formed before the accumulation.

We hope you find this strategy informative. Let us know if you have any questions in the comments below. Cheers!

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Forex Basic Strategies

Heard Of The Amazing ’20 Pips Per Day’ Strategy?

Introduction
Forex is the most liquid and volatile market in the world. The average pip movement in the major currency pairs is around 100 pips. However, as a retail trader

Introduction
Forex is the most liquid and volatile market in the world. The average pip movement in the major currency pairs is around 100 pips. However, as a retail trader

Introduction

Forex is the most liquid and volatile market in the world. The average pip movement in the major currency pairs is around 100 pips. However, as a retail trader, it is not impractical to grab 100 pips every single day. Though there are some strategies out there, it is very challenging to make 100 pips per day every day. But, there is 20 pips strategy, 30 pips strategy as well as 50 pips strategy, which is much reliable than the 100 pips strategy. So, in this lesson, we shall be discussing the 20 pips strategy.

The 20 Pips Strategy

The strategy is very simple and straightforward. According to this strategy, when the price breaks above a range in a logical area, you must go long, and when it breaks below a range in a logical area, you must go short. So, this strategy is basically a breakout strategy. However, it’s not as straightforward as it sounds. There are some criteria one must consider before trading this strategy.

❁ Considerations

✓ Currency Pair

You can trade this strategy on any currency pair. However, it is recommended to focus mainly on major and minor currency pairs.

✓ Session

Though the market is open 24 hours, it does not mean you can apply this strategy any time during the day. To keep it safe, it is advised to trade only during the times when there is high liquidity. That is, the London – New York overlap would be the best time to apply this strategy. Else, the London session or the New York session will work perfectly fine as well. And it is great if you do not trade it during the Asian session, as markets don’t usually break out during this period.

✓ Timeframe

Timeframe plays an important role when it comes to trading a strategy of this type. To make 20 pips a day, it is ideal to stay between the 1hour timeframe and the 15-minute timeframe.

✓ Indicators

This strategy does not require any technical indicators.

❁ How to trade the 20 pips strategy

Below is a step by step process to trade this strategy.

  1. Open the candlestick chart of any currency pair, preferably, a major or minor currency pair.
  2. Firstly, go to the 1-hour timeframe in the chart and see if the market is in a logical area to buy or sell (Ex: Support and resistance).
  3. If yes, then wait for the price to break above or below the consolidation area.
  4. Check the strength of the breakout on the lower timeframe (15 minutes). Based on the strength, prepare to hit the buy or sell.

❁ Trading the 20 pips strategy on the live charts

• Buy example

Below is the chart of AUDUSD on the 1-hour timeframe. We can see that the market has been bouncing off from the purple line. So, this becomes a logical area to buy. At present, the market is holding at the purple support line. And it was in a tiny range for like ten candles. Now, to apply the strategy, we need the market to break above this range.

In the below image, we can see that the market breaks above the range with a big green candle. But, before hitting the buy, we must switch to the lower timeframe and see if the momentum of the candle that broke the range was strong or not.

In the below 15 min chart, we can clearly see that the broke above the range in just two green candles. This is an indication that the buyers have come up strong. Hence, now we can prepare to go long.

Coming to the take profit and stop loss, the take profit would, of course, be 20 pips, and the stop loss can be kept a few pips below the support area. Alternatively, you can even go for a 1:1 RR by keeping a stop loss of pips.

 

• Sell example

Note that this strategy can be applied when the market is in a trending state as well. Below is the chart of EUR/USD on the 1-hour timeframe, and we can see that the market is in a downtrend. The market keeps making lower lows and lower highs. At present, it can be seen that the market is pulling back, and a green candle has appeared. Now, all we need is the price to break below the pullback to give us a heads up that the downtrend is still active.

In the below chart, we can see that, in the very next candle, the market broke below the pullback area. Hence, we can prepare to go short after getting confirmation of the strength from the lower timeframe.

In the below 15-minute timeframe chart, we can see that the momentum of the candle was sufficiently robust during the breakout. Hence, we can consider shorting in now.

As far as the take profit and stop loss are concerned, it remains the same as the previous example. That is, 20 pips take profit with 20 pips stop loss.

Bottom line

A great feature to consider about this strategy is that it can be used in any state of the market. However, all the criteria mentioned above must be met for the strategy to work. If you’re a beginner in trading, then this could be an ideal strategy to get started with. And if you have experience in trading, you can try enhancing the strategy by applying some indicators and patterns.

Note that this strategy, just like other strategies, does not provide 100% accuracy. There are times when this strategy fails, as well. Hence, it is recommended to use this strategy in conjunction with other strategies to have a better winning probability. Happy Trading!

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Forex Basic Strategies Forex Trading Strategies

How To Trade Options With a Directional Bias Strategy

Introduction
A challenging question every trader comes across in his trading career is: whether he should be buying a call option or a put option? Traders establish directional bias by

Introduction
A challenging question every trader comes across in his trading career is: whether he should be buying a call option or a put option? Traders establish directional bias by

Introduction

A challenging question every trader comes across in his trading career is: whether he should be buying a call option or a put option? Traders establish directional bias by studying high-level charts, support and resistance levels, price action, and fundamental indicators. Dow Theory suggests that the market will continue to move in the same direction until an external force causes a reversal or break in the trend.

Directional bias plays a major role in the ‘trend-reversal’ strategy than in the ‘trend following’ strategy. Directional bias will help a trader decide if he should be going long or short in options. You can also identify the direction of the market trend. Once you establish a directional bias, you will have greater confidence in executing your trading strategy. During the process of execution, none of the actions are emotionally driven.

How to develop a directional bias?

Any trade which includes thorough preparation should consist of establishing directional bias, and it is a two-step process.

  1. Predicting the direction of the price move and overall trend.
  2. Identifying the trigger points and trading rules that will confirm our directional bias.

Determining a directional is just one step towards making a successful trade. There are many more things we need to put together before taking a trade. After backtesting a few strategies, establish some trading rules. Remember to include only those rules that confirm your directional bias. Confirming directional bias is an excellent habit that improves the success rate of trades.

A successful trading strategy is more about the right planning and psychology rather than a single entry technique or trading system. Options trading is said to be complex, hence requires a lot of knowledge before one can trade it. Other than that, you need to consider factors that are specific to options like time decay, option theta, option beta, and option gamma. We explain here how it is to be done correctly.

Directional bias through momentum indicators

The easiest way to establish directional bias is by using momentum indicators and price action analysis. If prices are trending in an upward direction, making higher highs and higher lows, traders should look to buy. On the other hand, if prices are making lower lows and lower highs, traders should look to sell. In this strategy, momentum indicators can be used as an additional confirmation tool.

Example of buying a call option

In the above picture, the orange line graph represents the momentum indicator. The price action pattern shows a formation of higher highs and higher lows, with the indicator pointing towards the buy-side. The candlestick pattern should be such that there is no opposing force that could possibly reverse the current trend.

Point of entry: The exact point of entry would be after the formation of at least one higher high and higher low. This is confirmed by the momentum indicator, which shows a sudden rise above the average value. This is a low-risk entry with maximum reward.

Take profit and stop loss: When the momentum indicator no longer makes higher highs and higher lows with the main trend, it is a sign that the trend might be coming to an end. Hence, you should book profits here. Stop-loss in this strategy should be placed below the previous higher low.

Note: All the trades discussed above are to be executed using a call option and not using the cash segment. It is advised to choose the strike prices accordingly. There could be some differences in the entry price and stop loss of options when compared to spot prices.

The same rules apply for sell trade as well, but here a put option needs to be bought, and you would essentially want to look for lower lows and lower highs.

Directional bias through Moving averages

We would like to conclude our methods of establishing directional bias with the use of ‘moving averages.’ This is one such technical indicator, which can be used to develop any new strategy. For this strategy, we use the 20-day moving average as it is considered to be one of the most powerful moving averages.

In the above figure, we have plotted the 20-day Moving average using the yellow line. This is a simpler strategy as compared to the momentum indicator strategy. Here, if you see the price trading above the 20-day MA, you should form a directional bias to buy. And if the price is trading below the 20-day MA, you should form a directional bias to sell.

Point of entry: When price crosses the MA line on any side and stays there for more than four candles, you should be taking entry in that direction of the trend. More the number of candles better will be the entry.

Take profit and stop loss: You can continue to hold on to the trade until the price reverses and crosses the other side of the MA line. If it crosses, book out your profits. Stop-loss can be placed at the high or low from where the market reverses.

Conclusion

If you use any other way of developing directional bias, make sure that it needs to be simple. If it becomes complicated, it can increase the complexity of your trading strategy. Having a directional bias will make you trade in the direction of the dominant trend, which is less risky. Finally, a trader needs to abstain from opening positions that have no directional bias.

We hope you find this article informative. If you have any questions regarding this strategy, please let us know in the comments below. Happy Trading!

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Forex Basic Strategies

Understanding The N-period Narrow Range Trading Strategy

Introduction
There are three states in the market – trend state, channel state, and range state. A trending market is the one where the market makes higher highs or lower

Introduction
There are three states in the market – trend state, channel state, and range state. A trending market is the one where the market makes higher highs or lower

Introduction

There are three states in the market – trend state, channel state, and range state. A trending market is the one where the market makes higher highs or lower lows, and a ranging market is a state where the price goes through a consolidation phase. The channels can be considered as a particular case of range as they work similarly to a range, but are tilted.

What is consolidation?

To understand this strategy, we must first understand the concept of consolidation. Consolidation is a technical term in trading where the market loses momentum and starts to move in the form of a range.

A common tendency of the market is that, when the price starts to move in a range and begins to consolidate, it prepares blast in one of the sides. So, people always keep an eye on currency pairs, which are in a consolidation phase.

N-Period Narrow Range

In the N-period narrow range, the period N takes two values –4 and 7. So, we have the 4-period narrow range and the 7-period narrow range. These two are also referred to as the NR4 (Narrow Range 4) and the NR7 (Narrow Range 7).

The NR4 and NR7 trading strategy

This strategy is basically a modified range breakout strategy where the market consolidates in the beginning and then blasts out of a narrow range.

In NR4, number 4 refers to the period under consideration. That is, for NR4, the last four days are taken into consideration, and for NR7, the last seven days are taken into account.

What is the NR4 and NR7 strategy?

It is a breakout trading technique where we consider the last four or sever days to apply this strategy. And in these four or seven days, we compare the range of all these days and determine if the current day is an NR4 or NR7 day. Once we obtain the NR4 or NR7 day, we gear up to go long or short.

Calculating the range

Firstly, to trade this strategy, consider the candlestick chart on the daily timeframe. The range of a particular day is calculated as the difference between the high price and the low price.

What is the NR4 day and the NR7 day?

NR4 day

In layman’s terms, the least fluctuated day (4th day) in the recent four days is called the NR4 day. Technically, it is the day whose range is the smallest out of the previous four trading days.

NR7 day

Similarly, when the 7th day in the last seven days moves the least number of pips, it is referred to as the NR7 day.

How to trade the NR4/NR7 strategy?

Following is a set by step procedure to trade this strategy:

  1. Find the high and low of the last few days (seven for NR7 and four for NR4).
  2. Calculate the range (high – low) for each day under consideration.
  3. Compare these range values with the previous days.
  4. Determine if the present day is an NR4 or NR7 day. If so, then wait for the price to break out of the high or low of the NR4/NR7 day.

If the market breaks above the high, then it is an indication for a buy, or if it breaks below the low, then it is an indication for a sell.

Illustration to trade the N-period Narrow Range

Trading the NR4/NR7 strategy is simple. But, as far as the consistency of this strategy is concerned, one can make more out of this strategy only when the NR4/NR7 day appears in the right location. Hence, understanding ‘where’ the NR4/NR7 occurs is very vital. So, let’s consider a few examples to support this statement.

Below is the chart of USD/CAD on the Daily timeframe. We can clearly see that the market is moving in a channel state. Now, to trade this strategy, we blend it with the working of a channel.

Trading a channel is pretty straightforward. When the price is at the bottom of the channel, we look for buying opportunities, and when it is at the top of the channel, we look for short-selling opportunities. With this mind, we try spotting the NR4/NR7 days in these regions.

Below is the magnified image of the chart where we’re going to analyze the market. Initially, the market came down rolling until the bottom of the channel and began to hold down there. And the candle which held at the bottom turned out to be the NR7 day as it has the smallest range compared to the previous six days. This is an indication that the market (sellers) is slowing down. Later, the market blasts up north and breaks the high of the NR7 day. Therefore, now we can prepare to go long.

And as we can see, the trade performs exceptionally well. This is because the location was in favor of the NR7 day.

Continuing with the same chart, the market which was at the bottom of the channel now moves up to the top of the channel. During this up move, the market loses its momentum every step of the way and ends up giving us the NR4 day at the top of the Channel. Hence, once the price breaks below the low of the NR4 candle, we can go for the short sell. And as a result, the market does break through the NR4 day and heads down south.

Bottom line

Trading in the markets is not an easy task. There is no indicator, pattern, or strategy that can consistently work standalone. There are several other considerations that should be made before getting into a trade. For example, in the above trades, we saw how we combined the NR4/NR7 with the concept of channels and made a profit from them. Also, for any strategy, you trade, make sure that there is logical reasoning behind taking the trade. We hope you find this strategy informative. If you have any questions, please let us know in the comments below.

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Forex Basic Strategies

Trade Breakouts Like A Pro With This ‘Breakout Trading Strategy’

Introduction
In previous strategies article, we have discussed the ‘Turtle Soup Strategy by fading the Donchian channel.’ We hope you tried that strategy. In today’s article, let us discuss how

Introduction
In previous strategies article, we have discussed the ‘Turtle Soup Strategy by fading the Donchian channel.’ We hope you tried that strategy. In today’s article, let us discuss how

Introduction

In previous strategies article, we have discussed the ‘Turtle Soup Strategy by fading the Donchian channel.’ We hope you tried that strategy. In today’s article, let us discuss how to trade breakouts. We will also cover some of the best strategies used by professional traders to trade breakouts. Aggressive traders prefer trading this Breakout strategy compared to the conservative ones.

What is breakout trading?

To understand breakout trading, it is necessary to know the two important types of breakouts.

Defining a breakout

Breakout trading is an effort to enter the market when price moves outside a defined price range. The price range could be between support and resistance or between swing high and swing low. It is good if the breakout is accompanied by high volume.

Breakout of support and resistance

This type of breakout is quite simple and straight forward. The breakout of support and resistance should ideally happen with a big and bold candle. Because that shows the genuineness of the breakout. In the below chart, the candle closes well above the support and resistance level. In the below figure, it can be noticed instantly. A rule of thumb is that the bigger the breakout candle, the better it is.

Breakout of swing high and swing low

Very similar to the support and resistance breakout, this type of breakout has an additional filter. The filter is nothing but to trade the setups that offer the best outcome. In a swing high and swing low breakout, we enter the market after the price crosses a long-time high (1hr or 4hr high). That high should be followed by a strong sell-off. Conversely, the same is true for a swing low.  A trader must backtest their strategy before applying them to the live markets.

Best Breakout Strategy

To increase the accuracy of the signals generated by this strategy, we use an indicator known as Volume Weighted Moving Average (VWMA). It is a very simple technical indicator that is used for volume analysis. It resembles a moving average but is based on volume. It gives extra information than just the price of an asset. This indicator can be found on most of the trading platforms by default, and when plotted, it looks something like this.

Step 1: Identify the swing highs from where the market sold off very strongly and traveled a fair amount of distance. Mark that price on the chart.

The first step of a breakout strategy is to identify those levels and mark them as breakout trading levels. This step is important because we should pay attention to only significant and clear levels.

The resistance level we have identified in the above figure is a significant level. If you look closely, you will see rejection off the resistance level took the price down three times. Whenever there was a rally, the swing high stopped the price.

Step 2: Wait for a break and close above the resistance level

Once we have identified the swing highs, it’s just a game of patience and waiting. Next, we need a breakout candle to close above our resistance level. This is a sign that bulls are in full power.

It is not the end yet. We need confirmation from the VWMA indicator. This will give us the green signal to enter the trade in this breakout.

Step 3: Buy when the price closes above the VWMA

The final step of the breakout strategy is confirmation from the VWMA indicator. You should buy only if the VWMA is stretching above the close of the breakout candle. Visually, the VWMA should look stretched up. It is better if the moving average inclination is towards the upside.

Let’s understand this more clearly with the help of a chart.

In the above chart, prior to the breakout, the VWMA moved gradually higher, and after the breakout happened, the VWMA moved aggressively higher. This shows a strong presence of volume behind the breakout.

We haven’t still talked about placing our stop loss, which is crucial to reduce your losses in a trade. We also need to know where to book profits. This brings us to the final step of the strategy.

Step 4: Put stop loss below the breakout candle and take profit when you see a break below the VWMA

It is obvious to place the protective stop loss below the breakout candle. Because, if the price breaks below the candle that initiated the breakout, it will quickly tell that it was a false breakout.

Our take profit technique is automatic because a break below the VWMA suggests no more buyers are willing to participate in the current rally. We want to book profit at the early sign of market rollover.

We have taken the example of a buy trade. The same rules apply for a sell trade but in reverse. The best breakout strategy can be used in all market trends, whether up or down.

Bottom line

One of the advantages of our breakout trading strategy is that you’re trading with the momentum of the price. A final tip for all the traders while using this strategy is that, if the breakout happens after a big news event, then it is likely that big institution money is behind this breakout. When both fundamentals and technicals are working for you, the probability of success increases. We hope you find this strategy useful. If you have any questions, please let us know in the comments below. Cheers!

Categories
Forex Basic Strategies Forex Swing Trading

How To Trade The Infamous Turtle Soup Strategy?

In this article, we shall be covering the Turtle soup strategy by fading the Donchian channel, and Connor’s RSI strategy.
What is

In this article, we shall be covering the Turtle soup strategy by fading the Donchian channel, and Connor’s RSI strategy.
What is

In this article, we shall be covering the Turtle soup strategy by fading the Donchian channel, and Connor’s RSI strategy.

What is the Donchian Channel indicator?

The Donchian channel is an indicator that considers the high and low for N number of periods. For this particular Turtle Soup strategy, we will be setting the value of N=20, which accounts for the most recent 20 days.

This indicator works based on the highs and lows made by the market. The channel makes a stair-stepping pattern for every high or low made in a period of 20 days.

Below is a chart that shows the Donchian indicator applied to it.

From the above chart, we can clearly see that the top and bottom lines (blue lines) are moving in the form of a stair-stepping pattern representing the highs and lows over the past 20 days. Precisely, the black arrows represent the highs and lows in a look back of 20 days.

Trading the Turtle Soup Strategy

The Turtle Soup is a strategy developed by a trader and author Linda Bradford-Raschke. She published this strategy in one of her books named “Street Smarts: High Probability Short-Term Trading Strategies.” Talking about history, this strategy was taught to a set of novice traders (called the Turtles) by Richard Dennis and William Eckhardt in the 1980s. Also, this strategy is in reference to a well-known strategy called ‘Turtle Trading.’ Over the years, Linda Bradford-Raschke inverted the logic and reasoning behind this strategy and came up with a short-term trading method using this strategy.

Strategy 1: Adding confirmation to Donchian Channel breakout

This is the typical Turtle strategy.

The Turtle strategy using the Donchian channel is simple. When the market breaks above the resistance line, we can prepare to go long. Similarly, when the market goes below the support line, we can go short.

Here are some of the tips and tricks for using this indicator.

  • When the market breaks above/below the lines, make sure that the price is holding above/below it.
  • The candle that breaks the line must be quite strong.

Trading Example

Consider the below figure. Reading from the left, we can see that the market was holding at the upper line of the channel. Later, a huge green candle broke above the channel. Many would hit a buy at this moment, but we wait for a confirmation. When another candle shows a bullish sentiment as well, we can hit the buy at the point shown on the chart.

According to the original Turtle trading strategy, a stop loss of ‘two volatile units is kept,’ which is equal to n-period ATR x 2.

However, to keep it simple, you can keep the stop loss a few pips below the candle, which broke the channel.

Let’s do the converse

In the above example, we saw the typical way of trading the Turtle strategy. In this set of examples, we shall reverse the logic. That is, we will look to go long when the price breaks below the channel and short when the price breaks above the channel. Let’s consider a few examples for the same.

Buy strategy

Let’s say the market makes a 20 day low and is visible on the Donchian channel. Later, the price comes down to that low and even tries to break below it. Once the price shoots right back up to the line, we anticipate on the buy.

Rules:

  • The new 20 day low must be at least four days apart from the previous 20 day low. So, you cannot compare the low of yesterday and the low of today as the difference is just one day apart.
  • Entry must be 5-10 pips above the previous 20 day low.
  • Stop loss must be placed 1-2 pips below the low of today.
  • Aim for a take profit of 1R.

Sell strategy

The sell strategy is just the opposite of the strategy discussed for a buy. When a 20 day high is challenged for the second time having a gap of at least four days from the previous low, we can look to go short.

Rules:

  • The 20 day high must be at least four days in the past.
  • Entry must be placed 5-10 pips below the 20 day low.
  • Stop loss must be placed 1-2 pip of today’s low.
  • Aim for a take profit of 1R.

Trading examples

Buy example

Below is the chart of the EUR/USD on the Daily timeframe. Starting from the left, we can see that the market came down and made a 20 day low (indicated by the black dotted line). Now that we have the first low, we wait for the price to down to that low in more than four candles (days). And when the price spikes below the prior low and comes back up, we can hit the buy at the encircled region.

As far as the stop loss and take profit is concerned, we can keep a stop loss 2-4 pips below the low of the present candle and aim for a good 1:1 RR on this trade.

Sell example

In the below chart, the market made a 20 day high up to the black dotted line. Later, the price goes above the previous 20 days high yet again. Here, the price holds above the line and then drops below the next candle. So, once it’s below by 5-10 pips from the previous 20 days high, we can go short. And the stop loss and take profit are self-explanatory.

Conclusion

With no disrespect to the turtle trading strategy, we can conclude that this strategy can be used in both ways. This strategy is backtested and proven by a number of experienced traders. Try this strategy in your trading activities and let us know if you have any questions in the comments below. Happy Trading!