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Forex Basic Strategies

Forex Momentum Trading With The Help of RSI & MA Indicators

Introduction

If you are a trader, you should have some good ideas about the forex market. After having the basic knowledge and related stuff, you, as a trader, need to find a profitable forex strategy. After that, you need to find a proven track record of your strategy.

Therefore, you can easily implement it and start earning through your trades within a short time. However, it would help if you kept in mind that the forex is an uncertain and unstable trading market. Therefore, you must have a profitable and excellent trading strategy if you want to sustain here.

If you search on the internet, you will find thousands of proven strategies out there. The good thing is that experienced traders or mathematicians have created most of the strategies. You have to choose the best one for you.

However, the momentum-based strategy is profitable and famous too. Lots of traders are using this one as their primary trading strategy. However, if you find another suitable strategy, you can go for it besides the momentum trading strategy to boost your probability.

What is The Momentum Trading Strategy?

Momentum is a term that refers to buying a currency pair when it goes up and selling when it goes down. It is a very popular trading strategy among most professional traders.

When a big volume starts a movement, it creates a reliable market trend. Therefore, market momentum will be towards the trend that we can identify by reading the chart. In a strong bullish momentum, the price will aggressively create higher highs with a constant speed.

Similarly, in a strong bearish momentum, the price will create lower lows. After identifying the market momentum, we will move to one timeframe lower to take the trade.

However, forex trading always has an uncertain environment. No one can guarantee a 100% movement of price. However, when the market is in a trend, we can make a decent profit by using the momentum-based trading strategy.

Momentum Trading Strategy

Here is the most important part that you are looking for passionately. You will find the best momentum trading strategy for both the newbie and experienced traders. This guideline will answer all your queries.

Let’s have a look at the step by step approach of the momentum trading strategy.

Select the Currency Pair

First, you need to determine the price change from the last three months of some selected currency pairs. Also, don’t forget to do this calculation for the weekend. Once you find the last three months’ price changes, you need to research the last 13 weeks’ price movement.

In terms of currency pair, there is no clear indication of how much pair you should choose. Nevertheless, the ideal and wise option is to go through seven major currency pairs and cross pairs. It is better to put less importance on exotic pairs as they are risky because of their volatility.

After calculating the last three months’ price changes, it’s time to select the currency pair that moved much more than the others. As it is a proven profitable trading strategy, a currency pair can provide a 17% average annual profit. As per the last seven years of market observation, three months’ price has become a reliable factor while selecting the momentum-based strategy.

Entry

As we have a predetermined trend, you need to implement a trend continuation trading strategy to improve your overall trading result better. Moreover, many trend continuation strategies are there for you; you need to select a suitable one. In this trading strategy, we will use 20 Dynamic Exponential Moving Average (EMA) as a trend continuation indicator.

You should enter the trade towards the direction based on market momentum once the price rejects the 20 EMA with its body. Moreover, there is a good and effective solution for determining the trends’ strength: RSI. RSI is a good indicator, as well.

RSI stands for the Relative Strength Index. It has a 0-100 levels indicator. If the price goes below 30 levels, the price is likely to reverse towards the upside. On the other hand, if the price moves above the 70 RSI, it is likely to move down.

For a sell trade follow the following condition:

  • The price is moving towards the direction set in the market momentum.
  • The RSI is moving down from the 70 or 80 levels.
  • Price rejects the 20 EMA with a reversal candlestick formation.

Similarly, for a buy trade follow the following condition:

  • The price is moving towards the direction set in the market momentum.
  • The RSI is moving up from the 20 to 30 levels.
  • Price rejects the 20 EMA with a reversal candlestick formation.

Later on, enter the trade as soon as the candle closes above or below the dynamic level.

Stop Loss and Take Profit

After taking a trade, you need to determine the strength of the trend. You can set the stop loss 15 pips above or below the reversal candle or 20 days Average True Range (ATR).

To set the take profit, you need to determine how strong the running trend is. Moreover, impulsive pressure will indicate that the price may break the near-term support or resistance level. In that case, you can increase your take profit level. Alternatively, you can book some profit once you see the price stalling at the support or resistance levels.

Summary

In a nutshell, the summary of the entire guideline is here-

  • Find out the direction by calculating the last 13 weeks of market momentum.
  • Follow the market direction using a dynamic and hourly candle level of 20 EMA with a proper candlestick pattern.
  • According to the price action or ATR, set your stop-loss.
  • Following the market movement, you can set your take profit.

In this momentum trading strategy, trade management is the most challenging part as it requires to follow the market trend strongly. Since we know the forex market is uncertain, we should follow the market trend robustly. Moreover, you should follow an appropriate money management system that goes with your personality, and for each trade, it is wise to take less than 2% risk.

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Forex Course

90. The ATR Indicator & Its Corresponding Trading Strategy

Introduction

ATR (Average True Range) is a popular volatility indicator in the market. It is used to find how much the instrument moves on an average over a given period of time. This indicator is introduced by J. Welles Wilder Jr. in his book, ‘New Concepts in Technical Trading Systems.’ Apart from ATR, this book also includes some of the most famous technical indicators such as RSI, ADX, and Parabolic SAR, etc.

The ATR indicator was originally developed to trade the commodities market, but it has been modified in such a way that it could be widely used for stocks, indices, and the Forex market as well. This indicator is not developed to indicate the price direction. Instead, it is used to measure the volatility of the instrument, which is caused by the gaps, up & down moves. ATR is a boundless indicator, unlike the other indicators we learned till now. Higher the ATR level, higher is the market volatility, and lower the ATR level, lower is the volatility of the underlying asset.

Below is an illustration of how this indicator looks on a price chart.

Trading With The ATR Indicator

The image below represents the ATR indicator on a GBP/AUD Forex chart. The orange box indicates the pullback phase, and at this phase, we can see the ATR indicator keeps going down. This means that there is currently low volatility in this pair. Conversely, the uptrend in the Green box indicates high ATR value. This means the big players are back in the business, and they are accumulating big chunks. As a result, the instrument is quite volatile. Furthermore, the yellow box again shows a decline in volatility.

Traders can use this indicator to get an idea of how far the price of an asset is expected to move on a daily basis. We suggest you use this way of trading only on higher timeframes such as daily, weekly, and monthly. If the last closed candle of a daily chart shows 50 ATR value, it means that the last candle has moved 50 pips, and we can expect the next day price movement to move similarly.

First of all, we must find out the ATR value of the last closing candle on the daily chart. Then we can look for buy/sell opportunities at the opening of a new day’s candle. The profit target should be based on the last day’s ATR value. Some traders also use double the value of the ATR indicator to place their take-profit orders. It all depends on what kind of trade you are. If the ATR value is 50, we can go for 50 pip target (conservative move), or you can even go for the 100 pip target (aggressive move)

We can also use the ATR indicator for placing Stop-loss orders. When the ATR gives us the value of the present day, we can use those values to place the stop-loss orders below or above our entry points. If the market hits the stop-loss, it means that the daily price range is moving in the opposite direction. Hence we must exit our positions as soon as we can. The major benefit of placing the stop-loss orders by using the ATR value is that we can avoid the ‘market noise.’ That is, the unusual up and down moves will not stop us out.

Changing the Settings of this Indicator affects its Sensitivity

The standard setting of this indicator is 14, which means the ATR indicator will measure the market based on the last 14 candles. If we use a setting lower than 14, it makes the indicator more sensitive, and it will show us a choppier ATR line. On the other hand, a setting above 14 makes the indicator less sensitive to the price action and shows smoother reading.

In short, most of the Traders use the ATR indicator to check the market volatility and to place the stop-loss & take-profit orders. The higher value of the indicator implies that we must go for deeper stops, and the low value means we must go for smaller stops.

That’s about the ATR indicator and its use cases. Try using this indicator to check the market volatility and place accurate stop-loss orders. There are traders who use this indicator to enter the market as well, but those are advanced strategies that we will be discussing in the future. Cheers.

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Categories
Forex Daily Topic Forex Range

Hidden Wisdom Behind Range Measures

People coming to the Forex markets usually learned new vocabulary. The first special words they learn maybe are, margin, profit, risk-reward, and candlestick. Perhaps, afterward, they learn new concepts such as Volatility. Also, along with other technical indicators, they get to know one study called Average True Range. However, later, they forget about it since they usually consider it unimportant.

The Average True Range (ATR) is one way to measure Volatility. Volatility is, as we know, a measure of risk. Therefore, ATR can be used as an estimate of our risk. This measurement is essential for us as traders, especially if we are trading on margin. And I’ll explain why.

 

What tells the Range?

A range is a measure of the price variation over a period of time. It is measured between the High and the Low of a bar or candlestick. For instance, the range of figure 1 below (a 4H chart) is 357.9 points. If each point/lot were worth $1, a short position started at the Low of the bar would have lost $357.9 in four hours on every lot traded. Conversely, a long position would get this amount of profit.

True Range

True range is similar to a normal Range, but it takes into consideration possible gaps between bars. That happens a lot in assets that do not trade all day. Not always the close of a session matches the open of the next one. A gap may form. A True range accounts for that by considering gaps as part of the range of the bar if the gap is not engulfed by the range.

Average True Range

As we can see, in the figure above, every bar’s range varies depending on the particular price action on the bar. Some bars are impulsive and move considerably. Other bars are corrective, and their range is short.

Therefore, to measure the average price range an average is taken, usually, the 14-period, although traders can change it. Below we show the 10-bar ATR of the Bitcoin.

On this figure, we see that the ATR gets quite high at some point on the left of the figure, and it slowly decreases in waves. That is normal. Assets move in a series of increasing and decreasing volatility waves, which describes the interests and power of buyers and sellers.

Average True Range and Risk.

Retail traders usually have small pockets. The first measure a retail trader should know is how much his account would endure in the event of an adverse excursion.

As an example, let’s examine the EURUSD daily chart. Observing the 10-ATR indicator in the chart below, we see that the maximum level on the chart is 0.01053 and the minimum value is 0.00664. Since we want to assess risk, we are only interested in the maximum value.

Let’s assume that we wanted to trade long one EURUSD contract at $1.1288 and that, on average, our trade takes one day to complete. How much can we assume the price would move in a single day?

If we take the 0.01053 as its daily range value and multiply it by the value of a lot ($100K) we see that the EURUSD price is expected to move about $1,053 per day. We don’t know if that will be in our favor or not, but from the risk perspective, we can see that to be on the safe side we would need at least $1,053 of available margin for every lot traded.

If the average trade, takes 4 or 8 hours instead, we should set the timframe to 4H or 8H and proceed as we did with the daily range.

For not standard durations, we could use the following rule: For each doubling in time, the average range grows by a factor of the square root of 2.

That is handy also to compute the right trade size. Maybe we do not have the required margin level, but just one fourth. Thus, if we still wanted to trade the asset, we should trim down our bet size to one-quarter of the lot.

How much time our stop-loss will endure?

Based on ATR figures, we could assess the validity of a stop-loss level. If the stop-loss size is too short compared to the ATR, it might be wrongly set.

What profits to expect?

We could assess that as well, on average, of course. If the dollar range of an asset is $1,000 in a 4-hour span, we can expect that amount on average in four hours, and $1.410 (√2 * $1,000) on an 8-hour lapse.

Deciding which asset to trade

We could use the True Range to assess which asset is best for trading. Let’s suppose, for instance, that you are undecided about trading Gold (XAU) and Platinum (XPT). So let’s examine them.

Gold:

Spread: 3.2

$Spread cost: $32

Digits: 2

contract size: 100

MAX Daily ATR: 16, $ATR: $1600

Spread cost as Percent of the daily range: 2%

Platinum:

Spread: 12.9

$Spread cost: $129

Digits:2

Contract Size: 100

Max Daily ATR: 22, $ATR $2,200

Spread cost as Percent of the daily range: 5.86%

After these calculations, we can see that it is much wiser to trade Gold, since the costs slice only 2% of the daily range, while Platinum takes almost 5% of the range as costs before break even.