Sonic Wave Forex Day Trading Strategy

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Sonic Wave Forex Day Trading Strategy

Advanced strategies might not always be better. It may have rules and filters that are redundant and even pointless. It may sometimes be too complicated that an average trader would find it difficult to follow and might even cause paralysis by analysis. It may cause traders to freeze instead of being quick on their feet when making decisions, a skill that is very important for traders. This is especially true with day trading.

Scalpers and day traders must have the skill of being able to think on their feet and make quick decisions. This is because on the lower timeframes, you don’t have all the time in the world to decide whether to take a position, exit a trade, hold a position, etc. All you have are a few seconds and that’s it. A good opportunity could be lost in a few seconds. A good entry could become bad in just a few pips move.

But how do good day traders and scalpers do this? How do they make quick decisions? The truth is that they don’t. They had all the time in the world to make the decision. This is because they’ve already made decisions prior to the actual setup taking place. They’ve already decided what their entries should look like, where they would enter, and where they would take profits. The key is in knowing the area where you think is the best price and the best time to enter the market.

Rainbow MA – A Great Tool for Identifying Entry Areas on Trending Markets

One of the best ways to hasten the decision and being able to pull the trigger quick enough is knowing where and when you should be pulling the trigger. You shouldn’t be chasing price around as it makes its moves. Instead, you should have an approximate area where you think price is going and pull the trigger when it reaches that area.

Having an area to pull wait on is applicable with most strategies – breakout strategies, range trading strategies, channel trading strategies, reversal strategies, etc. But many newbie traders find it difficult to have an area to wait on when trading on a trending market environment. Many fall into the trap of chasing price around. But there is a remedy for that.

Trending markets, even strong ones, have pullbacks. Pullbacks are the brief moments where price would take a rest and retrace for a few pips. These pullbacks are the best times to enter a trending market environment. The question is where do we wait for these pullbacks?

The Rainbow MA, a custom indicator, is a moving-average based indicator with several lines. These lines tend to fan out during a trending market environment creating an area that could be visibly identified. Because pullbacks are minor reversions to the average price, the area inside the Rainbow MA becomes a prime area for price to pullback to. Right after the pullback, if a trend has enough strength to continue the trend, it will resume its initial direction. This makes the Rainbow MA a great tool to identify entry areas during trending market conditions.

Trading Strategy Concept

The idea behind this strategy is to use the Rainbow MA as an area to wait for pullbacks on. But first, we would have to identify if we are on a trending market or even on a start of a trend.

To identify a trend, we would be using a couple of rules. First, the Rainbow MA should be in agreement with the intermediate trend, the 50-period Exponential Moving Average (EMA). It should be on the correct side of the 50 EMA. Then, price should be pulling away from the Rainbow MA to the direction of the trend. Lastly, as price pulls away, the Rainbow MA would have a tendency to fan out, so it should be fanning out wide enough. Then we wait for the pullback.

Our pullback and entry will be simple. We will wait for price to pullback and close inside the Rainbow MA, then wait for it to exit and close towards the direction of the trend. This indicates the resumption of the trend. If this happens, then we pull the trigger and watch price run.

Indicators:

  • RainbowMMA_09 (Sky Blue)
  • RainbowMMA_10 (Gold)
  • 50 EMA (Magenta)

Timeframe: 5-minute chart

Currency Pair: any major pair

Trading Session: London or New York session

Buy (Long) Trade Setup Rules

Entry

  • The Rainbow MAs should be above the 50 EMA
  • Price should come from above the Rainbow MAs
  • The Rainbow MAs should be fanning out
  • Wait for price to retrace and close inside the Rainbow MAs
  • Enter a buy market order as price closes back above the Rainbow MAs

Stop Loss

  • Set the stop loss at the fractal below the entry candle

Exit

  • Close the trade on profit as price enters back and closes inside the Rainbow MAs

Sell (Short) Trade Setup Rules

Entry

  • The Rainbow MAs should be below the 50 EMA
  • Price should come from below the Rainbow MAs
  • The Rainbow MAs should be fanning out
  • Wait for price to retrace and close inside the Rainbow MAs
  • Enter a sell market order as price closes back below the Rainbow MAs

Stop Loss

  • Set the stop loss at the fractal above the entry candle

Exit

  • Close the trade on profit as price enters back and closes inside the Rainbow MAs

Conclusion

This strategy is great to use during a strongly trending market environment. This would allow you to catch big moves after a retrace. However, after a big strong move, the market might be overextended. It would be wise to be a little cautious and avoid further trades if you’ve already seen the market make a big move.

During a slowly chugging trending market condition, the returns would be smaller. The reward-risk ratio might suffer a bit, but you could be having several entries available. You could milk these trends for several entries, getting in and out as the market slowly moves to the direction of the trend. However, you should also get a feel as to when the last entry could be. Trends could last for three to five entries during these scenarios, sometimes even more.

Lastly, there are trends that are very slow, the retraces could be deeper than your entries. During these market conditions, it is best to avoid trading as you could be slowly chipping away on your account. The probable returns wouldn’t be worth the risk because if ever you would profit, the profits are way too small. And in some cases, although price is still going towards one direction, the retraces close at a price deeper than your entries, which would cause you to have several small losses.

Get a feel of what the market condition is and trade accordingly.

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