Trend Magic Continuation Forex Trading Strategy

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Trend Magic Continuation Forex Trading Strategy

Most people believe that trading is something that only the intellectually gifted and technically savvy people could do. Many people who are not acquainted to trading think that it is very complicated and difficult to understand. Although there is a certain level of intellect that is required to understand trading, it is really not that high. Anyone who could understand a simple bar chart can understand technical trading and anyone who have bought goods from the wet market would have an understanding of how behaviors in the financial market could play out.

Trading and the financial market is really just the same concept as trading goods and commodities in a physical market. The difference is just the volume of trades being done every minute and the way the trade takes place. The same concept of buying goods and commodities and holding them until prices go up before selling it again holds true. In the physical market traders buy goods and sell it for a profit. If they see that prices are going up, then many shrewd traders would hoard the commodity and sell it for a higher profit. For example, if the price of rice is constantly going up, they won’t be too keen on parting with their stock of rice easily for a low price. Instead, they would hold it and sell it when the price is higher. They would also look to buy more of such commodity knowing that prices are rising. However, they would also avoid buying at a very high price and would still look for a discount.

The same concept holds true in trading the forex markets. If the market is trending, traders are out to trade in the direction of the trend. However, wise traders would also avoid trading at a price extreme and would rather trade on pullbacks in order to enter the market at a better price.

Trend Magic Continuation Forex Trading Strategy trades on the same concept. It trades in the direction of the trend. However, it also waits for pullbacks and trades only when the market is signaling that it is ready to continue the direction of the trend.

Trend Magic

Trend Magic is a custom trend following technical indicator which helps traders objectively identify the direction of the mid-term trend.

Trend Magic is based on two underlying technical indicators, the Commodity Channel Index (CCI) and the Average True Range (ATR).

It identifies the direction of the trend based on the CCI. It then plots a line on the price chart which shadows price action. This line is shifted above or below price action depending on the direction of the trend by a multiple of the ATR.

The color of the line also changes depending on the direction of the trend. The line is blue if the trend direction bias is bullish. The line is red if the trend direction bias is bearish. Traders can use the changing of the color of the line as an indication of a potential trend reversal.

Awesome Oscillator

The Awesome Oscillator (AO) is a momentum technical indicator which is a part of the oscillator family of indicators. It is also based on the concept of moving average crossovers.

The AO is computed by finding the difference between a 5-period Simple Moving Average (SMA) and a 34-period Simple Moving Average (SMA). However, unlike most moving average lines which are based on the close of each bar, the AO bases its computation on the median of each candle.

The difference between the two SMA lines are then plotted as histogram bars. The color of the bars also changes to indicate the strengthening or weakening of the trend. Positive green bars indicate a strengthening bullish trend, while positive red bars indicate a weakening bullish trend. On the other hand, negative red bars indicate a strengthening bearish trend, while negative green bars indicate a weakening bearish trend.

Trading Strategy

This trading strategy is a trend following strategy which is based on retracements and breakouts of minor support or resistance lines. It also makes use of the indicators above to identify trend direction, potential retracement level, and confirm the resumption of the trend.

The 50 Exponential Moving Average (EMA) line and the Trend Magic indicator is used to identify the main trend direction based on how the two lines are stacked.

The Trend Magic indicator is used to identify trend direction based on the color of its line. Price action should also generally stay on the side of the line which agrees with the direction of the trend.

Price should retrace towards the Trend Magic line. As price retraces, a minor support or resistance line should be formed.

Price should then breakout from the minor support or resistance line in the direction of the trend. The AO should also agree with the resumption of the trend based on whether it is positive or negative and its color.

Indicators:

  • Trend Magic
  • 50 EMA
  • Awesome

Preferred Time Frame: 30-minute, 1-hour and 4-hour charts

Currency Pairs: FX majors, minors and crosses

Trading Sessions: Tokyo, London and New York sessions

Buy Trade Setup

Entry

  • The Trend Magic line should be above the 50 EMA line.
  • The Trend Magic line should be blue.
  • The AO bars should be positive.
  • Price should retrace towards the Trend Magic line.
  • A minor resistance line should be formed.
  • Price should break above the minor resistance line.
  • The AO should change to green.
  • Enter a buy order on the confirmation of these conditions.

Stop Loss

  • Set the stop loss on the support below the entry candle.

Exit

  • Set the take profit target at 2x the risk on the stop loss.

Trend Magic Continuation Forex Trading Strategy

Trend Magic Continuation Forex Trading Strategy 2

Sell Trade Setup

Entry

  • The Trend Magic line should be below the 50 EMA line.
  • The Trend Magic line should be red.
  • The AO bars should be negative.
  • Price should retrace towards the Trend Magic line.
  • A minor support line should be formed.
  • Price should break below the minor support line.
  • The AO should change to red.
  • Enter a sell order on the confirmation of these conditions.

Stop Loss

  • Set the stop loss on the resistance above the entry candle.

Exit

  • Set the take profit target at 2x the risk on the stop loss.

Trend Magic Continuation Forex Trading Strategy 3

Trend Magic Continuation Forex Trading Strategy 4

Conclusion

This trading strategy is a simple trend following strategy which is based on the concept of trading on retracements towards a dynamic support or resistance line. Confirming trade setups based on a breakout from a minor support or resistance line also makes it a very effective trading strategy. On top of that, momentum is also confirmed through the use of the AO. This combination makes this strategy very effective in delivering high probability trade setups.

Traders can tweak the risk-reward ratio based on their risk appetite. Getting this right is crucial for having a profitable trading strategy.

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