Price movements in a price chart is the result of what millions of traders around the world believe the fair value of a trading instrument is. Some traders believe that price is low and should be going up, then they would hit the buy button. Others see price being to high and should go down, then they would initiate a long trade. All these cumulative actions coming from millions of traders and market participants cause price to move. When summed up together, it becomes the current value of a trading instrument. In the case of forex currencies, it becomes the current exchange rate of a forex pair.
Because traders have the power to either buy or sell a currency, some traders would try to predict price movements. As soon as they hit that buy or sell button, some would think that they could will price to move in a certain direction based on their assumptions. However, that is not the case in forex trading. The market is too big to be moved by a single trader. One lot size could not move a market enough to create an impact. Retail traders have no power to move the market.
Instead of hoping to move the market, we should go with the flow based on what the market wants to do. We observe a chart, create assumptions of where price is going, and go with the flow.
Fisher Momentum Shift Forex Trading Strategy systematically allows traders to enter a trade based on where the market is moving. It allows traders to follow price movements based on price action and with the confirmation of indicators.
Fisher Indicator
The Fisher indicator is a trend following technical indicator developed to help traders anticipate the direction of price movements. It helps traders identify trend direction bias and possible trend reversal points.
The Fisher indicator is an oscillating indicator that converts historical price data into a Gaussian normal distribution. This allows traders to identify extreme price movements that have a high probability to reverse based on a normal distribution of price fluctuations. It helps traders identify potential trend reversal points as the Fisher indicator also tends to show possible trend reversals as price moves to an extreme point.
This version of the Fisher indicator is plotted as histogram bars. Positive lime bars indicate a bullish trend bias, while negative red bars indicate a bearish trend bias. This allows traders to identify possible trend reversals which they could use as an entry signal. Sections on the Fisher indicator window with long streaks of bullish or bearish bars could also be used to identify a trend bias. Traders could use this information to filter out trades that are not in line with the trend.
Exponential Moving Average
Moving averages are a staple technical indicator that many traders use in a trading strategy. This is because moving averages tend to work extremely well in identifying trend direction.
Moving averages can be used in different ways. Traders could identify trend direction based on the slope of the moving average line or the location of price action in relation to the moving average line. Traders can also identify possible trend reversals based on crossovers of moving averages or a moving average and price. Some traders also use moving averages as a basis for mean reversal trades, taking entries whenever price is too far from a moving average.
Although moving averages are excellent tools for trading, it has its setbacks. Most moving averages are either too lagging or too vulnerable to volatile choppy markets.
The Exponential Moving Average (EMA) was developed in order to address this. It is computed by incorporating the previous EMA in order to smoothen out the moving average line. The result is a moving average line that is very responsive to price movements and is also smoothened out making it less susceptible to market noise.
Trading Strategy
This trading strategy is a trend reversal strategy based on the crossover of price and a 20-period Exponential Moving Average (EMA). However, it should not be used as a standalone entry signal without confluence with other factors.
Trade signals should be filtered based on the trend bias coming from the Fisher indicator. The Fisher indicator would usually reverse ahead of a valid trade signal if price has been in an extreme condition prior to the reversal.
Price action and candlestick patterns should also be considered prior to taking a trade. This could either be congestions or reversal patterns. Lastly, a momentum candle indicating the direction of the trend reversal should confirm the trade setup.
Indicators:
- 20 EMA
- Fisher
Preferred Time Frames: 15-minute, 30-minute, 1-hour, 4-hour and daily charts
Currency Pairs: FX majors, minors and crosses
Trading Sessions: Tokyo, London and New York sessions
Buy Trade Setup
Entry
- Price should create a bullish reversal patterns or should be in a market congestion phase.
- The Fisher indicator should shift to positive lime bars.
- A bullish momentum candle should cross and close strongly above the 20 EMA line.
- Enter a buy order upon the confirmation of the conditions above.
Stop Loss
- Set the stop loss on the fractal below the entry candle.
Exit
- Close the trade as soon as the Fisher indicator shifts to negative red.
Sell Trade Setup
Entry
- Price should create a bearish reversal patterns or should be in a market congestion phase.
- The Fisher indicator should shift to negative red bars.
- A bearish momentum candle should cross and close strongly below the 20 EMA line.
- Enter a sell order upon the confirmation of the conditions above.
Stop Loss
- Set the stop loss on the fractal above the entry candle.
Exit
- Close the trade as soon as the Fisher indicator shifts to positive lime.
Conclusion
This trading strategy is a working trading strategy that should allow traders to consistently profit from the forex market. However, it should also not be used blindly taking any signal that crosses over. Instead, traders should use this to confirm a trend reversal coming from an area where price might possible reverse. Traders should also consider price action patterns when entering trade setups.
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