There are several ways to trade the forex markets. Some are more effective than the others. Among all the types of trading strategies, I find trading on retracements to be one of the most effective way to trade. Not only is it effective, it is also very efficient.
One pitfall for most traders is being too reactive to price movements. It stirs their greed and fear causing them to lose money.
One type of knee jerk reaction that most traders fall prey to is chasing prices. Momentum and trend traders see a strong price movement and they enter the trade right away. Often, they end up buying at the peak.
The best remedy for chasing prices is by doing the exact opposite. Wait for price to come to you instead of you chasing it. This is exactly what trading on retracements is. Trading in the direction of the initial impulse or trend, while waiting for price to retrace back to the mean.
Angles and Arrows Forex Trading Strategy is a good example of a retracement strategy. It uses moving average angles and indicators that pinpoint the resumption of a trend.
MA Angle Indicator
MA Angle indicator is a custom indicator which helps traders identify the general trend direction.
One of the most common ways to identify trend direction is by identifying the slope of a moving average. If a moving average is sloping up, then price is trending up. If it is sloping down, then chances are price is trending down.
This indicator is based on the same concept of using the slope of a moving average. It identifies the slope of a moving average line by taking the difference of its original moving average line and a shifted moving average line derived from the original line.
The result is then plotted as a histogram. The histogram bars oscillate from positive to negative and vice versa. If the bars are positive, then the moving average line is sloping up and the market is considered bullish. On the other hand, if the bars are negative, then the moving average line is sloping down, and the market is considered bearish.
Buy Sell Arrow Scalper
The Buy Sell Arrow Scalper indicator is custom indicator which aids traders in identifying momentum shifts.
It is basically a short-term trend indicator that plots a line close to price action. The line changes color depending on the direction of the short-term momentum. If momentum is bullish, then the line is colored blue. If momentum is bearish, then the line changes to red.
The indicator also pinpoints the reversal by plotting arrows on the exact reversal point. These arrows serve as entry signals which traders can use in conjunction with another indicator.
Trading Strategy
This strategy uses the confluence of the MA Angle indicator and the Buy Sell Arrow Scalper to identify high probability trade setups.
The MA Angle indicator is used to identify the general trend direction. In an up-trending market, the MA Angle bars should stay positive for quite some time. In a down-trend, the bars should stay negative.
Traders should also visually confirm if the market is indeed trend by looking at how the price swings are moving. If the swing points are constantly getting higher, then the market is considered bullish. If the swing points are getting lower, then the market is considered bearish.
If the trend is confirmed, then we wait for a retracement. During the retracement, price would temporarily reverse on the short-term, causing the Buy Sell Arrows Scalper line to temporarily change color.
Trade signals are taken as soon as the Buy Sell Arrows Scalper signal aligns with the trend indicated by the MA Angle indicator.
Indicators:
- Buysellarrowscalper (default setting)
- MAAngle (default setting)
Preferred Time Frames: 30-minute, 1-hour, 4-hour and daily charts
Currency Pairs: major and minor pairs
Trading Sessions: Tokyo, London and New York sessions
Buy Trade Setup
Entry
- Price should be trending up based on the rising of the swing points.
- The MA Angle bars should be positive indicating a bullish trend.
- Price should retrace causing the Buy Sell Arrow Scalper line to temporarily change to red.
- Enter a buy order as soon as the Buy Sell Arrow Scalper line changes to blue and an upward pointing arrow is plotted.
Stop Loss
- Set the stop loss on the fractal below the entry candle.
Exit
- Close the trade as soon as the Buy Sell Arrow Scalper line changes to red.
Sell Trade Setup
Entry
- Price should be trending down based on the falling of the swing points.
- The MA Angle bars should be negative indicating a bearish trend.
- Price should retrace causing the Buy Sell Arrow Scalper line to temporarily change to blue.
- Enter a sell order as soon as the Buy Sell Arrow Scalper line changes to red and a downward pointing arrow is plotted.
Stop Loss
- Set the stop loss on the fractal above the entry candle.
Exit
- Close the trade as soon as the Buy Sell Arrow Scalper line changes to blue.
Conclusion
Trading on retracements is one of the most effective ways to trade the market. This strategy is just one of the many ways to trade retracements.
The advantage of using indicators to identify these setups is that trade entries are very objective. Traders do not rely on gut feel to qualify if a trade setup is valid. Instead, objective rules are used to filter out low probability trades and trade only high probability setups.
One the best practices when using this strategy is looking at the higher timeframe trend and aligning trades with it. It would also be very good if a channel could be drawn in the direction of the trend. This would confirm the boundaries of the retracements as well as its usual depth.
Just as with most strategies, this strategy also requires some familiarity with price movements. Traders who could anticipate retracements and reversals could profit much using this strategy.
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