Forex Strategies

AMA Optimized Forex Trading Strategy

August 20, 2021

800

You would often hear seasoned traders talk about gaining an edge in trading. But what is it really? What does it mean to gain a trading edge?

Some traders talk about gaining an edge through technical indicators, some through trading and candlestick patterns, some through price action, and even some through trading psychology. Truth is none of these options has a monopoly on trading edge. Traders could get an edge over the market with any of these.

A trading edge is simply an advantage over the market. It could be quantified based on statistical results. This means that if you would repeat the same trading strategy, use the same indicators, trade the same price pattern, or have the same trading mindset or psychology over a long period of time you would come out either winning more often than losing, winning bigger yields than losing profits, or a combination of both.

One of the best ways to gain a trading edge is by looking for confluences. Certain indicators, trading signals or strategies may have just a very slight edge. However, when used together synergistically, these individual factors may result in a big advantage and could help traders earn consistent profits.

AMA Optimized Forex Trading Strategy trades on confluences based on a long-term trend bias and trend reversals based on shorter-term trends. It also makes use of confluences coming from two reliable trend-following technical indicators in order to confirm trend setups with a high degree of confidence.

AMA Optimized

AMA Optimized is a trend following technical indicator based on the Adaptive Moving Average (AMA).

Moving averages are simple yet effective technical indicators. It is mainly used to identify trend direction and trend reversals by identifying how the average price of a certain trading security is moving. Moving averages are great whenever the market is in a clear trend or trend reversal. However, whenever the market starts to become choppy, most moving averages become unreliable.

The Adaptive Moving Average (AMA) was developed in order to address market noise. During steadily trending markets with low noise, the AMA indicator tends to follow price closely making it very responsive to price changes. However, when the market becomes a bit too noisy and price starts to move erratically, the AMA line would drift further from price action allowing it to compensate for market noise.

The AMA Optimized indicator is basically a moving average line characterized by a very responsive line, which also tends to readjust whenever the market becomes too choppy.

It also plots dots along its line to help traders identify trend reversals based on its slope. Blue dots indicate a bullish bias, while red dots indicate a bearish bias.

Awesome Oscillator

The Awesome Oscillator (AO) is a trend-following technical indicator used to measure momentum.

It computes for the difference of a 5 bar Simple Moving Average (SMA) and a 34 bar Simple Moving Average (SMA). It then displays the results as a histogram, plotting bars on a separate window. Positive bars indicate a bullish bias while negative bars indicate a bearish trend bias.

The bars also change colors to indicate trend strength. Green positive bars indicate a strengthening bullish trend, while red positive bars indicate a weakening bullish trend. On the other hand, red negative bars indicate a strengthening bearish trend, while green negative bars indicate a weakening bearish trend.

The Awesome Oscillator could be used as a trend bias filter or a trend reversal signal. As a trend filter, traders could opt to use a different shorter-term entry signal, while filtering out trades that are not going with the flow of the trend as indicated by the Awesome Oscillator. As an entry signal indicator, traders could use the shifting of the bars from negative to positive or vice versa to indicate a trend reversal entry signal.

Trading Strategy

This strategy provides trade signals which are aligned with the long-term trend bias, while taking trade entries based on confluences coming from the AMA Optimized line and the Awesome Oscillator.

To identify the long-term trend, we will be using the 200-period Exponential Moving Average (EMA). Trend direction will be based on the slope of the 200 EMA line, as well as the general location of price action in relation to the 200 EMA line.

We will then wait for price to retrace allowing both the AMA Optimized indicator and the Awesome Oscillator to temporarily reverse. Then, we take the trade as soon as the AMA Optimized and the Awesome Oscillator aligns indicating the resumption of the long-term trend.

Indicators:

200 EMA (green line)
AMA_optimized (default setting)
Awesome (default setting)

Preferred Time Frames: 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 200 EMA line should be sloping up.
Price action should generally be located above the 200 EMA line.
The AMA Optimized indicator should temporarily print red dots along its line upon price retracement.
The Awesome Oscillator should temporary print negative bars upon price retracement.
The AMA Optimized indicator should print blue dots indicating the resumption of the trend.
The Awesome Oscillator should print positive bars indicating the resumption of the trend.
Enter a buy order on 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 AMA Optimized indicator prints a red dot.

Sell Trade Setup

Entry

The 200 EMA line should be sloping down.
Price action should generally be located below the 200 EMA line.
The AMA Optimized indicator should temporarily print blue dots along its line upon price retracement.
The Awesome Oscillator should temporary print positive bars upon price retracement.
The AMA Optimized indicator should print red dots indicating the resumption of the trend.
The Awesome Oscillator should print negative bars indicating the resumption of the trend.
Enter a sell order on 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 AMA Optimized indicator prints a blue dot.

Conclusion

This strategy is a mid-term trend reversal strategy which is aligned with the long-term trend. It produces trade signals that has the potential to earn huge yields. There will also be some minor wins and losses every now and then, but it is the big trades that could produce gains in the long run.

This strategy requires some knowledge of price action in order to identify markets that are choppy or trending. Avoid taking trades in a low volatility choppy market. Instead, focus trading on markets that are clearly trending on the long-term with sufficient retracements and resumptions of trend direction.

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