Forex trading does not need to be complicated. People have this notion that trading is difficult. For this reason, new traders would often shrug off strategies that are too simple. In their mind, simple strategies do not work. However, this is far from the truth.
While it is true that trading is not that easy, its difficulty is not caused by the strategies being used by traders. Instead, trading is difficult because traders find it difficult to control their emotions while trading. Complicated strategies could fail if used by an immature trader, and simple strategies could profit if used by seasoned traders.
Linear Weighted Crossover Forex Trading Strategy is a simple crossover strategy that any trader could use. New traders could start out by practicing a crossover strategy such as this.
Linear Regression Line
Linear Regression Line is a custom technical indicator used to identify trend direction like moving averages.
Although the Liner Regression Line indicator is derived from regression lines, it should not be confused with the usual regression lines which are used to identify correlation based on a series of data points.
The Linear Regression Line indicator is plotted on the price chart by connecting the end points of linear regression lines based on several candles.
It is plotted much like a moving average is. The advantage of the Linear Regression Line over the regular moving average line is that it has less lag and is more responsive to price movements.
IDWMA Indicator
IDWMA stands for Inverse Distance Weighted Moving Average. IDWMA is a complex variation of the moving average which aims to ignore irrelevant noise in price movements and emphasize significant momentum changes.
The standard Simple Moving Average (SMA) tends to be less responsive to recent price changes because it gives equal weight to price movements, whether it is recent or not, or an outlier or a not. For this reason, traders have developed means to put weight on price movements which they deem to be more important.
The Linear Weight Moving Average (LWMA) puts emphasis on the most recent price. This moving average line is geared towards making the moving average line more responsive to price changes.
The Distance Weighted Moving Average (DWMA) assigns a weight on price movements based on its distance from the average. The farther the distance, the lesser the weight. This moving average line is aimed at avoiding sudden changes during price spikes.
The IDWMA on the other hand is the exact opposite of the DWMA indicator. It places more weight on price closes that are farther from the average line. This puts more emphasis on strong momentum price movements and somehow ignores smaller candles as it is considered by this indicator as white noise. This makes the IDWMA very responsive to momentum changes and avoids whipsaws during low volatility and choppy market conditions.
i-Day Stochastics
The i-Day Stochastics indicator is a modified version of the popular stochastic oscillator.
A stochastic oscillator is a momentum indicator which helps traders identify momentum shifts and reversals based on the close of each price candles over a period.
The stochastic oscillator compares the most recent price close to the highest and lowest price traded for a certain period. The idea behind this is that price would usually close near the high during an uptrend, and near the low during a downtrend.
Trading Strategy
This trading strategy trades on confluences between the crossover of the IDWMA and the Linear Regression Line, the iDay Stochastic indicator, and a momentum price action.
In this strategy the Linear Regression Line should crossover the IDWMA line. This should be in conjunction with a trend reversal signal coming from the i-Day Stochastic indicator.
On the i-Day Stochastic indicator, the blue line should crossover the red line to the direction of the new trend. Then, the blue stochastic line should crossover the midline, 50.
Aside from the conditions mentioned above, a momentum candle should also be observable on the price chart heading towards the direction of the new trend.
Confluences between these signals tend to signal the start of a fresh trend.
Indicators:
- i_daystochastic_v1_1
- D Period: 9
- Slowing: 9
- IDWma
- MA_Period: 20
- ex4 (default setting)
Preferred Time Frame: 15-minute, 30-minute and 1-hour charts
Currency Pairs: major and minor pairs
Trading Session: Tokyo, London and New York sessions
Buy Trade Setup
Entry
- Price should cross above the IDWma line (red) and the Linear Regression Line (blue).
- The IDWma line should cross above the Linear Regression Line.
- The blue stochastic line should cross above the red stochastic line.
- The blue stochastic line should cross above 50.
- A bullish momentum candle should be observed on the chart.
- These bullish momentum signals should be closely aligned.
- 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 price closes below the IDWma line.
Sell Trade Setup
Entry
- Price should cross below the IDWma line (red) and the Linear Regression Line (blue).
- The IDWma line should cross below the Linear Regression Line.
- The blue stochastic line should cross below the red stochastic line.
- The blue stochastic line should cross below 50.
- A bearish momentum candle should be observed on the chart.
- These bearish momentum signals should be closely aligned.
- 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 price closes above the IDWma line.
Conclusion
This trading strategy works well because it incorporates momentum in its signals.
It incorporates momentum by using the IDWma indicator, which is geared towards reading momentum shifts, and the i-Day Stochastic, which is a short-term trend and momentum indicator. On top of this, it also observes for momentum candles which are telltale signs that the market bias has shifted in a certain direction.
As a result, confluences between the conditions above tend to result in a profitable trade.
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