Retracement Signals Forex Trading Strategy

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Retracement Signals Forex Trading Strategy 1

“Trade with the trend.” This is one of the most popular adages that seasoned trend traders preach, and this is for good reason. Trading with the trend gives clarity of trade direction. Because price has a clear direction, traders could easily make the decision whether to buy or to sell. Trades are also taken in the direction of the momentum of price. This means that trades are not going against the flow of the market but instead is moving along with it. Because many traders could easily identify trend direction and trade with it, market sentiment is also usually pushing price in the direction of the trade. All these factors give trend following a higher probability of resulting in a win.

“Do not chase price.” This is another bit of wisdom that seasoned traders would often give to aspiring traders.

Although trading with the trend is a good trading strategy, many trend and momentum traders are guilty of chasing prices. Trend traders would often take trades when they see price moving in one direction strongly. They often make the mistake of buying at the peak or selling at the bottom.

So, how do you put these two ideas together, trading with the trend and not chasing price? The answer is simple – retracement.

Retracement is a temporary reversal in a trading instrument’s price during a trending market condition. It is a temporary pullback toward the average price prior to price resuming its established trend.

Trading during retracements allow trend following traders to take trades with the trends while not falling victim to chasing price.

Retracement Signals Forex Trading Strategy is a trend following strategy that provides trade signals during retracements using a confluence of trend indicators.

Retracement Finder

Retracement Finder is a custom indicator that helps traders identify the direction of the trend as well as the minor reversals which are usually retracements when occurring in a trending market.

This indicator is an oscillating indicator that displays histogram bars to indicate trend direction. Positive bars that are color blue indicate a bullish trend while negative bars that are color red indicate a bearish trend. The indicator also changes to color yellow on the first bar that crosses over zero. This would indicate a trend reversal.

Because the Retracement Finder is focused on the short-term, this indicator is able to detect short-term reversals. These short-term reversals could indicate a retracement when used in the right market condition.

MA Trading Signals

MA Trading Signals is another custom indicator which pinpoints possible trend reversals which could be used as an entry signal.

This indicator is based on a crossover of a modified moving average. Traders could select the type of moving average used, the period which the moving average will be computed on, and the mode of price where the moving average will be derived from.

This indicator is a simple indicator which could provide excellent trade signals when setup with the right settings. It is also best to use this indicator in confluence with other indicators.

Trading Strategy

This trading strategy provides trade entry signals based on retracements during a trending market condition.

This strategy uses a 50-period Simple Moving Average (SMA) to identify trend direction. The trend will be based on the location of price in relation to the 50 SMA, as well as the slope of the 50 SMA line. Traders should also observe the movement of price action to visually identify the trend. Prices that are constantly rising or have higher highs and lows would indicate a bullish trend. On the other hand, prices that are falling or are having lower highs and lows would indicate a bearish trend.

As soon as the trend is identified, we would wait for a retracement, which would cause the Retracement Finder and the MA Trading Signals indicators to temporarily reverse.

Trades are taken whenever there is a confluence of trade signals pointing the resumption of the trend coming from the two indicators which are closely aligned.

Indicators:

  • Retracement Finder
    • A_period: 15.0
  • MATradingSignals
    • FastMA_Period: 7
    • SlowMA_Period: 10

Preferred Time Frames: 15-minute, 30-minute, 1-hour and 4-hour charts

Currency Pairs: major and minor pairs

Trading Session: Tokyo, London and New York sessions

Buy Trade Setup

Entry

  • Price should be above the 50 SMA line.
  • The 50 SMA line should be sloping up.
  • Price should retrace towards 50 SMA line causing the Retracement Finder and MA Trading Signals indicators to temporarily reverse.
  • A positive bar should appear on the Retracement Finder indicating the resumption of the bullish trend.
  • The MA Trading Signals indicator should display an arrow pointing up.
  • These bullish 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 a negative bar appears on the Retracement Finder.

Retracement Signals Forex Trading Strategy 1

Retracement Signals Forex Trading Strategy 2

Sell Trade Setup

Entry

  • Price should be below the 50 SMA line.
  • The 50 SMA line should be sloping down.
  • Price should retrace towards 50 SMA line causing the Retracement Finder and MA Trading Signals indicators to temporarily reverse.
  • A negative bar should appear on the Retracement Finder indicating the resumption of the bearish trend.
  • The MA Trading Signals indicator should display an arrow pointing down.
  • These bearish 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 a positive bar appears on the Retracement Finder.

Retracement Signals Forex Trading Strategy 3

Retracement Signals Forex Trading Strategy 4

Conclusion

Trading on trending market conditions using retracement as an entry setup is a great way to trade the market. It provides high probability trade setups that produce trades with decent yields.

The key to trading this strategy successfully is in identifying trending markets correctly. This is crucial as using this strategy on a non-trending market would not be effective.

As soon as you identify a trending market, you would have a window of about two to three trades on that trend. Trades which resulted in a strong momentum move could mean that the market might reverse sooner. In this case, traders would have lesser opportunities but would have a high yielding trade on that single trade.

Practice identifying trending markets correctly and you will be on your way to getting profitable trades using this strategy.

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