Good forex traders are good not because they know how to trade every currency pair in any market condition at any time. Instead, they are great traders because they know how to pick which currency pairs are best to trade at any given point. This is because although all market conditions are tradeable, some market conditions are easier to trade than others. Great traders know how to control themselves when the market does not show signs of good opportunities and know when to step on the gas when the market is in a condition where in it is easy to trade with relatively high probabilities.
Trending markets are one of the easiest markets to trade on. Traders could easily identify which direction the market is going just by looking at the chart. As such, most traders are more inclined to take trades in the direction of the trend. This then pressures price to continue moving in the direction of the trend.
Another market scenario which is also very easy to trade is one in which the market is showing signs of strong momentum. In these conditions, price is moving rapidly in one direction often resulting in a huge move in price contained in just one candle. This is a strong signal that price is more likely to move in the same direction in the next few candles.
Gator Rainbow Momentum Trend Forex Trading Strategy is a strategy that combines both trend following and momentum trading strategies. This allows traders to exploit the high probability trade setups that are available during trend following market conditions and identify specific high probability entry points that occur during a momentum trade scenario.
Rainbow MMA 05
Rainbow MMA 05 is a custom technical indicator which is based on multiple moving averages.
Moving averages have always been one of the staple trend following indicators used by many technical traders. It allows them to identify trends based on the moving average of price.
One of the most common ways traders identify trends using moving averages is by using multiple moving averages with varying sensitivity to price movements based on the number of periods covered. If the faster moving averages are above the slower moving averages, the trend is considered to be bullish. On the other hand, if the faster moving averages are below the slower moving averages, the trend is bearish.
Rainbow MMA 05 is based on the concept above. It is composed of 6 moving average lines with varying sensitivity. The faster moving average lines are colored lime, while the slower moving average lines are colored pink. If the lime lines are above the pink lines, the trend is bullish. If the lime lines are below the pink line, the trend is bearish.
R Gator
R Gator is a technical indicator which is based on Bill Williams’ Alligator trading strategy.
Bill William’s Alligator strategy makes use of three Smoothed Moving Average (SMMA) lines. The Jaw line is a 13-bar SMMA line, the Teeth is an eight bar SMMA line, while the Lips is a five bar SMMA line. The behavior of these three lines would indicate the type of market condition. If the three lines are congesting, the market is said to be congested or sated. If the lines are starting to widen, then the market is said to be developing a trend or the mouth is opening. If the lines are starting to contract, then the market is said to be contracting again or that it is satiated.
R Gator automatically plots these three lines to help traders identify the current market condition. The Jaw line is colored blue, the Teeth is colored green, and the Lips is colored red.
DeMarker Indicator
The DeMarker (DeM) Indicator is a technical indicator which is part of the oscillator family of indicators. It attempts to objectively identify the demand on an underlying asset by comparing the most recent maximum and minimum prices to historical maximum and minimum prices. It then plots an oscillator based on this, which traders can use to identify the directional bias of the market.
Unlike the RSI, the DeM indicator makes use of the highs and lows of each period rather than the closing prices. This allows traders to take into consideration each intra-bar price movement.
The indicator plots an oscillator line which could range from 0 to 1. Markers are placed on levels 0.3, 0.5 and 0.7. Lines dropping below 0.3 indicate an oversold market condition, while lines breaching above 0.7 indicate an overbought market condition. Lines that are below 0.5 indicate a bearish bias, while lines above 0.5 indicate a bullish bias.
Trading Strategy
As said earlier, this strategy combines a trend following strategy and a momentum strategy.
We will identify and confirm trends using the Rainbow MMA 05 and DeM indicators.
Trend direction we will be based on the direction indicated by the Rainbow MMA 05 lines.
The DeM oscillator would confirm if the market is indeed trending based on whether the oscillator line is generally above or below 0.5.
As soon as the trend is confirmed, we will wait for the market to contract and expand again based on the R Gator indicator. The expansion of the R Gator lines indicate that the market is gaining momentum. Trade setups are confirmed when the expansion of the R Gator lines are accompanied by a momentum candle.
Indicators:
- RainbowMMA_05
- R_Gator
- DeMarker
- Period: 29
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
- The lime lines of the Rainbow MMA 05 indicator should be above the pink lines.
- The DeM line should generally be above 0.5.
- The r Gator lines should contract.
- The r Gator lines should expand after the contraction with the lips being above the jaw line.
- A momentum candle should accompany the expansion.
- Enter a buy order on the confirmation of these conditions.
Stop Loss
- Set the stop loss on the support below the entry candle.
Exit
- Set the take profit target at 2x the risk on the stop loss.
Sell Trade Setup
Entry
- The lime lines of the Rainbow MMA 05 indicator should be below the pink lines.
- The DeM line should generally be below 0.5.
- The r Gator lines should contract.
- The r Gator lines should expand after the contraction with the lips being below the jaw line.
- A momentum candle should accompany the expansion.
- Enter a sell order on the confirmation of these conditions.
Stop Loss
- Set the stop loss on the resistance above the entry candle.
Exit
- Set the take profit target at 2x the risk on the stop loss.
Conclusion
This trading strategy is an excellent trading strategy with a positive expectancy.
Trend following strategies tend to be very effective because trade direction is already identified. The only question is when or where to take the trade. The momentum setup as indicated by price action and the r Gator indicator helps traders confirm the trade setups.
Having a fixed target of 2:1 ensures that traders have a good risk-reward ration which assures the positive expectancy of the trade setups.
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