Many traders who would try to dabble in forex trading would usually come across many of the most basic types of trading strategies. These lessons are free to learn online at no cost at all. Basics such as candlestick patterns, price patterns and price action can be learned freely. While there is a certain advantage when you are being taught by an experienced trader through structured courses, most new traders would quickly forgo the lessons learned from the basics not knowing that these basics are a treasure chest of effective trading strategies.
Some of the most basic strategies that could easily be learned are price patterns. These are basic patterns that could be observed on a price chart that could indicate the direction of price with relatively high degree of accuracy. Patterns such as flags and pennants are examples of continuation patterns, while patterns such as double tops and double bottoms are great examples of reversal indications.
Double tops and double bottoms are some of the most effective reversal price patterns that traders could use. However, many new traders would avoid this trading pattern because it is not that easy to spot these types of patterns in real time. Many new traders struggle identifying swing points which is vital when trading double tops and double bottoms. Double Tops and Bottoms Forex Trading Strategy simplifies this process by providing technical indicators that could be used as tools to identify these swing points.
ZigZag Indicator
The ZigZag indicator is a technical indicator which indicates swing points on the price chart.
It automatically connects swing highs and swing lows with a line forming a zigzag like pattern. These swing points are identified based price movements between swing highs and swing lows that are greater than a specified percentage. It also filters out minor fluctuations and identifies only major swings making it more reliable and less susceptible to errant price fluctuations.
The ZigZag indicator can be used in many applications. Traders can use it to identify the trend pattern of price action. It could also be used to identify swing points which is applicable with the Elliot Wave Theory. These swing points can also be used to identify supply and demand zones or horizontal support and resistance lines.
Trend Signal
The Trend Signal indicator is exactly as its name suggests. It is a custom indicator which helps traders identify trend reversal points.
The indicator basically identifies the said trend reversal points and plots arrows pointing the direction of the possible new trend direction.
Traders can use these signals as a trend reversal entry signal to confirm their trend reversal setups. Traders can also use the arrows to help them identify the direction of the momentum and trade short-term momentum setups in the said direction.
Trading Strategy
This trading strategy is a basic double tops and double bottoms strategy. The difference is that it makes use of the ZigZag indicator to simplify the process of identifying the swing points.
First, we should identify the prior swing point. Then, we should identify a supply or demand zone based on the candle that formed the peak or trough of the prior swing point. Then, we should wait for price to revisit the supply or demand levels.
If price bounces off the supply or demand levels, price action could start to form a double top or double bottom. The pattern is confirmed as soon as the Trend Signal indicator plots an arrow pointing the direction of the reversal.
The take profit target is then set at the opposing swing point relative to the double top or double bottom.
Indicators:
- ZigZag
- Trend_Signal
- Length: 10
- Risk: 20
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
- A demand zone should be identified based on the prior swing low.
- Price should bounce off the demand zone.
- A Double Bottom pattern should start to form.
- The Trend Signal indicator should plot an arrow pointing up.
- 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 the prior swing high level.
Sell Trade Setup
Entry
- A supply zone should be identified based on the prior swing high.
- Price should bounce off the supply zone.
- A Double Top pattern should start to form.
- The Trend Signal indicator should plot an arrow pointing down.
- 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 the prior swing low level.
Conclusion
Trading double tops and double bottoms are some of the most effective pattern trading strategies. Traders who have mastered trading these types of setups tend to gain so much out of each successful trade. However, new traders still need to practice identifying such swing points in order to be successful in trading double tops and double bottoms.
This strategy just simplifies the process using the ZigZag indicator. Now, even new traders can easily identify such swing points and trade double tops and double bottoms successfully.
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