In and Out Trend Retracement Forex Trading Strategy

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In and Out Trend Retracement Forex Trading Strategy

Many beginner traders out there are looking for simple, easy to understand, easy to do strategies that they could start with. This strategy is one of those that you could begin with. A simple strategy that is very mechanical, something that you could do day in and day out.

To begin with, this strategy is solely for trending markets. This is the kind of market that I think beginning traders should start with. Trending markets have an increased bias on one side of the market, either a bullish bias or a bearish bias. By trading with the trend on a trending market, you got half the battle won. The chances of price going your direction is significantly higher than when you’re trading on a non-trending market or than when you’re not trading with the trend.

This is the reason why the vast majority of successful traders out there prefer to trade on a trending market rather than a ranging market. Most of them have a strategy that is specific for a trending market.

As a beginning trader, this would be the best direction for you to start with. So, many look for a trending market strategy. Others are quite good, some not so good.

So, what should you be looking for when finding a trending market strategy? This is my take. I only have a few things that I think should be well in place in a trending market strategy.

First, the strategy’s entry rules should allow the trader to enter the market at a slightly better price. Most trend following strategies make traders chase price. However, by chasing price, the possibility that the trader will be entering at the top or at the bottom of a trend is very high. A sound strategy should keep a trader from chasing price. The strategy should give a trader a price area where he or she could wait for price to retrace back to, then as price enters that area, then the trader could enter the market.

Second, the strategy should cause the trader to enter the trade when there is a confirmation that the market has resumed going the direction of the trend. Sometimes a strong retracement could lead to a market reversal. Entering solely based on a retracement without a confirmation would be like picking tops or bottoms, only that retracements are minor highs and lows. Some traders though prefer to disregard confirmation and enter solely based on retracement to their expected areas. Each to his own.

Lastly and more importantly, the strategy should filter out non-trending markets. The most common cause of failure when using a trending strategy is when a trader uses it on a non-trending market. This is very common. However, most strategies don’t have a filter for a non-trending market. By adding one, we increase the probability of success on our trades.

The Setup: Trading the In & Out Trend Retracement Strategy

To identify the direction of the trend, we will be using three Exponential Moving Averages (EMA).

  • 10 EMA (gold)
  • 20 EMA (magenta)
  • 50 EMA (brown)

We will define the direction of the trend in relation to how these EMAs are stacked. A bullish market should have a stack of 10 EMA on top, 20 EMA in the middle, and 50 EMA at the bottom. A bearish EMA will be the reverse.

However, the 10 and 20 EMA will not be used solely for trend direction purposes. We will also be using it as an area of support or resistance. The area in between the two EMAs will be the area where we will wait for price to retrace to ensure that we will not be chasing price.

Also, the 10 EMA will serve as our confirmation that price has resumed its trend direction. If price, coming from our area of support or resistance, closes above the 10 EMA on a bullish setup, then we will assume that price is resuming its bullish trend.

Finally, even though we have defined our trend direction using the three EMAs, it is still not enough to determine if the trend is strong enough. To determine if the market is strongly trending, we will be using the Average Directional Movement Index (ADX). The ADX should be above 30 on our entry candle.

We will also be using the Bill William’s Fractals indicator to determine our stop loss.

Buy Entry:

  • EMA stack should be as follows:
    • 10 EMA (gold) – top
    • 20 EMA (magenta) – middle
    • 50 EMA (brown) – bottom
  • ADX should be above 30
  • Allow price to retrace between the 10 & 20 EMA
  • Enter the trade as price closes above the 10 EMA

Stop Loss: Set the stop loss at the bottom of the fractal candle

Take Profit: Set the take profit at 1.5x the stop loss

Sell Entry:

  • EMA stack should be as follows:
    • 10 EMA (gold) – bottom
    • 20 EMA (magenta) – middle
    • 50 EMA (brown) – top
  • ADX should be above 30
  • Allow price to retrace between the 10 & 20 EMA
  • Enter the trade as price closes below the 10 EMA

Stop Loss: Set the stop loss at the top of the fractal candle

Take Profit: Set the take profit at 1.5x the stop loss

Conclusion

This strategy is a simple and mechanical trend following strategy that ticks all the boxes of what I believe is a good trend following strategy. It allows the trader to enter at retracement and not chase price. It allows the trader to enter at a confirmed trend resumption. It also filters out non-trending and weak-trending markets with the use of the ADX.

This strategy is an excellent strategy to begin trading a trending market. However, not all entry setups are profitable. There will be times when the market does reverse. There will also be times when the entry candle will already be overextended.

 

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