Box Thrust Forex Strategy

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Box Thrust Forex Strategy

The forex market is considered one of the most volatile markets. It could move five pips or 100 pips in an hour. For this reason, many are afraid of the forex markets.  Volatility is a double-edged sword. It could wipe out your account in a few minutes, or give you a fortune if done right. Volatility, to a seasoned trader is a good thing. Why? Because it is what brings in the money. Without volatility and without price movement, no money could be made. For this reason, we need to understand the behavior of the forex market.

Amidst the chaos of the forex market, there are a few noticeable behaviors that gives predictability to the forex markets. One is that the forex markets behave with a series contractions and thrusts. Although this is one of the main reasons for the forex markets volatility, it also brings a sense of predictability to it. If you would look closely at a forex chart, thrusts are usually preceded by contractions.

On the chart you would notice the contractions represented by the rectangles. In these areas price moves within a narrow range. This is because during these times the market players are still watching and waiting what the big players are gonna do, so a big chunk of the market is staying on the sidelines. As soon as a big institutional player comes in, or a major news is released, or the market for some reason starts to move, volume also increases thus increasing volatility. I would like to call these strong unidirectional movements as thrusts. These are indicated in the chart with the upward pointing arrows and are usually composed of a few long and full-bodied candles going one direction. You could think of the contractions and thrusts as a coiled spring. It starts off compressed, then as soon as it is released, it jumps right off the ground with so much power.

How to Trade Contractions?

So, how do we make money out of this phenomenon? We start off by using fast moving averages to identify the direction of our trade for us to have a higher probability trade. This will allow us to trade with the trend, and only a strong trend, which is where most strong thrusts are found. For this, we will be using the 10-15-30 EMA band.

The 10 EMA is represented by the dark orange line, the 15 EMA represented by the saddle brown line, and the 30 EMA represented by the fire brick red line. If it is an uptrend, the bands will be neatly stacked on top of each other, with the 10 EMA on top and the 30 EMA at the bottom. On a downtrend, the 30 EMA will be on top and the 10 EMA will be at the bottom.

Then, we will be boxing the contraction including the highs and lows represented by the wicks.

Then we could use a pending stop order to enter the trade based on the upper and lower extremities of the box.

The Setup: Entry, Stop Loss & Exit

This setup is on a bullish trending market, so we will be using a buy stop order to enter the trade.

Entry: To enter the trade the EMA bands should be stacked with the 10 EMA on top and the 30 EMA at the bottom. We will be placing the buy stop pending order five pips above the box so that as soon as the thrust begins, we would be in the trade.

Stop Loss: The stop loss will be placed below the box.

Exit: The trade will be closed as soon as the 10 EMA starts curling downward.

Conclusion

This strategy is a trend continuation strategy based on the idea of contraction and thrust of forex prices. By doing so, we can catch big moves and long thrusting candles, which every trader dreams of catching.

By using a fast EMA band, only strongly trending markets are traded. This also makes the trader enter only one pending order, which is a protection against whipsaws. The regular box where pending stop entry orders are straddled above and below the box is very risky because whipsaws may occur which would trigger entry in the market both ways and both stop orders are also hit. This doubles the potential losses. By using only one pending entry order, we avoid doubling our potential risk.

Since the trade is entered using a pending buy stop order, the trader has the luxury of analyzing the chart, setting up the order, leave the screen, and do something else worthwhile, only to come back when the pending order is hit. This would be less stressful, and would allow a trader much more leverage on his time.

The hard work starts when the pending order is hit, and the trade is entered in. The trade would then have to be managed since the exit uses a manual closing of the trade, when the 10 EMA starts to curl. However, this is done because it allows us to maximize the potential profits coming from the trade and not prematurely exit the trade.

By using the idea of contractions and thrusts, we are given the opportunity to make money on big market movements brought about by the forex market’s volatility.

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