The strategy
Now that we are done with basics it’s time to put it all together. Into a strategy, a method to trade. You might see that there is no exact black or white rules to trade. If trading was like that you could buy “super duper over 9000 xxx Tradimus Prime” trading robot and get rich quick.
In reality as people are unpredictable 100% of the time and so are the markets, and you have to be flexible to adapt. Learning to adapt very important for making money in markets, because they are constantly changing, however some things never change. This strategy is all about that.
- Pairs and timeframes to trade.
- Analysis.
- Setups.
- Entry, stop and target.
- Trade management.
- Exit.
Pairs and timeframes to trade
Pairs to trade:
This strategy works on all currency pairs. I trade mostly majors, but if you want to get more setups you could trade as many pairs as you want. With this strategy you are less likely to get overwhelmed, because it takes very little time to spot trading opportunities and profit on them.
Timeframe to trade:
Main timeframe is 4 hour. This means that you will look for possible setups on 4h chart and make decisions based on 4 hour candles.
However if you are following the trend and you see price approaching SR area with slow momentum you could look at smaller timeframes like 1h or 30 min to get an entry signal at SR area.
If you are just starting I recommend to stick with 4 hour timeframe because it has less noise and are easier to read.
To determine the trend use 4 hour chart. To determine SR
are use 4h and higher timeframes.
Analysis
- Determine closest SR areas and target areas. Do this on 4 hour or higher timeframe.
- Determine
the trend. Do this on 4h hour timeframe. Analyse if trend is just starting, are in progress, or shows signs of ending (parabolic move to strong SR area).
- Analyse
price momentum. See if price is moving to SR area slowly of rapidly. If price moves rapidly be careful and wait for it to slow down, because fast momentum indicates that price has strength to break out.
- Check if no
important news releases are coming out soon. Make sure to
avoid random market behaviour during these releases.
The winning setup
When your analysis is done its time to look for potential trade setups. We are looking to enter on SR area bounce, so firstly we need is preceding trend to SR area. If price are ranging at SR area for more than 3 4 hour candles or 12 hours, it’s better to avoid the trade and enter later, after price breaks out of that range.
When price hits SR area wait for price to form indecision. This way you will get better odds at winning the trade. However when you are experienced enough you can easily enter with limit orders at the best prices.
If you are taking trend following trade you can look for signs if indecision on 1 hour or 30 min timeframe. If you are taking reversal better wait for 4 hour candles to form indecision.
I recommend to trade using 4hour candles, so you’ll have to check charts every 4 hours.
This is EUR/JPY 4h chart. Price was in a clear downtrend. As you can see price was slowly approaching entry SR area. When it finally did, it formed small indecision candle. We would have entered few pips below indecision candle, while placing stop loss above SR area to give price room to move.
Price began to drop and reached ½ target. Then it slowly got back up and formed another entry setup. Second time price hit target area very quickly and even went to another target area.
Entry: Determine your risk, entry, stop loss and target
If you entering short, enter below indecision candle by few pips, place stop loss above SR area and/or previous lower high. If you are entering long enter few pips above indecision candle, place stop loss above SR area and/or previous lower low.
Make sure your trade has enough room to develop. IT would be best to place stop loss above SR area and previous low/high, but always beware risk reward ratio. Fundamentally your stop should be at the price where you clearly can see that setup didn’t work.
Target the next SR area. You can place your target few pips before SR area, so that your trade won’t miss it and go back. Believe me, this happens quite a lot.
Make sure you have at least 1:2 risk reward ratio. If not –
don not enter. Then calculate your position size based on your risk tolerance
and enter accordingly.
Trade management
To manage trades you have to look at the chart every 4 hours – at the close of four hour candles. If you see clear signs of reversal adjust your stop loss. When price goes to half of your target place your stop at break even.
Also if you see price approaching your target with high
momentum you can close half of your position and let the other half run. Then
target the next SR area.
Exit
Stop loss: If trade goes against you to the point where it proves to you that you were wrong it hits stop loss.
Target: When price hits your target you take the profits and look for new opportunities.
Manual exit: If important news are out within 30 minutes or you see clear reversal signs forming you might choose to exit manually or lock in some profits with stop loss.
Trailing: You can close half of your position when it reaches your ½ of your target and place stop loss at breakeven.
Another option is to close half of your position when it reaches your initial target and place stop loss locking in some of your profits while letting trade run to the next SR area. This exit strategy is most profitable while following the trend.
I use all of these strategies, choose what works best for
you.
Conclusion
With this strategy you should expect to win 70% of the time. However when you get experienced you might even expect months with 95% win rate. Adjust it to yourself, because this strategy consist mostly of trading basics – risk management and price action. You will develop your unique feel for the market and your unique method but this is very good place to start. Remember to always keep it stupid simple. (Shiny Deals Kiss).
