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As I’ve touched on in the past, I’m a HUGE fan of using areas of confluence when it comes to Forex trading… or trading any market for that matter. Originally found in the stock market since pretty much forever, traders started noticing that price tends to form similar patterns prior to advances or declines.

Today, I’m going to go in-depth as to what I look for in terms of confluence areas utilising Forex trading concepts such as classical technical analysis, candlestick patterns, support and resistance, fundamental analysis, and then how we can combine these to find confluence areas to trade off.

What’s critical with trading confluence, is that we’re really looking for a trade with the least path of resistance. Speaking of resistance, support and resistance are two super key elements to look for when finding confluence areas.

When it comes to support and resistance, there are essentially two types, classic and dynamic. Classic support and resistance is really just horizontal lines that signify rejections from price action. Dynamic, however follows price often in the form of a trendline or significant MA.

So what do we look for?

What we’re looking for with confluence is instances where support and resistance areas coincide with technical chart patterns. Take for example the image below, noticing the area of support highlighted.

Now, we can also see that price has formed a triple bottom technical pattern.

For additional confirmation, we also have a triangle reversal technical pattern.

Next, you can notice that the triangle line also provides an area of dynamic resistance in the form of a trendline.

How do you trade confluence?

In the example above, there are a number of ways in which it could be traded. However he’s one in which the odds are stacked greater in our favour.

1. We wait for price to break through our upper triangle line / downward dynamic resistance trendline.
2. We set our stop loss just underneath the prior low / support / final low of the triple bottom pattern.
3. We can set a measured move target which would be the widest part of the triangle in length. We could also use the measure move target area of the triple bottom pattern which is the length of the highest bounce in the pattern from the high of the pattern. Or, alternatively use other established support and resistance areas, or even trail our stop loss and close the trade when the market reverses.

Out of all the possible profit target methods, the measured move from the triple bottom pattern gives us our largest fixed profit target.

In the above method, there are four factors at play that make this an area of confluence:

1. Classical Support
2. A Triple Bottom Pattern
3. A Triangle Pattern
4. Dynamic Resistance (Trendline)

I know in this example it seems that the stars aligned and created a perfect scenario, but when you know what to look for you’d be surprised how often you can spot confluence areas where 2-3 patterns occur at the same time.

Wrapping Up

Using confluence areas to trade are an extremely robust method of trading price action. When you stack the odds in your favour, you might not get signals all the time but you’ll certainly notice the reliability of the signals that do occur.

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Whether you’re a scalper, swing trader or investor, the momentum indicator is a highly underrated tool suitable for almost all forex trading strategies, because unlike many other common indicators, it doesn’t repaint.

What is the Momentum Oscillator?

The momentum indicator is one of MT4’s default indicators. It shows the difference between a candles closing price and the price of a specific period back, by default, 14. The momentum indicator then compares these values with the 100 level.

The chart below shows what the momentum indicator looks like on a NZDCAD Daily timeframe. You’ll notice that price crosses the 100 level quite frequently, and whilst you could simply trade every cross, there are far better ways to utilise the momentum indicator in your forex trading system.

Instead, let’s consider the 100 level as our bull/bear level and also a method of indicating market volatility. The further away from the 100 level the indicator is, the higher the market volatility is, and the stronger the current trend is.

Momentum Trend Strategy

One method of trading with the momentum indicator as you’ll notice in the chart below, is as a simple trend trading strategy. As you’re likely aware, a trend can be defined as a series of higher highs and higher lows for bulls, and lower lowers and lower highs for bears.

By simply applying these laws of price action to the momentum indicator we can create a very robust strategy.

The EURUSD weekly chart above shows an example of how a trader can use price action rules to trade with the momentum indicator. First, we note whether we are above or below the 100 level, thus determining our trend.

Then, we start to see a series of lower lowers (red) and higher highs (blue) emerging. As in any trending market, a pullback is healthy, and both the 100 level and the trendlines drawn on the momentum indicator both offer traders a place to enter a trade in the direction of the prevailing trend.

Momentum Divergence Strategy

Various oscillators are used to show divergences, or differences between the indicator and price.

Divergences typically form around significant tops and bottoms.

Higher highs and lower lows also feature prominently in this strategy. You can see that price formed a lower low on the chart, however the momentum indicator failed to do so, instead forming a higher low, which can mean that the current trend is running out of steam. This is where a trader would be looking to initiate a long position.

Wrapping up

Using the momentum indicator in your trading offers a little bit of everything. It follows price action, keeping you close to where the market is going. Even by just using the 100 level in your trading strategy to determine the current trend, you’ll adding an extra layer of robustness to your existing strategy.

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When it comes to Forex trading, there are a few theories out there concerning the structure of the Forex market and trading cycles. We’re going to dive in to one today, one of the most important in my opinion, the Wyckoff trading method.

So Who Was Richard Wyckoff?

Born late in the 19th century, Wyckoff was a famous stock trader and investor. He went on to open up his first brokerage in his 20’s and later wrote several trading books that remain highly valued and studied today.

Wyckoff’s 2 Rules

Wyckoff’s theories are based purely on price action and market cycles. That’s it… just two essential components summarised below.

Rule 1
The market never behaves the same way. Price action will never create a move in the exact same way as it did in the past, it is truly unique.

Rule 2
Since every price move is unique, its analytical importance comes when compared to previous behaviour.

Wyckoff’s Market Cycles

So, on top of the paraphrased points above, he developed a price action theory that is still a leading principle for technical traders today. The market cycle consists of four stages: Accumulation, Markup, Distribution, Mark Down.

Stage 1 – Accumulation
Accumulation is the first stage of the Wyckoff price cycle. Accumulation is created by institutional demand in an asset or instrument. The bulls are gradually gaining power (building their positions), and are poised to push price higher.

The thing about this cycle is that although there’s a lot of buying going on, price action on the chart remains relatively flat. Simply put, the accumulation phase looks a lot like a range consolidation, though you will notice the ranging period can show that price is forming higher bottoms within the range, which tends to be solid evidence of accumulation.

Stage 2 – Markup
On to stage 2.

So the bulls and big buyers have gained enough power to push price through the upper resistance of the range (accumulation phase). When this happens, it’s considered a pretty good signal that we’re entering the second stage and that a bullish price trend is starting to take place.

Stage 3 – Distribution
The third phase of the cycle is called distribution and this is where we see the bears attempt to regain power, often formed by the earlier buyers liquidating their holdings.

The price action resembles that of the accumulation phase, however it can tend to be more volatile, and of course price fails to create higher bottoms on its chart. Instead, we should start to see a series of lower highs, indicative of a sell off.

Stage 4 – Markdown
Now we’re entering the final stage of the Wyckoff price cycle.

Once the distribution phase is complete, the bears are in charge. This stage of the cycle is signaled by price breaking down through the lower level of the distribution range or channel that’s formed.

After this, the cycle begins again.

Here’s what the Wyckoff concept looks like.

You will notice that in the accumulation phase, the bottoms are rising, likewise the opposite for the distribution phase.

What we haven’t yet mentioned is the spring, which is where price breaks briefly through the previous low/high of the accumulation/distribution channel. A spring is the same as a false breakout, which is strong confirmation that the price action of an instrument is following the Wyckoff market cycle. Springs are often associated with the institutional traders taking out weak hands’ stop losses, creating even more liquidity for institutions to accumulate or distribute their holdings.

Wyckoff’s 3 Laws

In addition to his two laws, Wyckoff also developed three laws which are a natural cause of the market phases outlined in the cycle above.

Law 1 – Supply and Demand
This is rule is just as applicable outside the markets as it is toward the markets. Simply, if there’s excess supply, prices decrease. If there’s excess demand, prices increase. The result of both is either increased buying or selling pressure.

Law 2 – Effort versus Result
The idea behind this law is that effort should lead to a result. In this case, he’s referring to trading volume data. If there is an unusually large volume bar, we can typically expect a significant price move.

Law 3 – Cause and Effect
The final law suggests that every cause in the market results in an effect. Using the Wyckoff market cycles as an example, Accumulation causes the Markup effect, while Distribution causes the Markdown effect.

How to Profit Using Wyckoff Trading in Forex

Traders can put all of the above principles to recognize potential upcoming moves in price.

Buy recognising what could be the Accumulation stage, traders can prepare to trade to the long side, and similarly to the short side after the Distribution stage.

After doing your analysis, you should be able to recognise what cycle stage the market is currently in. So that you can take advantage of the current cycle, you must have a trading plan that you can execute. So let’s get stuck into some rules that we can use to trade a Wyckoff strategy.

Wyckoff Trade Entry
Simply put, you should be entering a trade at the point in which price is switching from Accumulation to Markup, and Distribution to Markdown. The first thing you need to do is identify which stage the market is in while the Forex market is ranging. To make this easier to identify, you might find it useful to analyse the previous price move for additional confirmation.

The actual trade itself should be taken when price breaks out of the range in the direction of the expected move. So you would buy a currency pair when price breaks through the upper level of a range, and sell the pair when price breaks through the lower support of the Distribution range. Let’s take a look at a what it looks like on a real chart.

Where to Place your Stop Loss
We all know that nothing is guaranteed when it comes to Forex trading, which is why we should always use a stop loss. When trading the Markup, you can place your stops below the lows of the Accumulation phase. Conversely, when trading the Markdown, stops can be placed just above the highs of the Distribution phase.

When to Take Profit
Sometimes one of the hardest parts of trading is knowing when to take profit. When it comes to trading Wyckoff cycles, we want to try to take our profits once we notice Markup transitioning to Distribution, or the inverse for short trades.

Alternatively you can keep an eye out for other chart or candlestick patterns that can signal are reversal.

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Well traders, as the year draws to a close, it’s a good time to reflect on what we did well throughout 2018 as well as how we can improve in 2019. As forex traders, that means putting thought in to how the next year can be another profitable one.

It could have been that you were rushing your entries, or loose with your stops, but whatever the case, there’s certainly always room to improve.

Let’s get into how we can make 2019 our most profitable year to date.

Do one thing, and do it well

Before going any further, it’s important to preface that experimenting with different strategies is perfectly fine. Having said that, it takes more than a few days or weeks to prove the merit of any given strategy or system.

When I first started ‘trading’, I seldom gave any strategy a chance to prove itself. Instead I’d jump from system to system without giving myself the time to figure out if one of them was suitable for me.

Finally, I decided to stick with the price action patterns and systems and the rest is history.

So, how can we use this lesson to improve ourselves in 2019?

First, find the trading style that suits you, such as:

  • Swing Trading
  • Day Trading
  • Scalping
  • Position Trading
  • High-frequency trading

Once you’ve found the trading style that not only interests you, but matches your personality and lifestyle, it’s time to start looking for a strategy or system within that category.

As you’re all aware, I’m a price action advocate, and there are many patterns that fall into price action, for example candlestick patterns such as engulfing candles, pinbars or inside bars. Or, there are classical chart patterns such as wedges, triangles, flags and pennants, cup and handles, head and shoulders, and many more.

As you can see, even within the category of price action, there are quite a few options to choose from, so it’s important to focus on just one or two at a time, honing your skill and perfecting the execution of your chosen strategy.

Less is more

This probably sounds quite counter-intuitive, but building your bottom line isn’t contingent on the number of trades you make when trading the forex market. Sometimes the market will deliver plenty of setups that meet your strategy or system requirements, sometimes it won’t. But it’s important to remember that staying in cash can be a position, too.

And, depending on your trading style (you all know I prefer the daily timeframe), chances are that even if you haven’t had a trade setup for a couple of weeks, you could still have an open position as trade’s can remain open and in profit for weeks at a time, depending of course on your strategy.

Even just two or three setups a month can be quite profitable. I’d ask you to take some time to dig into the numbers and see just how many trades you took, as well as analysing the setup of those trades and of course, the outcome. You may be surprised to learn that if you took a few less positions and focussed more on taking only the higher quality setups, your equity curve will look smoother and drawdowns will be reduced significantly.

So what does it all mean for 2019?

Each new year brings with it new opportunities, and now is the perfect time to take a detailed look at what you did right and wrong throughout 2018.

If you noticed yourself sometimes trading too large, too frequently, or outside of your trading plan, then it’s a time to review and work towards controlling the areas where you notice weakness, whether frequent or occasional.

Everything you should be working towards is for the ultimate benefit of preserving your capital. Without it, you’ll never be able to fully capitalise on the quality setups in your trading plan. After all, you need capital to place a trade when one of your setups finally arises.

Make 2019 the year that you focus on protecting your capital, and then the profit will come naturally.

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It’s safe to say that every trader should aspire to know not only how to identify a trend, but also determine the strength of a given trend. After all, it’s the strength of a trend that allows us to trade with momentum on our side, putting the odds on our side.

So how exactly do you gauge the strength of a trend? I’m sure many of you have tried a variety of indicators that claim to do the job for you, but why make a relatively simple task more complicated?

First, let’s take a look at the characteristics of a trending market. So many new traders implicate the concept of a Forex market trend, but I assure you all it’s really quite simple.

What we want to see is nothing more than a market making higher highs followed by higher lows for a bullish trend, or lower lows followed by lower highs for a bearish trend.

Simple, right? Let me show you what it looks like.

Easier than you thought, isn’t it? Now, what can we do with this info.

To do this we’ll take a look at an actual chart and take note of the swing highs and lows within a given trend.

You can clearly see that over the period of time there are easily identifiable trending periods demonstrated by the swing highs and lows.

But how do we know how strong the trend actually is? To help us with the strength of an underlying trend we need to take into consideration some key levels. Notice the trendlines and how one is respected by price better than the other? The first bullish trendline was broken to the downside after just two swings, which indicates that the trend was struggling to maintain its bullish momentum. This was then confirmed by the double top (first red dot), where price failed to make new higher highs.

Now the second trendline shows that price is being consistently rejected by these levels, pushing price further down with increasingly stronger swings on the downside, while consistently weaker upward swings are showing us that the bulls really don’t have much strength and upward momentum can’t be sustained.

You will also notice in the image below that after price rejected our bearish trendline, a trader could’ve shorted the market once price broke below our swing trendlines, shown in blue. These trades present us with low risk – high reward entries.

Alternatively, traders could short once price breaches the previous swing low as shown below.

Wrapping up

One of the easiest ways to determine the strength of momentum in an underlying trend is to simply see how price respects horizontal and diagonal levels during its swing highs and lows. Just like everything in trading, it’s not an exact science, but it is a very easily identifiable method that can be utilised to trade with the trend, and capture quite a significant portion of the prevailing trend.

The best thing that any trader can do to determine the strength of a trend is to just go back to basics and identify key levels through swing highs and lows.

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We’ve touched on flag patterns before in our ‘flags and pennants’ post, but let’s go into a little more detail. After all, flag patterns come in all sorts of shapes and sizes, and it’s not as simple as calling a flag a flag, so to speak.

Typically, flag patterns indicate a continuation of the existing trend. So, if a currency pair in the forex market is showing a bullish trend and then forms a flag, there’s a pretty decent chance that the break will be to the upside. And of course, the opposite applies in a downtrending market.

But here’s a key element that can often go overlooked. See, a flag is only a reliable continuation pattern if the flag itself forms at an angle that’s opposite to the existing trend. Ie, the flag will slope downwards in an uptrending market, and vice-versa for downtrending markets. If this opposing slope isn’t there, neither is the pattern.

So what does this mean?

Well, to put it bluntly, it means that if you’re not being critical of this one key component, then you’re pulling the plug on your profit potential because you’re simply going to be stuck on the wrong side of the trade.

Let’s sus out the flag pattern in more detail.

The Continuation Flag

Before diving deeper into the significance of sloping flags, it’s important to get your head around why a flag pattern forms.

As I mentioned before, flags are most often a continuation pattern. The most profitable of these flag patterns form within an existing, strongly trending market and are a result of profit taking, causing a slight pullback and offering us a chance to get enter into the overriding trend.

Check out the bull flag below.

Notice with the illustration of the flag pattern above that the flag forms after an extended bullish move. Then, buyers take some profit causing a light pullback at an angle opposing the trend direction, before breaking out and resuming its upward trend.

As you might have guessed, this is what the bear flag tends to look like.

Why Do Flags Form?

First and foremost, these patterns are an indication of price consolidation. As I’m sure you’re aware, a healthy trending market pauses time to time to distribute old holders and accumulate new buyers or sellers.

Quite simply this scenario represents the same cycle of buying and selling that happens throughout the duration of a trending market. Throughout times of consolidation, we’re simply seeing money changing hands between buyers and sellers.

As price action traders, we need to be on the lookout for favourable trading patterns such as flags. This allows us to catch the trend as it continues, while offering an extremely favourable R-ratio.

The Flag That’s Not a Flag

There are some common misunderstandings of what constitutes a continuation flag pattern and what doesn’t.

The only difference between these often misunderstood patterns is the angle at which the flag develops. Everything else looks the same, although the difference is critical.

You’ll notice how the misunderstood ‘bull flag’ pattern formed in the direction of the trend, not against it. Although a minor difference, the significance is strong. See, these ‘flags’ are inconsistent in their outcome, though can quite often represent exhaustion of an existing trend.

In order for this pattern to be considered bullish, we need the consolidation to slope AGAINST the momentum.

Wrapping up

Bull and bear flags come in all sorts of sizes and shapes, but the one thing that never changes is that the angle of the flag has to oppose the current trend in order to be considered tradable. As forex traders, it’s not our job to take every single trade setup, it’s our job to take the trades that put the strongest odds in our favour. We do this by being very selective and choosing only the highest probability setups to trade.

Keep this close to mind and more often than not you’ll hit the resumption of the trend by trading these quality flag patterns.

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With the recent running bull markets slipping of late, what could it mean for gold & silver?

First, let’s step back and consider what’s happening fundamentally in the markets today. Or more specifically, let’s consider US Politics, Geo-politics and the overall market health.

Starting with American politics. We have what have been dubbed as the “most important mid-term elections in the history of all mid-term elections” coming up.

Geo-politically, the world is on a knife edge, with tension over Saudi Arabia’s alleged assassination turning heads across the globe. Iran and Israel are at each other’s throats and the situation in Syria shows no signs of getting better. Across the ocean a BREXIT deal is looking less and less likely and in the Americas, trade wars and trade deals are nowhere near anything resembling a resolution.

Why is this important?

Well, despite the gold standard ‘expiring’ in ’71, gold seems to be perfectly priced for economic, market, political and geo-political perfection. And right now, all four of these contributing factors are on the cusp of turning from perfectly peaceful to complete global chaos. That means that the ‘perfection’ that gold is priced at looks to be very short lived.

Let’s Check out the Technicals

You can see that the daily chart of gold on MT4 is currently holding the 50 SMA since its recent pop, though nothing really convincing in terms of a trending move.

While silver does the same and looks to be forming an Inverse Head & Shoulder pattern at the same time.

With the raising of interest rates, we’re seeing a huge amount of money transferring into gold from US treasuries as a ‘safe-haven’ asset, and to aid in hedging against equity market risk. We’re seeing big investment shifts such as Russia ditching nearly all their holdings of US debt and Treasuries, and moving their money into gold, while China are doing the same. But it’s not only the powerhouse countries that are stockpiling gold. We’re seeing plenty of emerging economies as well as countries like Poland, Hungary, Kazakhstan and Mongolia significantly buying up physical gold.

What this all means, is at this stage unclear. However with a high degree of uncertainty in the air, time will tell. If history is any guide, it could spell plenty more turmoil in equity markets and the broader economy as a whole is on its way.

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A current look at global markets

With recent market volatility due to various significant fundamental factors around the world, I thought it might be a good idea to have a look at what the markets around the world are doing at the moment, and potentially how a trader could interpret current events from a technical analysis point of view.

Let’s start with the China 50 Index.

China 50 Index

Last Friday, the Chinese government intervened which helped the index rebound from the lower support line of a channel it’s currently trading within. On the daily chart you can also see that it formed a strong rejection of support. Whilst the current price action on the chart can generally be considered positive, it’s important to note that the China 50 index is in an established downtrend, trading under the 200 SMA.

Euro Stoxx 50 Index

The first thing to observe is a long-term downward channel that has been forming over the past 15 months. Of particular note, we’re seeing a series of lower lows and a significant breakdown through our support levels. To add to the negative outlook, price has also just started trading below the 200SMA.

If price cannot recover the broken support level, we can likely expect to see further weakness in the coming months.

DAX

The German DAX Index has pulled back to what I’d consider the neckline of a Head & Shoulder pattern, finding pretty solid resistance. As of now, DAX opened with a gap down, however being out of session for the German powerhouse, the gap may not be indicative of anything significant besides an overall negative sentiment. Typically, the outlook is turning quite negative for the European equity benchmark.

Russell 2000 & NASDAQ

First, the Russell has broken down through it’s somewhat sloppy, but clear uptrending channel and it looks like it’s on its way to test the lows seen in January and April. Notice the break through the channel also occurred at previous support levels. As for NASDAQ, it continues to hold its trend channel and is currently sitting on strong support levels.

Overall, the sentiment across globe in the Forex market and indices is pretty negative from a fundamental point of view, and as you can see the charts are reflecting this negativity. FTSE, ASX 200, SP 500, India, and more are showing significant weakness. Though it’s too early to label any as a strong bear market, you can confidently call it a well overdue correction.

Risk Disclosure: In addition to the website disclaimer below, the material on this page prepared by Vantage FX Pty Ltd does not contain a record of our prices or solicitation to trade. All opinions, news, research, tools, prices or other information is provided as general market commentary and marketing communication – not as investment advice. Consequently, any person acting on it does so entirely at their own risk. The expert writers express their personal opinions and will not assume any responsibility whatsoever for the forex trading account of the reader. We always aim for maximum accuracy and timeliness, and Vantage FX shall not be liable for any loss or damage, consequential or otherwise, which may arise from the use or reliance on this service and its content, inaccurate information or typos. No representation is being made that any results discussed within the report will be achieved, and past performance is not indicative of future performance.

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Trading major news events like NFP (Non-Farm Payrolls), FOMC, or RBA announcements, etc can be a bit of a dangerous activity, and to anyone who’s experienced it before you know how badly the volatility can ravage your account.

However, to the Forex trader that is conscientious of protecting their downside, applies disciplined money management, news events can provide attractive opportunities for a lot of movement in a short time.

Today, we’re going to go into one of the more common ways that traders can look to trade news in the Forex market. This methodology is valid regardless of whether the news is positive or negative.

Here’s how it’s done

Let’s use NFP as our example throughout this strategy

Observe Price leading into NFP
At 11pm Sydney time, around 30 minutes prior to the NFP announcement traders should plot their support and resistance areas based on swing highs and lows. Simply use the past several hours of chart data on the 5 and 15 minute charts to create your high and low levels of support and resistance.

The pair you choose to trade is up to you, though given we’re using NFP as our example, I’d stick to one of the major USD pairs such as EURUSD or USDCHF.

Identify Support and Resistance
So, you’ve marked your levels and noted the pip range between the highs and lows. More often than not you’ll notice a relatively tight trading range in the hours leading up to the announcement.

Any surprising NFP numbers that are announced will set off a quite significant and rapid movement, and in the moments leading up to the announcement, and positions can bear significant risks, hence the lack of liquidity and tight range leading in.

Set your Entry Orders
So you’ve got your support and resistance marked, now it’s time to set your game plan. One thing you can be sure of, is that going into NFP there’ll likely be a volatile move. In order to catch it we’ll place our pending orders just outside of our support and resistance zones. Now, as these are pending orders you’ll have to be very wary of slippage which can be quite detrimental during rapid movements.

Set your stops!
Because rapid volatility is expected, it is imperative (as always) to manage your risk properly. Because we’re using support and resistance  to enter, let’s use it as our stop loss levels, by placing our stops just outside the opposite areas of support/resistance.

As for profits, we really want at least 2R targets. Though nothing is certain, 2R should be quite attainable considering the significance of NFP announcements.

Wrapping Up

It really doesn’t get much simpler than that folks, but as mentioned, one of the most important facets of this trade is to choose a Forex broker with very low slippage.

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Ok traders, this is a bit of a new one for me, but today we’re going to get cracking with our first lesson in MQL4 coding for MetaTrader 4.

As I’m learning at the same time as I’m writing this, we’ll be starting off with the very basics and hopefully (successfully) progress through to developing a custom indicator or EA.

First and foremost, we need to know what we’ll be coding, so let’s get stuck into developing our strategy.

The Strategy we’ll be Coding

The strategy I’ll be looking to code is a relatively simple price action system based on a candle pattern occurring in the direction of the trend.

So let’s go over the nuts & bolts of our strategy.

First, we’re going to establish the rules of our candle pattern. For this exercise we’re using bullish and bearing engulfing candles that occur in the direction of the current market trend.

So what is an engulfing candle? An engulfing pattern is a candlestick chart pattern that forms when the body of a candle completely overlaps or engulfs the body of the prior candlestick. Since we’ll be only trading in the direction of the overall prevailing trend, so we’ll need a method of defining whether the trend is bullish or bearish.

Determining the Trend

So, I want this system to maintain its simplicity so to determine our trend we’re simply going to use an MA. We’ll create a custom input for this to set the period and type of MA, although for now, let’s assume that it’s the 30EMA which will mean that we only trade bullish engulfing patterns when price is above our 100 SMA and only take short entries when price is below.

Our Entry, Stop Loss & Take Profit Rules

For our first version of this coded system (and given me non-existent coding skills), we’ll keep our trading rules quite simple and potentially refine as we move forward.

So, the very first thing I like to do when trading, is define my stop loss. For this system I’ll be forward testing two different stop loss methods. The first will be arbitrarily placed beneath/above the high/low of the signal candle contingent on trend direction, and the second will be above/below the most recent swing high/low, again contingent on trend direction.

While both have their merits, I anticipate that the first option will get hit more often, however the loss value will be significantly lower.

Our entry will simply be placed after the close of the signal candle on the open of the new candle. Again, I’ll test a second entry method whereby a buy/sell stop order is placed at the high/low of the signal candle.

Our profit areas will be determined in one of two methods also. The first being an arbitrary 2R level, so the TP will be twice that of our SL. Secondarily, we will stagger our exits, taking half profit at 1R and then the remainder of the trade can either be closed at a significant S&R level, or simply at 2R, or even higher.

At this stage the entries, SL & TP will be placed manually so they won’t be coded into this version of the indicator.

What’s it Look Like?

This is a basic illustration of the setup I’ll be attempting to code.

In this particular example, we’re looking at a bullish setup. Note our two criteria have been met, and I’ve adjusted the Fibonacci indicator to indicate our R-Ratios. As you can see, a position was taken at the open of the candle after the signal candle.

We’re going to leave it here for now, and start getting our hands dirty with some code in MT4 in the next lesson.

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