Price Action Strategy
To us a trading day is from 5pm EST to 5pm EST in forex.
1. Enter long on a stop order if the previous day’s high was crossed.
2. Exit on a limit if the trade gains approximately 10 pips. Exit on stop if the trade looses approximately 30 pips.
3. Enter short on a stop order if the previous day’s low is crossed down.
4. Cover your short position if the trade gains approximately10 pips using a limit order. Exit on a stop if the trade goes approximately 30 pips against you.
5. Only take the first high/low cross of the day.
Below is an example of an hourly chart.
Risk Control
With this strategy and any other strategy I discuss, it is critical to keep in mind the 2% rule. The 2% rule should supersede any rule of a system. The 2% rule states that you can never risk more than a certain percentage of your account on any single trade. In my case this is usually 2%, but certain traders like to kick the number up to 5%. Going above 5% in my opinion is an extremely bad idea.
Enhancements
The strategy that I described here is just a base for you to build on. There is a lot of proprietary information that I have to hold back. Putting in and testing out certain rules may enhance the system substantially. I will go through some examples.
Only take the trades in the direction of the overall trend. We back-tested a strategy very similar to the one I am describing here and a great majority of our loosing trades were short, while a great majority of our winning trades were long. Not so coincidentally the trend was primarily up during the period of our back-testing. I suggest using a trend indicator such as a moving average, trend candles tool in your software package (TopGun Software has this tool you can find more information on our website), trend lines or a parabolic SAR of some sorts.
Position Sizing Strategy
Since this system is very accurate, using an approach like the martingale that I described in my previous article will help you. Doubling the position after every losing trade may be a great idea. However it is imperative to never risk more than 2% of your account on any trade so positions should be sized accordingly. Pyramiding into the trades that go your way may enhance the performance quite a bit as well.
Place your entry stop orders a pip or 2 above or below the pivot level. By doing this you are ensuring that the price has actually crossed the pivot level.
Variations
There are numerous ways you can play around with this system to fit your style. Many traders like to straddle the opening price and go long if the price action moves a certain amount of pips above it and go short if it moves below it. Some traders like to keep this system on only during active market hours to ensure the necessary volatility. You can use other pivot points such as the midpoint and other support and resistance areas. What I described here to you is a simple time tested trading idea of trading around a price now it is on you to develop it into a system.
Execution Issues
It may be tough trading this system during heavy news hours or during a fast market. Spreads may widen out or you may get requited especially if you are trying to enter on a stop order. You may not get the best fills in this short term system. One approach that may be effective is to wait for the bar that crossed the key area to complete its move and than enter on the open of the next bar. You may leave a few pips on the table but at least eliminate some frustration.
Conclusion
What I described to you is a simple strategy that traders can use to be successful. A variation strategy was actually taught to me by a friend who was a former pit trader. By using various parameters and risk management tools you can turn it into a robust system. I recommend trading this only on the EUR/USD pair as other pairs seem to have a few too many spikes and the spreads are wider on them which eats into the profits. I would be interested in seeing variations of this approach you can email me. We use numerous strategies such as this and tools to try to enhance the performance of our clients. Our research department programmed in an approach similar to the one that I described above. Below is the Wealth-Lab report on the strategy. Keep in mind that we are overly conservative a back tested data is not indicative of future performance.
Below is a 7 months Intra day (hourly) Wealth-Lab back-tested report for you to look at. This report is based on a $100,000 account with the initial position size being 1 standard lot.
Alexander Nekritin is a professional trader with over 8 years of experience. His specialties include risk management and system development. Alexander is the CEO of www.forexyourself.com, which is a forex introducing broker and education company that helps suite client’s needs in forex trading. Alexander has a degree with a concentration in Investment Banking and derivative instruments from Babson College in Massachusetts. You can contact Alexander with further questions at alexn@forexyourself.com. Alexander conducts free seminars on Wednesdays at 9pm EST on risk management, strategy and trader’s psychology to register you can click this link: http://www.forexyourself.com/seminar.
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