Today’s goal is to create a Forex strategy from scratch. Or in other words, we are going to develop a brand new trading strategy together. As all traders love the strategy side of Forex trading, I am sure this will be a fun and exciting exercise! Will you join our strategy team?
First of all, our motto at Winner’s Edge Trading is simple: Keep Trading Simple!
It is tempting to over complicate trading and create thousands of rules but this will only severely increase problems when implementing our trading plan and trade management plan. The DTT strategy has been created with the same philosophy in mind (keep trading simple) and this new strategy will engrain the same vision.
Secondly, as building blocks for constructing this strategy, we will use the article “how to build a trading strategy” as our main resource in providing a live example. Here is the link. http://www.winnersedgetrading.com/how-to-build-a-trading-strategy/
Last but not least before we embark on our mission, it is important to emphasize that the strategy presented here is not a tested strategy backed up by weeks or months of testing and trading.
Our goal is to create an intra-day strategy that can be actively traded by all types of traders from beginners to very experienced ones.
We want to minimize discretion as much as possible – that way our rules are crystal clear for all types of traders. Our main goal when trading is “reacting” to events on the charts and not “thinking.” In the heat of the battle implementation mistakes can easily occur.
Our only tool is technical analysis, but we will not trade this strategy when high impact news events are scheduled for a currency pair (30 min prior and 15-30 min after event).
Our strategy is focused on trading with the trend – just like the Double Trend Trap method does.
As our goal is to create an active strategy, our main time frames will be the 1 hour and 5 min charts.
The main strength of our strategy will be to capitalize on strong hourly trends but minimizing the exposure of any trade by scaling in and out via a short-term trigger chart (5 min).
Our tools and indicators are very simple:
a) DTT trend indicator 4 hour (not daily)
b) 10 ema close
c) 40 ema close
d) 150 ema close
The reason why we are using ema’s is because their usage is non-discretionary. The average is the average – irrelevant if Jack, Nathan, Casey, you or I use it. The main advantage is simplicity and understanding of the rules becomes simple. The 10 ema measures momentum, the 40 ema identifies the intermediate trend, and the 150 ema close shows the long-term direction.
With the basic pointers covered it’s time to move on to the juicy part: our TOFTEM model.
This model is an abbreviation of the 5 steps which are essential prior to entry.
T = Trend
O = Opportunity
F = Filters
T = Trigger
EM = Entry Method
All of these steps will be reviewed here one by one.
Due to the active nature of this strategy, the 1 hour chart will be the main trend definition chart. We will use the 4 hour DTT trend indicator for trend direction (green = up, red = down, grey is neutral). The daily DTT trend indicator will not be used as this time frame is too distant from our intended trade setups.
For those who do not have access to our trending tools, the alternative would be to ensure that the 10-40-150 ema’s are all aligned. This means that price needs to be above the ema’s and ema’s above each other.
To be very precise we need to see these main conditions: the hourly candle close above the 10 ema, 10 ema above the 40 ema, and 40 ema above the 150 ema.
As soon as the hourly candle close is below the 10 ema then the trend is nullified and will not be considered a trending mode until the above mentioned main conditions are met.
When a trend is in play, Forex traders can start thinking of step 2: the opportunity. This process should be straightforward. At this point in time we can zoom in to the lower time frame of the 5 min chart.
On this chart the opportunity arises upon a pullback. Just because there is a trend in place does not mean that joining a trend at any point will automatically lead to profits. How do we define whether the pullback was sufficient?
Price needs to retrace at the very minimum back to the 40 ema close. With “retrace to” we mean price only needs to touch the 40 ema.
Filtering out sub optimal setups is needed to improve the strategy statistics, system expectancy and drawdown levels. This strategy will filter out setups which are too close to previous day’s high or low and are triggered near a high impact news event.
- Too close for daily high/low means when the ratio between entry and daily high/low is less than entry minus stop loss size (in terms of pips). That ratio must be at least 1:1 or more.
- Too close for news events means 30 min prior to high impact event and 15-30 min after event.
Another element that is used in this phase only is the AO (awesome oscillator). The importance of using an oscillator is that any signal of divergence on the 5 minute chart will filter out potential entries. No trade is taken when divergence is present.
Trigger & entry
The trigger and entry for this strategy are the exact same. They both depend on the direction of the trend but in all cases the 5 minute chart is used.
In an uptrend price needs to close above the highest ema. In a downtrend price needs to close below the lowest ema.
When the price closes an entry order can be executed immediately.
This part could be discussed in more detail in potential part 2 of strategy 101 (if there is enough interest in the idea). There are many options a trader can think of. We will present a couple of these options in the sequel of our article. For the moment though we will use this as a guideline:
The stop loss will be placed 6 pips below the 1 hour candle low (uptrend) or 6 pips above 1 hour candle high (downtrend).
The exit will be the same: a trailing stop loss of 6 pips below each 1 hour candle low (uptrend) OR 6 pips a above each 1 hour candle high (downtrend). Part of the trade can be closed at 1:1, 2:1, 3:1 reward to risk ratios.
Last but not least, every strategy needs a name! Let’s call ours “strategy 101”!
Do YOU find our new strategy interesting? Are you interested in testing it? What are your findings? Because this strategy has been created together, we need you to become an active member of the group so that everyone can benefit the most from this process. Do you want to see a part 2? Looking forward to your comments.
Thanks for sharing this article and wish you many pips!
Happy Trading! Chris
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