Welcome to my financial market trading and investing blog. This is where I share my thoughts on various financial markets. I also use this space to talk through the actual trades that I make each time I trade. Right now, while I’ve got a long-term portfolio that I manage less frequently, my primary focus each day is trading Forex. This is the strategy I use to source pairs to trade, what I’m looking for when selecting pairs, and the criteria I use for entry, stop and target levels.
I hadn’t been very happy with my trading strategy and performance, so I decided to tweak it a few months ago. I’ve finally got it “fully” implemented (in quotes because I’m constantly learning and making minor adjustments), and have felt good about if over the last couple of weeks.
Overall, I consider myself more of a hybrid trader. My rules aren’t extremely rigid; they’re more like guidelines to follow to find my opportunities. I’m not looking to check specific boxes in order to get into trades. Rather, I focus on finding the overall trends and riding the waves.
There’s a decent amount to cover here. So let’s get in to it.
Sourcing Pairs
I felt like I was getting a lot of anxiety each morning with my prior method of sourcing pairs, so I’ve made it a lot more simple and straight forward. Taking the 8 major currencies that I trade, I listed out all 28 available pairs in my watchlist.
Each morning, now, I simply sort the list by volume, and start looking through the ones with the highest amount. I have noticed, though, that oftentimes the pairs with the highest volume also have the highest amount of chop. So I’m experimenting with starting my search at pairs with the median or even lowest amount of volume on the day. Sometimes the lowest volume pairs are still over 60K, so I would be fine starting there.
I’ve also noticed (especially lately) that I’ve gotten some “analysis paralysis” starting my day on the 2h/4h charts but ultimately trading on the 15m/5m charts. Often something that looks like a simple correction on the higher time-frames looks like trend-changing moves on the lower ones. To remedy this, I’m going to start my analysis on the 15 minute chart, and only pay attention to the last 2 or 3 day’s activity to inform my decisions. I want to get into more trades, anyway, and I think this will help.
Selecting Pairs
Once I’ve got the pairs sorted desirably and I’ve made sure I’m looking at the 15 minute chart, I’ll go through each pair looking for a chart where price appears to be returning to the overall trend direction. I’m looking for price to be in an overall uptrend, but has been selling off recently and is ready to continue in the direction of the trend. The sell off would be disqualified to trade if the low it made is a new lower low.
I’m also looking for price bouncing off of the lower Bollinger Band or one of the moving averages in the middle of the bands, and for RSI to be coming out of oversold and heading up. I’d prefer if RSI was above 50, but that one’s not a deal breaker.
When trading the bounce off of the lower Bollinger Band, I don’t want the RSI to have gotten close to overbought before heading upward, I want to look for something that was definitely oversold and is coming out of that area. If I’m trading the bounce off of a MA in between the Bollinger Bands, I’m looking for RSI to be above 50 and sloping upward.
For shorts, it’s the inverse of this — something coming off of a rally that appears to be returning to the downside; bouncing off of the upper band or the 20 MA to the downside, and RSI either coming out of overbought or pushing below 50 given the situation.
Organizing and Deciding
As I come across pairs that meet the criteria, I’ll put them into a separate list for a closer look — and mark them with a color to remind me whether I’m leaning long or short. If price is moving as I’m looking at the chart, though, I may pause my “sourcing” and start looking for entries right away.
Once I’ve got my most interesting pairs separated, I look through those again, this time writing out what I see. The purpose of writing out what I see is to figure out why I thought it was viable in the first place, and to determine whether or not it still is. If, based on price action and what I discover as I write out my thoughts, I determine the indicators don’t line up, or I don’t like the price action, I’ll remove the pair from my separated list.
If, though, I still like what I see after typing my thoughts out, I’ll move on to look for targets, entries and stop levels.
Targets
There are a couple of ways I pick my targets, and honestly, I often interchange them based on which offers me the better R:R.
Prior High
The first is, I believe, more reliable; and it’s selecting a target based around prior high/low/key areas. Given an uptrend, while looking at the 15 minute chart, I find the swing high that was the highest point before the sell-off correction that I’m trading and use that as my target. If price is returning to an uptrend, then I would actually expect price to push pretty far past those recent highs, but if I can get a 2 R:R just to that level, that’s the ideal setup.
Occasionally, if I need a better target for a higher R:R, I’ll pick the next resistance area above that initial high. Given the same thought process: I’d expect price to push that high on a return to an uptrend.
In a downtrend, of course, I’ll pick a target at or below the lows created before the brief rally. The rally that provided the overbought conditions that I’m hopefully shorting in to.
Fibonacci Retracement
Occasionally, if I don’t like the prior high as a target I’ll use the first Fibonacci retracement level as my target. I’m not going to get into the math or the psychology behind the Fib right now, just know like a lot of things in nature, charts can follow the “Golden Ratio”.
Finding this level on the chart requires the use of the Fibonacci Retracement tool that most platforms that I’ve used have. In an uptrend, simply open the tool and connect the highs that make up your entry level to the prior swing low. The lines shown on the chart by the tool are the various retracement levels, which can then be used as target levels.
You would draw a line from the lows that make up your entry to the prior swing highs if you were using this tool to pick a target when shorting.
Entry and Stop Levels
Once I determine that I do want to trade something and the direction, it’s just a matter of finding a pattern to trade in to. I’ll drop down to the 5 minute chart to find my entries, and use a pattern (such as a base or correction) to determine at what price I’m willing to buy or sell the pair to get in to the trade. I’m also determining the price level where I’m willing to admit defeat and get out of the trade if it moves against me.
I’ll post something separate about all of the chart patterns I’d trade, but the most frequent ones are bases and bull-pullbacks/bear-rallies. They happen often and provide good trading opportunities.
Bases
Bases are two or more candles of roughly the same size and shape, moving in a fairly tight range, right after making a trending move. Using a down-trend as an example, after making a relatively strong push down, price has at least 3 candles in a row of roughly the same size and shape.
I don’t like bases that are largely wicks, so I want to see mostly candle bodies. It would also be preferable if price made the next push down between candles 4 and, say 10 of the base. If price bases for too long, or if one or two of the candle’s highs are above the rest of the candles’ highs, it will disqualify this pattern. I like nice, tight, sideways movement.
My entry will be placed below the lows of the base, and my stop will be above the highs (plus the spread). Simple. If I’m trading an uptrend, it’d be the inverse of this.
Pullbacks & Rallies
Bull-pullbacks/bear-rallies, on the other hand, are smaller reversals that offer trading opportunities (rather than the larger reversals that define the overall direction initially). Using longs as an example, after making a fairly strong push up, price reverses and pushes down for two – five candles. The push down, though, should drop to about 1/3 (maybe 1/2, depending on the size) of the initial up move — any more and it’s no longer a bull-pullback. It may be a bullish retest, but that’s a separate pattern.
After the pullback, I expect price to fairly quickly push back up to the highs that were just created, and my entry would be just above said high. My stop loss would be just below the low that the pullback created.
If I’m trading a downtrend, though, I’m looking for the inverse of this. Thus “Bear-Rally” vs “Bull-Pullback”.
Reward:Risk Ratio & Opening Orders
When I worked at a prop firm, one thing I was taught was that the only “missed” trade is one where you did all of the work and didn’t pull the trigger. You didn’t miss a trade in a pair that made a strong move if you were never aware of the pair in the first place. However, if you do all of the work and just decide not to enter the orders for one reason or another, you missed that trade if it went in your favor.
With that in mind, I do my best to enter trades quickly given all of my parameters are met. And one of those parameters is reward:risk level. It’s fairly simple, really. My reward level is how much I would potentially make on the trade, if I exit at my target level. To find it, simply subtract your target from your entry (if going long; vice versa if going short).
My risk is how much I would potentially lose on the trade if price goes against me and I’m stopped out at my stop level. To find this, simply subtract your entry price from your stop-loss price (again, if going short, do the inverse). This is how you determine your reward:risk level.
If your target is 20 pips away from your entry, and your stop loss is 10 pips away from your entry, you’ve got a 20:10 reward:risk ratio, which can be divided down to a 2 R:R.
So, given a pair returning to it’s overall trending direction after a corrective move (which hasn’t done anything to suggest the corrective move is a reversal); and is providing patterns on the 5 minute chart that give me a clean place to enter the trade with a clear place to exit if I’m wrong; with a target that provides me with a 2 or greater reward:risk ratio, I place the orders without much further thought.
Things to Keep in Mind
As I just mentioned, I have to make sure that the corrective move that I’m trading is in fact that, and not a reversal move. If price has moved extremely quickly, and extremely far in the opposite direction of the overall trend (taking out multiple key areas), it’s more than likely a reversal move. I should treat it as such, and not a correction to trade in to. I could even, potentially, trade the power reversal — though that would be a different strategy than this ‘continuation’ strategy.
This is also why I’m planning on starting my day looking at pairs with slightly lower volume: hoping that the moves are a bit more smooth.
By the Numbers
With this strategy, I expect to win 50% – 55% of my trades. By win, I don’t mean a full win, either. I just mean that price closes in profit. Given a profit factor of around 1.75 — being less than 2 because not all of my winning trades are full wins (maybe I should target a higher R:R?) — with my 50%-55% win rate, my expectation is to make around 200 pips per month. That’s a winning trading formula. Stay tuned, I may update this page with specific numbers after using this strategy for a couple months.
Conclusion
With the amount of information that the market provides at any given time, it can be overwhelming to figure out where to best invest your money. This is why we create a trading plan: to sift through the noise and focus on what makes us successful.
Use this as a guideline if you want to, but always make sure you understand your plan, your numbers, and why you’re taking every trade you take. What works for me might not exactly work for you. Take some time to do some testing and figure out rules and guidelines that work with your personality.
Feel free to use the comments section to let me know if you have any questions or want any help developing your trading plan. Or, if you have any feedback or critiques on mine. And be sure to check trade.anthonydbradley.com frequently for market analysis and trade reviews!