Forex Trading Strategies

Trading Strategies Tips – How To Enter Forex Market

Forex trading strategies are using multiple time frames. However, even if you are not a day trader but just want to open a long-term position, you have to enter and exit the market in the real time. Period.

This means we have to deal with daily volatility, which can sometimes reach 2% and even more. This is a significant number for leveraged trading. Even if the trading strategies are to stay in the position for long time in anticipation of bigger gains. Good entry timing not only gives you more profit, but also lets you place better stops.

Indicators are of no help in real-time here because they are lagging. E.g. popular oscillator indicators like RSI can show extreme values for days. Market may really be topping or bottoming, but you won’t be able to find the best moment to enter the market.

Markets don’t move in a straight line. Even powerful trends always have pullbacks. The only reliable observation we can make is that we always see zigzags. If we see a local top, this will always be followed by a turn and then a local bottom.

In addition, markets have a fractal nature. It means that the pattern we see on a short time frame will become a smaller part of the same picture on the longer time frame.

We used this observation in developing price pattern market entry algorithm. We use it as a building block of all our trading strategies.

Practical Implementation For Trading Strategies

We implemented the algorithm as a part of our Smart Forex Strategy Tester software.

Here is couple of examples how the algorithm works. Both refer to the same sample of market data covering only couple of hours. The detected pivot points are shown as black dots on the graph.

Market Signals Generation For Forex Day Trading Strategies — Example #1. Price action algorithm based market signals for Forex day trading strategies

You can see that the volatility for these 2 hours is over 1%. The graph is an average of bid and ask, slightly filtered for easier viewing. Note that the pivot points are calculated in real time. I.e. each point is only evaluated based on the price data to the left of it.

In the example #1, the algorithm sensitivity is set higher (note short horizontal sliders) and it captures more pivot points. As you can see, during these 2 hours the algorithm generated almost 30 signals. Which are definitely can be used for profitable day trading strategies.

Market Signals For Forex Trading Strategies — Example #2. Price action algorithm adjusted for long-term Forex trading strategies

In the example #2, we lowered the sensitivity of the algorithm (see longer values of horizontal sliders) and it only detected 3 pivot points within same 2 hours. You can see that all 3 are profitable market entries. Moreover, the algorithm managed to capture both the market top and bottom for given interval.

If you are interested, you can download Smart Forex Strategy Tester and try for yourself.

Forex Trading Simulation: A Nice Idea To Avoid

Forex Trading is often learned by using trading simulation. The easiest way to do that is using demo accounts. There is a also special simulation software. Compared to demo account, it is more advanced. It can accelerate of slow down the market, or easily start from scratch. And computer simulation is essentially the same as “paper trading” that was used before the PC became affordable to masses.

At the first glance, the idea is clever. Simulators are used virtually everywhere, even in pilots’ training. Pilots are responsible for peoples’ lives – so what can be wrong with the idea of learning forex trading by simulators?

There are principal differences, though. Flight simulators are useful, because airplanes have a lot of different controls that a pilot needs to learn. Doing that in simulator is a way to avoid the risks of their misuse.

Now, let’s take Forex. On the contrary, Forex trading is technically very simple. You either buy or sell. Of course, there are multiple positions handling, stop losses, risk management, etc. But these all are technicalities. Learning them is important but on itself does not train you in the main component of Forex trading.

Forex Trading Is About Psychology

The problem with learning Forex trading in simulators is that it is too comfortable. But real Forex trading, when there are your own money at stake, is very stressful. And the simulator doesn’t principally teach you how to manage your stress. You might think that you learn some skills that can be then reused in real trading. But this might only work for some, but definitely not for all.

Our Smart Forex Strategy Tester framework can easily be modified to support simulation mode. We are planning to do that, but we don’t see it as a first priority. For majority of us simulators will only do bad service.

Renowned traders don’t recommend paper trading, either. E.g. Raghee Horner (“ForeX Trading for Maximum Profit: The Best Kept Secret Off Wall Street”) and Courtney D. Smith (“How to make a living trading foreign exchange: a guaranteed income for life” our review).

The best way to learn Forex trading is to trade for real. Micro lots are excellent way to start.

Forex Swing Trading And Automation

What is Forex swing trading? By definition, swing trading is targeting profits within one to several days. In other words, using timeframe longer than in day trading, but way shorter than in position trading. In the day trading, the positions are only kept open during trading session. But as Forex markets are open round the clock, technically, Forex swing trading does not differ from day trading.

Of course, is the trading is done manually, there is an obvious difference. Efficient swing trading requires constant monitoring of open positions, as profit potential is usually smaller there compared to position trading. There a position can be open for weeks or even more so timing of profit taking is less important, and can be done with e.g. day accuracy.

In manual swing trading, we have to leave positions unattended. Which means we have to rely on take profit order trailing of the trading terminal, which is usually not as efficient as when done by trader itself. The same of course is valid for entering the market. When a trader is resting, the options of entering the markets are limited.

Given our trading strategy is unambiguosly formalized, trading automation easily solves both problems. Here, the trailing of take profit orders can be efficiently done by an algorithm, implementing whatever sophisticated trailing logic a trader might have. Only working faster and reacting immediately. Likewise, the algorithm won’t miss any of the potential market entry opportunities.

Naturally, more realistic semi-automation mode is more reliable as well. The trader can manually make corrections into algorithm activity according to market situation. Basically, this is important in case a of an unexpected technical problem or a software issue. Also we should always be wary of some “black swan” events which can cause unpredictable market reaction. A good example of that can be false tweet about the White House bombing is 2013.

Automated Forex Swing Trading Software

We are developing our automated Forex trading software to be suited for trading swings. It is designed to run on its own up to 5/24. Keeping positions open over the weekend makes little sense. It can be risky. Markets opening with gap can result in that stops are not even triggered.

During trading week essentially unexpected events are dangerous for the software performance. News releases can be handled by closing orders according to their schedule or not opening new ones in close vicinity. The software is designed so that any trading strategy can be run both in our testbed or plugged to the MetaTrader terminal with a configuration change.

We also develop our Forex strategy testing software suite so that it is able to performs automated testing of swing trading algorithms. Our tests are mainly designed as 5/24.

We also develop automated trading algorithms which use price action approach. The strategies use market top or bottom detection price action. For the profit taking, we tried several ideas, but haven’t yet decided on the best one.

Apart from the “black swan” events, the only problem with the price action Forex swing trading is whe a powerful trend suddenly begins. See an example. To better handle this situation, we are developing trend price action algorithm.

TO BE CONTINUED…

Generating Forex Signals By Pivot Points Analyzer

Forex signals are notifications of the moments when one should enter or exit the markets. How to generate them?

Note that the accurate decision to enter or exit has a value of its own. It can be completely independent on the used trading strategy.

Even if the strategy is a long-term, and is targeting a profit of hundreds of pips, it is always beneficial to make additional pips with successful market timing.

And of course, timing is absolutely essential for intraday trading, when the daily trading ranges over 100 pips are rare.

We have developed an algorithm that makes it possible to detect market pivot points in real-time.

Forex Signals At Price Extremes

The idea is based on the observation that it usually takes time for important peaks or pivot points to form. In other words, even if the price has already reached its extreme, it most often oscillates around that value for some time.

So it might take quite a while before the prices start eventually moving faster and farther in the opposite direction. Then, at some point, this process will repeat itself.

Of course, if the market is trending, the extremes against the direction of the trend will be formed faster. But the idea is still valid.

Our algorithm uses this knowledge and runs the price curve through several filters with decreasing time constant.

The filter with the biggest time constant (slowest) will detect the peak price value with some delay. At this moment, we check if the current price value still doesn’t exceed the signalled extreme value. If not, we start looking at the output of the faster filter that signals for the next extreme in the opposite direction. This is the moment to enter the market.

On the below screenshot, you can see how well the tool works. Detected pivot points are marked with short horizontal lines.

Real-time Forex Signals for intraday trading — Forex Signals By Pivot Points Analyzer

Note that these pivot points are detected in real time. Meaning that each point marked on the screenshot was detected only based on the price information that was available to the left of it. This makes the algorithm very valuable.

If you want to try yourself how this algorithm works, you can try our Pivot Point Analyzer that is integrated in our Smart Forex Tester software.

An Example From The Dow-Jones

Recently we found an interesting illustration to our method from the stock market.

On the below picture (Dow-Jones), apparently a lot of trading signals were generated at the point shown by arrows. Note the daily trading volume (10B) exceeded its average value (below 0.1B) more than 100 times!

If you look closer, you can see that this point matches pretty well the algorithm we discussed.

Trading Signals Generated After The Pivot Point — Trading Signals After The Pivot Point

If We Need To Use “Plan B”

We need to understand, that, of course, there is no silver bullet. There is no way to tell beforehand, for how long the detected pivot point will stay a pivot point. However, what we do know is that the price line will have peaks and bottoms following in succession.

Suppose that we misjudged the “ultimate” pivot point. And the point where we entered the market turned out to be only the local extreme. So after our entry, markets will make a peak in the opposite direction and turn back.

Still, entering markets close to the extreme gives us clear advantage in this case, as well. We will have more time to react to the direction change. And also more pips to spare to minimize our losses.

Forex Strategies Selection

Forex strategies selection problem can literally become a million dollar question. How to find the best trading strategy? Or at least the one that works. This would already be enough.

We don’t have to get a strategy that will be profitable all of the time. That would be ideal, but is is impossible. However, we can analyze and identify the areas where certain strategy works and collect statistics.

But how should we do strategies selection in practice? Obviously, “trial and error” approach will lead us nowhere. The number of options is infinite. To get results in reasonable time, we need a method.

Natural Forex Strategies Selection

Can we apply the evolution principles to Forex strategies selection?

We can take a number of strategies, and a set of the test scenarios. We run all the scenarios for all strategies and compare the results. After that, we select only the best strategies and only the most difficult test cases.

Then, we analyze the test results and make enhancememnts to the strategies that performed the best. In addition, new market data is analyzed and new test scenarios are added to the existing set. Then the test cycle repeats.

This model is difficult to apply without automated trading environment. For that, we need to use adequate method of presenting forex strattegy. Each trading strategy should be a unique combination of trading logic and parameters.

Next, the strategy description formalism should provide a mechanism to make changes in the strategies as easy as only possible, without need to do coding. We use the Forex strategy description based on state machines – this is one example of how it is possible.

And the most important part in the evolution model is to be able to merge strategies. Meaning that we can easily run multiple strategies as one. Our state machine based strategy description is suited well for strategy merging, as well.

Forex strategies selection in the above model is impossible without testing tools. We use our proprietory software – Forex strategy tester, which is designed to run multiple strategies against the multitude of test scenarios.

TO BE CONTINUED…

Simple Forex Trading Strategies

What are the signs of a winning Forex strategies? Can simple forex trading strategies be profitable?

Some successful traders agree that the strategy must be simple. E.g. Raghee Horner (“ForeX Trading for Maximum Profit: The Best Kept Secret Off Wall Street”) and Courtney D. Smith (“How to make a living trading foreign exchange: a guaranteed income for life” our review).

If we accept simple Forex trading strategies, the logical consequence is that such strategies must have limited area of applicability. E.g. scalping strategy will most probably fail in trending markets. These limitations, however, aren’t a problem at all: all what we would need to know are just the limits within which the strategy works. With that, we can wait on the sidelines until we see them occur, and then enter the market and use the potential.

Strategy applicability is essentially about stable nature of the markets. This assumption can be treated as “insider information”. So, if we have enough evidence to conclude that a market is e.g. trending up, we can use loose stops and open a long position on every dip.

Furthermore, under this assumption a trading strategy can be optimized by design and testing. E.g. for trends, testing should cover trading algorithm capability of following trends of different shapes and strength without losing too much on pullbacks. In this case, the classic testing approach can be efficiently used.

Trading strategy simplicity also helps in the implementation, especially for automated trading. Trading software design is very important efficiency factor, especially for trading strategy study phase. Research assumes frequent changes, and doing them in the code often obscures the essential factors by programming routine and also increases chances of human error for that (unless you are a hard-core coder, of course). So only when the strategy is “cast in stone” after successful testing, does it make sense to program it. For the study phase, better approach is to design the software so that strategy description would be as clear as possible.

Convenient way to do that is using XML for trading strategy description. In this way, strategies can be constructed of small interchangeable “blocks”. This also makes it easier to make changes in the strategies and compare different strategies.
This approach is also much more efficient for simple Forex trading strategies.

Forex Trading Without Indicators

Many Forex trading strategies rely on indicators. However, indicators are not ideal solution and there are different approaches, e.g. price action trading.

The authours of a popular book “Naked Forex: High-Probability Techniques for Trading Without Indicators” suggest that indicators are not useful, but instead prevent a trader form entering or exiting the market in time.

Of similar opinion is a famous trader Raghee Horner. In her book, “ForeX Trading for Maximum Profit: The Best Kept Secret Off Wall Street”, she states that she doen’t use indicators for entering and exiting the market, but only as a means of confirmation of the market direction.

Indeed, doing Forex trading without indicators sounds very logical. There is an inherent problem in all indicators – they are lagging the market. I.e. the more informative the indicator is, the later this information is available.

This resembles the well-known “uncertainty principle”. The combination of profit and certainty appears to be a constant. The more certain you want to be in the market move, the longer you have to wait, Consequently, the less profit is left to be taken when you enter the market.

That said, we need to point out that everything is, of course, relative. Indicators used in day trading are less lagging. But, on the other hand, market moves are smaller during the day. So the importance of quick decisions is higher. And the main idea persists.

Another problem is that indicators can’t provide the most important information – when the market nature changes. Take a look at the test scenario example #2 where the trading strategy used was to look for a top or bottom after the RSI exceeded 70 or dropped below 30, correspondingly. As you see, this strategy failed when the powerful uptrend started.

As known, in this case RSI can grow significantly over 70 before the top is reached.

We will run the scenario in the above example without using RSI.

Meanwhile, you can check out our price action software that implements an algorithm for detecting market turning points.

Read more on price action trading in Forex not using indicators.