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1 Сентябрь 2009

Create your own trading strategy. Part 3

In previous articles (Part 1 and Part 2) were the theoretical principles which should be based forex strategy. In today’s article we will look at practical aspects of implementation of trade tactics.


Any trading tactics should include the following preparatory elements:

1. Identifying the trend or its lack of definition
2. Defining moment begins rollback
3. Waiting when rollback enters final phase
4. Receive confirmation signal from the indicators or trading system
5. Opening positions and the simultaneous nomination of protective orders stop loss and take profit

For practical implementation, we give an example, when forex strategy is based on the MACD.

We assume that in this case:

• the trend is up, at a time when the average of MACD is different (greater than) zero and there is no bullish divergence with price range. Thus, each maximum price, which makes the price confirmed by a maximum, which makes the line of the indicator (the average of MACD);
• downward trend, when the average of MACD is different (less than) zero and there is no bearish divergence with price. In this case, each new minimum price will be confirmed a minimum of another line indicator (average of MACD);
• Identify the price range as we will roll back down in the event that a quick line to cross for a slow down and this will be accompanied by a rising trend. Thus, here the average of MACD will be different (greater than) zero, and there will be no bullish divergence;
• Identify upward price movement in a downtrend as a rollback, we will be when the fast line crosses the slow upward. Average on MACD is in this case is different (smaller) from scratch and will not have a bearish convergence.

Objective 1. Identify the trend on the daily chart

Note in Figure 1. Here, I took for example a short-term uptrend. It is rising on the grounds that each successive maximum, which makes the price will be higher than the previous one. And each subsequent minimum, which makes the price higher than the previous one. At the same time there is no bullish divergence on the line (slow) MACD. All this tells us that the uptrend has sufficient strength.

trend

Figure 1

Objective 2. Identification of early rollback

But in some cases, forex strategy can be based on further analysis conducted using shorter time intervals. For example, if we see that at, say, a daily chart MACD fast line crossed slow down, this schedule is to look at the 4-hour period, in order to verify the possibility of early recoil down. So sometimes at 4-hour chart we can see the following picture (Figure 2):

forex strategy

Figure 2

If we did an analysis of the day and 4-hour schedule, say EUR / USD and saw a picture similar to the situations discussed above, in this case, the bullish divergence on the MACD midline at 4-hour chart tells us that at day period begins rollback.

Objective 3. Identifies completion of the rollback

Your forex strategy will not work if you do not learn how to determine the end of the rollback. It is the completion of the rollback will allow us to more accurately predict its entrance or exit from the market, so a method of determining the completion of the rollback should be treated with special care research. End rollback may signal a bearish divergence on MACD on the midline 4 chasovke or bearish convergence, only on the hourly chart. It should also be taken into consideration some nuances. For example, the fact that the signals given by the schedule with a longer time interval will be more reliable than the signal produced by the schedule with less than a short time interval. But in some cases quite enough and time of convergence. Note Figure 3. Here is a time chart of EUR / USD. In the current market situation occurs completion of the rollback.

forex

Figure 3

Task 4. Get confirmation signal from the other indicator
In order for our forex strategy was more reliable to obtain a reliable signal to base their assumptions about future price movements on the testimony of several elements. In this case, you can add the indicator readings Parabolic SAR. When the price would cross the parabolic line, it will serve as a good signal to buy.

parabolic sar indicator

Figure 4

In the current situation it is desirable to enter the market on the closing price of white candles, that is at the level of 1.3036.

Task 5. Placing orders stop loss and take profit

Warrant stop loss should be displayed with a margin to prevent accidental graze as a result of market noise. It is advisable to put it at 15 pips below. Warrant take profit expose two times more than an order stop loss. Thus, our forex strategy is the ratio of profit / loss is 2 / 1. In this case, the minimum price is 1.2963, so the warrant stop loss set at 15 pips below, ie 1.2948. Take profit order is set at 1.3036 + 2 * (1.3036 - 1.2948) = 1.3212 (Figure 5)

stop loss take profit

Figure 5

This forex strategy in this situation would bring us a profit of 176 pips.
But above all, in this case, there are important nuances that I would like to clarify for you. The fact that such a deal runs counter to the theory of risk management, as well as in a situation which is shown in Figure 5, we had to put a protective order is too far from the price at which we are engaged position. Therefore, the decision should be based on the specifics of a particular position. This forex strategy can be applied at shorter intervals, but always keep in mind that in this case the market will be less than forecast, because it will present a lot of market noise.

Summing up the results.

With this example, we considered the general principle of constructing their own trading strategy. He was not perfect and does not guarantee a profit, but illustrates the principle of formation of trading tactics.