So I have been interested in trading for the past 2 months, I’ve ran through pipsology and I’ve traded demos on a few different brokers. I am going to trade on a live account soon and I wanted to post my trading strategy to see what everyone thought. All support and/or criticism is welcomed.
Modified Day Break Strategy
Here is the thread for the daybreak system, as well as another modified version.
http://forums.babypips.com/free-forex-trading-systems/45422-daybreak.html
http://forums.babypips.com/free-forex-trading-systems/45633-triple-threat-exit-strategy.html
I started trading using the daybreak system that won best system of the month this past June, basically if price passes the high of the previous day, go long, if it passes the low of the previous day, go short. It’s very, very simple which is why I like it and why it makes sense; it’s also very easy to back test. I don’t do exactly what is described in the daybreak thread but it is the main influence for this style that I am using. When I want to trade on the high/low of a daily candlestick I look on the smaller time frames to find a more precise entry; that is the main difference. For indicators I use 50 and 100 period moving averages just as dynamic support/resistance and possibly a crossover to confirm a trend. I also use Bill Williams’ fractals to help confirm areas of interest. I don’t put a lot of weight on any indicator; I just use them to help me read the charts.
I also trade on the principle or philosophy of fractals; fractal simply meaning a pattern in nature repeating itself. If I see an entry point on the daily chart, I look for the same pattern on smaller time frames. A very precise and distinct formation will be visible on multiple time frames. If a low/high forms on a chart, I zoom to smaller time frames and see what the price did to form the high or low. Maybe price bounced off a high/low many times during the day or maybe it only hit that area once and pulled right back; this is important information to have. There are 24 candles on the 1H chart for every 1 candle on the daily chart, those 24 candles are going to have a lot of information that the daily candle won’t show. So I use the Daily chart as my base chart and then use the 15 minute, 30 minute or 1 hour charts like a microscope.
Entry
My broker’s day opens at global standard time which is 8pm US eastern. So I’ll look at the charts from about 7-9pm and watch the new days candle form and try to look for some good trades. The way I used the daybreak system was to enter using a buy/sell stop when price breaks the previous high/low, but this can cause problems during periods of consolidation or on candlesticks with long wicks. So I look where the high/low of the previous day is on the smaller time frames and find areas of interest that I wouldn’t be able to see on the daily chart for more precise entry points and stop losses. Once I find a high/low that I like I will set a buy or sell stop for my entry. I am speculating that after this area of interest is broken a trend will begin or resume. It is important to leave a little bit of space between my entry and area of interest because the price is usually going to be moving in a range or channel. I don’t want my buy/sell entry to get triggered at the high/low of a range just for the price to immediately reverse and hit my stop. I want the price to have convincingly broken the area of interest that I am using as an entry point.
Exit
I never use a set amount of pips for stop loss like some traders do. I will usually look for a good area of interest to place my stop on the smaller time frames. If I can’t find a good spot I will just place my stop visually using the grid squares on MT4 as my unit of measurement. The squares on the grid may represent anywhere between 5 and 50 pips depending on what time frame you are in and how much price has moved. When placing a stop I really want to give the pair enough space to move and retrace. I don’t necessarily think how much I am willing to lose (although that is important), I try to think what is the most this pair is going to pull back after my entry is triggered without reversing completely (or how long will the wick on the daily candle be if price moves in my desired direction).
Once I am in a trade I will look for price to move a safe distance from my entry so I can put a new stop at break even, then I look to place new stops slightly beyond support/resistance. Every time I look at the charts to monitor my trades I will look for a new stop loss making sure it is not too close to allow for a retracement. I just keep raising my stop loss to follow the trend until I get stopped out usually for a solid profit depending on how much the trend moved. I’ll hold on to the trade as long as price remains in the trend without hitting my stop.
I might use a take profit if I am not confident in a trend forming or if I set a sell and a buy stop on the same pair (I don’t do that often) to decrease my chances of a loss. I only like to use a take profit if I feel that a pair will reach a certain price but not stay there (like a long wick). The good thing about a take profit is that the wick of the next day just needs to break your take profit level; it doesn’t necessarily matter where price closes. I don’t like to use a take profit though; I usually just try to ride the trend. If I am nervous enough about a trade that I feel a take profit is necessary then I probably shouldn’t look to enter anyway, but that is just me.
Pairs
I like to trade the GBP/USD, USD/JPY, AUD/USD and USD/CAD. I like trading GBP and JPY because they are not too highly correlated with a lot of other currencies and I like the com dolls because of their correlation to oil and gold. I know everyone loves the EUR/USD but I try to stay away from it because of all the issues going on with the Euro zone and the amount of news reports that come out about it. So I avoid pairs with the Euro in it, including the CHF since it is pegged to the Euro. I am pretty new to trading and I don’t use a lot of financial reports or news to trade yet so I don’t want to mess around with any of the BS going on in the Euro zone.
Tell me what you guys think, here are some trade examples in the next post.