For those of you that like to get in and out of the market more rapidly, you might like trying this retracement strategy. Set up 3 30-min charts side by side on the USD/CHF, EUR/USD and GBP/USD. The reason for using these three is the correlation aspects of these currency pairs. When the USD/CHF is going up the EUR/USD is going down most of the time. And generally, the GBP/USD is either going down as well. Having all three closely correlated can be a confirmation for a certain time to enter. But I only trade the EUR/USD or the GBP/USD. Then set up two additional 5-min charts on the EUR/USD and GBP/USD. On the 5-min charts add a bollinger band (20,2) and Full Stochastic (5,3,3). If the stochastic doesn’t add the overbought/oversold lines then add them at 80 and 20 to help visually see the setups.
Setups occur when the stochastic is above 80 or below 20. It is in those areas that the currency has gone down and will reverse more often than not. It is easy to look back at past candles above and below 20 to determine the frequency that the price changes direction and starts the other way. If you do a thorough examination you might see that some candles stay above the 80-line or below the 20-line for 30 min (which is 6 5-min candles). I’ve seen 40 min max. But generally it is one, two or three candles then the price retraces.
So here’s a typical entry. The GBP/USD has been trending up. It is now gone above the stochastic 80-line to 85. The candle is above the upper bollinger band. The USD/CHF has stopped going down and has gone up a couple of pips. The EUR/USD has stopped going up and has gone down a few pips. The GBP/USD moves faster and farther than either of the other two currencies thus you would entry for a short trade expecting the GBP/USD to follow the euro down. If the currency continues up, then exit the trade for a minimal loss (3-5 pips), otherwise hang on and watch the trade go positive for several pips. Once the price is has bagged 5 pips or so bring your stop loss to break even so you don’t lose anything on the trade. Thus if the trade is managed correctly, the most you would lose on the trade is 5 pips or so. Again, if the trade goes against you, you exit but continue to watch for possible retracements because if the trade was good enough to get in the first time, it will get to be an even better trade if it continues up. The stochastic value goes up and it gets even more overbought.
A big criteria for me is trading safely. I’ve seen how easy it is to lose money in Forex. The market is so fast and volatile at times that 10, 15 or 20 pips or more can be lost so quickly. I’m want to live again to trade another day. So if I get into a trade that doesn’t go positive for me rather quickly I get out with a small loss. Safer trades are those when the stochastic is not only above 80 but above 90. If you can wait til the value gets to 92 or 93 or even 95 you will have a much safer trade. And the same is true for taking long trades when the stochastic is below 20. It’s safer when the stochastic is down to 15 or even 10 or 5. Another margin of safety is when the candle is above the upper bollinger band or below the lower bollinger band. The entry doesn’t require that price be above or below but it is safer.
Now, this system isn’t without its failures or holes. It can be applied quite successfully if one can manage their emotions and get out for small losses. It has given me more positive trades than negative trades (6 to 1) but when I began I stayed in losing trades too long believing they would come back. At times I might let them go 40-50 pips then I’d finally take my loss and get out. They psychological damage that I did to myself was weighing on me. So I now expect losses but I manage them more proficiently. And that’s the key to success with this or any other system.
Even though we have these “helps” with the 80/20 lines and BB’s and other currencies, we can’t ever know for sure the currency might continue in a certain trend or direction higher for a while longer. It will eventually turn around and the trader can make a few pips but we can’t know for absolute certainty. It’s suggested that this be traded on demo for a while to get a “feel” for the system and get used to watching the three pairs and what they do when the lines are exceeded in either direction. Try taking a sell trade on the GBP when the line exceeds 80 and see what happens. Try buying the EUR when the line is under 20 and see what happens. Then try only buying when the price is below the bottom BB and the stochastic is below 20, etc. Keep trying the system.
I believe this is a good system, but like anything else it can probably be tweaked to give even more reliability. I would be happy to hear from other traders after trying this system. Maybe we could make something good into something great.