Pipsqueaks #38: Improving Upon A Simple Strategy

Last week we looked at a simple strategy for trading a daily chart; today I’m going to review some of my trading results from last week and go into a little more detail regarding how this strategy can be improved.

Let’s look at this daily chart of GBP/USD from earlier this week:

pipsqueaks 38 forex trading strategy 1

This chart is showing a five EMA (red line), a 200 EMA (white line), and RSI indicators. The yellow arrow is pointing at a signal candle that closed more than 10 pips below the five EMA line, while the RSI simultaneously had recently crossed below the 50 line (dotted white line in the center, lower part of the chart). Notice that the price action (candle activity) is above the white 200 EMA line, indicating an uptrend. Ordinarily, I would have passed on a short position in such a case, as I usually like to trade with the trend; however, I felt that the price action was significantly high enough above the 200 EMA that the price action would drop down somewhat to meet it. And eventually that’s what happened – although initially price went up and touched the five EMA, bounced off of it and dropped more than 30 pips below. I manually closed this trade at +30 pips. But what made this trade compelling?

Here’s the same chart again but with some trendlines that I added:

pipsqueaks 38 forex trading strategy 2

Now these trendlines are added in a fashion that I like to construct trendlines – that is, the up trend lines are drawn connecting recent lowest lows and the downward trendlines are drawn using the highest highs of the candles. This gives us an interesting flavor of trend line that the market tends to respect. When the signal candle crossed and closed below the 5 EMA, it also crossed and closed below the uptrend line drawn from the bottom of the candles. This reinforced the signal that the following day’s candle would continue down, along with the RMA being below the 50 line. And that’s what happened. This was a live trade I took this week, and I gained +30 pips.

Now let’s look at the EUR/AUD chart for the following day:

pipsqueaks 38 forex trading strategy 3

The yellow arrow is pointing at the signal candle. It crossed and closed more than 10 pips below the 5 EMA. But also take note of what the candles are doing in regard to the trendlines I drew. I connected the highs four candles; the candle before the signal candle briefly went through that downward trend line and retreated – a good indicator of a strong downward move. The signal candle closed with the RSI below 50, and that’s our confirmation of a sell position. So I set my stops and went to bed (it’s after midnight when I’m doing this, after all), and picked up +50 pips (as I usually set my take profit for +50 pips). Now these were the only two trades I took this week using this strategy. I thought about another short trade on EUR/AUD, as I thought price action would continue down to meet the red uptrend line. Let’s see what happened in the market:

pipsqueaks 38 forex trading strategy 4

Just as I thought – price continue down the following day, and the day after that tin you down until it almost touched the uptrend line, and bounced back up. I should’ve taken the trade, but I didn’t – an opportunity missed. It will be interesting to see if price continues up to meet the down trend line (purple line). I’ll probably take a trade when the candles cross the five RMA on their way up to meet the purple line. A strong cross of the purple downtrend line would indicate a strong uptrend that would make a nice trend trade. We will have to wait till next week to see how that will play out.

What I’m demonstrating here are examples of “filtering”. Filtering is a good practice to help weed out poorly performing or losing trades. Now the simple strategy I demonstrated works very well for me but I always look for other indicators to confirm my forecast wherever possible. You see, reading charts is not hard after all…

Something else that’s not hard to do is Forex (and Nadex) trading when you’re a Sapphire member of the Slick Trade Academy. As a member, you’ll receive trade signals for Forex and Nadex trading, as well as access to educational materials, expert advisors, and more. Maybe it’s time you considered joining Slick Trade Academy – I think you’ll be pleased if you do!

That’s all for today – have a great week and good luck with your trading! JC

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