Big Wave Day Trade Forex Trading Strategy

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Big Wave Day Trade Forex Trading Strategy

I guess you would agree with me that the primary goal in trading is to be profitable. To some extent, all traders dream of not just being profitable, but extremely profitable. But this a whole different ball game altogether. For a start, let’s aim for being profitable.

Accuracy versus Gains

There are a couple of ways to approach trading which would make a trader profitable. One is to aim for accuracy rather than gains. These types of traders opt to be right most of the time. They opt to have higher win-loss ratios, which means they have higher accuracy.

However, high accuracy is not the only way to go. In fact, you could even have an accuracy lower than 50% or a win-loss ratio lower than one and still be profitable. How? This is through the second approach – gains.

The second approach, aiming for higher gains or reward rather than accuracy is also a very sound option to take. In fact, many profitable day traders trade like this. They aim for higher reward-risk ratios rather than accuracy. This would result to a trading account with many small wins and losses with some trades with huge gains that would make for probably 80% of their profit.

Either of the two would be profitable, aiming for accuracy or gains. It all depends on the type of trader you would want to be.

Market Reversals for Bigger Gains

Although this is not the only way to catch trades with big gains, trading on market reversals is probably one of the better ways to catch big gains. This is because entering the market as the market starts to reverse and break the previous trend often means entering at the start of a new trend.

Before the actual reversal, there will be so much headwinds going against your trade direction, if you are opting for a reversal. However, if the market does break the trend, there are often lesser barriers that block price from rallying going your direction. This means a wider space for price to travel going your direction, which means bigger gains. This also means entering the market at a point which could probably be a start of a new trend.

MACD for Longer-term Market Reversals

The MACD is an excellent oscillating indicator, which could allow for identifying possible market reversals. This is because the MACD is probably one of the slower responding oscillating indicators. It is characterized by smoother movements and longer and slower oscillations around the midline zero. If you would want to catch bigger gains, it is better to aim for longer reversals rather than short burst reversals.

The only disadvantage that the MACD has is that it has no fixed overbought and oversold values. This is because the MACD is not bound by a fixed range but rather an infinite number around the zero line. Eyeing market reversals without this line in the sand would be more difficult, but with practice it could be done. This is by looking for conditions where the MACD is relatively farther from the zero-line compared to the previous MACD peaks or valleys. These conditions often indicates that the market is overextended and is due for a market reversal.

Heiken-Ashi Smoothed for Trend Reversal Confirmation

Probably one of the most underrated indicator freely available on the world wide web is the Heiken-Ashi Smoothed indicator. This is because it is also one of the most misunderstood and misused indicators.

Because the Heiken-Ashi Smoothed indicator is a variation of the original Heiken-Ashi Candlesticks, many traders think it is one and the same, when in fact it is very different.

The original Heiken-Ashi candlesticks is basically a candlestick that changes color as the short-term trend changes. You could still see the highs and the lows with the use of wicks. This allows traders to use price action based on swings, although without candlestick patterns.

The Heiken-Ashi Smoothed indicator however, though it looks like a candlestick, is in fact less of a candlestick and more of a moving average. Yes, it is a moving average indicator that is derived from the lows, highs, opens, and closes of a range of candles. In effect, it becomes a very potent and reliable trend indicator, which could pinpoint market reversals by changing colors.

Trade Concept

The aim of this strategy is to take trades with the likelihood of getting bigger gains because these trade setups could be a start of a market reversal.

To identify a probable market reversal scenario, we will be using the MACD. However, we will be using it differently than how most traders use it. Most traders enter the market using MACD as the indicator crosses the midpoint which is zero, which may be a little too late if you are aiming for the start of a market reversal. Instead, we will be biased on our trading direction based on where the MACD histograms and lines are relative to the zero line and whether the histogram has crossed over the MACD oscillating line.

Lastly, we will be entering the market as soon as the Heiken-Ashi Smoothed indicator has confirmed a probable trend change as it changes color.

Timeframe: 5-minute chart

Currency Pair: any major currency pair

Trading Session: preferably on the trading session of the market where the currency is used (Ex: GBPUSD – London and New York session)

Buy Trade Setup

Entry

  • MACD histogram and line should be below zero (the farther the better)
  • MACD histogram should be above the MACD line
  • Enter a buy market order at the close of a candle corresponding to the change of the Heiken-Ashi Smoothed indicator color from Crimson or Red (depending on the setting of the indicator) to Royal Blue

Stop Loss

  • Set the stop loss two pips below the Heiken-Ashi Smoothed candle

Exit

Trail the stop loss two pips behind the Heiken-Ashi Smoothed candle until stopped out in profit

big wave day trade strategy 01

Sell Trade Setup

Entry

  • MACD histogram and line should be above zero (the farther the better)
  • MACD histogram should be below the MACD line
  • Enter a sell market order at the close of a candle corresponding to the change of the Heiken-Ashi Smoothed indicator color from Royal Blue to Crimson or Red (depending on the setting of the indicator)

Stop Loss

  • Set the stop loss two pips above the Heiken-Ashi Smoothed candle

Exit

  • Trail the stop loss two pips behind the Heiken-Ashi Smoothed candle until stopped out in profit

big wave day trade strategy 02

Conclusion

This strategy is excellent for catching high gain or reward trades. This is because of the MACD’s tendency to reverse and go back to the zero line when overextended, which sometimes leads to a market reversal. This is further confirmed by the Heiken-Ashi Smoothed indicator which is excellent for determining trends and catching the whole move.

However, though this strategy would yield to huge pip gains, it could also have periods of low accuracy especially during ranging markets. This is because during those times volatility is confined in a narrow range constricting the market from making a new trend. Also, the fact that we are trading mean reversions with the hope that it will lead to market reversals mean that at the beginning periods of the trade, we are trading against the current market trend.

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