Trading the forex market does not necessarily need to be difficult. Contrary to popular belief, trading does not require superior intellect for a trader to succeed. Instead, it only requires a logical strategy that can produce trade setups with decent win probabilities and a trader that has the discipline to follow his trade plans without being affected too much by greed or fear.
Complex strategies do not always equate to profitable strategies. In fact, complex strategies can often contribute to more psychological pressure on traders. Complex strategies often mean that traders have many things to look out for when trading a strategy. This could translate to making the trader more susceptible to errors because of stress. Complex strategies also have the tendency to produce too little number of trades. This means that a single loss could be very devastating to a trader, which can put even more psychological pressure on traders.
Simple strategies on the other hand tend to be very easy to follow. This allows traders to have a carefree attitude towards each trade. This then allows them to let the law of large numbers play out on their strategies. If they can pick decent trade setups based on their strategies, there is a high chance that the trader with a simple strategy can profit consistently over the long run.
Dynamic Kumo Forex Trading Strategy is a simple trend following strategy which is based on only two indicators. This setup creates a chart with not much clutter, providing only the essentials for identifying a decent trade.
Ichimoku Cloud
Kumo literally means “cloud” in Japanese. Ichimoku Cloud or Kumo is a part of the Ichimoku Kinko Hyo system or indicator.
The Ichimoku Kinko Hyo indicator is composed of five lines. Tenkan-sen line represent the short-term trend. Kijun-sen line represents the mid-term trend. Chikou Span represents the current price action movement. The Up Kumo or Senkou Span A and the Down Kumo or Senkou Span B lines are part of the Kumo, which represents the long-term trend.
The Senkou Span A is basically the median between the Tenkan-sen and Kijun-sen shifted 26 periods into the future.
Senkou Span B is the median price for the past 52 periods, shifted 26 periods into the future.
The long-term trend is identified based on how these two lines overlap. If Senkou Span A is above Senkou Span B, the market is considered to be bullish on the long-term. On the other hand, if the Senkou Span A is below the Senkou Span B, then the market is considered bearish.
The Kumo is usually used as a long-term trend filter. Traders avoid trading against the long-term trend based on the Kumo. The area between the two lines can also be used as a dynamic area of support or resistance where traders can expect price to bounce. Lastly, there are also traders who use the crossover of the two lines as a long-term trend reversal signal.
Stochastic Cross Alert
The Stochastic Cross Alert indicator is a momentum reversal signal indicator based on the Stochastic Oscillator.
The classic Stochastic Oscillator is mainly used to identify momentum direction and reversals based on recent historical price movements. It plots two stochastic lines which oscillate within the range of 0 to 100. Bullish signals are generated whenever the faster line crosses above the slower line. On the other hand, bearish signals are generated whenever the faster line crosses below the slower line. It also has markers at level 20 and 80. These levels indicate the oversold and overbought points. Crossovers occurring on these areas tend to have a higher probability because price is reversing at a point where it is either already oversold or overbought.
The Stochastic Cross Alert simplifies the process of identifying momentum reversals. It simply plots an arrow on the corresponding candle where it detects a high probability momentum reversal based on its underlying Stochastic Oscillator settings.
Trading Strategy
This trading strategy is a simple trend following strategy that uses the Kumo as an area of dynamic support or resistance.
First, we would have to identify the direction of the trend. This is based on price action and the trend direction of the Kumo. Traders can identify trend direction based on whether the swing points of price action is consistently rising or falling. On the Kumo, traders can identify trend direction based on how the Senkou Span A and Senkou Span B are overlapping.
As soon as we identify the trend direction, we could then wait for price action to retrace towards the Kumo.
Then, as price touches the area of the Kumo, we could then wait for an entry signal pointing the direction of the trend based on the Stochastic Cross Alert indicator.
Indicators:
- Ichimoku Kinko Hyo
- Tenkan-sen: None
- Kijun-sen: None
- Chikou Span: None
- Stochastic_Cross_Alert
- KPeriod: 10
- DPeriod: 5
- Slowing: 5
Preferred Time Frames: 1-hour, 4-hour and daily charts
Currency Pairs: FX majors, minors and crosses
Trading Sessions: Tokyo, London and New York sessions
Buy Trade Setup
Entry
- Price action must be consistently making higher swing highs and swing lows.
- Senkou Span A should be above Senkou Span B.
- Price should retrace towards the Kumo.
- Enter a buy order as soon as the Stochastic Cross Alert plots an arrow pointing up.
Stop Loss
- Set the stop loss on the support level below the entry candle.
Exit
- Close the trade as soon as the Stochastic Cross Alert plots an arrow pointing down.
Sell Trade Setup
Entry
- Price action must be consistently making lower swing highs and swing lows.
- Senkou Span A should be below Senkou Span B.
- Price should retrace towards the Kumo.
- Enter a sell order as soon as the Stochastic Cross Alert plots an arrow pointing down.
Stop Loss
- Set the stop loss on the resistance level above the entry candle.
Exit
- Close the trade as soon as the Stochastic Cross Alert plots an arrow pointing up.
Conclusion
This trading strategy can produce high probability trade setups based on this simple trend following setup.
Using the Kumo and price action to identify trend direction makes it easier for traders to identify which direction to trade and eliminates trade setups that have a relatively lower probability.
Using the Kumo also as a dynamic area of support or resistance helps traders systematically identify where to anticipate trend retracements.
Finally, the Stochastic Cross Alert signal provides a high probability trade signal based on a deep retracement while still complying with the long-term trend.
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