Trend following strategies are the types of strategies that allow traders to earn so much in just one trade. This is because trend following strategies allow traders to catch a trend as it starts, hold on to it as it develops into one of those big trends, and exit the trade just as it is about to end. The key to these types of strategies though is to have a filter that would allow traders to avoid low probability trades and take only trades that have a higher probability to trade.
The Fib Tunnel Cross Forex Trading Strategy is one of those strategies that allow traders to do such with great accuracy. By doing so, traders have a better chance of catching trades that could result into a big trending wave which means bigger yields.
DEMA Indicator
DEMA stands for Double Exponential Moving Average. DEMA was first introduced by Patrick Mulloy back in February 1994 in the “Technical Analysis of Stocks and Commodities” magazine. It was very useful to many traders as a modified version of an Exponential Moving Average (EMA) because it smoothens out further the moving averages, which many traders use to determine trend direction. This smoothening of the moving average then results into a less choppy looking moving average and lesser false signals.
Fib Tunnel
The Fib Tunnel is a custom indicator with a modified moving average and has several outer bands adjacent to the moving average, which are based on the Fibonacci ratios.
On the lower timeframes, these bands become more visible, while on the higher timeframes, the spacing of the bands tend to contract. As such, on the lower timeframes, it could be used as an entry area for retracement strategies. Traders could wait for price to come back inside the bands to enter a trending market while price is retracing. Traders could also use it for mean reversion strategies during tight range bound markets. Once price goes outside of the bands, it could be an indication that price could reverse especially during tight ranging market conditions.
However, on the higher timeframes, the bands tighten up and become less visible. The above-mentioned techniques become irrelevant. Traders could however use the indicator as a crossover strategy, by waiting for price to crossover the modified moving average as well as the outer bands around it.
Double CCI Woody
The Double CCI Woody indicator is a custom-made Commodity Channel Index indicator. It is an oscillating indicator, which prints histogram bars around a midline at zero, and allows figures to fluctuate freely on its own window.
It is very reactive to price movements and allows traders to see its peaks and troughs. However, with the right parameters it is quite good in determining trend direction.
Trading Strategy Concept
The Fib Tunnel Cross Forex Trading Strategy is a trend following strategy that allows traders to enter the market on trend reversals using the DEMA Indicator and the Fib Tunnel Indicator. The Fib Tunnel Indicator would serve as the long-term trend while the DEMA Indicator would serve as the short-term trend. Trades are then taken during the crossovers of the two modified moving average indicators.
However, not all trade signals generated by these two indicators should be taken. The crossover of the two indicators should be in agreement with the Double CCI Woody Indicator. This is because the Double CCI Woody Indicator would tend to reverse only when price action reversal seems to have momentum behind it. It then usually goes ahead of the DEMA and Fib Tunnel crossover, making it useful as a signal of a probable trend reversal.
Indicators:
- DEMA
- Period: 36
- FIBTunnels
- DoublecciWoody
- Tunnel CCI Period: 50
Timeframe: 4-hour and daily charts
Currency Pairs: major and minor pairs
Trading Session: Tokyo, London and New York
Buy (Long) Trade Setup
Entry
- The Double CCI Woody indicator should be printing positive histogram bars indicating a bullish trend
- Enter a buy order as the DEMA indicator crosses above the Fib Tunnel indicator
Stop Loss
- Set the stop loss below the moving averages
Exit
- Close the trade as soon as the Double CCI Woody indicator prints a negative histogram bar
Sell (Short) Trade Setup
Entry
- The Double CCI Woody indicator should be printing negative histogram bars indicating a bearish trend
- Enter a sell order as the DEMA indicator crosses below the Fib Tunnel indicator
Stop Loss
- Set the stop loss above the moving averages
Exit
- Close the trade as soon as the Double CCI Woody indicator prints a positive histogram bar
Conclusion
This simple trend following strategy allows traders to take higher probability crossover setups using the modified moving average indicators, DEMA and Fib Tunnel. The probability of the trades generated are further improved by filtering out lower probability trades using the Double CCI Woody indicator. It also allows traders to catch big trends that could run for quite some time as shown above.
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