Hot Pips Envelopes Forex Trading Strategy

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Hot Pips Envelopes Forex Trading Strategy 1

Success in trading is an irony. Most traders seek success in trading by looking for a strategy that ensures a win every time it is traded. However, there is certainly no trading strategy that could deliver that. There are no Holy Grails in trading and no strategy could deliver a 100% win rate all the time. On the contrary, successful traders understand that trading is all about probabilities. Instead of looking for a strategy that guarantees a win, they look for strategies that has a decent winning probability, which has a combination of a good win rate and reward-risk ratio.

The Hot Pips Envelopes Forex Trading Strategy is a strategy that delivers both. It provides a decent win rate comparable to other profitable trading strategies and allows for trade setups that could yield profits that have a high reward-risk ratio.

It does this by using two complimentary indicators. One indicator provides information on reversals coming from an overbought or oversold area, while the other provides information regarding price action showing signs of reversing the trend.

Envelopes Indicator

The Envelopes indicator is a trend following indicator which is overlaid on the price chart. It is an indicator which is based on a type of moving average with two lines flanking the moving average line, one on top and the other below the midline. These lines are plotted based on a deviation coming from the moving average.

The line above the midline typically represents the overbought territory while the at the bottom represents the oversold territory. Mean reversion traders would interpret price action going over these lines as an indication that price should reverse back to the mean soon.

On the other hand, momentum traders see breaches of these lines differently. Instead of looking at it as a sign of a probable price reversal, they would see it as momentum. These traders would take a trade going the direction of the breakout with the thesis that price has broken through the overbought or oversold lines because there is momentum behind that candle.

Hot Pips Indicator

The Hot Pips indicator is a custom oscillating indicator which provides high probability entry signals to traders. It is composed of three histograms overlaid on top of each other. The red histograms represent the leading trend while the sky-blue histograms represent the lagging trend. These histogram bars oscillate from positive to negative. Positive bars represent a bullish trend while negative bars represent a bearish trend. The farther away the bars are from the midline, the more it could be considered overbought or oversold. As trends reverse, these histograms also crossover each other. The red histogram would cross above the sky-blue histogram during a bullish trend. On the other hand, the bars would crossover inversely during a bearish trend. The yellow histogram represents the difference between these two bars. Signals are generated whenever the histograms crossover, which would coincide with the yellow histogram crossing over the midline. This indicator also conveniently places an arrow at the crossover points indicating a trend reversal.

Trading Strategy

This trading strategy is a trend reversal strategy based on the convergence between a trend reversal signal on an overbought or oversold condition coming from the Hot Pips indicator and a breach of the Envelopes indicator wherein price would crossover all the lines of the Envelopes indicator, indicating that there is momentum behind the trend reversal.

Weak trend reversal signals would usually not cause a candle to crossover or close on the opposite side of the Envelopes lines. However, if the trend reversal signal has momentum, price would usually crossover all the Envelopes lines.

Reversal signals coming from the Hot Pips indicator should also begin relatively far from the midline. This would allow for a higher probability trade since price has a longer time to travel to the midline, allowing it to gain ground in favor of our trade direction.

Having these two opposing signals occur at the same time does not come too often. However, whenever these trade signals occur in confluence with the other, they tend to produce higher probability trade setups.

Indicators:

  • HotPips
  • Envelopes
    • Period: 28
    • MA Method: Exponential

Timeframe: preferably 4-hour and daily charts

Currency Pairs: major and minor pairs

Trading Session: Tokyo, London and New York sessions

Buy Trade Setup

Entry

  • The Hot Pips indicator should print an arrow pointing up indicating a probable bullish trend reversal
  • The arrow should occur at a significant distance below the midline indicating an oversold condition
  • Price should close above the blue line of the Envelopes indicator indicating a bullish trend reversal with momentum
  • These bullish trend reversal signals should be aligned
  • Enter a buy order on the confluence of the above conditions

Stop Loss

  • Set the stop loss on the support level below the entry candle

Exit

  • Close the trade as soon as an opposing signal arrow pointing down is printed by the Hot Pips indicator

Hot Pips Envelopes Forex Trading Strategy 1

Hot Pips Envelopes Forex Trading Strategy 2

Sell Trade Setup

Entry

  • The Hot Pips indicator should print an arrow pointing down indicating a probable bearish trend reversal
  • The arrow should occur at a significant distance above the midline indicating an overbought condition
  • Price should close below the red line of the Envelopes indicator indicating a bearish trend reversal with momentum
  • These bearish trend reversal signals should be aligned
  • Enter a sell order on the confluence of the above conditions

Stop Loss

  • Set the stop loss on the resistance level above the entry candle

Exit

  • Close the trade as soon as an opposing signal arrow pointing up is printed by the Hot Pips indicator

Hot Pips Envelopes Forex Trading Strategy 3

Hot Pips Envelopes Forex Trading Strategy 4

Conclusion

This strategy is a working trend reversal strategy which allows traders to take trades on high probability trend reversals due to an overbought or oversold market condition. Adding the breakout from the Envelopes lines adds more confidence on the trade since it would mean that the trade signal has momentum behind it. It would also be helpful if the entry signals are combined with divergences using the Hot Pips indicator.

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