The forex market is like a fickle minded person. It never seems to have a fixed decision. It would make decisions rashly based on whims and change its mind the next second. If you have been looking at the forex chart for quite some time, you would notice this behavior. Price would be moving up one period and then suddenly drop back down. It would stagnate and contract, then it would suddenly reverse. It would break through significant levels only to reverse again.
This volatile market behavior seems impossible to predict. Only those who can understand the behavior of this fickle minded market can conquer it. Only traders who can understand how the market flows could make significant and consistent profits from the market.
Hot Pips Market Flow Forex Trading Strategy is a simple strategy that helps traders understand the flow of the market. It helps traders identify and confirm if the market has already reversed or not. It trades on trend reversals yet acts on the confirmation of a reliable custom technical indicator in order to identify the exact entry point.
Hot Pips Indicator
Hot Pips is a custom technical indicator used by traders to identify trend direction and trend reversals. It is a trend following oscillator which identifies specific trend reversal points.
The Hot Pips indicator displays bars that oscillate around zero on a separate indicator window. It displays red bars and deep sky-blue bars. Positive bars generally indicate a bullish bias, while negative bars generally indicate a bearish bias.
Although the indicator can be used to identify trend bias, it could also be used to identify probable trend reversals based on an overextended price condition, either an oversold or overbought market. If the both bars are positive and are far from the midline, which is zero, the market might already be overbought. If the both bars are negative and far from the midline, then the market might already be oversold. In an overbought condition, if the red bars crosses below the deep sky-blue bars, the market might already be starting to reverse. On the other hand, in an oversold condition, if the red bars crosses above the deep sky-blue bars, the market might also be reversing to the upside.
The indicator also plots a lime bar to represent the difference between the red and deep sky-blue bars. If the red bar is above the deep sky-blue bar, the lime line would be positive. If the red bars are below the deep sky-blue bars, then the lime line would be negative.
This simplifies the process of identifying probable trend reversals coming from an overextended price condition. The crossing of the lime bars from negative to positive could be taken as a bullish reversal signal, while the crossing of the lime bars from positive to negative could be used as a bearish reversal signal. The indicator also plots an arrow pointing the direction of the trend reversal on the bars where the lime line crosses the midpoint. This simplifies identifying trend reversals even further.
Trading Strategy
This trading strategy is a simple trend reversal strategy which trades based on the trend reversal signals coming from the Hot Pips indicator.
To trade this strategy, simply look for overbought or oversold price conditions based on the distance of the Hot Pips bars from the midline. Then, we wait for the red bar to cross the deep sky-blue bars hooking back to the midline. This would also be the crossing of the lime bars over the midpoint. This would also trigger the indicator to plot an arrow pointing the direction of the trend reversal. Take the trade as soon as this signal occurs.
Indicators:
- HotPips
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
- Both the red and deep sky-blue bars should be negative and far below the midline.
- The red bars should start to hook up and cross above the deep sky-blue bars.
- The lime bars should cross above zero.
- The Hot Pips indicator should print an arrow pointing up.
- Enter a buy order on the confirmation of the conditions above.
Stop Loss
- Set the stop loss on the fractal below the entry candle.
Exit
- Close the trade as soon as the red bars crosses back below the deep sky-blue bars on the Hot Pips indicator.
Sell Trade Setup
Entry
- Both the red and deep sky-blue bars should be positive and far above the midline.
- The red bars should start to hook down and cross below the deep sky-blue bars.
- The lime bars should cross below zero.
- The Hot Pips indicator should print an arrow pointing down.
- Enter a sell order on the confirmation of the conditions above.
Stop Loss
- Set the stop loss on the fractal above the entry candle.
Exit
- Close the trade as soon as the red bars crosses back above the deep sky-blue bars on the Hot Pips indicator.
Conclusion
This trading strategy works well in confirming trend reversals coming from overbought or oversold price conditions.
However, this strategy should not be used independently as an entry signal. It should be used only on supply and demand zones in order to confirm the trend reversal.
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