Wave Rider Forex Trading Strategy
One of the best ways to trade the forex market is by riding a trending market. This is because trading with the trend also means you are trading with less headwinds. Much of the market is trading going your direction and only a few are trading against it up until a very strong reversal signal occurs on a strong support or resistance.
Although many traders know that trading with the trend is the way to go, many find it hard to trade this way. This is primarily because they find it hard to identify trends.
Using Moving Averages to Identify Trend Directions
There are many ways to identify trends. Seasoned price action traders determine trend by price action’s swing highs and lows. But doing it this way makes identifying trends to subjective. Other traders use a plethora of trading indicators. Some are great while some pretty much just fails. However, one of the best ways to identify trend might be right under our noses. It is the use of our good old trusted moving average indicator.
When you come to think of it, moving averages in itself is a great tool to identify trends individually. Being a moving average, you would know if price’s bias is upward or downward just by identifying if the current price is higher or lower than the average. If price is constantly higher, then price must also be constantly going up, and vice versa.
So, individually moving averages could work. But what if we use a whole bunch of them. This would further increase the probability that we get our trend direction right. By using several commonly used moving averages that are commonly used to identify trend, we could easily decide which way the trend is just by looking at the chart.
The key to identifying trends via multiple moving averages is on whether they are stacked or not, and in which order. Shorter period moving averages layered above longer period moving averages means the trend is bullish. If the stack is the reverse of that, then the trend is bearish.
The Carter MA
The Carter MA indicator is an indicator comprised of several Exponential Moving Averages (EMA), all of which are commonly used by traders. It is comprised of the 8, 21, 50, 100, & 200 EMA. The 8-period EMA is already quite too fast causing a whipsaw on the EMAs. We could identify trends on whether the 21, 50, 100 & 200 EMAs are stacked correctly.
Below is an example of a chart with a stacked EMA with the 21 on top and the 200 at the bottom. This shows how easy it is to identify trends via moving averages.
Next, a sample of a bearish trend. Notice how the stack of moving averages is upside-down.
Trading Strategy Concept
Knowing that we have our trend direction pretty much nailed spot on, all we need to do is have a decent entry signal indicator.
For this strategy, we will combine the Carter MA indicator with the binaryarrows indicator, which identifies logical entries via fractals.
Timeframe: any timeframe
Currency Pair: any, preferably major pairs when scalping or day trading
Session: swing trade could be any session, while day trading and scalping should be the session of the currency being traded (Ex: GBPUSD – London or New York session)
Buy Trade Setup
Entry
- EMAs should be stacked in the following order:
- 21 EMA (green): top
- 50 EMA (blue): 2nd from top
- 100 EMA (dashed red): 2nd from bottom
- 200 EMA (solid red): bottom
- Enter a buy market order on the close of the candle when the aqua upward arrow of the binaryarrows indicator appears
Stop Loss
- Set the stop loss below the arrow
Exit
- Close the trade at the close of the candle when the red downward arrow of the binaryarrows indicator appears
Sell Trade Setup
Entry
- EMAs should be stacked in the following order:
- 21 EMA (green): bottom
- 50 EMA (blue): 2nd from bottom
- 100 EMA (dashed red): 2nd from top
- 200 EMA (solid red): top
- Enter a buy market order on the close of the candle when the red downward arrow of the binaryarrows indicator appears
Stop Loss
- Set the stop loss above the arrow
Exit
- Close the trade at the close of the candle when the aqua upward arrow of the binaryarrows indicator appears
Conclusion
Trading based on whether the commonly used moving averages are pointing the same direction greatly increases the probability of a successful trade. The only thing you would have to worry about is the entry. While the binaryarrows is visually great at identifying highs and lows, trying to catch a high or low is a bit tricky, especially when using fractals alone. This is why it is important to trade at the close of the candle or better to add an additional confirmation via reversal candlestick patterns.
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