Forex Selective trend trading strategy

In this article we will look at the theoretical aspects of the Selective trend trading strategyThe strategy is a market-oriented one. This strategy is trend-following and is designed to work with trends of medium length.

Marketplace: ;
Indicators: EMA(21) on Close price, Stohastic (period %K - 5, period %D - 3, deceleration 3), candlestick patterns;
Timeframe: H1;
Strategy: trending;
Protective orders: StopLoss.

Anyone who has been engaged or is engaged in trading for some time knows that trading trends is a profitable activity at a distance and allows you to show positive returns for many years. Also a trader of any level knows that one of the best trend-tracking indicators is a moving average, but it tends to lag, which is the main disadvantage. The main manifestation of this disadvantage are false signals, which can "eat" almost all the profits. Therefore, almost all traders who take the moving average as a basis for their strategy, use a variety of filters, whose main objective is to false signal filtering. How well the filters did their job determines the final financial result.

Also, do not forget that according to common statistics, financial markets are in a trend state for only 30-35% of time and the rest of the time these markets are in trading ranges in which trend-following strategies show losses, and this is considered quite normal. What does it mean for us? It means that profits and losses are not evenly distributed in time, and it is of great importance whether the trader's deposit can "survive" a series of losing trades or not. It depends on the risk level accepted by a trader for one trade and on the diversification level. That's why competent money management is also an integral part of success.

So, in of each trading strategy We will break down the decision to make a deal into several component parts. The first part is the so-called set-up. Setup - is a market signal that will answer the question - where to? That is, what position we will open - long or short. The next part is Trigger. Trigger determines the moment of position opening. That is, it answers the question when? In addition, we need a clear risk management plan, which includes the rules for setting a stop-loss order and further maintenance of the position.

Selective trend trading signals

Defining a trading set

Main market trend we will determine by the location of the price relative to EMA moving average(21). If prices are above the moving average, it upward trend. In this period of time we should open only long positions (buy). If prices are below the average it is downtrend - we only open short positions (sell).

We will use the candlestick chart to determine the buy or sell set-up. To determine the set-up, we need two candlesticks located close to the average, and the closing prices of both candlesticks must be on the same side of the average. For a buy-setup is above the average, and for a sell-set - below. It should be noted that the body and the shadows of the 1st candle may cross the average.

Trigger definition

When we have a set-up, it means we need to look for a signal to open a position. We will call this signal as a trigger. In our trading strategy we will use a fairly simple trigger. Purchase Trigger - The closing price of the current candle is higher than the maximum of the previous candle. If after the formation of a buy set-up we have such a trigger - at the opening of the candle we open a buy position. Trigger for sale is formed when the closing price of the current candle is below the minimum of the previous candle.

Application of an additional filter

An additional filter in our strategy will be stochastic oscillator. The main signals for opening positions should coincide with the stochastics signals. Stochastic gives a buy signal as soon as the line %K crosses the line %D upwards. Crossing the line %K line %D from the top down gives a sell signal.

Also in signal filtering we will use the concept of overbought/oversold. If at the time of the signal to buy the line %K is above level 80, ie, in the overbought zone, then we ignore this signal. Also, if at the time of the signal to sell the line %K is below level 20, ie, in the oversold zone, then we also ignore this signal.

Setting a stop loss order

Protective stop loss order We will place a stop loss immediately after opening a position. For buy trades we place a stop loss a few pips below the relative low of the last 3 candles, for sell trades we place a stop loss a few pips above the relative high of the last 3 candles.

Profit taking

Fixing of profit is carried out at the opening price of the candleFor buy trades, the fixation of profits is performed at the opening price of the candle following the candle, whose maximum closed below the previous minimum. For sell trades, profit taking is carried out at the opening price of the candle following the candle, whose maximum closed above the previous maximum. If we have the conditions described above, but we have a floating loss on the trade - the trade according to trading strategy it still closes.